Trusts

Question 1

Express Trusts

Answer 1

A valid express trust requires: (1) a definitive beneficiary; (2) a settlor with capacity; (3) an present intent to create a trust; (4) a trustee; (5) a valid trust purpose; (6) trust property; AND (7) compliance with any State formalities.

Question 2

Precatory Expressions

Answer 2

A settlor’s expression of a hope, wish, or mere suggestion that the property be used in a certain way does NOT create a trust because the settlor must impose a legal obligation on the transferee.

Question 3

Split of Title

Answer 3

If the sole trustee and the sole beneficiary are the same individual, the equitable and legal titles merge and the trust TERMINATES.

Question 4

Definitive Beneficiaries

Answer 4

Beneficiaries may be unascertainable when the trust is created as long as they are ascertainable when they are to benefit

(e.g., “grandchildren” is OK; “friends” is NOT).

Question 5

Resulting Trust

Answer 5

If a trust fails for lack of a beneficiary, a resulting trust in favor of the settlor or their successors is presumed.

NO resulting trust will be implied if (1) the trust instrument specifically or implicitly provides for disposition of trust property when the trust has failed; (2) settlor received consideration for their original transfer in trust; or (3) cy pres is applicable in cases of charitable trusts.

Question 6

Valid Trust Purpose

Answer 6

A settlor may create a trust for any purpose that is valid. Purposes that are (1) illegal; (2) contrary to public policy; (3) impossible to achieve; or (4) intended to defraud the settlor’s creditors or based on illegal consideration.

Question 7

Absence of a Trustee

Answer 7

A trust will not fail because the trustee dies, refuses to accept appointment, or resigns. The court will appoint a successor trustee UNLESS the settlor clearly intended that the trust can only continue under the supervision of a particular named trustee.

Question 8

Trustee Qualifications

Answer 8

Anyone with capacity to acquire and hold property for their own benefit AND has capacity to administer that property may be a trustee

(e.g., minors and insane persons can HOLD, but cannot ADMINISTER property).

Question 9

Removal of Trustee

Answer 9

A court can remove a trustee on its own motion or upon request by the settlor, a beneficiary, or a co-trustee. Grounds for removal include (1) a serious breach of trust; (2) lack of cooperation with other co-trustees; (3) unfitness, unwillingness, or persistent failure to administer; (4) a substantial change in circumstances.

ExamTip: Primary consideration is whether trustee’s continuation in office would be a detriment to the trust.

Question 10

Present Declaration of Trusts VS. Transfer of Conveyance in Trust

Answer 10

Present Declaration of Trust: A trust can be created by a person declaring themself trustee of specific property for a beneficiary.

Transfer or Conveyance in Trust: A trust can be created by transferring legal title of property to a trustee.

Question 11

Trusts within the Statute of Frauds

Answer 11

Writing is required for trusts that involve land transfers

Question 12

Discretionary Trusts

Answer 12

Trustee is given discretion whether to apply or withhold payments of income or principal to a beneficiary. Creditors CANNOT reach (but can attach) the beneficiary’s interest until the trustee exercises their discretion to make payments. They may not, however, compel a distribution by the Trustee.

ExamTip: A court can force a trustee to satisfy a judgment for the support or maintenance of beneficiary’s child, spouse, or former spouse (this exception also applies to spendthrift trusts).

Question 13

Spendthrift Trusts

Answer 13

A spendthrift trust precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust. Creditors are precluded from reaching the spendthrift trust to satisfy their claims (note: CANNOT even attach!)

ExamTip: Restraint on alienation is all-or-nothing. A spendthrift cannot permit voluntary transfers, but purport to deny access to creditors.

Question 14

Domestic Asset Protection Trusts (“DAPT”)

Answer 14

A settlor (i.e., person who furnished the consideration) cannot use a spendthrift trust to protect their own property from creditors. Many states, however, now allow for self-settled spendthrift trusts known as “domestic asset protection trusts”.

Question 15

Support Trusts

Answer 15

A support trust directs the trustee to pay only so much of the income or principal as is necessary for the beneficiary’s support. Interests in a support trust are NOT assignable.

Standard of Support: The beneficiary’s accustomed standard of living.

Question 16

Termination of Trusts

Answer 16

A trust will terminate automatically (1) upon the expiration of the term specified in the instrument; (2) when all purposes of the trust are accomplished; (3) purpose has become unlawful or contrary to public policy; OR (4) purpose is impossible to achieve.

Question 17

Revocation of Trusts by Settlors

Answer 17

Under the UTC, a settlor can revoke OR amend a trust UNLESS the terms expressly state that it is irrevocable.

Under the traditional rule, a trust is irrevocable unless the settlor expressly reserves the power to revoke or modify the trust.

Question 18

Termination of Trusts by Beneficiaries

Answer 18

With Settlor’s Consent: A trust may be terminated or modified upon the consent of the settlor and all beneficiaries EVEN IF the modification or termination conflicts with a material purpose of the trust

Without Settlor’s Consent: A trust may also be terminated or modified on the consent of only all beneficiaries (but no settlor consent) ONLY IF no material purpose of the trust would be frustrated.

ExamTip: ALL beneficiaries, including unborn and unascertained beneficiaries must consent.

Question 19

Termination of Trusts by Courts

Answer 19

A court may terminate or modify the trust if (1) the trust could have been modified if all beneficiaries had consented; and (2) the interest of any non-consenting beneficiaries will be adequately protected.

Other grounds of termination by court: (1) Unanticipated circumstances threaten the trust’s purpose; (2) Continuation of the trust on its existing terms is impracticable or wasteful; or (3) The value of the trust is insufficient to justify the cost of administration.

Question 20

Termination of Trusts by Trustees

Answer 20

A trust that has insufficient property to justify the cost of administration may be terminated by the trustee. Trustee must notify all beneficiaries, wind-up the affairs of the trust, and distribute whatever remains to remainder beneficiaries.

Question 21

Powers of a Trustee

Express Powers: Mandatory & Discretionary; Implied Powers

Answer 21

Imperative (Mandatory) Powers: Powers enumerated in the trust instrument that MUST be exercised (e.g., Pay $1,000 per month to Beneficiary).

Discretionary Powers: Powers that the trustee may or may no perform as the trustee determines in their judgment to be most appropriate. Trustee must act in good faith and their discretionary acts subject to abuse-of-discretion review. No trustee is entitled to “absolute discretion”.

Implied Powers: Powers that are appropriate to achieve the proper investment, management, and distribution of the trust property (e.g., sell trust property; lease trust property; incur reasonable expenses; hire agents; mortgage trust property; and repair property).

ExamTip: UTC has numerous powers enumerated for trustees.

Question 22

Duties of a Trustee

Answer 22

1. Duty to Administer Trust in good faith and in a prudent manner
2. Duty of Undivided Loyalty to avoid self-dealing and treat beneficiaries with utmost fairness AND impartiality (ExamTip: Trustee’s good faith or benefit to the trust is irrelevant. Self-dealing is a per se violation of this duty).
3. Duty to Report an annual accounting of the trust, trustee’s contact information, and information about the trust administration when requested.
4. Duty to Separate Trust Property: Simply no commingling of “earmarked” trust property.
5. Duty to Invest Trust Property Prudently / Duty to Diversify Trust Investments

Question 23

Prohibited Self-Dealing & Its Consequences

Answer 23

A trustee must not (1) buy from or sell to trust any of his property; (2) borrow funds from trust or loan money to the trust; (3) use trust assets as collateral; (4) cannot gain personally as trustee. All of these would entail self-dealing if a close relative of Trustee engaged in them.

Consequences: Self-dealing transactions are VOIDABLE by the affected beneficiary UNLESS (1) a court or the express terms of the trust approved it; (2) beneficiary failed to bring a timely suit; (3) beneficiary consented or ratified.

Question 24

Prudent Investor Rule

Answer 24

A trustee must exercise reasonable care, skill, and caution when investing and managing trust assets.

Investment decisions are evaluated by an assessment of the entire trust portfolio. Trustee must have an overall investment strategy!

Question 25

Delegation of Investment and Management Functions by Trustee

Answer 25

A trustee may delegate investment and management functions. Trustee must act prudently by (1) selecting an agent; (2) establishing the scope and terms of the delegation; and (3) periodically reviewing the agent’s actions.

ExamTip: If delegation is PROPER, trustee is not liable to the beneficiaries for the decisions or actions of the agent.

Question 26

Remedies for Breach of Trust

Answer 26

1. specific performance of trustee’s duties; 2. enjoinment of trustee from a breach of trust; 3. compel trustee to pay money or restore property; 4. suspend or remove trustee

Trustee is liable for the greater of: (1) Amount necessary to restore the trust property and distributions to what they would have been absent the breach; or (2) Trustee’s profit from the breach.

ExamTip: Trustee will not be liable to beneficiary if there has been a (1) ratification by B; (2) reasonable reliance on trust terms; or (3) release from liability.

Question 27

Remedies for Self-Dealing

Answer 27

Pick one of three options:
1. Affirm the transaction if the trust PROFITED
2. Set aside the transaction if the trust LOST money
3. Trace profits from the trustee if the trustee profited

Question 28

What effect does a BFP have on sold trust property?

Answer 28

A bona fide purchaser cuts off the beneficiaries’ equitable interests.

An innocent donee of trust property is not liable for damages but must restore the property, its value, or a substitute.

Question 29

Trustee’s Adjustment Power

Answer 29

If a Trustee determines that by distributing only the trust’s income the trustee is unable to comply with the requirement that all beneficiaries be treated fairly, the trustee may adjust between principal and income to the extent necessary.

Question 30

Principal and Income

Answer 30

Following items MUST be allocated to income: (1) receipt of rental payments; (2) money received from an entity (i.e., interest on investments and cash dividends); (3) ordinary expenses and repairs.

Following MUST be allocated to principal: (1) proceeds from the sale of a principal asset; (2) all property other than money received from an entity; (3) extraordinary expenses and repairs (i.e., unforeseen occurrence causes a need for repair).

Question 31

Charitable Trusts

Answer 31

A charitable trust must (1) have indefinite beneficiaries; (2) may be perpetual; and (3) must have a charitable purpose.

Charitable purposes include (1) relief of poverty; (2) advancement of education or religion; (3) promotion of health; (4) accomplishment of government purposes (e.g., parks, museums, playgrounds).

Enforcement: State’s attorney general or a qualified beneficiary may enforce the charitable trust.

ExamTip: Charitable Trusts are NOT bound by RAP.

Question 32

Doctrine of Cy Pres

Answer 32

Settlor’s charitable purpose that is impracticable, unlawful, impossible to achieve, or wasteful may be replaced with an alternative. The Court will select an alternative purpose that is “as near as possible” by ascertaining the settlor’s primary purpose.

Traditionally, cy pres applied only if the settlor had a general charitable intent. Under the UTC, however, settlor’s charitable intent is conclusively presumed.

Question 33

Constructive Trusts

Answer 33

An equitable remedy to prevent unjust enrichment resulting from wrongful conduct, such as fraud, undue influence, or breach of fiduciary duty. Equity turns the holder of legal title into a trustee when they may not, in good conscience, retain the beneficial interest in the property. Constructive trustee MUST convey the property to the rightful owner.

Constructive trust will be imposed when (1) fraudulent promise causes transfer of property; (2) breach of promise by one in a confidential relationship (e.g., attorney-client); or (3) breach of promise by the decedent’s devisee or heir to hold property for the benefit of a third-person.

E.g., A takes property of decedent by a will signed under duress. If not for duress, property would have gone to B. A holds the property in constructive trust for B.