Trusts

Question 1

What is needed to create a valid trust?

Answer 1

1. a settlor w/ present intent to create a trust
2. a valid trust purpose
3. trust property (res)
4. trustee (court can appoint one)
5. ascertainable beneficiaries

“to create a valid trust, there must be a settlor who, intending to create a trust for a valid trust purpose, delivers the trust property to the trustee to hold for the benefit of one or more ascertainable beneficiaries”

Question 2

Merger of Title

Answer 2

A trust will be terminated where the sole Trustee is also the sole Beneficiary

so if one party is both a trustee and beneficiary, title will NOT merge only if there are other beneficiaries of the trust (needs to be SOLE trustee and SOLE beneficiary for merger and thereby termination)

Question 3

Trustee

Answer 3

the trustee holds legal title to specific property under a fiduciary duty to manage, invest, and administer the trust assets and income for the benefit of designated beneficiaries (who hold equitable title)

a trust will not fail for lack of a trustee (court will appoint one)

Question 4

Trustee - fiduciary duties

Answer 4

1. Duty of Care (duty to invest prudently)
2. Duty of Loyalty (no self dealing)
3. Duty to Perform trust duties personally

Question 5

Trustee - Duty to Perform Trust Duties Personally

Answer 5

Traditional rule - trustee could NOT delegate investment decisions

Modern rule - Trustee may delegate investment/management functions but only if a prudent trustee of comparable skills could properly delegate under the circumstances

For delegation, Trustee must across prudently in:
1. selecting an agent
2. establishing scope and terms of delegation
3. periodically reviewing the agent’s actions

If delegation is proper, the Trustee is NOT liable to the beneficiaries for the decisions/actions of agent

Question 6

Trustee - Duty of Care

Answer 6

requires Trustee to invest and manage the trust’s assets as a prudent investor would

Question 7

Trustee - Duty of Loyalty

Answer 7

requires trustee to administer the trust solely in the interest of the beneficiaries

The trustee may NOT engage in self-dealing regarding trust assets. A trustee’s good faith or actual benefit to the trust is irrelevant

Question 8

Evaluating the Trustee’s Investments

Answer 8

A trustee’s investments should NOT be evaluated in isolation, but should instead be evaluated in the context of the portfolio as a whole and as part of an investment strategy

Question 9

Uniform Prudent Investor Act

Answer 9

Trustee must exercise reasonable care, skill and caution when investing trust assets

investment decisions are evaluated in context of the entire trust portfolio as part of an overall investment strategy

Question 10

Trustee - duty to allocate property to principal and income

Answer 10

dictates whether receipts earned during the administration of the trust should be allocated to the income or the principal

most states have adopted the Uniform Principal and Income Act, which specifies how receipts should be allocated

General Rule: ordinary expenses should be allocated to income and extraordinary expenses should be allocated to the principal

Question 11

Proper Allocations to Principal and Income:

Assets allocated to Principal (PLEAD)

Answer 11

1. money received from Principal asset
2. Life insurance proceeds
3. Eminent domain awards
4. All property other than money received from an entity
5. Distribution of stock (stock dividend)

Question 12

Proper Allocations to Principal and Income:

Assets allocated to income (RIM)

Answer 12

1. Rental income
2. Interest
3. Money (includes cash dividends from stock)

Question 13

Trusts - Revocability (Termination by Settlor)

Answer 13

If a trust is revocable, the settlor may terminate the trust at any time

In most states (UTC view), a settlor can revoke or amend an inter vivos trust unless the the terms expressly state that it is irrevocable

common law rule requires that the Settlor reserve the power to revoke/amend, and that a trust is irrevocable unless expressly stated otherwise in instrument

Question 14

Trusts - Termination/Modification by the Beneficiaries with Settlor’s Consent

Answer 14

a trust may be terminated/modified if:
1. the settlor consents, and
2. all beneficiaries consent

this is allowed even if the modification/termination conflicts with a material purpose of the trust

Question 15

Trusts - Termination/Modification without Settlor’s Consent

Answer 15

a trust may terminated/modified on the consent of just the beneficiaries if:
1. ALL beneficiaries give consent
2. and no material purpose of the trust would be frustrated (Claflin Rule)

If Claflin rule can’t apply (e.g. a beneficiary can’t consent), then look to if court has power to modify

Question 16

Doctrine of Equitable Deviation: Modifying the Trust due to Change Circumstances

Common Law

Answer 16

If the Claflin doctrine can’t apply, try to use this analysis

At common law, a court in equity may authorize or direct a trustee to deviate from the administrative terms of a trust if
1. the Settlor did not know or anticipate the new circumstances, and
2. compliance with the terms of the trust would defeat or substantially impair the trust purposes

Usually, this doctrine of changed circumstances cannot be used to change the beneficial rights of the beneficiaries, but courts will often give power to invade the principal for an income beneficiary if it finds that supporting that B was purpose of trust

Question 17

Doctrine of Equitable Deviation: Modifying the Trust due to Changed Circumstances

UTC

Answer 17

Under the UTC, court modification may be sought if the trust could have been modified if all beneficiaries had consented and the interests of any nonconsenting beneficiaries will be adequately protected

A court may modify the trust terms if circumstances unanticipated by the Settlor threaten the purposes of the trust

To carry out the Settlor’s primary intent, the court may ignore a specific direction of the Settlor and grant Trustee powers specifically prohibited in the trust

Under the UTC, there is no restriction against changing the beneficiaries’ rights. If unanticipated circumstances threaten the purpose of the trust, the court allows modification

Question 18

Trusts - Terminating a Trust with contingent/unascertained beneficiaries

Answer 18

look out for a question involving termination/modification of a trust where there are unborn beneficiaries, unascertained beneficiaries, or beneficiaries of future interests

If any beneficiaries are unborn or unascertained, there must be a party appointed to represent their interests or they must be virtually represented according to state law

Otherwise, the trust may NOT be terminated/modified

Question 19

Pour over provision in will

Answer 19

occurs where a will makes a gift to a trust

Traditional view: to create a valid pour over gift from a will to a revocable trust, the trust must be in existence or must be executed at the time of the will’s execution

Modern view: a will may devise property to a trustee of a trust established or to be established during the testator’s lifetime (i.e. the trust can be established after the will is executed but before the testator’s death)

modern approach is that later made amendments to the trust are valid. But old common law view was that amendments to the trust made after the execution of the will were NOT valid

pour over gifts are valid even if the trust is unfunded during the testator’s lifetime, and even if trust is amended prior to the testator’s death

Question 20

Discretionary trust

Answer 20

in a discretionary trust, the Trustee has discretion to decide when to make a distribution to a Beneficiary

Beneficiary can NOT demand any disbursements. Neither can creditors (except for child support or alimony in some states)

beneficiary can only ask court to compel a distribution if the trustee has abused their discretion

Question 21

Support Trust

Answer 21

type of trust in which the Trustee must pay what is necessary for the beneficiary’s support

Question 22

Spendthrift trust provision

Answer 22

Restrains both the voluntary and involuntary transfer of a beneficiary’s interest. Therefore, the B can’t transfer their interest in the trust, and creditors also can’t reach the trust interest to satisfy their claims

purpose is to protect the B from their own improvidence

know that creditors can still reach the distribution from the trust AFTER it has reached Beneficiary (then it’s just the B’s property at that point)

but there are some exceptions to enforcement

Question 23

Spendthrift Provision exceptions/limitations

Answer 23

These are some of the limitations on enforcement of a spendthrift trust

1. when the Settlor is the Beneficiary (can’t use spendthrift to protect your own property)
2. judgments/court orders for dependents (i.e. child support or spousal support)
3. claims by the government
4. claims by persons supplying necessities

Question 24

Charitable Trust

Answer 24

trusts created for a charitable purpose

must have a large number of not readily identifiable individuals

the charitable trust may be terminated if the charitable purpose becomes unlawful, impracticable, or impossible (but be aware of potential for cy pres to save the trust)

Question 25

cy pres

Answer 25

Under the cy pres doctrine, if:
1. the charitable purpose of the trust has become unlawful, impracticable, or impossible,
2. No alternative charity is named in the trust, and
3. the court determines the Settlor had a general, rather than a specific, charitable purpose

Then the court may apply cy pres and direct that the trust property be distributed in a manner consistent with the settlor’s general charitable intent (e.g. selecting a similar charity org)

a general charitable intent is conclusively presumed under UTC

Question 26

Trusts - Terminating an Irrevocable Trust

Answer 26

By settlor: the settlor may terminate the trust if all beneficiaries are in existence and all agree

By beneficiaries: after the settlor dies, an irrevocable trust can be terminated if both the income beneficiaries and the remaindermen unanimously consent, and if there is no material purpose of the trust yet to be performed

Question 27

Trusts and Rule Against Perpetuities

Answer 27

Under the RAP, an interest is void if there is any possibility that it may vest more than 21 years after some life in being at the creation of the interest

For revocable trusts, the RAP period begins to run on the date of the Settlor’s death

then look to see if each successive interest is valid (i.e. if it vests within 21 years of measuring life)

Question 28

Trusts - gifts to a class

when does a class close for distribution?

Answer 28

to determine when membership of a class closes, courts apply the rule of convenience, which provides that a class remains open until some member of the class can call for distribution of the class gift

Under the rule of convenience, when there is a gift to a class conditioned upon the members attaining a certain age, the class closes when:
1. the preceding estate, if any, terminates, AND
2. the first class member reaches the specified age

that class member’s minimum share should then be determined and distributed to him at that time. the class then closes and no subsequent members of the class can be added

the shares of that first class member can also increase if the other members die before reaching the age requirement

Question 29

Creating a trust in the future

Answer 29

When a Settlor promises to create a trust in the future:
- and the promise is supported by valid consideration,
- then the trust can arise in the future when the property is acquired
- without any further manifestation of intent

Question 30

Do trusts have a writing requirement?

Answer 30

To create a valid trust, there must be intent by the Grantor, trust property, ascertainable beneficiaries, and a trustee

Most states do NOT require a writing for a trust of personal property (but always need a writing if real property)

Question 31

Does a trust terminate when the Trustee dies?

Answer 31

NO

generally, once a trust is established, it will not fail merely because of the trustee’s death

the court will appoint a successor trustee to carry out the Testator’s intention if he intended the trust to continue beyond the death of the trustee

Question 32

Disclaimer by Beneficiary

Answer 32

A beneficiary may disclaim an interest in the trust by filing a written instrument with the trustee (or probate court if testamentary)

if a valid disclaimer is made, the trust is read as though the disclaiming was deceased as of the relevant date

Question 33

Valid trust purpose - precatory language

Answer 33

to have an enforceable trust, the settlor must show an intent to create a trust

Most courts hold that language merely expressing the settlor’s hope, wish, or desire that the trust property be used for a certain purpose does not create a valid trust

for a trust, you want to find clear language expressing that the Settlor intended a trust