Trusts

Question 1

The issue is whether a trust condition providing for the termination of an income interest upon marriage is invalid as a matter of public policy.

Answer 1

A trust can be created for any purpose, as long as it is not illegal, restricted by rule of law or statute, or contrary to public policy. Trust provisions that restrain a first marriage have generally been held to violate public policy. However, a restraint on marriage might be upheld if the trustee’s motive was merely to provide support for a beneficiary while the beneficiary is single.

Question 2

The issues are whether the trustee violated his duty of loyalty by purchasing the stock from the trust and, if so, what remedies are available.

Answer 2

A trustee is bound by a broad range of fiduciary duties, including a duty of loyalty. When a trustee personally engages in a transaction involving the trust property, a conflict of interest arises between the trustee’s duties to the beneficiaries and her own personal interest. A trustee buying or selling trust assets is considered self-dealing, even if the transaction occurred at FMV. When self-dealing is established, an irrebuttable presumption is created that the trustee breached the duty of loyalty. No further inquiry into the trustee’s reasonableness or good faith will be required, because self-dealingg is a per se breach of the duty of loyalty. When the duty of loyalty is breached, any beneficiary has standing against the trustee if his interests are violated, and he can choose either to set aside the transaction or to ratify the transaction and recover any profits therefrom.

Question 3

The issue is whether the trustee violated the prudent investor rule by retaining mutual fund investments after they declined in value.

Answer 3

The Uniform Prudent Investor Act (“UPIA”) requires the trustee to act as a prudent investor would when investing his own property. The trustee must exercise reasonable care, caution, and skill when investing and managing trust assets unless the trustee has special skills or expertise, in which case he has a duty to utilize such assets. Determinations of compliance under the UPIA are made with reference to the facts and circumstances as they existed at the time the action was made, and they do not utilize hindsight. Part of being prudent is taking care to make informed decisions regarding the investment scheme and/or delegating such decision-making to an expert. In assessing whether a trustee has breached this duty, the UPIA requires consideration of numerous factors, including (1) the distribution requirements of the trust, (2) the general economic conditions, (3) the role that the investment plays in relationship to the trust’s overall investment portfolio, and (4) the trust’s need for liquidity, regularity of income, and preservation or appreciation of capital. Although the trustee must adequately diversify the trust investments to spread the risk of loss, investing in one mutual fund may be sufficient if the fund is sufficiently diversified.

Question 4

The issue is how the rents, sales, proceeds, cash dividends, and stock dividends received prior to the trustee’s receipt of the son’s letter should have been allocated between the trust principal and income.

Answer 4

All assets received by a trustee must be allocated to either income or principal. The allocation must be balanced so as to treat present and future trust beneficiaries fairly, unless a different treatment is authorized by the trust instrument. 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. The traditional approach serves as the starting point for the modern approach. Under the UPAIA, a trustee is empowered to recharacterize items and reallocate investment returns as he deems necessary to fulfill the trust purposes, as long as his allocations are reasonable and are in keeping with the trust instrument. A distribution of stock is treated as a distribution of principal under the UPAIA.

[In this case, the $30,000 in rents received from the office building and the $20,000 in cash dividends both constitute money that is generated by the trust property. Thus, they should be characterized as trust income. However, the $700,000 proceeds from selling the office building constitutes money generated in connection with a conveyance of trust property, and should be characterized as trust principal. The 400 shares in stock dividends should be treated as trust principal under the UPAIA.]

Question 5

The issue is how the son’s letter to the trustee affects the future distribution of trust principal.

Answer 5

A gift to a group of individuals with an automatic right of survivorship is a class gift. 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 interest terminates. 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. If the income beneficiary of a trust disclaims her interest, then 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.

Almost all states have enacted statutes that permit beneficiaries of trusts to disclaim their interest in the trust property. The state statute here requires that a disclaimer be made within nine months of the testator’s death. When the holder of a future interest effectively disclaims that interest, the disclaimant is deemed to have predeceased the life tenant.

Question 6

The issue is how the son’s letter to the trustee affects the future distribution of trust income.

Answer 6

Subject to the trust instrument, it is the beneficiary’s right to receive income or principal from the trust. The trustee of a mandatory trust has no discretion regarding payments; instead, the trust document explains specifically and in detail how and when the trust property is to be distributed. In this case, the trust instrument specifically states that all income should be distributed to the son and all principal should be held in trust for the grandchildren who survive the son. Because the son’s disclaimer was ineffective, the trustee should comply with the trust instrument.

Question 7

The issue is whether the trust may continue for its stated duration (in perpetuity or until its assets are exhausted).

Answer 7

Generally, a trust is created when a settlor intends to create a trust by placing trust property with a trustee for the benefit of beneficiaries for a valid purpose. Charitable trusts are created when the settlor intends to create a trust for a charitable purpose, often to benefit the public at large, and has no ascertainable beneficiaries (meaning the trust is not intended to benefit a few limited or named people). Often, charitable trusts are for scientific, research, or educational purposes, but may extend to other charitable purposes. The rule against perpetuities does not apply to charitable trusts. For trusts subject to the RAP, the RAP prohibits the distribution of property when the recipient of the property is uncertain for more than 21 years after the death of the last life in being at the time of the creation of the purported distribution. Even trusts that would be invalid under the common law may survive because modern courts typically exercise a wait and see approach, seeing if in fact the assets are exhausted within 21 years. Courts can also strike the violating language and modify the trust so that it comports with the RAP.

Question 8

The issue is, assuming the trust cannot endure for its stated duration, whether a court could preserve the trust for any period of time to carry out Ann’s [settlor] intentions.

Answer 8

Under the UTC, courts will apply the doctrine of cy pres to preserve distributions of property with charitable purposes. Cy pres allows the court to reform the trust to carry out the intentions of the settlor as closely as the court can.

Question 9

The issue is to whom Ann’s estate should be distributed if the trust fails.

Answer 9

When a decedent dies without a will, their inheritance is passed intestate, or by operation of law. Under the parentella approach, the closest to the family line would receive [Niece over uncle because direct family line]. Under the degree approach, the court considers the actual distance from the decedent to the family member claiming [Niece is two degrees away (Ann - Sibling - Niece) and Uncle is two degrees away (Ann - Parent - Uncle), so Niece and UNcle have an equal claim to the inheritance]. Under the UPC, the inheritance passes up to the older generation and then falls down to the various heirs [parents then to anyone in that lineage (Ann’s siblings), so Niece wins again].

Question 10

The issue is whether the court can reform the provisions of the trust to authorize the trustee to sell the home.

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. 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 11

The issue is whether a court can reform the provisions of the trust to authorize using both sale proceeds and earnings on those proceeds to pay Daughter’s rent on a home.

Answer 11

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 impracticable, wasteful, or impair the trust’s administration.

Here, both Daughter and Charity have rights as beneficiaries. Daughter’s interest in the home is a life interest. Charity has a remainder interest. Though selling the home and applying the proceeds of the sale to pay Daughter’s rent might further the trust’s purpose of providing Daughter with a comfortable home, it would drastically, if not completely, deplete Charity’s remainder interest. The court would likely find, however, that enforcing the trust’s terms as-is would be ineffective or impracticable, as retaining the home in its current state would not provide Daughter with a comfortable residence, which is the material purpose of the trust. If the court saw fit to modify the trust provisions to authorize the sale of the home and apply the sale proceeds to the purchase of a new home that would meet Daughter’s needs, rather than simply paying rent, then the rights of both beneficiaries would be protected and the result would more closely conform to Testator’s intent and further the trust’s purposes.

Question 12

The issue is whether the cy pres doctrine will prevent trust property from passing to Testator’s estate upon Daughter’s death.

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. The settlor’s intent controls. 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. However, there is a rebuttable presumption that the settlor had a general charitable purpose.

Question 13

The issue is whether Friend breached the duty of loyalty.

Answer 13

A trustee owes trust beneficiaries a duty of loyalty and must administer the trust exclusively in the beneficiaries’ interests. Because the trustee must act on behalf of the beneficiaries, and not on behalf of himself, the duty of loyalty is breached when a trustee enters into transactions, on behalf of the trust, that involve a conflict of interest or self-dealing. Under the Uniform Trust Code, an investment in a corporation in which the trustee has an interest that might affect the trustee’s best judgment is presumptively a breach of the duty of loyalty.

Question 14

The issue is whether Friend breached a duty to invest prudently.

Answer 14

Almost all states have adopted the Uniform Prudent Investor Act. Under the UPIA, a trustee owes trust beneficiaries a duty to invest trust assets prudently. In assessing whether a trustee has breached this duty, the Act requires consideration of several factors, including (1) the distribution requirements of the trust, (2) general economic conditions, (3) the role the investment plays in relationship to the trust’s overall investment portfolio, and (4) the trust’s need for liquidity, regularity of income, and preservation or appreciation of capital.

Question 15

The issue is whether Friend breached the duty to diversify.

Answer 15

A trustee owes a duty to diversify trust investments unless he reasonably determines that because of special circumstances, the purposes of the trust are better served without diversifying.

Question 16

The issue is whether Friend breached the duty of care.

Answer 16

Under the common law, a trustee owes beneficiaries the duty to act with care, skill, and prudence. Although the UTC does not impose on trustees a duty of care, it does impose a duty to administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries.

Question 17

The issue is whether Husband can bequeath his probate assets to the trustees of a revocable trust created by Wife.

Answer 17

The disposition of those assets will be governed by the terms of the trust, including amendments made after Husband executed his will. Under the UPC, a person may bequeath assets to a trust created during the testator’s lifetime, by the testator or another, so long as the trust is identified in the testator’s will and its terms are incorporated in a writing executed before or concurrently with the execution of the testator’s will. A devise is valid even if the trust is revocable or amendable. And, even if the trust is amended after the testator’s will was executed, the terms of the amendment will govern the distribution of assets bequeathed to the trust. It makes no difference that the amendment was made by someone other than the testator. [Husband could pour his estate over to Wife’s Trust, and the amendments to that trust would govern the disposition of his estate.]

Question 18

The issue is whether Son is entitled to a share of the assets of Wife’s trust given the language of the Amendment to Wife’s Trust.

Answer 18

The amendment to Wife’s trust is capable of two interpretations (either that Niece’s children must be 21 at the time of Niece’s death or must turn 21 after Niece’s death). The court will attempt to effectuate Wife’s intent. Son can argue that it is hard to imagine why Wife would have wanted to exclude a child of Niece simply because the child had not yet attained the age of 21 at Niece’s death. Son was only 15 when the amendment was signed, so the sole purpose of the age requirement may have been to assure a beneficiary was sufficiently mature to when he/she took possession of the property and that Wife never anticipated that Niece would die only five years later.

Question 19

The issue is whether Grandchild [age 4] is entitled to a share of the assets of Wife’s trust given the language of the Amendment to Wife’s Trust.

Answer 19

Grandchild can take a share of the trust only if Grandchild is a substituted taker for Daughter under state law. In most states, Grandchild would not be and thus would not take.

Grandchild is not a taker under the trust instrument because the gift was limited to Niece’s children who survived the trust termination and the word “children” includes the ancestor’s immediate offspring, not more remote descendants. Most state anti-lapse statutes apply only to wills and thus would not apply to the trust amendment. In these states, Grandchild would not take any share of the trust funded by gifts from Wife or from Husband’s estate.

However, some states have enacted the UPC or a like statute. Under this statute, when a remainder class gift is bequeathed to a class composed of children and a child dies before the event upon which the remainder becomes possessory, a substitute gift is created in the descendants of the deceased child; words of survivorship (such as “who are living”) do not affect the creation of a substitute gift. Thus, under the UPC, Grandchild would take as a representative of the deceased child beneficiary.

Question 20

The issue is how the assets of the revocable trust should be distributed.

Answer 20

Another plausible interpretation of the statutory language concludes that a revocable trust created during the decedent’s marriage is illusory for all purposes. Under that interpretation, this would be a void trust. When a trust fails, a court may create a resulting trust requiring the holder of the property to return it to the settlor’s estate.

Question 21

The issue is whether the trust has an unfulfilled material purpose.

Answer 21

A trust may terminate by consent if all beneficiaries and the trustee consent to the termination. Under the Claflin doctrine, a trustee can block a premature trust termination—even one to which all beneficiaries have consented—if the trust is shown to have an unfulfilled material purpose. Most courts allow the trustee to block the termination if it can be shown that termination would violate the settlor’s intent.

Question 22

The issue is whether Settlor’s children have the only remainder interest in the trust [and not Settlor’s grandchildren when trust says to “Settlor’s children].

Answer 22

A gift to a group of individuals with an automatic right of survivorship is a class gift. Here, the gift of trust assets to “Settlor’s children” at Husband’s death is a class gift and “Settlor’s children” have been given a future interest, the remainder. The remainder is vested because the holders, Settlor’s children, are ascertainable and there is no express condition precedent required before the interest becomes possessory, i.e., the trust document does not require survivorship. The question then becomes that of disposition should one of Settlor’s children not be alive at the time of distribution, i.e., at the time of Husband’s death.

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. Here, if the common law applies, Trustee is incorrect because Husband and Settlor’s children are the sole beneficiaries of the trust and, absent a violation of material purpose, can consent to termination.

However, under the UPC, if a class gift is limited in favor of a class of children, only those children alive at the time of distribution are entitled to possession of the property. If a child who survives the settlor but then predeceases the time of distribution has surviving issue, that issue would have a right to the parent’s share of the gift. Thus, if the UPC applies, Trustee is correct in that termination would require the consent of all potential beneficiaries, including the future grandchildren with potential rights.

Question 23

The issue is whether the class gift to Settlor’s children included Settlor’s youngest child, who was born after creation of the trust.

Answer 23

A class remains open and may admit new members until (i) at least one class member is entitled to obtain possession of the gift, or (ii) the preceding interest terminates (such as when the holder of the present life interest dies). Here, the class of “Settlor’s children” remained open to new members until Settlor died. Because the fourth child was born years before Settlor died, the class was still open and the fourth child was validly admitted to the class. Accordingly, the fourth child has a beneficial interest in the trust equal to that of the other members of the class and is equally entitled to a distribution of trust principal. Therefore, Trustee’s position that the fourth child is not entitled to a distribution is incorrect.

Question 24

The issue concerns a trustee’s fiduciary duties after termination of a trust.

Answer 24

A trust is a fiduciary relationship wherein the trustee is called upon to manage, protect, and invest certain property and any income generated therefrom for the benefit of one or more named beneficiaries. The trustee holds the legal interest or title to the trust property. Should the trust be terminated, title would merge and would vest in the beneficiaries. Thus, if the trust here was terminable and the trustee distributed the trust principal pursuant to the beneficiaries’ directions, the trustee would not be violating any fiduciary duty. The beneficiaries would be entitled to distribute trust proceeds as they saw fit. Even if such a distribution could be deemed breach of a fiduciary duty, because the beneficiaries directed it (i.e., joined the breach), equity will prevent them from pursuing an action against the trustee. Accordingly, Trustee is not correct that the distribution would be a breach of trust.

Question 25

The issue is whether it was proper for the trustee to accumulate trust income during Settlor’s lifetime.

Answer 25

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. [would be breach if irrevocable]

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. Traditionally, and in a minority of jurisdictions, a trust is presumed to be irrevocable. Under the UTC and majority rule, however, a trust is presumed revocable unless it expressly states that it is irrevocable. 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 the trust.

Here, Settlor transferred most of her wealth into a revocable trust, which expressly provided that Settlor could revoke the trust during her lifetime by a written instrument. After creating the trust, Settlor gave written direction to the trustee to accumulate trust income rather than distributing it to Settlor. This instruction complies with the method for modification contained in the trust instrument. Thus, the trust was modified, and it was appropriate for the trustee to accumulate trust income.

Question 26

The issue is whether Charity has any interest in the trust assets under Settlor’s will and the trust instrument.

Answer 26

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

In this case, Settlor granted herself a power of appointment that could be exercised in her will. This was a special power of appointment because the objects were limited to Settlor’s children. Settlor exercised her power of appointment in her valid will by instructing the trustee to hold half the assets for the benefit of her son, who was to receive income during his lifetime. Because the power was exercised in Settlor’s will and because her son is a permissible object, the appointment is valid under the terms of the trust, and Charity does not have an interest in the income from the trust assets. Therefore, Charity has an interest in one-half of the trust assets, but not in the income from those assets during the son’s life.

Question 27

The issue is whether the appointment to the grandchildren was valid.

Answer 27

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”—that party who would have received the interest in the absence of any appointment. Here, the Settlor’s grandchildren are not a permissible object of the power of appointment because the granting provision in the trust included only “Settlor’s children.” Thus, the Settlor’s attempt to distribute the trust principal to her grandchildren was ineffective. The trust provides that in the absence of a valid appointment, the assets will pass to Charity. Consequently, Charity has an interest in the principal of one-half the trust assets.

Question 28

The issue is whether Settlor’s husband has a valid claim to any trust or probate assets.

Answer 28

An elective share gives the 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. In this jurisdiction, the elective share is one-third of the decedent’s probate estate, without any mention of the decedent’s non-probate assets. Thus, the husband’s election will depend on which assets are included in Settlor’s probate estate.

The probate estate includes all assets that pass by will or intestacy upon a decedent’s death. 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 terms of the individual’s will or the intestate rules.

[H would get $50,000 under terms of will, elective share is 1/3 so $33k. should not take elective share]

In some jurisdictions, the surviving spouse can set aside inter vivos transfers made by the decedent during marriage, without spousal consent, if the decedent initiated the transfer within one year of her death, retained an interest in the property, or received less than adequate consideration. Here, the husband may be able to argue that Settlor retained an interest in the trust property because she could have terminated the trust at any time prior to her death. If this jurisdiction recognizes that claim, husband should make the election against Settlor’s total $600,000 estate.

Question 29

The issue is what happens if the daughter fails to exercise her power of appointment.

Answer 29

If a beneficiary fails to exercise their power of appointment, the court may create a resulting trust, and the trust principal will be distributed in a manner that satisfies the trust purpose and the settlor’s intent.

Here, if the daughter does not exercise her power of appointment [to create a will devising the trust principal to her heirs at law as she sees fit], a court will likely distribute the interest among the daughter’s heir if they find the settlor’s purpose was for the daughter’s heirs to receive the trust principal.