Trusts

Question 1

Allocation between income and principal

Answer 1

All assets received by a trustee must be allocated to either income or principal

Question 2

How to balance allocations of trust proeprty

Answer 2

The allocation of assets between the principal and income must be balanced so as to treat present and future trust beneficiaries fairly, unless a different treatment is authorized by the trust instrument

Question 3

Traditional approach to allocating trust assets

Answer 3

The traditional approach assumed that any money generated by trust property was income and that any money generated in connection with a conveyance of trust property was principal

Question 4

UPAIA and reallocating trust assets

Answer 4

Under UPAIA, a trustee is empowered to recharacterize items and reallocate investement returns as they deem necessary to fulfill trust purposes, as long as their allocations are reasonable and are in keeping with the trust instrument

Question 5

How are stock distributions treated for allocation

Answer 5

A distribution of stock is treated as a distribution of principal under UPAIA

Question 6

Class gift

Answer 6

A gift to a group of individuals with an automatic right of survivorship is a class gift

Question 7

Closing of class

Answer 7

A class remains open and may admit new members until at least one class member is entitled to obtain possession of the gift or the preceding instrument terminates.

Question 8

Vested remainder accelerating into possession

Answer 8

A vested remainder accelerates into possession as soon as the preceding estate ends for any reason, such as the disclaiming of the estate by its holder

Question 9

What happens if the income benficiary of a trust disclaims their interest

Answer 9

If the income benficiary of a trust disclaims their interest, the trust principal becomes immediately distributable to the presumptive remainder beneficiaries of the trust, provided no one would be harmed by making a distribution to them earlier than it would have been made had the income beneficiary not disclaimed

Question 10

When may a trust be modified

Answer 10

A court may modify a trust if events that were unanticipated by the settlor have occurred and the changes would further the purposes of the trust.

Question 11

Parameters for modifying a trust

Answer 11

To the extent possible, the modification must be made in accordance with the settlor’s probable intention, and the court need not seek beneficiary consent to make the modification.

Question 12

Cy pres doctrine

Answer 12

In an effort to carry out the testator’s intent, under the cy pres doctrine, a court may modify a charitable trust to seek an alternative charitable purpose if the original charitable purpose becomes illegal, impracticable, or impossible to perform.

Question 14

Settlor intent and cy pres

Answer 14

In modifying a trust under the doctrine of cy pres, the settlor’s intent controls

Question 15

Cy pres and if the settlor did not want an alternative charitable purpose

Answer 15

If it appears that the settlor would not have wished that an alternative charitable purpose be selected, the trust property may instead be subject to a resulting trust for the benefit of the settlor’s estate.

Question 16

Presumption of charitable purpose and cy pres

Answer 16

Under both the Uniform Trust Code and Restatement (Third) of Trusts, there is a rebuttable presumption that the settlor had a general charitable purpose

Question 17

Modification of a trust when circumstances have not changed in an unanticipated manner

Answer 17

Even if circumstances have not changed in an unanticipated manner, a court may modify the terms of a trust that relate to the management of trust property if continuing the trust on its existing terms would be impracticabl or uneconomic

Question 18

Discretionary trust

Answer 18

If a trustee is given complete discretion regarding whether to apply payments of income or principal to the beneficiary, a discretionary trust exists

Question 19

Support trust

Answer 19

If a trustee is to make payments to the beneficiaries of the trust as is necessary for their support, then a support trust exists

Question 20

Necessity for purposes of support trust

Answer 20

“Necessary” is not limited to bare essentials, but includes maintaining the standard of living to which the beneficiary is accustomed, as well as support for the beneficiary’s spouse and children

Question 21

Health care bills and support trusts

Answer 21

Clearly encompassed within the definition of “support” are expenses related to a beneficiary’s health.

Question 22

Administering a discretionary trust in good faith

Answer 22

The trustee of a discretionary trust has a duty to administer the trust in good faith, in accordance with its terms and provisions, and in the interests of the beneficiaries.

Question 23

Duty of impartiality

Answer 23

Trustees have a duty to be impartial when dealing with the beneficiaries of a trust, including not to be influenced by the trustee’s personal favortism or animosity

Question 24

Creditors rights to discretionary trust assets

Answer 24

In a discretionary trust, if the trustee exercises his discretion to pay, then the beneficiary’s creditors have the same rights as the beneficiary, unless a spendthrift provision exists.

Question 25

Spendthrift trust

Answer 25

A spendthrift trust expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest in the trust.

Question 26

When may a trust be terminated

Answer 26

A trust may terminate by consent if all beneficiaries and the trustee consent to the termination.

Question 27

Claflin doctrine

Answer 27

Under the claflin doctrine, a trustee can block a premature trust termination, even one to which the beneficiaries have consented, if the trust has an unfufilled material purpose

Question 28

When will court allow trustee to block termination of trust

Answer 28

Most courts allow a trustee to block the termination if it can be shown that termination would violate the settlor’s intent

Question 29

Class gift

Answer 29

A gift to a group of individuals with an automatic right of survivorship is a class gift

Question 30

CL rule of construction for class gift to children

Answer 30

Unless the governing instrument provides otherwise, the common law general rule is that the gift is expressly limited to the transferor’s surviving children, so that the surviving issue of a deceased child does not take

Question 31

UPC construction of class gift to children

Answer 31

Under the UPC, if a class gift is limited in favor of a class of children, only those chldren alive at the time of distribution are entitled to trust property. If a child survives T but predeceases the time of distribution, their issue would have a right to the parent’s share of the gift

Question 32

How long does a class remain open

Answer 32

A class remains open and may admit new members until (i) at least one member is entitled to take possession or (ii) the preceding interest terminates.

Question 33

Trustee’s fiduciary duty once the trust terminates

Answer 33

When a trust terminates, title merges and vests in the beneficiaries. Thus, once a trust terminates, the trustee would not vioalte any fiduciary duties by making distributions pursuant to the beneficiaries’ directions

Question 34

Trustee’s duty of good faith

Answer 34

A trustee has a duty to administer the trust in good faith, in accordance with its terms and purposes, and in the interest of the beneficiaries

Question 35

Private express trust

Answer 35

A private express trust clearly states the intention of the settlor to transfer property to a trustee for the benefit of one or more ascertainable beneficiaries

Question 36

Presumption of irrevocable trusts

Answer 36

Traditionally, and in a minority of JDXs today, a trust is presumed to be irrevocable

Question 37

UTC/majority rule on revocability

Answer 37

Under the UTC and majority rule, a trust is presumed to be revocable unless it expressly states that it is irrevocable.

Question 38

Effect of being able to revoke trust

with regard to modification

Answer 38

If the trust is revocable, a settlor may amend or revoke a revocable trust by substantial compliance with a method provided in the terms of trust

Question 39

Power of appointment

Answer 39

A power of appointment enables the holder to direct a trustee to distribute some or all of the trust property without regard to the provisions of the trust

Question 40

Special power of appointment

Answer 40

A special power of appointment allows the donor to specify certain individuals as the objects of the power, to the exclusion of others

Question 41

What happens when one exceeds their power of appointment

Answer 41

When one with a power of appointment makes an appointment that exceeds the grant given to him, other valid appointments are not invalidated, but the property or interest that was invalidly appointed passes to the “taker in default of appointment” – the party who would have received the itnerest in the absence of any appointment

Question 42

Elective share

Answer 42

An elective share gives a surviving spouse a fraction of the decedent’s estate if the surviving spouse decides to elect that share, rather than a gift in the will.

Question 43

What is included in the probate estate

Answer 43

The probate estate includes all assets that pass by will or intestacy upon a decedent’s death.

Question 44

Trust as a will substitute

Answer 44

A trust is generally considered a will substitute because the distribution upon death of property placed in a trust by an individual during her lifetime is determined by the terms of the trust, not the will or intestate rule