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Trusts Flashcards

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1
Q

Traditional v. Modern approach to Trust revocability

A

Traditional rule presumed irrevocability, Modern trend flipped and presumed revocable

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2
Q

Mandatory v. Discretionary v. Remedial Trust

A

Mandatory: Trustee must make distributions as outlined in Trust

Discretionary: Trustee has power to make distributions at their discretion (abuse of discretion standard)

Remedial: Legal remedy created by operation of law

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3
Q

A Trustee

A

holds legal title and has power to manage property (may be bank or company in addition to person)

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4
Q

A beneficiary

A

holds equitable title to the property, benefits from the trust, and has power to enforce trust instrument

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5
Q

Requirements of an Express Trust

A

(1) Intent
(2) Property in Trust
(3) A trust purpose (cannot be illegal or contrary to public policy)
(4) Beneficiaries (ascertainable)

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6
Q

Intent of an express trust requires

A

“trust words” or otherwise clear intent. Can be oral

Exception to oral being allowed:
(1) SoF (conveying real property)
(2) Part of a devise (e.g. Will) - Testamentary trust (must follow ALL will formalities including witnesses)
(3) Minority Jx require writing

Note: Be wary of precatory or ambiguous language

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7
Q

Exception to Property being in a Trust

A

Pour Over trust (Trust terms in writing at time a Will is executed in which property will pour over into a Trust at decedents death)

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8
Q

Beneficiaries must be

A

Ascertained or have some clear criteria to determine who the person is

Exceptions:
(1) Unborn children
(2) Class gifts (class must be definite)
(3) Charitable trusts
(4) Indefinite class (e.g. “my friends”) so long as distribution is not required to be equal

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9
Q

Charitable trusts must have

A

a charitable purpose (e.g. relief of poverty, advancing religion or education, benefitting the community at large or particular segment of the community)

Modern trend is to find charitable trust

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10
Q

The doctrine of Cy Pres allows for

A

modification of a trust when its charitable purpose is no longer possible

Find Trust’s general charitable purpose and make trust conform as closely as possible to that

If new charitable purpose is impossible (or original purpose was clearly specific), property goes to Resulting Trust for the Testator’s estate

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11
Q

Who has standing to enforce charitable trusts?

A

Attorney General’s office and Settlor

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12
Q

Declaration of Trust v. Deed of Trust

A

(1) Settlor declares herself holder of property and serves as trustee

(2) Settlor conveys property to a trustee and settlor does not serve in that role

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13
Q

Resulting Trusts are used when

A

a trust fails and the Trustee must return property to a Settlor or the Settlor’s estate (goal is to avoid unjust enrichment)

Note: “Gift-over” clause may avoid creation of resulting trust

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14
Q

Purchase-Money Resulting Trust

A

Person 1 buys property but title is taken in Person 2’s name and Person 2 is NOT the natural object of Person 1’s bounty (not a close friend or relative)

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15
Q

Constructive trusts are used when

A

a 3rd party takes advantage of the settlor and is used to prevent unjust enrichment

Look out for: Fraud. duress, undue influence, breach of duty, detrimental reliance

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16
Q

Alienability of Trust Property and Creditor’s ability to reach

A

(1) Beneficiary’s equitable interest in trust property is freely alienable (unless limited by statute) allowing creditors to reach beneficiary’s equitable interest
(2) A creditor cannot reach trust principal or income until such amounts become payable to the beneficiary or the beneficiary can demand payment

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17
Q

Support and Discretionary trusts shield beneficiaries from creditors’ claims by

A

preventing beneficiary from being able to demand payment ensuring creditors can only reach when the trust makes a payment

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18
Q

Spendthrift Trusts are used to

A

expressly restrict the beneficiary’s power to alienate their interest (creditors cannot reach until payment is made)

Exceptions:
(1) Spousal or Child support
(2) Creditors who provided basic necessities to beneficiary
(3) Holders of federal or state tax liens

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19
Q

3 Ways of Terminating a Trust

A

(1) Expiration
(2) Satisfaction of Material Purpose
(3) Unfulfilled material purpose

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20
Q

Unfulfilled material purpose doctrine allows

A

a trustee to block premature termination of a trust if it is still serving some material purpose

Most commonly seen for:
(1) Discretionary Trusts
(2) Support Trusts
(3) Age-dependent trusts

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21
Q

A settlor may terminate or modify a trust if

A

the trust is not irrevocable or ALL the beneficiaries consent

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22
Q

If the settlor has died, a trust may be modified if

A

(1) All beneficiaries agree to modify consistent with the original purpose of the trust, OR
(2) An unforeseen event (or unanticipated change) has frustrated the purpose of the trust - no beneficiary consent required

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23
Q

A trustee may be removed if

A

the trustee breached a fiduciary duty or grossly mismanaged the property

Trustee may resign with written notice if settlor is alive

Removal likely to be granted if
-Material breach
-Serious conflict between trustee and beneficiary
-Conflict of interest arises
-Trust persistently performs poorly due to trustees actions or inactions

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24
Q

Principal v. Income from Trusts

A

Traditional Rule: any money generated from trust property was income, and any money generated in connection with a conveyance of trust property was principal

Old Rule: life beneficiary entitled to income, future interests entitled to principal

Modern Approach (UPAIA)
-Focus is on the total return of trust portfolio and trustee can re-characterize and re-allocate items as necessary (so long as reasonable - fair and balanced)

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25
Q

Factors trustee must balance between principal and income

A

(1) Intent of settlor and language of trust instrument
(2) Nature, duration, and purpose of trust
(3) Identities and circumstances of beneficiaries
(4) Anticipated effect of economic conditions
(5) Anticipated tax consequences

26
Q

Trustees powers are derived from

A

trust documents first, then statute or common-law principals

Modern trend: Grant all powers necessary to act as a reasonably prudent person

27
Q

Duty of Loyalty and Duty of Care are

A

fiduciary duties owed to trust

Any beneficiary has standing to sue trustee for breach

28
Q

Duty of Loyalty for a trustee is an

A

Objective standard (act reasonably)

Self-dealing is a breach of loyalty (always per se)

Even if trust documents permit some self-dealing, still must be reasonable and fair

Conflicts of interest assessed under reasonable and good-faith test

29
Q

Duty of Care

A

Subjective standard (act in good faith)

Care of ordinarily prudent person

Any special skills of trustee must be used, and will be held to heightened standard

Trustee has a duty to be impartial

30
Q

Delegation under Duty of Care

A

Old Rule: Barred delegating authority

New Rule: Permit delegation though trustee has a duty to oversee

31
Q

Investments under Duty of Care

A

Old rule: Severely limited (minimize risk)

Modern Rule: Prudent investor
-Expectation to diversify and spread risk of loss, exercise reasonable care, caution and skill - and measure portfolio’s success as a whole

32
Q

Administrative duties of a Trustee

A

(1) Duty to inform beneficiaries about nature of trust property
(2) Duty to account for actions taken on behalf of the trust (report on health of trust portfolio)

33
Q

Fee Simple Absolute is the largest estate because it can

A

last forever

34
Q

Defeasible fee is an interest which can

A

be cut short (look for conditional language “so long as” “while” “during which time)

Grantor retains possibility of reverter

35
Q

Fee Simple Subject to Condition Subsequent (FSSCS) is an interest in fee simple which

A

terminates upon the happening of an event or condition (look for language such as “but if” or “on the condition that”)

Grantor has right of re-entry, must be affirmatively invoked (does not happen automatically)

36
Q

Life estate is a

A

present possessory estate that ends at the death of the life tenant (or measuring life for life estate pour aurtrie vie)

Grantor retains right of reversion to life estate (automatic)

37
Q

Future interests of a Grantor

A

Possibility of Reverter (for FSD)

Right of re-entry (for FSSCS)

Reversion (for life estate)

38
Q

A remainder interest is an interest which

A

is capable of becoming possessory at the natural termination of the prior estate (must be held by transferee)

39
Q

A vested remainder is

A

a remainder in an ascertained individual or group with no condition precedent

40
Q

A vested class subject to open is

A

a class of people supposed to take and at least one member of the class has vested (is ascertained)

Each successive class member partially divests

41
Q

A contingent remainder arises when the taker is

A

either unascertained or subject to a condition precedent

42
Q

An executory interest may be either

A

springing (divest grantor), or

shifting (divest grantee)

43
Q

Class Gifts to classes with right of survivorship means

A

Generally, if one class member dies that member’s share is automatically re-divided among surviving class members

RST. 3rd issues share of deceased class member to surviving Issue

44
Q

Approaches to the interest of Issue of a predeceased class member’s future interest vesting

A

Minority Common law: Survival of child is not essential and deceased grandchild’s estate takes interest

Uniform Probate Code: Future interests under a trust are contingent on beneficiary surviving until the distribution (Estate of pre-deceased class member with no surviving issue therefore takes nothing)

45
Q

Testamentary Trusts must

A

be created in writing in a will or document incorporated by reference into a will (must meet will formalities standards)

46
Q

If a charitable trust fails it will result in

A

an honorary trust (may last for 21 years bc subject to RAP)

Honorary trust has no human identifiable beneficiaries and are generally for either animals or non-charitable purpose

47
Q

Lapse of a Gift devised in trust

A

In most states, anti-lapse statutes do not apply to trusts

Under UPC, anti-lapse is applied to trusts and a substitute gift is created in the decedents of the deceased issue

48
Q

The duty of impartiality requires a trustee to

A

treat all beneficiaries (including future and present beneficiaries) equally and not engage in favoritism

49
Q

Allocation of income and principal in regards to fees

A

Generally split fees or costs between income and principal of trust, but ordinary expenses are charged to income generated while extraordinary expenses should be charged to the principal

50
Q

When a trustee breaches their duty of loyalty / duty against self-dealing beneficiaries of the trust can

A

sue for either rescission of the sale/transaction or damages

51
Q

Under the UPIA, whether a trustee has breached their duty of prudent investing considers 4 factors which are

A

(1) Distribution requirements of the trust
(2) General economic conditions
(3) Role that investment plays in relationship to trust’s overall investment portfolio (how substantial is the investment) and
(4) Trust’s need for liquidity, regularity of income, and preservation or appreciation of capital

52
Q

A vested remainder accelerates into possession as soon as

A

the preceding estate ends for any reason, such as the disclaiming of the estate by its holder (provided no one would be harmed by making a distribution to them earlier than it would have otherwise been)

53
Q

Prudential duties of a trustee include

A

(1) Prudent Investor Rule (reasonable care, caution)
(2) Duty to diversify
(3) Duty to make property productive (e.g. rent Trust property)
(4) Duty to be impartial
(5) Allocate principal and income

54
Q

Support Trusts may be used to provide

A

the beneficiary with “necessities”

Typically interpreted as more than just bare essentials, and something things that maintain the standard of living for the beneficiary

55
Q

A court may modify the terms of a trust that relate to the management of trust property if

A

continuing the trust on its existing terms would be impracticable, wasteful, or impair the trust’s administration

56
Q

Must future beneficiaries (e.g. children of a settlor who take distribution after death of other parent) be alive at the time of distribution?

A

Under the common law: children must survive to the day of distribution, and failure to do so results in issue of the future beneficiary taking nothing

Under the UPC/modern approach: issue of pre-deceased future beneficiary would have a right to their parents’ share of class gift

57
Q

A power of appointment enables the holder to direct a trustee to

A

distribute some or all of the trust property without regard to the provisions of the trust

58
Q

A special power of appointment allows the donor to specify certain individuals as

A

the objects of the power, to the exclusion of others

Note: Special powers of appointment are strictly limited to the permissible objects (as opposed to general powers of appointment)

59
Q

In some jurisdictions, the surviving spouse can set aside inter vivos transfers made by the decedent during marriage, without spousal consent, if

A

the decedent:
(1) initiated the transfer within one year of her death and
(2) retained an interest in the property (e.g. power to revoke) or received less than adequate consideration

60
Q

When one with a power of appointment makes an appointment that exceeds the grant given to him,

A

other valid appointments are not invalidated, but the property or interest that was invalidly appointed passes to the “taker in default of appointment”

Note: Thus invalid appointment ONLY affects the invalid portion

61
Q

When a donee of a special power of appointment fails to exercise the power, the property or interest passes to

A

the takers in default of appointment as specified in the trust instrument

IF not specified in trust instrument, passes to the permissible appointees (who it COULD have passed to had the powers of appointment been exercised, absent intent to the contrary

Bar Flashcards (18 decks)

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