Trusts

Question 1

Trust defined

Answer 1

A fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries, who hold equitable title.

Question 2

Settlor defined

Answer 2

the person who causes the trust to come into existence

Question 3

Ownership in Trust

Answer 3

Legal interest = held by trustee
Equitable interest = held by beneficiary

Question 4

Purposes and Uses of Trust

Answer 4

1. Providing for and protecting trust beneficiaries
2. Flexibility of asset distribution
3. Protection against settlors’ incompetence
4. Professional management of property
5. Probate avoidance
6. Tax benefits

Question 5

What is an express trust

Answer 5

Created by the express intention of the settlor (can be private or charitable)

Question 6

Two types of trusts created by operation of law

Answer 6

Resulting trusts: arise from the presumed intention of the owner of the property

Constructive trusts: an equitable remedy used to prevent unjust enrichment

Question 7

Six elements of a valid trust

Answer 7

1. Intent
2. Identifiable corpus
3. Ascertainable beneficiaries
4. Proper purpose
5. Trustee
6. Mechanics and formalities

Question 8

Intent required to create a valid trust

Answer 8

• No formal words required;
• Communication of intent to beneficiary not required
• Settlors intent must be that the truest take effect immediately
• No precatory expressions
• Split of title (any split of title is sufficient so long as the sole trustee is not to sole beneficiary)

Question 9

Identifiable corpus required to create a valid trust

Answer 9

• No res, no trust
• Property settlor cannot transfer or does not yet own cannot be trust property
• Trust res must be segregated from other property

Question 10

Beneficiaries requirement to form a valid trust

Answer 10

• An ascertainable beneficiary is necessary to the validity of every trust except charitable and honorary trust
• Any person capable of taking and holding legal title to property can be a beneficiary of a private trust
• The trust must operate directly to benefit the person
• Class gifts  must be sufficiently ascertainable

Question 11

What is a qualified beneficiary

Answer 11

1) current beneficiary, or 2) a first-line remainderman

Question 12

What is a disclaimer?

Answer 12

no one can be compelled to accept an interest in a trust against their will

Question 13

How does divorce effect a trust beneficiary?

Answer 13

a final decree of divorce or annulment revokes all beneficial gifts and fiduciary appointments in favor of a former spouse

Question 14

When is a trust purpose invalid?

Answer 14

o Illegal
o Contrary to public policy
o Impossible to achieve
o Intended to defraud the settlor’s creditors or based on illegal consideration

Question 15

Will a trust fail because the trustee dies, refuses to accept appointment, or resigns?

Answer 15

No, Court will appoint a successor trustee

Question 16

A person accepts a trusteeship by:

Answer 16

o Signing the trust or a separate written acceptance
o Substantially complying with the acceptance terms in the trust instrument
o Accepting delivery of trust property, exercising powers or performing duties as a trustee, or indicating acceptance

Question 17

Grounds for removal of trustee

Answer 17

o A serious breach of trust
o Serious lack of cooperation among co-trustees
o Unfitness, unwillingness, or persistent failure to administer
o Substantial change in circumstances

Question 18

What is an inter vivos trust?

Answer 18

Created while the settlor is alive either by the settlor declaring themselves trustee for another or by the transfer of property to another as trustee

Question 19

What is a testamentary trust?

Answer 19

Created in the settlors valid will

Question 20

What is a pout-over gift from will to trust?

Answer 20

A settlor can make gifts by will to a trust established during their lifetime.

Question 21

What is a discretionary trust?

Answer 21

Trustee is given discretion whether to apply or withhold payments of income or principal to a beneficiary

• Exception: claims of child, spouse, or former spouse support

Question 22

What is a spendthrift trust?

Answer 22

Precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust, and the beneficiary’s creditors are precluded from reaching it to satisfy their claims.

Question 23

What is a support trust?

Answer 23

Directs the trustee to pay only so much of the income or principal as is necessary for the beneficiary’s support.

Question 24

When can a trust be modified/terminated by the settlor?

Answer 24

A settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable

Question 25

When can a trust be modified/terminated by the beneficiaries?

Answer 25

• 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 the material purpose of the trust
• Without settlor’s consent: A trust also may be terminated or modified on the consent of only all beneficiaries, but only if no material purpose of the trust would thereby be frustrated.

Question 26

When can a trust be modified/terminated by operation of law?

Answer 26

trust will terminate by operation of law if the property has been exhausted or if the legal and equitable titles have merged.

Question 27

When can a trust be modified/terminated by the court?

Answer 27

court may terminate or modify the trust if 1) the trust could have been modified if all beneficiaries had consented, and 2) the interests of any nonconsenting beneficiaries will be adequately protected.

Additionally, a court may modify/terminate a trust if
o Unanticipated circumstances threaten the purpose of the trust
o Continuation of the trust on its existing terms is impracticable or wasteful, or
o The value of the trust is insufficient to justify the cost of administration or to achieve the settlors tax objectives.

Question 28

When can a trust be modified/terminated by the trustee?

Answer 28

A trustee can terminate a trust if the trust property is less than 50k and the amount is insufficient to justify the cost of administration.