Trusts

Question 1

Support Trust

Answer 1

A support trust is one where the trustee is required to pay or apply so much of the trust (income or principal) as is necessary for the beneficiary’s support (health, maintenance, education & support)

-Standard of support if not in instrument: lifestyle to which beneficiary accustomed to

-Trustee does not have discretion to refuse to pay bills necessary for the beneficiary’s support

Question 2

Discretionary Trust

Answer 2

In a discretionary trust, trustee is given discretion whether to apply or withhold payments of income or principal (or trust property) to the beneficiary. This discretion actually limits the rights of the beneficiary to the amounts the trustee decides to give her.

The beneficiary cannot interfere with the exercise of the trustee’s discretion unless the trustee abuses her power. What constitutes abuse depends on the extent of discretion conferred on the trustee. Generally, a court will not interfere unless the trustee has acted in bad faith or dishonesty.

Question 3

Trustee

Answer 3

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

Question 4

Duties of Trustee

Answer 4

Owes fiduciary duties to beneficiaries:
1) Trustee must deal with property w/ reasonable care
2) Trustee owes a duty of loyalty to beneficiaries to exercise the utmost good faith in all matters pertaining to the trust
-Trustee must avoid self-dealing, personally benefitting from trust, purchasing property from trust, selling their own property to trust, borrowing from trust, or claim excessive compensation
-Trustee’s good faith or fairness is irrelevant

Question 5

Trust Termination/Modification

Answer 5

-Most jurisdictions permit termination of a trust by its beneficiaries only if all of the beneficiaries consent and the modification will not interfere with a material purpose of the trust.

-Although permitted by the UTC, most states do not permit a guardian to consent to the termination of a trust on behalf of unborn beneficiaries

Question 6

Spendthrift Provision + Termination?

Answer 6

Presence of a spendthrift provision precludes termination of a trust because it shows the settlor’s purpose and manifests his lack of confidence in the judgment and management ability of the beneficiary

Question 7

Valid Trust

Answer 7

To create a valid trust, there must be 1) a settlor who, 2) intending to create a trust for a 3) valid trust purpose, 4) delivers the 5) trust property 6) to the trustee to hold for benefit of 7) one or more beneficiaries.

-Trust can fail for lack of trust property

-Trust will NOT fail for lack of trustee, one will be appointed

-If there are no trust assets when the instrument is executed (i.e. the settlor promises gratuitously to create a trust in the future), a trust arises in the future only if, when the assets come into existence, the settlor manifests anew an intention to create the trust. This remanifestation is not required, however, if the promise is supported by valid consideration.

Question 8

Pour-Over gift from Will to Trust

Answer 8

A pour-over gift is a testamentary gift to a trust created during the testator’s lifetime, with the testamentary assets to be administered and distributed as part of that trust.

Under the 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.

Under the prevailing 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 may be established after the will is executed but before the testator’s death.

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

Question 9

Spendthrift Trust

Answer 9

A spendthrift trust is one in which the beneficiary is unable voluntarily or involuntarily to transfer his interest in the trust. He cannot sell or give away his rights to future income or capital, and his creditors generally are unable to collect or attach such rights.

EXCEPTION: However, an exception is made when the settlor is a beneficiary of the trust and attempts to protect his own retained interests from his creditors by the inclusion of a spendthrift provision. In that event, the settlor-beneficiary’s creditor can reach his right to the income just as if the spendthrift provision did not exist.

Question 10

Beneficiaries

Answer 10

Because a trust cannot exist without someone to enforce it, definite beneficiaries are necessary to the validity of a trust.

Although the beneficiaries need not be identified at the time a trust is created, they must be susceptible of identification by the time their interests come into enjoyment.

The trust beneficiaries may be a class, provided that the class is sufficiently definite. The settlor can even allow the trustee in its discretion to select the members as long as the class is reasonably definite. If the class is too broad, however, the trust (or a portion thereof) may be invalid for a lack of definite beneficiaries.

Question 11

Trust Fails for a Lack of Beneficiary

Answer 11

When a portion of the trust fails for lack of a beneficiary, a resulting trust in favor of the settlor or the settlor’s successors in interest is presumed.

Called the “residuary beneficiary.”

Question 12

Creditors Rights

Answer 12

Except as otherwise provided by statute or as validly restricted by the terms of the trust instrument (spendthrift provision), the interest of an insolvent trust beneficiary can generally be reached in appropriate proceedings to satisfy the claims of his creditors.

However, the creditor reaches only the interest of the beneficiary and not the trust property itself. (only whenever the beneficiary is entitled to receiving from the trust)

Question 13

Cy Pres Doctrine

Answer 13

The cy pres doctrine applies when a specific charitable purpose indicated by the settlor is no longer possible or practical, and the settlor manifested a general charitable intent.

In such a case, the court can direct that the trust property be applied to another charitable purpose as close as possible to the original one, rather than permit the trust to fail and become a resulting trust.

In states following the Uniform Trust Code, the settlor’s general charitable intent is conclusively presumed. In those states, absent express trust terms to the contrary, application of cy pre is mandatory.

Question 14

Cy Pres Doctrine

Answer 14

The cy pres doctrine applies when a specific charitable purpose indicated by the settlor is no longer possible or practical, and the settlor manifested a general charitable intent.

In such a case, the court can direct that the trust property be applied to another charitable purpose as close as possible to the original one, rather than permit the trust to fail and become a resulting trust.

In states following the Uniform Trust Code, the settlor’s general charitable intent is conclusively presumed. In those states, absent express trust terms to the contrary, application of cy pre is mandatory.

Question 15

Merger of Title

Answer 15

Merger of title results in termination of a trust where the SOLE trustee is also the SOLE beneficiary.

Does not apply where there are other beneficiaries.

Question 16

If Settlor wants to retain full control of assets & ability to add assets to trust?

Answer 16

If settlor wishes to retain full control of the trust assets, one solution would be to name himself as trustee.

Although a trust will not fail for lack of a trustee (when Settlor dies), Settlor could name Bank or X as successor trustee to ensure that (their spouse or whoever they did not want to be trustee) is not appointed.

Question 17

Amending or Revoking a Trust

Answer 17

Under the Uniform Trust Code, a settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable.

However, many states still follow the common law rule, which requires that the settlor reserve the power to revoke and amend. In those states, a trust is irrevocable unless the instrument expressly states otherwise. Thus, for the settlor to retain control in those states, the trust instrument should expressly state that it is revocable.

Question 18

Settlor wants to add assets to trust later?

Answer 18

Generally, a trustee’s duties cannot be enlarged after he has accepted. This makes it difficult to add assets to the trust.

OPTIONS:
1) Revise the trust instrument to expressly provide for later additions to the trust corpus
2) Executing the trust instrument but leaving the trust unfunded until his death. Then, settlor can include a pour-over provision in settlor’s will to fund the trust, and would have full control of all of their assets until their death,

Question 19

How can Settlor ensure a beneficiary is comfortably provided for after his death?

Answer 19

1) Create a support trust
OR
2) Create a discretionary trust with an ascertainable standard: “Trustee shall pay trust income and principal to X as is necessary to comfortably provide for X’s support.” This standard would allow X to compel distributions.
OR
3) Giving beneficiary a right to withdraw trust principal. This right could be unconditional or it could be limited to withdrawals necessary to ensure beneficiary’s comfortable support.

Question 20

Power of Appointment

Answer 20

(How a Settlor can give a beneficiary the power to allocate trust assets in the beneficiary’s will in favor of his issue)

A power of appointment is an authority created in a donee enabling the donee to designate, within the limits prescribed by the donor of the power, the persons who shall take certain property and the manner in which they shall take it.

A general power of appointment is exercisable in favor of the donee, her estate, her creditors, or the creditors of her estate.

A special power of appointment, on the other hand, is exercisable in favor of a specified class of persons that does not include the donee, her estate, her creditors, or the creditors of her estate.

A presently exercisable power is exercisable by the donee during her lifetime.
A testamentary power is one that is exercisable only by the donee’s will.

Question 21

Anti-Lapse Statutes

Answer 21

Nearly all states have anti-lapse statutes that operate to save a gift to a predeceasing beneficiary if the beneficiary was in a specified degree of relationship to the testator and left surviving descendants.

Several states and the Uniform Probate Code apply the anti-lapse statute to future interests created in trusts (even to those conditioned on survival), but in most states the anti-lapse statute applies only to testamentary gifts.

In an state that does not apply the anti-lapse statute to trusts, the trust instrument should expressly provide that issue of deceased children take their parent’s share.