Trusts Flashcards
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.
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.
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.
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.
The issue is whether the trustee violated the prudent investor rule by retaining mutual fund investments after they declined in value.
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.
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.
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.]
The issue is how the son’s letter to the trustee affects the future distribution of trust principal.
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.
The issue is how the son’s letter to the trustee affects the future distribution of trust income.
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.
The issue is whether the trust may continue for its stated duration (in perpetuity or until its assets are exhausted).
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.
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.
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.
The issue is to whom Ann’s estate should be distributed if the trust fails.
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].
The issue is whether the court can reform the provisions of the trust to authorize the trustee to sell the home.
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.
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.
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.
The issue is whether the cy pres doctrine will prevent trust property from passing to Testator’s estate upon Daughter’s death.
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.
