Trusts

Question 1

trust definition

Answer 1

a formal arrangement intentionally created by a settlor under which a trustee manages property for the benefit of a beneficiary

Question 2

types of express trusts

Answer 2

charitable: set up for a charitable purpose and it typically has a large class of beneficiaries

private: non-charitable purpose
kinds of interests typically found:
1)right to receive income from the trust
2) principal of the trust

Question 3

constructive and resulting trusts

Answer 3

an equitable remedy that arises by operation of law

Question 4

hallmark of the trust arrangement

Answer 4

trust holds legal title but not equitable title

Question 5

trustee’s creditors

Answer 5

personal creditors of trustee cannot reach trust assets

creditors of the trustee in their fiduciary capacity cannot reach personal assets
caveat: if breaches fiduciary duties, personal assets are at risk

Question 6

what law is applied

Answer 6

VA law applies
follows the Uniform trust code with a few modifications

Question 7

Knowledge under the UTC

Answer 7

A person has knowledge of a fact if:
1) she has actual knowledge of that fact
2) she has received notice/notification of that fact or
3) based on all the facts and circumstances known to the person at the relevant time, she has reason to know that fact

corp/entity has knowledge if the relevant info is:
1) received by an employee having responsibility to act for the trust, or
2) would have been brought to the employee’s attention if the corp exercised reasonable diligence

Question 8

qualified beneficiary under the UTC

Answer 8

a living beneficiary who is likely to be affected by a change to the trust because the beneficiary is:
1) a permissible distributee of trust income or principal, or
2) would be a permissible distributee if either the interests of other qualified beneficiaries terminated or the trust itself terminated

Question 9

representation under the UTC

Answer 9

when a beneficiary is not capable of acting on their own behalf, must act through a representative
there cant be a conflict of interest
UTC allows for virtual representation

Question 10

UTC as default rules

Answer 10

they apply in the absence of some provision to the contrary in the trust
if conflict: trust instrument controls

there are certain rules that cannot be modified by the trust instrument

Question 11

relationship between UTC and common law

Answer 11

UTC does not displace the rules about trusts under CL or equity
continue to apply as long as there is no conflict
if conflict: UTC controls

Question 12

choice of law

Answer 12

the law of the jurisdiction designated in the trust unless the designation is contrary to public policy of the jurisdiction having the most significant relationship to the matter

examples:
1) laws on self-settled spendthrift trusts
2) privileged status of claims for child support against spendthrift and discretionary trusts
3) inheritance rights of spouse under rules for elective share/ augmented estate

Question 13

five methods of creating a trust

Answer 13

1) a transfer of property by the settlor to another person as trustee during the settlor’s lifetime
2) a declaration by the owner of property that the owner holds identifiable property as trustee
3) Testamentary trust:a transfer of property by the settlor under the settlors will that takes effect upon settlors death
4) exercise of a power of appointment in favor of a trustee
5) a petition by an interested party to a circuit court

Question 14

elements of a trust

Answer 14

1) there must be a settlor with capacity to make a trust
2) settlor must have the intention of creating a trust
(doesnt have to be written)
cant be through fraud etc.
3)trust must have a purpose that is lawful, not contrary to public policy, and possible to achieve
4)trust must have one or more beneficiaries
5)trust must have a trustee

Question 15

how does a trustee accepts the role

Answer 15

1)substantially complies with the terms of the trust regarding acceptance, or
2) the trustee accepts the trust property, exercises trust powers, and performs trust duties

Question 16

how can a trustee be removed

Answer 16

1) by courts own motion, or
2) by request for a breach of trust, lack of cooperation, unfitness, or a substantial change in circumstances

Question 17

trusts not required to have ascertainable beneficiaries

Answer 17

charitable trust
trust for care of an animal
certain trusts permitted by UTC

Question 18

Charitable trust

Answer 18

trust for the:
1)relief of poverty
2) advancement of education or religion
3) promotion of health
4) promotion of a gov or municipal purpose, or
5) promotion of other purposes the achievement of which is beneficial to the community

Question 19

Trust for care of an animal

Answer 19

UTC allows a settlor to establish a trust for the care of an animal that was alive during the settlor’s lifetime

cannot put excessive amounts in the trust- will be distributed out

Question 20

UTC time when ascertainable beneficiary not necessary

Answer 20

UTC allows for the creation of a trust for a non-charitable purpose that does not have a definite ascertainable beneficiary or for a non-charitable purpose to be selected by the trustee

cannot last longer than 21 years

enforced by someone:
1)named in the trust, or
2) appointed by the court

cannot have excessive amounts

Question 21

Rule against perpetuities

Answer 21

Uniform statutory rule against perpetuities: an interest is valid if it either:
1) satisfies the CL version of the rule, or
2) actually vests or lapses unvested within 90 years of when the interest is created

interest is created when the trust becomes irrevocable

trusts that are exempt:
1)charitable trusts
2) cemetery trusts
3) perpetual-care funds, and
4) employer provided retirement plans

opting out:
can write in trust instrument for any personal property but not real property

Question 22

spendthrift trusts

Answer 22

contains a spendthrift clause that prohibits a beneficiary from alienating their interest in the trust

prohibits both the voluntary and involuntary alienation of the trust interest

doesnt prohibit a creditor from reaching the money already in the beneficiary’s hand

extends only to beneficiary who is not also the settlor of the trust

Question 23

exceptions to spendthrift protection

Answer 23

exception creditors:
1) a child of the beneficiary who has a judgment or order against the beneficiary
2) a judgment creditor who has provided services for the protection of the beneficiary’s interest in the trust
3) government: except special needs/supplemental needs trusts

Overdue distributions
due under the terms of the trust but trustee doesnt make it within a reasonable time after the designated distribution date
treated as an asset of the beneficiary

Question 24

discretionary

Answer 24

trust that provides for distributions to be made at the discretion of the trustee
cant compel distributions to be made, but if not a spendthrift can garnish any distributions that are made

Question 25

protection of settlor from creditors under a revocable trust

Answer 25

while alive, treated as though they are the owner of whatever assets are in the trust

after death: if there is not enough money in probate, trust assets can still be reached by creditors and are available for the costs of settling the settlor’s estate and to satisfy allowances to survivors

Question 26

protection of settlor from creditors under irrevocable trust

Answer 26

general rule: if settlor makes herself the beneficiary of an irrevocable trust, the settlor’s creditors can reach the assets up to the maximum amount that could be distributed for the settlor’s benefit

Question 27

Qualified self-settled spendthrift trust

Answer 27

exception to settlor rule of creditors under irrevocable trusts

four reqs:
1) trust is irrevocable
2) trust incorporate VA law and includes an otherwise valid spendthrift clause
3) A VA trustee who is independent of the settlor has sole discretion as to whether to distribute and
4) at least one other beneficiary is entitled to receive distribution of income or principal during the settlor’s lifetime

who is not independent:
1)settlor
2)settlor’s spouse, children, siblings
3) an employee of the settlor, and
4) any business entity with respect to which the settlor has 30% or more of the voting power

what is protected:
1) any assets are protected from the claims of a future creditor
2) those assets are also protected from the claims of a current creditor for which no collection action is initiated within five years of the transfer, unless the creditor can show that the settlor’s transfer of the assets into the trust was made with the intent to delay, hinder, or defraud the settlor’s creditors.

Question 28

examples of will substitutes

Answer 28

revocable trust
life insurance
bank accounts
statutory trusts

Question 29

revocable trusts

Answer 29

any inter vivos trust created on/after July 1 2006 is a revocable trust unless expressly stated otherwise

not subject to same reqs as a will but do have to have mental capacity and it is treated as part of the augmented estate

pour over trust: allowed as long as identified in the will and terms are set forth in a written instrument

Question 30

settlor control of revocable trust

Answer 30

settlor has extensive control: can change or revoke up until death

trustee owes fiduciary duties to settlor not beneficiary

Question 31

amending/revoking a revocable trust

Answer 31

if made in substantial compliance with the reqs of trust instrument
or by any method that manifests intent by clear/convincing evidence

divorce/annulment: same rules as wills

Question 32

challenges to validity of revocable trusts

Answer 32

may challenge no later than the earlier of:
1) 2 years after the settlor’s death, or
2) 6 months after trustee sends the person a copy of the trust

if trust is declared invalid, and distributions received have to be returned

Question 33

life insurance

Answer 33

can be held in a trust with the trustee as the beneficiary
any spendthrift protection protects the trust as well

Question 34

bank accounts

Answer 34

joint saving accounts and joint checking accounts are presumed to be survivorship accounts unless clear and convincing evidence to the contrary
P.O.D accounts: money goes to designated person after death

Question 35

statutory trsts

Answer 35

Uniform transfer to minors act: a gift to a custodian for a minor creates a statutory trustL custodian becomes the trustee

Uniform custodial trust act: holds assets for a beneficiary in the event of the beneficiary’s incapacity

Question 36

general fiduciary duties and obligations of the trustee

Answer 36

1)administer the trust and invest the trust assets in good faith in accordance with the terms and the purposes of the trust and in the interest of the trust beneficiaries
2) must comply with the UTC, UPIA, and UP and Income Act
3) fundamental duties of loyalty, prudence, and impartiality
4) permitted to delegate powers and duties: if in good faith, not liable for the acts of the agent

Question 37

Trustee duty of loyalty

Answer 37

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

if operates under a conflict of interest in a transaction involving trust assets, transaction is voidable by the beneficiary
presumed conflict of interest if:
1)The trustee’s spouse;
2)The trustee’s descendants, siblings, parents, or their spouses;
3)An agent or attorney of the trustee; or
4)A corporation or other person or enterprise in which the trustee has an interest that might affect the trustee’s best judgment.
**can be validated if it is authorized by the terms of the trust, a court order, the consent of the beneficiaries

prohibits the trustee from commingling trust property with any property of another trust or trustee’s own property

Question 38

trustee’s duty of impartiality

Answer 38

address the divergence interests among the beneficiaries- must consider all of them

Uniform Principal and Income Act: balancing of interest between income and principal beneficiaries

unitrusts: distributions will be determined as a percentage (between 3 and 5%) of total trust assets without regard to distinction between income and principal

allocation of trust expenses:
Income:
1)half the trustee’s commissions
2)half total expenses
3)ordinary expenses such as interest payments

Principal:
1)half commissions
2) half total expenses
3) payments on mortgage principal
4) taxes, and
5) any disbursements related to environmental matter

Question 39

duty of prudence

Answer 39

requires the trustee to administer the trust as a prudent person would
if has special skill- should use it

Uniform prudent investor act: default rules
have to invest within reasonable time: 4 months
establishing an investment strategy
diversify unless better served without it or terms of the trust allow opposite
can delegate
safe harbor for small trusts: conclusively presumed to have been diversified

Question 40

multiple trustee

Answer 40

multiple trustees typically act by unanimous decision, if disagreement- majority

may be responsible for action of another trustee:
1)each trustee has a duty to exercise reasonable care to prevent another from committing a serious breach of duty
2) in the event of a breach, each trustee has a duty to make the breaching trustee remedy the breach

Question 41

following directions as a trustee

Answer 41

revocable: trustee may follow directions of settlor even if they would violate the terms

trust director: power to give directions to the trustee- has duties
protects trustee from liability absent willful misconduct or gross negligence

Question 42

available remedies against a trustee

Answer 42

a court may:
1)issue an injunction to compel trustee to perform their duties
2) injunction to prohibit trustee from committing a breach of trust
3) order the trustee to pay money damages, restore property, or otherwise redress the breach
4) suspend or remove the trustee, or
5) reduce or deny compensation to the trustee

Question 43

money damages that the trustee would be liable to pay

Answer 43

the greater of:
1) the amount needed to restore the value of the trust property or
2) the amount by which the trustee profited from the breach

damages cannot be speculative

Question 44

trustee obtaining a contribution from a co-trustee

Answer 44

to obtain, co-trustee must also be liable from the breach
cannot obtain if trustee seeking contribution:
1) was substantially more at fault
2) committed the breach in bad faith, or
3) committed the breach with reckless indifference to the purposes of the trust or the interests of the beneficiaries

Question 45

third party liability for trustee’s breach

Answer 45

generally are protected if third party acts in good faith and without knowledge of the breach
3rd party not required to determine:
1)scope of the trustee’s powers, or
2) propriety of the trustee’s actions

Question 46

trustee liability even if there is not a breach of trust

Answer 46

is liable for any improper profit
but is not liable for a loss or depreciation in value of trust

Question 47

transferring the principal place of trust administration

Answer 47

may transfer without judicial intervention, except a testamentary trust

must notify all qualified beneficiaries at least 60 days before initiating or dont need court approval if no beneficiary objects

Question 48

terminating the trust without court approval

Answer 48

may do so if the trustee determines that the value of the trust does not justify the cost of trust administration

3 reqs:
1) total value cannot exceed 100,000
2) trustee must give notice to the qualified beneficiaries
3) trustee must distribute the trust property in a manner consistent with the purposes of the trust

Question 49

combination and division of trusts

Answer 49

may combine or divide without court approval

terms dont have to be identical but it cannot materially impair the rights of any beneficiary

must give notice to the qualified beneficiaries

Question 50

may a trustee preserve trust assets without accepting the trustee designation

Answer 50

yes
may take steps to protect the trust assets and within a reasonable time send notice rejecting the trustee position
notice must be sent to:
1) settlor if alive/competent
2) a qualified beneficiary

Question 51

resignation of a trustee

Answer 51

terms of trust instrument control

if they dont say anything: can resign by giving 30 days notice
notice given to
1) settlor if still alive
2) co-trustees and all qualified beneficiaries

does not eliminate liability
must remain until successor is in place

Question 52

documents prepared and provided by trustee

Answer 52

1)annual report: covers trust property, liabilities, receipts, disbursements, compensation
2) notice of a change in the method/rate of trustee’s compensation
3) a copy of the trust instrument at a beneficiary’s request

Question 53

effect of SOL on beneficiaries bringing claims against trustees

Answer 53

1)if report adequately discloses the existence of a potential claim , have 1 year after the filing of the report

2) absence of a report, 5 years after the earliest of:
i) removal, resignation, death of trustee
ii) termination of the beneficiary’s interest in the trust
iii) termination of the trust

*** in the case of fraud, action is timely brought within 2 years of discovering fraud even if falls out of other SOL situations

Question 54

notice of distribution plans on termination

Answer 54

trustee may give notice of the termination
trustee send a proposed plan of distribution to the beneficiaries that notifies them of their right to object and the time for making the objection

Question 55

trust vacancies/appointments

Answer 55

terms of the trust controls
otherwise:
1)non charitable trusts- unanimous choice of qualified beneficiaries, or by court if not unanimous
2)charitable trusts: filled by the person chosen by the charitable beneficiaries

Question 56

consent to breach

Answer 56

trustee can be relieved of liability if beneficiary does any of the following:
1) consents to the conduct
2) releases the trustee from liability or
3) ratifies the transaction

relief is nullified by:
1) improper trustee conduct, or
2) the beneficiary not having knowledge of the material facts relating to the breach

Question 57

informal settlements

Answer 57

beneficiary may enter into a binding non-judicial settlement involving any trust matter

cannot violate a material purpose of the trust

Question 58

general rule for judicial interpretation of a trust

Answer 58

terms of the trust instrument are controlling
the court is to determine the intent of the settlor and look to the plain language of the trust instrument

Question 59

court modifying/terminating a trust of settlor and all beneficiaries consent

Answer 59

may do it even if it is inconsistent with a material purpose of the trust

Question 60

court modifying/terminating if settlor does not consent but all beneficiaries consent

Answer 60

termination: court can terminate the trust if continuing the trust is not necessary to achieve a material purpose

modification: can if the modification is not inconsistent with a material purpose

both cases: spendthrift is considered a material purpose of a trust

Question 61

court modifying/terminating if not all the beneficiaries consent

Answer 61

can if determines that the interests of the non-consenting beneficiaries will be adequately protected:
1) when unanticipated circumstances arise
2) continued administration of trust becomes uneconomic
3) necessary to achieve the settlor’s tax objectives, or
4) necessary to reform the trust to conform to the settlor’s intention: even if language unambiguous if their is a mistake of fact/law

Question 62

cy pres

Answer 62

modification/termination of a charitable trust
when the original charitable purpose becomes unlawful, impracticable, impossible or wasteful court may direct the trust assets to be applied/ distributed in a manner consistent with the settlor’s charitable purpose

Question 63

what happens if a charitable trusts would result in distribution a non charitable beneficiaries

Answer 63

provision is enforced only if, at the time the provision becomes effectiveL
1) trust property is to revert to the settlor and the settlor is still alive, or
2) fewer than 21 years have passed since creation of the trust

Question 64

protecting trustees for contracts

Answer 64

a trustee properly entering into a contract in her fiduciary capacity is not personally liable on the contract

only applies if contract discloses that the trustee is acting in a fiduciary capacity

Question 65

protecting trustees for torts

Answer 65

A trustee is not personally liable for torts committed in the course of trust administration or for obligations arising from ownership of trust property, provided the trustee is not personally at fault

Question 66

protecting trustees for partnership investments

Answer 66

A trustee who, acting in her fiduciary capacity, invests as a general partner in either a general partnership or a limited partnership, is not personally liable to third parties on partnership contracts if the trustee’s fiduciary’s capacity was disclosed in (i) the contract or (ii) a statement filed under the Uniform Partnership Act.
**This immunity does not apply if either the trustee or a close relative of the trustee holds a separate interest in the same partnership in a non fiduciary capacity.

If the trustee of a revocable trust holds an interest as general partner, the settlor may be treated as if he or she were a general partner for purposes of liability.

Question 67

exculpatory clauses

Answer 67

are unenforceable to the extent that it purports to relieve the trustee from liability for a breach of trust committed in bad faith or with reckless indifference to the purposes of the trust

also unenforceable if it is the result of the trustee’s abuse of a fiduciary or confidential relationship with the settlor- presumed unless trustee proves adequate communication to settlor

Question 68

common law grounds for removing a trustee

Answer 68

1) trustee breach of trust
2) inability to cooperate with co-trustees
3) lack of fitness, and
4) persistent failure to administer the trust effectively

Question 69

statutory grounds for removing a trustee

Answer 69

1)substantial change in circumstances or there has been a request to remove by qualified beneficiaries
2) removal would best serve the interests of all trust beneficiaries
3) removal would not be inconsistent with material purpose
4) there is a suitable co-trustee or successor available

Question 70

reporting and disclosure rules that apply to all trusts

Answer 70

1)The trustee must keep qualified beneficiaries reasonable informedabout the administration of the trust and material facts necessary for the protection of their interests.
2)Unless unreasonable under the circumstances, a trustee must respond promptly to requests from beneficiaries for information regarding trust-administration matters.
3) Upon request of a beneficiary, the trustee must promptly furnish the beneficiary a copy of the trust instrument
4) The trustee must notify qualified beneficiaries of any change in the method or rate of the trustee’s compensation

Question 71

reporting and disclosure rules that apply to new trusts

Answer 71

july 1, 2006
1)Within 60 days of accepting trusteeship, the trustee must give the qualified beneficiaries notice of the trustee’s acceptance and certain contact information.
2)Within 60 days of learning that an irrevocable trust has been created or that a formerly revocable trust has become irrevocable, the trustee must notify the qualified beneficiaries of:
i)The existence of the trust;
ii)The identity of the settlor;
iii)The right to request a copy of the trust instrument; and
iv) the right to receive annual reports.
3)The trustee must furnish to permissible distributees and, upon request, to other beneficiaries, reports of trust receipts and disbursements, trust assets (including fair market values), trust liabilities, and the amount of the trustee’s compensation.

Question 72

waiver by beneficiary

Answer 72

A beneficiary can waive his or her right to any of the information that is required to be disclosed or provided.