Trusts

Question 1

A trust is ____

Answer 1

a fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries, who hold equitable title.

Question 2

The legal interest is held by ___

Answer 2

the trustee who has the responsibility of
ownership.

Question 3

The trustee receives ____ from the legal title (except possibly a fee for acting as trustee)

Answer 3

no benefit

Question 4

A trustee is a fiduciary and thus:

Answer 4

(1) must deal with the property with reasonable care;
(2) must maintain the utmost degree of loyalty; and
(3) is personally responsible if their conduct falls beneath required standards

Question 5

The equitable or beneficial interest is held by ____

Answer 5

the beneficiary who receives the benefits of ownership as set forth in the trust.

Question 6

The settlor is ___

Answer 6

the person who causes the trust to come into existence by supplying the initial trust property. Other terms for the settlor include trustor, grantor, and donor.

Question 7

A trust must have ____

Answer 7

trust property, that is, the settlor must supply property so the trustee has property over which to exercise duties. Other terms for trust property include the principal, corpus, trust estate, and res.

Question 8

The settlor creates a trust by ___

Answer 8

transferring legal title to the trustee (for example, a person with good investment skills) and equitable title to a beneficiary (a person or charity deserving of a windfall).

Question 9

The trustee manages and invests the property in accordance with ___ duties and the _____ as contained in the trust instrument.

Answer 9

legal; settlor’s instructions

Question 10

When the trustee’s duties are completed, the trust ____

Answer 10

terminates and the trustee distributes any remaining property to the remainder beneficiaries

Question 11

PURPOSES AND USES OF TRUSTS

Answer 11

• Providing for and Protecting Trust Beneficiaries
• Flexibility of Asset Distribution
• Protection Against Settlor’s Incompetence (may be a better option than an expensive and embarrassing guardianship)
• Professional Management of Property
• Probate Avoidance
• Tax Benefits

Question 12

BASIC CLASSIFICATION OF TRUSTS

Answer 12

Express Trusts and Trust Created by Operation of Law

Question 13

Express trusts are created by ____

Answer 13

the express intention of the settlor.

Question 14

Express trusts fall into two categories distinguished primarily by the identity of their beneficiaries:

Answer 14

1. Private: private beneficiaries (certain ascertainable persons)
2. Charitable: charitable beneficiaries (indefinite class of persons or the public in general)

Question 15

Types of Trusts Created by Operation of Law

Answer 15

1. Resulting Trusts
2. Constructive Trusts

Question 16

Resulting Trusts

Answer 16

Resulting trusts arise from the presumed intention of the owner of the property.

Question 17

Constructive Trusts

Answer 17

Constructive trusts are an equitable remedy used to prevent unjust enrichment.

Question 18

The first step in any trust question is to ____

Answer 18

ascertain whether the trust is valid.

Question 19

Elements of a valid trust:

Answer 19

1. Intent
2. Identifiable corpus
3. Ascertainable beneficiaries
4. Proper purpose
5. Mechanics and formalities

Question 20

Express trusts are governed by the _____, which has been adopted by almost all states.

Answer 20

Uniform Trust Code (“UTC”)

Question 21

Elements required for an express trust are:

Answer 21

(1) a settlor with capacity to convey,
(2) a present intent to create a trust relationship,
(3) a competent trustee with duties,
(4) a definite beneficiary, and (5) the same person is not the sole trustee and sole beneficiary.
+ Additionally, there must be a present disposition in trust of specific property then owned by the settlor, and the trust must have a valid trust purpose.

Question 22

_____ is not required for a valid trust.

Answer 22

Consideration

Question 23

The capacity required to create an inter vivos trust is _____, and the capacity to make a testamentary trust is _____.

Answer 23

the same as to make an inter vivos gift; the same as that required to make a will

Question 24

The settlor’s intention to create a trust is essential to the existence of an express trust. The settlor must intend to ____

Answer 24

split the legal and equitable title and to impose enforceable duties on the holder of the legal title.

Question 25

Intent may be manifested by written or spoken words or by the conduct of the settlor—unless ______. No ____ words are required; the settlor does not even have to call the arrangement a trust.

Answer 25

the Statute of Wills or the Statute of Frauds applies.

formal

Question 26

An oral trust of ____ is valid in some states if certain conditions are met.

Answer 26

personal property

Question 27

Communication of intent to _____ is not necessary; delivery of the property to ____ is sufficient because acceptance of gifts is normally presumed.

Answer 27

the beneficiaries; the trustee

Question 28

An intention to create a present trust must have been externally manifested by the settlor at ____ and prior to _____.

Answer 28

the time they owned property; its conveyance to another

*-> However, the conduct of the parties subsequent to the conveyance may be evidence of an earlier intent.

Question 29

The settlor’s intent must be that the trust take effect ____, not at _____

Answer 29

immediately; some future time (although a future interest can be trust property)

Question 30

A promise to create a trust in the future, like a promise to make any future gift, is not enforceable unless ____

Answer 30

the promise is a binding contract (that is, supported by consideration).

Question 31

Once an outright transfer of property occurs, it is too late for _____

Answer 31

the alleged settlor to go back and claim the transfer was really one in trust.

Question 32

A settlor’s expression of a hope, wish, or mere suggestion that the property be used in a certain way is called ____

Answer 32

precatory language

Question 33

The usual inference is that precatory expressions ____ create a trust because the settlor must impose a legal obligation on the transferee, not merely a moral one. This inference can be overcome by:

Answer 33

do not

• Definite and precise directions
• Directions addressed to a fiduciary (for example, executor under a will)
• A resulting “unnatural” disposition of property (for example, close relative will otherwise take nothing) if no trust imposed; or
• Extrinsic evidence showing that the settlor previously supported the intended beneficiary

Question 34

Any split of title is sufficient so long as _____.

Answer 34

the sole trustee is not the sole
beneficiary

Question 35

If the sole trustee and sole beneficiary are the same individual, the equitable and legal titles merge and ____

Answer 35

the trust terminates.

Question 36

IDENTIFIABLE CORPUS

Answer 36

Because a trust is a type of property transfer, trust property is required.

Question 37

The trust property must be ____.

Answer 37

ascertainble with certainty

Question 38

Where there is no trust property, the trust _____

Answer 38

fails because the trustee has no property to manage.

Question 39

The trust property must be an _____ in _____.

Answer 39

existing interest; existing property

Question 40

A future interest may be held in trust, but an interest _____ cannot be held in trust.

Answer 40

not yet in legal existence (that is, a mere expectancy such as the right to inherit from
a person who is still alive)

Question 41

Future profits from an ____ can be a trust res.

Answer 41

existing contract

Question 42

The trust res must be existing property that the settlor has ____, including intangibles (for example, promissory notes) in which the settlor has _____.

Answer 42

the power to convey; an assignable interest

Question 43

An unenforceable ____ promise cannot be the subject of a trust.

Answer 43

gratuitous

Question 44

The res must be identifiable and segregated, but the res may be _____

Answer 44

a fractional or undivided interest in specific property.

Question 45

A debtor cannot hold ____ in trust, but the debtor can declare themself trustee of ____; and the debt can be held in trust by _____.

Answer 45

their own debt; particular property from which the debt is to be paid; another person

Question 46

A trust cannot exist without someone to ____. Thus, an ____ beneficiary is necessary to the validity of every trust except ____ trusts.

Answer 46

enforce it; ascertainable

charitable and honorary

Question 47

A qualified beneficiary is a beneficiary who, on the date the beneficiary’s qualification is determined, is:

Answer 47

(1) a current beneficiary, or
(2) a first-line remainderman (that is, one who would become eligible to receive distributions were the event triggering the termination of a
beneficiary’s interest or of the trust itself to occur on the qualification date).

-> Qualified beneficiaries may have additional rights compared to remote beneficiaries as discussed later.

Question 48

Capacity Required of Beneficiary

Answer 48

Any person or entity capable of taking and holding title to property can be a beneficiary of a private trust. The beneficiary need not be competent.

Question 49

Not everyone who benefits from a trust is considered to be a beneficiary (Incidental and Indirect Beneficiaries). The trust must _____

Answer 49

operate directly to benefit the person (for example, an attorney designated by the trust instrument is not a beneficiary).

Question 50

Notice to a beneficiary is not essential to the validity of a trust. Lack of such notice may indicate, however, that ____

Answer 50

no trust was intended.

Question 51

Acceptance by the beneficiary is required, but can take place _____. Acceptance may be express or implied and is generally ____.

Answer 51

after a valid trust is created; presumed

Question 52

Disclaimer

Answer 52

No one can be compelled to accept an interest in a trust against their will.

Question 53

Under the law of most states, a beneficiary may disclaim an interest by ____.

Answer 53

filing a written instrument with the trustee (or, if a trust created by will is involved, with the probate court)

Question 54

If a valid disclaimer is made, the trust is read as though ____

Answer 54

the disclaimant was deceased as of the relevant date.

Question 55

Time for Making Disclaimer

Answer 55

Many state disclaimer statutes require that a disclaimer be made within nine months of the interest’s creation, and that is the relevant period for federal gift tax purposes.
- Some states do not impose a time limit; the beneficiary may disclaim as long as the beneficiary is not estopped from doing so.

Question 56

Exceptions to disclaimer timing rules

Answer 56

The time limit does not apply to a beneficiary who is under age 21.
- A disclaimer is timely if made within nine months after the beneficiary attains age 21

Question 57

A beneficiary may be estopped from making a disclaimer if ____

Answer 57

they have exercised any dominion or control over the interest or accepted any benefits under the trust.

Question 58

Under most state disclaimer statutes, a disclaimer relates back to the date of the transfer for ____

Answer 58

all purposes.

-> In these states, a disclaimer by an insolvent beneficiary can be used to defeat creditors’ claims but not a federal tax lien.

Question 59

The anti-lapse statutes in most states apply only to ____ and come into play only if a will beneficiary within a certain degree of relationship predeceases the testator. (See Wills outline.)

Several states and the UPC apply the anti-lapse statute to ____ created in trusts unless the trust makes an alternate gift in case of a beneficiary’s nonsurvival.

Answer 59

wills

future interests (even to future interests expressly made contingent on survival)

Question 60

Divorce Impact on Trusts

Answer 60

• A final decree of divorce or annulment revokes all beneficial gifts and fiduciary appointments in favor of a former spouse.
• The UPC and several states have extended the “divorce revokes” rule to beneficiary designations of individuals who are related to the former spouse but not the settlor.

–> The governing instrument is read as though the former spouse (and their relatives) is deceased.

Question 61

There must be definite beneficiaries to have a ____

Answer 61

private trust (not required in charitable trusts).

Question 62

Beneficiaries may be “definite” even though not yet ____. Beneficiaries must be ascertainable by the time ____

Answer 62

ascertained (for example, unborn children)

their interests are to come into enjoyment.

Question 63

Class Gifts

Answer 63

• Beneficiaries may be designated by generic descriptions such as “children.” - Beneficiaries may be unascertainable when the trust is created as long as they are ascertainable when they are to benefit, for example, “to my children and upon their death, to my then surviving grandchildren.”
• The trustee must be able to determine who belongs to the class. (i.e., “friends” is not enough)

Question 64

At common law, if a private trust exists for the benefit of a class, the class must be ____

Answer 64

reasonably definite (As long as the class is reasonably definite, the trust may authorize the trustee to exercise their discretion in selecting members to be benefited, or may provide that only those who meet certain requirements will benefit).

-> Broad power to choose beneficiaries, however, may constitute a gift or a power of appointment rather than a trust

Question 65

Under the UTC, a settlor may empower the trustee to select the beneficiaries from an ____ class. Failure to exercise the
power gives rise to a resulting trust in favor of ____.

Answer 65

indefinite; the settlor or their successors

Question 66

If a trust fails for lack of a beneficiary (for example, because the beneficiaries are not ascertainable), a resulting trust in favor of _____ is presumed.

Answer 66

the settlor or their successors

Question 67

The general rule is that a settlor may create a trust for ____. However, a trust purpose is invalid if it is:

Answer 67

any purpose

• Illegal
• Contrary to public policy
• Impossible to achieve
• Intended to defraud the settlor’s creditors or based on illegal consideration

Question 68

Public policy is violated if the purpose of a trust is to:

Answer 68

induce others to engage in criminal or tortious acts; encourage immorality; or induce a person to neglect parental, familial, or civic duties.

Question 69

If a condition attached to an interest is against public policy:

Answer 69

• The settlor’s alternative desire controls if expressed.
• If the illegal condition is a condition subsequent, the condition is invalidated but the trust is valid.
• If the illegal condition is a condition precedent, the preferred view is to hold the interest valid unless there is evidence that the settlor’s wish would be to void the beneficiary’s interest altogether if the condition is unenforceable.

Question 70

A growing (but minority) number of states have abolished the Rule Against Perpetuities as it applies to ____

Answer 70

trusts, permitting the creation of “dynasty” trusts.

Question 71

Once established, a trust will not fail because the trustee ____. The court will _____ so long as ____.

Answer 71

dies, refuses to accept appointment, or resigns

appoint a successor trustee unless it is clear that the settlor intended the trust to continue only; a particular trustee served.

Question 72

The absence of a trustee may cause an ____ trust to fail for lack of delivery.

Answer 72

attempted inter vivos

Question 73

A person accepts a trusteeship by:

Answer 73

(1) signing the trust or a separate written acceptance;
(2) substantially complying with the acceptance terms in the trust instrument; or
(3) accepting delivery of trust property, exercising powers or performing duties as trustee, or indicating acceptance.

Question 74

The person designated as trustee may still act to preserve the trust property without accepting the trusteeship, provided they ____. If the trusteeship is not accepted within a reasonable time, it is presumed to be ____

Answer 74

send notice of rejection to the settlor or a qualified beneficiary

rejected.

Question 75

The settlor must intend to impose ____ on the trustee.
If duties are not spelled out in the trust instrument, the court will _____

Answer 75

enforceable duties; usually imply duties if there is an intention to create a trust, a res, and an identified beneficiary.

Question 76

Anyone who has capacity to ____ may be a trustee.

State statutes limit the right of some persons or ____ to serve as trustee.

Answer 76

acquire and hold property for their own benefit and has capacity to administer that property (Minors and insane persons can hold property, but cannot admin-
ister.)

corporations (for example, foreign corporations).

Question 77

Compensation and Reimbursement rules for Trustee

Answer 77

• A trustee is entitled to reasonable compensation or to whatever compensation is specified in the trust instrument.
• A trustee is entitled to reimbursement for expenses incurred in the trust’s administration and any other expenses that resulted in a benefit to the trust.

Question 78

A court can remove a trustee on ____ or upon request by ____

Answer 78

its own motion; the settlor, a beneficiary, or a co-trustee.

Question 79

Grounds for removal of a trustee include:

Answer 79

(1) a serious breach of trust;
(2) serious lack of cooperation among co-trustees;
(3) unfitness, unwillingness, or persistent failure to administer; or
(4) a substantial change in circumstances.
–> The basic factor considered is whether continuation in office would be detrimental to the trust.

Question 80

Before acceptance, a trustee can disclaim or refuse appointment for any reason. However, a trustee cannot ____

Answer 80

accept a trust in part and
disclaim it in part

Question 81

Relation Back of Trustee Acceptance

Answer 81

A testamentary trust is treated as in existence as of the settlor’s death, and the trustee’s acceptance “relates back” to that date.
-> It is thus possible for a trustee, by accepting, to become liable (in their fiduciary capacity) on tort claims arising prior to the time the trustee accepted.

Question 82

Under the UTC, once an appointment has been accepted, the trustee can resign by either:

Answer 82

(1) giving 30 days’ notice to the qualified beneficiaries, settlor (if living), and co-trustees; or
(2) obtaining court approval.

Question 83

A successor trustee succeeds to ____

Answer 83

all of the rights, powers, and privileges of the original trustee and is subject to all of the original trustee’s duties, liabilities, and responsibilities.

Question 84

MECHANICS AND FORMALITIES: A trust can be created by ____

Answer 84

inter vivos transfer, by inter vivos declaration of trust, or by will (testamentary trust).

Question 85

Inter vivos trusts are created ______

Answer 85

while the settlor is alive either by the settlor declaring themself trustee for another or by the transfer of property to another as trustee.

Question 86

The present intent of an inter vivos trust required must be manifested by ____

Answer 86

conduct (delivery) or words (declaring oneself trustee).

Question 87

If a present trust is not established because there is no trust res, the trust arises when ____

Answer 87

the settlor subsequently acquires the res and remanifests trust intent.

Question 88

Present Declaration of Trust—Settlor Is Trustee

Answer 88

A trust can be created by a person declaring themself trustee of specific property for a beneficiary. The settlor keeps legal title.

Question 89

Transfer or Conveyance in Trust—Settlor Is Not Trustee

Answer 89

The settlor creates the trust by transferring legal title of property to a trustee. The settlor may retain or transfer the equitable title, but the settlor conveys legal title.

Question 90

Transfer (Delivery) of Property to Trustee (methods for inter vivos trust)

Answer 90

1. Declaration of Trust
2. Conveyance in Trust

Question 91

If a (inter vivos) trust was created by a declaration of trust, no conveyance of ____ property is needed as long as ____.

_____ property should be conveyed from the settlor as an individual to the settlor as a trustee.

Answer 91

personal; the property is identified and segregated

Real

Question 92

If the (inter vivos) trust was created by a conveyance in trust, the settlor must
_____.

____ property is conveyed by deed. ____ property is conveyed by physical delivery or an appropriate written assignment.

Answer 92

convey the property to the trustee

Real; Persona

Question 93

Delivery means ____

Answer 93

placing the trust property out of the settlor’s control.

Question 94

Failure to ____, or a promise to _____, may evidence a lack of present intent and prevent delivery of the res.

Answer 94

name a trustee; name a trustee in the future

Question 95

Formal Requirements—Statute of Frauds for inter vivos trust

Answer 95

• Most states do not require a writing for a trust of personal property.
• For a trust of land, however, a written instrument signed by the person entitled to impress the trust upon the property is commonly required under the Statute of Frauds.

Question 96

Oral trusts of personal property may be established only by ____

Answer 96

clear and convincing evidence.

Question 97

An otherwise invalid oral trust of land may be enforced by imposing a ____

Answer 97

constructive trust.

Question 98

What precludes SOF defense to real property trust

Answer 98

If the holder of the legal title acts as if they are a trustee, part performance will preclude the Statute of Frauds defense.
-> The Statute of Frauds is to protect the donee of a gift from false claims that the donee is really a trustee.

Question 99

Under the Uniform Testamentary Additions to Trusts Act, a settlor can ____ to a trust—even an amendable and revocable trust—established during their lifetime. The trust must be ____

Answer 99

make gifts by will

clearly identified from language in the will.

Question 100

Pour-Over Gift from Will to Trust: Property goes into the trust as the trust exists at the date of ____, not how the trust was written at the date when ____.

Answer 100

the testator’s death; the will was executed
-> Thus, trust amendments made after the will execution are effective to govern the poured-over property. If the
trust is revoked, the gift fails (lapses).

Question 101

The trust may remain unfunded during the settlor’s lifetime. The pour-over property can be the ____ trust funding if:

Answer 101

initial

• The trust is identified in the will, and
• The trust is executed before the testator’s death

Question 102

Testamentary trusts are created ____

Answer 102

in the settlor’s valid will.

Question 103

Formalities of testamentary trusts

Answer 103

Trust intent and the essential terms of the trust (trust res, beneficiaries, and trust purpose) must be ascertained from the will itself, from a writing incorporated by reference into the will, or from the exercise of a power of appointment created by the will.

Question 104

“Secret Trust”

Answer 104

In the case of a secret trust, the settlor agrees with a will beneficiary that the beneficiary will hold the property in trust for someone else—and relies on the beneficiary’s promise—but the will does not state the trust nature of the gift.

Question 105

For “secret trust” allegations the intended trust beneficiary may present extrinsic evidence of _____. If this can be proven by clear and convincing evidence, a ____ will be imposed on the property in favor of the intended trust beneficiary

Answer 105

the will beneficiary’s promise to hold the property in trust.

constructive trust

Question 106

A constructive trust will be imposed in a secret trust case even if the will beneficiary did not make the promise until ____.

Furthermore, it does not matter whether the will beneficiary intended to ____; all that matters is that the testator ____.

Answer 106

after the will was executed

perform the promise when they made it; relied on the promise

Question 107

“Semi-Secret Trust”

Answer 107

In a semi-secret trust, the will makes a gift in trust but fails to name the beneficiary.

Question 108

Where there is a semi-secret trust the gift ____

Answer 108

fails, and the named trustee holds the property on a resulting trust for the testator’s successors in interest

Question 109

Extrinsic evidence is not allowed for which secret trust situation?

Answer 109

The Semi-Secret Trust

Question 110

Re: Voluntary Transfers—Gifts and Sales

Absent restrictions by statute or by the trust instrument, a beneficiary may ____. The assigned interest remains subject to ____

Answer 110

freely transfer their interest in the trust; all previous conditions and limitations.

Question 111

Re: Involuntary Transfers—Creditors

Unless statute or the trust provides otherwise, the beneficiary’s creditors ____ beneficiary’s interest in the trust. The interest is
subject to ____ sale.

To avoid this, a court may order the trustee to _____.

Answer 111

may reach the; judicial

pay the beneficiary’s income to the creditors until the debt is satisfied

Question 112

DISCRETIONARY TRUSTS

Answer 112

In a discretionary trust, the trustee is given discretion whether to apply or withhold payments of income or principal (or both) to a beneficiary.

Question 113

Before the trustee exercises their discretion to make payments to the beneficiary, the beneficiary’s interest is ____

Answer 113

not assignable and cannot be
reached by their creditors.
-> Put simply, the beneficiary has nothing to transfer and no interest for creditors to reach—the beneficiary merely has an expectancy to be a beneficiary.

Question 114

Creditors are usually allowed
to attach the beneficiary’s interest but may not ____.

Answer 114

compel the trustee to make a distribution.

Question 115

If the trustee has notice of an attachment by creditors and decides to make payments to the beneficiary, the trustee must _____ unless _____

Answer 115

make those payments directly to the creditors

the beneficiary’s interest is protected by a spendthrift provision.

Question 116

The court can force the trustee to satisfy a ____

Answer 116

judgment or order against the beneficiary for the support or maintenance of the beneficiary’s child, spouse, or former spouse.

Question 117

The beneficiary cannot interfere with the exercise of the trustee’s discretion unless ____, in which case ___ will intervene.

Answer 117

the trustee abuses their power; the court

Question 118

SPENDTHRIFT TRUSTS

Answer 118

A spendthrift trust precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust, and the beneficiary’s creditors are precluded from reaching it to satisfy their claims.
-> The purpose is to protect the beneficiary from their own improvidence.

Question 119

Under spendthrift trusts the beneficiary may not transfer their interest. However, once the trustee pays the beneficiary, the beneficiary may ____

Answer 119

transfer the property received

Question 120

Under spendthrift trusts the beneficiary’s creditors cannot reach the beneficiary’s trust interest until ____.
Of course, once the trustee pays the beneficiary, the creditors may reach the property.

Answer 120

income or principal has been paid to the beneficiary

Question 121

A restriction permitting the beneficiary to voluntarily alienate their interest, but purporting to _____, is probably invalid.

Answer 121

deny creditors the right to reach the beneficiary’s interest

Question 122

A beneficiary’s ___ cannot force the trustee to pay them directly. However, the trustee may choose to honor a purported assignment by the beneficiary, but the trustee may _____.
-> Likewise, the beneficiary’s creditors cannot force the trustee to pay them.

Answer 122

assignees; recommence payments to the beneficiary at any time, and the beneficiary may withdraw their direction to pay the assignee

Question 123

Limitations on Enforcement on spendthrift clauses (high level)

Answer 123

• Ineffective If Settlor Is Beneficiary
• Ineffective Against Certain Creditors

Question 124

In most states, a settlor cannot use a spendthrift trust to protect their own property from their own creditors. However, a growing number of states allow self-settled spendthrift trusts, that is, the
_____

Answer 124

“domestic asset protection trust” or “DAPT.”

Question 125

When it is unclear whether a beneficiary is the settlor, determine ____.

Answer 125

who furnished the consideration for the creation of the trust
-> If a person furnishes the consideration, they are the settlor even though the trust is created by another person.

Question 126

Re: Creditors, typically, a spendthrift clause cannot be used to shield the beneficiary from:

Answer 126

• Judgments or court orders for support or maintenance of the beneficiary’s child, spouse, or former spouse
• Claims by the government

Question 126

A support trust directs the trustee to ___

Answer 126

pay only so much of the income or principal (or both) as is necessary for the beneficiary’s support.

Question 127

Even under a spendthrift clause a creditor can reach a mandatory distribution of income or principal if ____

Answer 127

the trustee did not make it within a reasonable time.

Question 127

A support trust may be ____.

Answer 127

mandatory or discretionary
-> If discretionary, the creditors’ rights are the same as they are for other discretionary trusts

Question 127

Even without a spendthrift clause, the beneficiary’s interest in a support trust is such that ______; the beneficiary’s interest is not ____ by definition.

Answer 127

no one but the beneficiary can enjoy it; assignable
-> Support trusts are, therefore, impliedly spendthrift.

Question 128

If the support trust is silent, the standard of support is ____. Whether the beneficiary’s other income or resources should be taken into account is a question of ____

Answer 128

the beneficiary’s accustomed standard of living; the settlor’s intent and is decided by courts on a case-by-case basis.

Question 129

The creditors of the trustee cannot reach ____

Answer 129

trust property to satisfy their claims; they have only a personal claim against the trustee

Question 130

A trust will terminate automatically upon ____

Answer 130

the expiration of the term
specified in the instrument or when all of the purposes of the trust have been accomplished or have become unlawful, contrary to public policy, or impossible to achieve.

Question 131

The most common way for a trust to end is by ____

Answer 131

its express terms. A trust will terminate automatically upon the expiration of the term specified in the instrument.

Question 132

Under the UTC, a settlor can revoke or amend a trust unless _____. However, some states, even some that have adopted the UTC, follow the traditional rule, which provides that a trust is irrevocable unless ____

Answer 132

the terms expressly state that it is irrevocable

the settlor expressly reserves the power to revoke or modify the trust.

Question 133

Under the law of some states, the settlor may revoke an irrevocable trust upon _____

Answer 133

written consent of all living persons with vested or contingent interests

Question 134

A trust may be terminated or modified upon the consent of ____, even if the modification or termination conflicts with a material purpose of the trust.

Answer 134

the settlor (or the settlor’s agent, conservator, or guardian) and all beneficiaries

Question 135

A trust also may be terminated or modified on the consent of only all beneficiaries (that is, without consent of the settlor), but only if ____

Answer 135

no material purpose of the trust would thereby be frustrated (“Claflin Rule”).

Question 136

Under the UTC, a court may modify a trust even without the consent of all of the beneficiaries if

Answer 136

(1) the trust could have
been terminated had all of the beneficiaries consented, and (2) the interest of a beneficiary who does not consent will be adequately protected.

Question 137

The following provisions in a trust are likely to prevent the beneficiaries from modifying or terminating as they are considered material purposes:

Answer 137

• Support of beneficiary
• Spendthrift provision
• Payment at certain ages
• Payment at certain dates
• Discretionary trust

Question 138

All beneficiaries must consent, including ____ beneficiaries, as well as beneficiaries of ___, no matter how uncertain or contingent.

If any beneficiaries are unborn or unascertained, there must
_____; otherwise, the trust may not be terminated or modified.

Answer 138

unborn and unascertained; future interests

be a party appointed to represent their interests or they must be virtually represented according to state law

Question 139

If the trust is terminated by agreement of all beneficiaries, then the trustee must ___

Answer 139

distribute the trust property as agreed by the beneficiaries

Question 140

Where all beneficiaries consent to termination, the trustee is not liable if ____ even if the termination violates a material purpose of the settlor.

Answer 140

the trustee accommodates them by distributing the
trust assets

Question 141

As long as the beneficiaries have a right to terminate, the _____ are not a bar. However, joinder of the settlor may be deemed a waiver of ____

Answer 141

settlor’s objections (but may be evidence as to whether termination would defeat trust purposes)

a material purpose that would otherwise block termination.

Question 142

A trust will terminate by operation of law if ___

Answer 142

the property has been exhausted or if the legal and equitable titles have merged.

Question 143

If termination or modification is not available because not all of the beneficiaries consent, a court may terminate or modify the trust if: (1) the trust could have been modified if all beneficiaries had consented;
and (2) the interests of any non-consenting beneficiaries will be adequately protected.

Additionally, a court may terminate or modify a trust if:

Answer 143

• Unanticipated circumstances threaten the purposes of the trust
• Continuation of the trust on its existing terms is impracticable or wasteful; or
• The value of the trust is insufficient to justify the cost of administration or to achieve the settlor’s tax objectives

Question 144

In some states, the court can reform the terms of a trust to reflect the settlor’s intent if ____

Answer 144

a mistake in the terms is shown by clear and convincing evidence.

Question 145

In some states, a trustee can terminate a trust if the trust property is ____, as long as the trustee provides the qualified beneficiaries with notice.

Answer 145

less than $50,000 and the amount is insufficient to justify the cost of administration

Question 146

Combination and Division of Trusts

Answer 146

• Absent contrary terms in the trust, the trustee can combine several trusts into one trust or divide one trust into several trusts, provided doing so does not frustrate any purposes of the trusts or impair the rights of any beneficiary.
• The trustee is not required to obtain the consent of the qualified beneficiaries prior to combining or dividing trusts, but the trustee must provide them with notice.

Question 147

DUTY OF TRUSTEE UPON TERMINATION

Answer 147

1. Wind Up Trust Business: The trustee may continue to exercise powers for a reasonable period of time necessary to wind up the affairs of the trust
2. Distribute to Remainder Beneficiaries: timely distribute trust property to the appropriate remainder beneficiaries.

Question 148

The trustee can properly exercise only such powers as are expressly or impliedly conferred upon them. These include:

Answer 148

• Powers expressly conferred upon them by the terms of the trust (which control)
• Powers granted by state law; and
• Implied powers that are appropriate to achieve the proper investment, management, and distribution of the trust property

Question 149

These implied powers of the trustee include the power to:

Answer 149

• Sell trust property (How else invest?)
• Lease trust property (How else earn income?)
• Incur reasonable expenses (How else carry out trust?)
• Hire agents (How else carry out trust?)
• Mortgage trust property (How else borrow money?)
• Repair (How else keep trust property valuable?)

Question 150

Under the UTC A trustee, without authorization by the court, may exercise:

Answer 150

• Powers conferred by the terms of the trust (which control)
• Powers that an unmarried competent owner has over individually owned property
• Any other powers appropriate to achieve the proper investment, management, and distribution of trust property; and
• Any other powers conferred by the UTC

Question 151

The UTC confers many powers on the trustee, including the power
to:

Answer 151

collect and hold trust assets; operate a business; acquire an undivided interest in a trust asset; invest trust assets; buy, sell, or encumber trust assets; enter into a lease; vote securities; pay taxes and assessments; insure assets; make distributions; prosecute and defend actions; etc.

Question 152

Co-trustees who are unable to reach a unanimous decision may act by ____ in many states. If a co-trustee cannot perform because of, for example, absence or illness, the remaining co-trustees may ____

Answer 152

majority decision; act for the trust.

Question 153

A power is “imperative” (sometimes called a “mandatory” power) if _____

Answer 153

the trust instrument requires its exercise

Question 154

If a trustee fails or refuses to perform under an imperative power, a court will, upon petition, _____

Answer 154

order the trustee to exercise the power as required by the trust instrument (provided that exercising the power would not violate the law or be against public policy).

Question 155

“Discretionary” powers are ones that ____. The trustee must exercise a discretionary power in ____

Answer 155

the trustee may or may not perform, as the trustee determines in their judgment to be the most appropriate.

good faith.

Question 156

Exercise of a discretionary power is subject to judicial review for ___. The court will also intervene if a trustee has ____

Answer 156

abuse of discretion; completely failed to exercise judgment with regard to a discretionary power.

Question 157

If the settlor grants the trustee absolute or uncontrolled discretion with regard to some matter, the trustee’s acts are _____

Answer 157

still reviewable by the court. Otherwise, there would be no trust because there are no enforceable duties.

Question 158

Trustees owe their fiduciary duties to ____. In some states, a trustee of a revocable trust owes duties only to ____.

Answer 158

the beneficiaries of the trust; the settlor

Question 159

Once the trustee accepts the position of trustee, the trustee is bound to follow the terms of the trust and will be ____

Answer 159

liable for noncompliance.

Question 160

High level duties of trustee

Answer 160

• Duty to Administer Trust
• Duty of Loyalty
• Duty to Report
• Duty to Separate Trust Property and Keep Records—No Commingling
• Duty to Enforce Claims and Defend Trust from Attack
• Duty to Preserve Trust Property and Make It Productive

Question 161

Duty to Administer Trust

Answer 161

• The trustee has a duty to personally administer the trust in good faith and in a prudent manner, in accordance with the terms and purposes of the trust instrument and the interests of the beneficiaries.
• If there is more than one beneficiary, the trustee must act impartially, taking into account any of their differing interests.

Question 162

Under the duty to administer the trust of a trustee has ____, they will be held to a higher standard.

Answer 162

special skills or expertise

Question 163

Generally, a trustee may not delegate ____

Answer 163

discretionary functions (such as the decision to make or not to make distributions).
-> To do so would make the trustee a guarantor for any losses caused by the improper delegation.

Question 164

Duty of Loyalty (generally)

Answer 164

• Absent court approval or express waiver in the trust instrument, a trustee cannot enter into any transaction in which the trustee is
  dealing with the trust in their individual capacity.
• A trustee owes a duty of undivided loyalty to the trust and its beneficiaries.

Question 165

The duty of loyalty precludes the following actions:

Answer 165

• A trustee cannot buy or sell trust assets even if the price is a fair one.
• A trustee may not sell property of one trust to another trust of which they are also trustee.
• A trustee may not borrow trust funds nor loan their personal funds to the trust (except to protect the trust), and any interest paid on such a loan must be returned to the trust.
• A trustee cannot use trust assets to secure a personal loan.
• A trustee cannot personally gain through their position as trustee.
• A corporate trustee cannot invest in its own stock as a trust
  investment. But it can retain its own stock if such stock was a part
  of the original trust res when the trust was established, provided
  that retention of the stock meets the prudent investor standard.
• Self-employment can constitute a form of prohibited dealing.
  –> However, if the trustee renders extraordinary services to the trust,
  the trustee may be entitled to additional compensation.

Question 166

When faced with a question involving a self-dealing trustee, remember that a trustee’s ____ is irrelevant.

Answer 166

good faith or actual benefit to the trust

Question 167

Indirect self-dealing: The trustee presumably violates their duty of loyalty if ____

Answer 167

the trustee enters into a transaction with their spouse, close relatives, attorney, or corporation in which they own a significant interest.

Question 168

The duty of loyalty extends ___

Answer 168

equally to all beneficiaries, unless the trust instrument specifies otherwise.

Question 169

Trustee Duty to Report

Answer 169

A trustee must:
(1) provide the qualified beneficiaries with the trustee’s name, address, and telephone number;
(2) respond to beneficiary requests for information about the trust’s administration and provide a copy of the trust instrument if requested; and
(3) furnish an annual accounting of the trust.

Question 170

A transaction involving trustee self-dealing is ____ unless:

Answer 170

voidable by the beneficiary affected by the transaction

(1) a court or the terms of the trust approved it;
(2) the beneficiary failed to bring suit within the prescribed time period;
(3) the beneficiary gave their consent, ratification, or release; or
(4) it involves a contract or claim arising before the trustee became trustee.

Question 171

A trustee may not commingle trust property with _____. The trustee must also ____ trust property by labeling it as trust, rather than individually owned, property.

Answer 171

their own property or that of another trust

“earmark”

Question 172

If the trustee commingles trust property with their own, losses are charged to _____, and gains are credited to ____.

Answer 172

the trustee; the trust

Question 173

The trustee must keep ____

Answer 173

records of the trust’s administration.

Question 174

The trustee has a duty to enforce _____

Answer 174

claims of the trust and to defend
the trust.

Question 175

Duty to Preserve Trust Property and Make It Productive

Answer 175

• The power to invest is normally implied from the duty to make trust property productive.
• The trustee is expected to take actions to, for example, lease land, collect claims, and invest money.

Question 176

The measure of damages for breach of this duty (to Preserve Trust Property and Make It Productive) is ____

Answer 176

the amount of income that would normally accrue from proper investments.

Question 177

In virtually all states, a trustee’s investment responsibilities are governed by ____

Answer 177

the Uniform Prudent Investor Act (“UPIA”).

–> The trust terms can expand or limit the trustee’s powers—UPIA provisions apply only if there is no contrary provision in the trust instrument.

Question 178

If the trust instrument provides that investments may be made in the trustee’s discretion, it is a question of interpretation whether _____. Although the investment power may be broadened, such language will be ____.

Answer 178

the trustee’s power is expanded beyond the UPIA; strictly construed

Question 179

The following phrases in a trust invoke the prudent investor rule (note that some of them clearly appear to invoke a much different
standard):

Answer 179

• “Prudent person rule”
• “Prudent man rule”
• “Legal investments”

Question 180

Uniform Prudent Investor Act - Standard of Care

Answer 180

A trustee must exercise reasonable care, skill, and caution when investing and managing trust assets.

Question 181

Uniform Prudent Investor Act - Approach to the Standard of Care

Answer 181

Investment decisions must be evaluated in the context of the entire trust portfolio (corpus) and as part of an overall investment strategy that has risk and return objectives reasonably suited to the particular trust.
-> Thus, some speculation may be appropriate or even required.

Question 182

Uniform Prudent Investor Act - Type of Investment Permitted

Answer 182

The UPIA permits a trustee to invest in any kind of property or any type of investment provided the trustee acts prudently; no particular type of investment is inherently imprudent.

Question 183

The following circumstances are relevant and must be considered by the trustee in making investment decisions (under Uniform Prudent Investor Act):

Answer 183

• General economic conditions
• The possible effect of inflation or deflation
• The expected tax consequences of investment decisions or strategies
• The role that each investment plays within the overall trust portfolio
• The expected total return from income and the expected appreciation of capital
• Other resources of the beneficiaries
• Needs for liquidity, regularity of income, and preservation or appreciation of capital
• An asset’s special relationship or value to the purposes of the trust or to one or more of the beneficiaries (for example, a family
  home or heirloom)

Question 184

A trustee must ____ the investments of the trust unless they reasonably determine that the purposes of the trust are better served without it (i.e., family heirlooms and businesses)

Answer 184

diversify

Question 185

Watch for a fact pattern containing a revocable trust and a settlor directing the trustee to make nondiverse investments. Because the trustee of a revocable trust owes their duties to the settlor in many states, such a directive may ____

Answer 185

relieve the trustee of their duty to diversify.

Question 186

Compliance with the UPIA is determined in light of the facts and circumstances existing at ____. A trustee who acts in _____ with the Act will not be held liable.

Answer 186

the time of the trustee’s decision or action; substantial compliance

Question 187

A trustee cannot excuse a breach by proving the trustee possesses and exercises in the trust’s private affairs _____

Answer 187

subnormal business judgment (lower skills).

Question 188

Duty to Review Trust Property

Answer 188

• When the trustee assumes office, the trustee must review the trust assets to bring them into compliance with the prudent investor rule.
  –> If imprudent investments are discovered by a successor trustee, the successor trustee may need to sue the prior trustee for breach of
  duty

Question 189

A trustee must act exclusively for the beneficiary when investing and managing trust assets. Accordingly, ____ may be problematic, especially if the returns from a “politically correct” investment are ____.

Answer 189

social investing (refers to the consideration of factors other than the monetary safety of the investments and their potential to earn income and appreciate in value).

lower than from other investments

Question 190

If there is more than one beneficiary, the trustee must act ____ when investing and managing trust assets.

Answer 190

impartially and not favor one beneficiary over another

Question 191

A trustee may delegate investment and management functions but only if ____

Answer 191

a prudent trustee of comparable skills could properly delegate under the circumstances.

Question 192

When permissible to delegate investment and management functions the he trustee must act prudently in:

Answer 192

• Selecting an agent
• Establishing the scope and terms of the delegation; and
• Periodically reviewing the agent’s actions

Question 193

If delegation is proper, the trustee is ____ for the decisions or actions of the agent.

Answer 193

not liable to the beneficiaries

Question 194

If the trustee commits, or is about to commit, a breach of trust duties, the court may:

Answer 194

(1) enforce specific performance of the trustee’s duties,
(2) enjoin the trustee from committing a breach of trust,
(3) compel the trustee to pay money or restore property, or
(4) suspend or remove the trustee.

Question 195

Damages for breach: If a trustee commits a breach of trust, the trustee is liable to the beneficiaries for the greater of:

Answer 195

• The amount necessary to restore the trust property and distributions to what they would have been absent the breach, or
• The trustee’s profit from the breach

Question 196

A trustee is liable to a beneficiary for any profit arising from administration of the trust, even if ____

Answer 196

there was no breach.

Question 197

In any action in which trust beneficiaries are parties, a minor, incapacitated, or unborn beneficiary may be ____

Answer 197

represented by another beneficiary with substantially identical interests under the law of many states.

Question 198

In the case of self-dealing, the beneficiary may have a choice of the following remedies:

Answer 198

• Affirm the transaction if the trust profited
• Set aside the transaction if the trust lost money
• Trace profits from the trustee if the trustee profited

Question 199

A trustee is not liable to a beneficiary for a breach of trust if:

Answer 199

(1) the trustee acted in reasonable reliance on the terms of the trust; or
(2) the beneficiary consented to the conduct, released the trustee from liability, or ratified the transaction, so long as the beneficiary was not improperly induced.

Question 200

Exculpatory clauses are void if they:

Answer 200

(1) relieve the trustee of liability for breach of trust committed in bad faith or with reckless indifference; or
(2) appear in the trust instrument because of the trustee’s abuse of a confidential relationship with the settlor (unless the trustee can show that the clause is fair and was adequately communicated to the settlor).

Question 201

Generally, a trustee will not be liable for the acts of co-trustees if ____

Answer 201

the trustee did not join in the action and exercised reasonable care in preventing the breach of trust or compelling the co-trustee to redress the breach.

Question 202

A court may remove a trustee if the trustee’s continuation in office would ____

Answer 202

be detrimental to the trust (taking into consideration both the settlor’s intent and the interests of the beneficiaries).

Question 203

There are numerous grounds upon which a trustee may be removed, including the following:

Answer 203

• Incapacity
• Unfitness (for example, convicted of a crime or chemically dependent)
• Commission of a serious breach of trust
• Serious conflict of interest
• Insolvency (because a trustee is more likely to embezzle if they are in financial trouble)
• Extreme hostility between the trustee and beneficiaries but only if it would interfere with proper trust administration
• Refusal to post any required bond
• Refusal to account
• Lack of cooperation among co-trustees that substantially impairs
  trust administration
• Unwillingness or persistent failure to administer the trust
• Substantial change of circumstances so that removal is in the best interest of all beneficiaries

Question 204

Courts will consider the settlor’s intent when considering removal of a trustee, if the settlor knew _____

Answer 204

the trustee was in a conflict of interest situation but selected the trustee regardless.

Question 205

Trustee’s Liability to Third Parties: Contracts on Behalf of Trust Estate

Answer 205

• The general rule is that a trustee may be sued on the contract in the
  trustee’s fiduciary capacity.
• A third party may sue the trustee person-ally only if the trustee, in entering into the contract, failed to reveal the fiduciary relationship either by indicating their role as trustee in their signature or by referring to the trust

Question 206

Trustee Indemnification or Reimbursement from Trust Property from lawsuits on a contract

Answer 206

If the contract was properly entered into for the trust and the trustee was not in breach, the trustee is entitled to indemnification or reimbursement from trust property.

Question 207

Trustee’s Liability to Third Parties: Tort

Answer 207

• A third party injured in tort can sue the trust estate by proceeding against the trustee in their fiduciary capacity.
• The third party may also sue the trustee personally if the trustee is personally at fault, but not by reason of respondeat superior.

Question 208

LIABILITY OF THIRD PARTIES TO THE TRUST: Property Improperly Transferred to Non-Bona Fide Purchaser

Answer 208

A beneficiary or successor trustee can set aside transactions that are breaches of trust if the property is not in the hands of a bona fide purchaser (“BFP”)

Question 209

Transfer to BFP ____ Beneficiaries’ Interests

Answer 209

Cuts Off

Question 210

A third party is a BFP if the party acquires the property for value and without notice of ____.

A person who knows of facts requiring ____, which if pursued would have revealed ____, is not a BFP.

Answer 210

the trust

an inquiry; the existence of a trust

Question 211

An innocent donee of trust property is not liable for damages but ____

Answer 211

must restore the property, its value, or its substitute to the trust.

Question 212

A ____ in a breach of trust is liable for the resulting loss to the trust estate.

Answer 212

knowing participant

Question 213

Direct suits by ____ are not permitted against third parties who damage trust property; the ____ alone can sue.

Answer 213

beneficiaries; trustee

Question 214

The beneficiaries’ remedy against third parties is _____

Answer 214

to bring suit in equity to compel the trustee to sue the third party.

Question 215

(exception rule) Direct actions by beneficiaries against third parties are permitted where the trustee:

Answer 215

(1) participated in the breach,
(2) has left the jurisdiction and no successor trustee is appointed, or
(3) fails to sue a third person liable in tort or contract.

Question 216

ALLOCATION OF RECEIPTS AND EXPENSES BETWEEN INCOME AND PRINCIPAL ACCOUNTS: A majority of states have enacted the ____

Answer 216

Uniform Principal and Income Act (“UPAIA”).

Question 217

The UPAIA, which applies to all trusts and estates unless ____, gives the trustee or personal representative an ____ power to reallocate investment portfolio return.

Answer 217

the governing instrument provides otherwise; adjustment

Question 218

This adjustment power authorizes the trustee to ____

Answer 218

characterize items such as capital gains, stock dividends, etc., as income if the trustee deems it appropriate or necessary to carry out the trust purposes.

Question 219

If the trust calls for distribution of trust income to a beneficiary, the
trustee must follow traditional trust accounting rules by distributing interest and dividend income, etc., to the beneficiary.
-> If the resulting distribution effectuates the settlor’s intent and the purposes of the trust, then _____.
-> If, however, the trustee determines that by distributing only the trust’s income the trustee is unable to comply with _____, the trustee may adjust between principal and income to the extent necessary.

Answer 219

nothing further needs to be done

the requirement that all beneficiaries be treated fairly

Question 220

In deciding whether and to what extent to exercise the adjustment power, the trustee must consider the following factors:

Answer 220

(1) the nature, purpose, and expected duration of the trust;
(2) the intent of the settlor;
(3) the identity and circumstances of the beneficiaries;
(4) the needs for liquidity, regularity of income, and preservation and appreciation of capital;
(5) the nature of the trust’s assets; (6) the net amount allocated to income under the other sections of
the Act and the increase or decrease in the value of the principal assets;
(7) whether and to what extent the trust gives or denies the trustee the power to invade principal or accumulate income;
(8) the actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation; and
(9) the anticipated tax consequences of an adjustment.

Question 221

The trustee may not make an adjustment if _____, as this would give the beneficiary a general power of appointment for estate tax purposes, and the trust assets would be taxed in the beneficiary’s estate.

Answer 221

the trustee is a beneficiary of the trust,

Question 222

An adjustment cannot be made if the adjustment power would disqualify the trust for a ____

Answer 222

federal estate tax marital or charitable deduction.

Question 223

In general, the allocation rules follow ____; for example, net rental income is income and the proceeds of sale of a trust asset are principal.

Answer 223

traditional accounting rules

Question 224

Allocation of receipts from entity

Answer 224

• Money received from an entity such as a corporation (for example, cash dividends) is characterized as income unless the money is characterized as a capital gain for federal income tax purposes, or is received in partial or total liquidation of the entity.
• All property other than money received from an entity (for example, stock dividends) is characterized as principal.

Question 225

Allocation of Insurance Policies and Other Contracts

Answer 225

• Proceeds from a life insurance policy or other contract in which the trust or trustee is named beneficiary are allocated to principal.
• If a contract insures the trustee against a type of loss, the proceeds are allocated to income.
• Dividends on an insurance policy are allocated to the account from which the premiums are paid.

Question 226

Allocation of Deferred Compensation

Answer 226

• For periodic receipts from a deferred compensation plan (for
  example, a pension plan), the receipt is income to the extent that the payment is characterized by the payor as income, and the balance is principal.
• If no part of the payment is characterized as income or as a dividend, 10% of the payment is characterized as income and the balance is principal.

Question 227

Allocation of Liquidating Assets Such as Patents, Copyrights (an asset whose value will diminish over time because the asset is expected to produce receipts over a limited period)

Answer 227

Proceeds from such liquidating assets (for example, patents, copyrights) are allocated 10% to income and 90% to principal.

Question 228

Allocation of Mineral Interests

Answer 228

For most oil, gas, mineral lease, and water right payments, receipts are allocated 10% to income and 90% to principal.

Question 229

Allocation of Unproductive Property

Answer 229

Under the former law, if a particular trust asset produced little or no income, on the asset’s sale, the income beneficiary was entitled to a portion of the sale proceeds under the principle of “delayed income.”

Because the UPIA looks to the total return from the overall portfolio,
the unproductive property rule was repealed except for certain trusts that are intended to qualify for the estate tax marital deduction.

Question 230

Summary - Receipts Allocated to Income

Answer 230

• Ordinary receipts from use or investment of trust property (e.g., rents, interest)
• Cash dividends
• Proceeds from contract insuring
  trustee against loss
• 10% of payment from a deferred compensation plan (e.g., pension plan), unless otherwise characterized
• 10% of proceeds received from a liquidating asset (e.g., patents, copyrights)
• 10% of proceeds received from a working interest (e.g., oil and gas interests)

Question 231

Summary - Expenses Charged to Income

Answer 231

• 50% of regular compensation of the trustee and any person providing investment services
• 50% of all expenses for accountings, judicial proceedings, and other matters affecting income and remainder interests
• Ordinary expenses
• Insurance premiums covering loss of a principal asset

Question 232

Summary - Receipts Allocated to Receipts

Answer 232

• Extraordinary receipts (e.g., proceeds from sale of trust assets)
• Stock dividends
• Proceeds from life insurance policy naming trust or trustee as beneficiary
• 90% of payment from a deferred
  compensation plan (e.g., pension plan), unless otherwise characterized
• 90% of proceeds received from a liquidating asset (e.g., patents, copyrights)
• 90% of proceeds received from a working interest (e.g., oil and gas interests)

Question 233

Summary - Expenses Charged to Principal

Answer 233

• 50% of regular compensation of the trustee and any person providing investment services
• 50% of all expenses for accountings, judicial proceedings, and other matters affecting income and remainder interests
• Expenses of a proceeding that concerns a principal interest
• Payments on the principal of a trust debt
• Estate taxes
• Disbursements related to environmental matters

Question 234

The rules are basically the same for private and charitable trusts, but the rules governing charitable trusts differ from those applicable to private trusts in three important ways:

Answer 234

a charitable trust must have indefinite beneficiaries, it may be perpetual, and the cy pres doctrine applies.

Question 235

A charitable trust must have a purpose considered to ____. Charitable purposes include:

Answer 235

benefit the public

• The relief of poverty
• The advancement of education or religion
• The promotion of health
• The accomplishment of government purposes (such as parks, museums, and playgrounds)

Question 236

The charitable purpose may be expressed in _____. A charitable trust will be implied when ____

Answer 236

very general terms; the settlor’s charitable purpose
is clear.

Question 237

For a charitable trust The class to be benefited may be limited, but may not be so narrow as to _____. However, just because ____ be benefited (for example, a trust to provide parks in the city where the
family lives) does not keep the trust from being charitable.

Answer 237

only benefit a few individuals whom the settlor wishes to aid
personally

some family members might

Question 238

Beneficiaries of a charitable trust must be ____

Answer 238

indefinite.

–> this rule does not mean that the beneficiary cannot be a specific charitable entity, such as the American Red Cross or the Humane Society. The ultimate beneficiaries (the individuals the specified charity serves) are indefinite, even though the entity is specific.

Question 239

The court can select a charitable purpose or beneficiary if none is specified in the trust instrument, so long as ____

Answer 239

the selection is consistent with the settlor’s ascertainable intention.

Question 240

CY PRES application to charitable trusts

Answer 240

When a charitable purpose selected by the settlor is impracticable, unlawful, impossible to achieve, or wasteful, the court may select an alternative under the doctrine of cy pres, which means “as near as possible,” by ascertaining the settlor’s primary purpose.
-> This doctrine applies to outright charitable gifts as well as to charitable trusts.

Question 241

Under the UTC, the settlor’s general charitable intent is ____. Thus, unless the trust terms
expressly provide otherwise, application of the cy pres doctrine is ____. The court has discretion to _____

Answer 241

conclusively presumed

mandatory, and the court must reform the trust

determine the settlor’s primary charitable intent.

Question 242

Charitable trusts are not bound by the _____ and thus may be perpetual.

Also, the Rule Against Perpetuities does not apply to the shifting of the beneficial interest in a trust from ____. The Rule does apply, however, to shifts between ____.

Answer 242

Rule Against Perpetuities

one charity to another on the happening of a condition; private and charitable uses

Question 243

Suit to enforce a charitable trust can be brought by _____

Answer 243

the settlor (but some states require the settlor to have an interest in enforcing beyond merely being the settlor), a qualified beneficiary, or the
state’s attorney general

Question 244

HONORARY TRUSTS OR PURPOSE TRUSTS

Answer 244

An honorary or purpose trust is a trust that is not for a charitable
purpose and has no private beneficiaries.

Any excess property is distributed to the settlor or their successors unless the governing instrument provides otherwise.

Question 245

HONORARY TRUSTS

Answer 245

Honorary trusts are commonly established for the benefit of pets or for the maintenance of burial places.
- Under the common law, because there is no human beneficiary to enforce an honorary trust, the trustee is “on their honor” to carry out its terms.
- Under the UTC, the trust is
enforceable by someone named in the trust instrument or appointed by the court.
- The trust property may be applied only to carry out the terms of the trust.

Question 246

Absent special statutes, many jurisdictions will void an honorary trust (not for the care of animals) on the basis of the Rule Against
Perpetuities if its duration may be _____. The UTC, however, expressly provides that an honorary trust (not for the care of animals) may not be enforced for ____

Answer 246

more than a (human) life in being
plus 21 years

more than 21 years.

Question 247

A trust for the care of an animal alive during ____ is valid. The trust terminates when ____

Answer 247

the settlor’s lifetime; the animal dies.

Question 248

Resulting trusts involve ____ and are based on the presumed intent of the settlor.

Answer 248

reversionary interests

Question 249

Constructive trusts are used to
prevent ____

Answer 249

unjust enrichment.

Question 250

Resulting trusts arise by implication from ____

Answer 250

the settlor’s conduct

Question 251

Resulting trusts are of three types:

Answer 251

(1) purchase money resulting trusts,
(2) resulting trusts arising on failure of an express trust, and
(3) resulting trusts arising from an incomplete disposition of trust assets (that is, excess corpus).

Question 252

Beneficiaries of Resulting Trust

Answer 252

• The settlor is the beneficiary of a resulting trust.
• If the settlor is deceased, the settlor’s successors in interest (heirs or beneficiaries under the settlor’s will) are the beneficiaries.

Question 253

The purpose of a resulting trust is ___

Answer 253

to do what the settlor would have done had the settlor put their intent into words.

Question 254

Circumstances Giving Rise to Resulting Trust (on Failure of Express Trust) = A resulting trust arises where a settlor has conveyed property to a trustee under an express trust and:

Answer 254

(1) the trust is void or unenforceable, or
(2) the beneficiary is dead or cannot be located.
+ A resulting trust may also apply on failure of a charitable trust where cy pres is inapplicable.

Question 255

Circumstances Where Resulting Trust NOT Implied (on Failure of Express Trust)

Answer 255

(1) the trust instrument specifically or implicitly provides for disposition of trust property when the trust has failed or been completed;
(2) the settlor was given consideration for their original transfer in trust;
(3) the settlor created the trust for an illegal purpose; or
(4) cy pres is applicable in cases of charitable trusts

Question 256

Resulting Trust Implied from Excess Corpus

Answer 256

• A resulting trust in favor of the settlor also arises when the trust purpose is fully satisfied and some trust property remains.
• There could be a resulting trust of part of the corpus even before the trust is terminated if it is clear that there is excess trust corpus.

Question 257

Purchase Money Resulting Trusts

Answer 257

A purchase money resulting trust is presumed whenever X (the
“beneficiary”) furnishes the consideration (usually money, but any other valuable consideration suffices) for the acquisition of real or personal property but, with X’s consent, title is taken in the name of Y (the “trustee”).

Question 258

In a Purchase Money Resulting Trust situation, there are three possible explanations for the
relationship between the parties:

Answer 258

• Settlor-beneficiary of PMRT/Trustee of PMRT
• Donor/Donee
• Creditor—Debtor

Question 259

For a Purchase Money Resulting Trust The consideration paid by X must be for ____ of the property.

Answer 259

purchase
-> Sums paid by X to make improvements on the property or to pay taxes on it do not give rise to a trust.

Question 260

For a Purchase Money Resulting Trust the consideration (or obligation to pay) must be supplied _____

Answer 260

at or before the time Y takes title.

Question 261

Burden of Proof on One Claiming as Beneficiary For a Purchase Money Resulting Trust

Answer 261

The burden is on X, the party claiming to be the beneficiary of a resulting trust, to prove by clear and convincing evidence that they supplied the consideration

Question 262

Once X proves that they supplied the consideration, a resulting trust is presumed; but Y can rebut by showing that _____. Recitals as to _____ are not conclusive.

Answer 262

no trust was intended (for example, payment was a gift or loan to Y or satisfaction of
a debt owing to Y)

who paid consideration

Question 263

If X, the person providing the consideration, expects to be reimbursed, the relationship is a ____ rather than a purchase money resulting trust. In a purchase money resulting trust, X expects to receive an interest in the property, not the consideration back.

Answer 263

loan

Question 264

Exceptions to purchase money resulting trust

Answer 264

1 - No Trust Presumption Where Parties Closely Related (a gift is presumed rather than a trust)
–> rebuttable
–> The normal presumption of a trust applies where the person furnishing consideration is the uncle, aunt, brother, sister, child, or grand- child of the person receiving title.

2 - Unlawful Purpose
- Modern cases suggest that the implied trust is still proper where X’s misconduct is slight compared to the unjust enrichment Y will enjoy if permitted to keep the property.

3 - Transferee Obtained Title Wrongfully
–> No resulting trust arises when the transferee obtained title wrongfully (for example, by fraud), although a constructive trust may be imposed.

Question 265

Where X supplies only part of the consideration, the resulting trust in their favor is only for ______.

Answer 265

a pro rata portion of the property

Question 266

A constructive trust is not really a trust but rather ____

Answer 266

is a flexible equitable remedy to prevent unjust enrichment resulting from wrongful conduct, such as fraud, undue influence, or breach of a fiduciary duty.
-> Equity turns the holder of legal title into a trustee when they may not in good conscience retain the beneficial interest in the property.

Question 267

The constructive trustee’s only duty is ____

Answer 267

to convey the property to the person who would have owned it but for the wrongful conduct.

Question 268

A constructive trust must be ____.

Answer 268

requested as a remedy in a court action (A constructive trust is not automatic; it must be pled and proved.)

Question 269

Proof of the facts necessary to establish a constructive trust must be made by _____ rather than a preponderance of the evidence in some states.

Answer 269

clear and convincing evidence

Question 270

For a constructive trust remedy, the plaintiff must be able to ___

Answer 270

identify particular property as the trust res.
-> The mere proof that a defendant has been guilty of wrongdoing against the plaintiff and that the defendant has assets that could be used to satisfy the plaintiff’s claim is not a sufficient basis for imposing a constructive trust.

Question 271

Constructive Trust Arising from Theft or Conversion

Answer 271

• If Y steals property from X, title remains in X; there is no need to
  imply a trust.
• But if Y uses the property to acquire other items, Y takes title to the items and holds them in constructive trust for X

Question 272

Constructive Trust Arising from Fraud, Duress, Etc.

Answer 272

• Where Y acquires property from X by fraud, duress, mistake of fact, or by breach of a fiduciary duty owed to X, Y holds the property in constructive trust for X’s benefit.
  –> If property is conveyed to a third
  party who is not a BFP, the third party can be declared a construc-
  tive trustee.
• If Y takes property under a forged or fraudulent will, Y holds it in constructive trust for its rightful inheritor.
  –> This is true even if Y is innocent.

Question 273

Constructive Trust Arising from Breach of Fiduciary Duty

Answer 273

The fiduciary’s duty forbids them from taking title to property belonging to a beneficiary and from seizing for themself an opportunity to acquire property that comes to them in their capacity as fiduciary –> If the fiduciary violates this duty, courts may impose a constructive trust in favor of the person to whom they owe the duty.

Question 274

Constructive Trust Arising from Homicide

Answer 274

In states without a slayer statute, if Y kills X and is convicted of murder or manslaughter, Y holds any property acquired from X by will or intestacy as constructive trustee in favor of whomever would have taken the property had Y predeceased X.

Question 275

Constructive Trust Arising from Homicide - Where Victim and Killer Held Property in Joint Tenancy

Answer 275

Where X and Y were joint tenants, the killer Y may be trustee of only a one-half interest and own the balance free of trust, or Y may hold the whole interest in constructive trust less his life estate in one-half
(depending on the jurisdiction).

Question 276

Constructive Trust Arising from Breach of Promise - General Rule

Answer 276

The general rule is that a mere breach of a promise will not raise a constructive trust.
-> Thus, where A transfers real property to B on B’s oral promise to hold it for C, some jurisdictions consider the Statute of Frauds a bar. But the trend is to impose a constructive trust for C.

Question 277

Constructive Trust Arising from Breach of Promise - Exceptions General Rule

Answer 277

A constructive trust will be imposed in the following cases:
- Fraudulent promise (promisor never intended to keep it)
- Breach of promise by one in a confidential relationship (which can include attorney-client, doctor-patient, business partners, family relations, and friendships)
- Breach of promise by the decedent’s devisee or heir to hold property for the benefit of a third person (secret trust)
- Breach of promise by the decedent to devise property to one rendering services in reliance thereon (but no constructive trust here if damages adequate)
- Breach of promise to the debtor by the buyer at the foreclosure
sale to hold the property for the debtor, causing the debtor to
forgo bidding at the sale (but in many jurisdictions no constructive
trust if damages adequate)

Question 278

Constructive Trust - Standard of proof

Answer 278

The burden of proof is on the party seeking the constructive trust to establish facts relied upon by clear and convincing evidence rather than a preponderance of the evidence in some states.

Question 279

OBLIGATIONS OF TRUSTEE OF CONSTRUCTIVE OR RESULTING TRUST

Answer 279

• Once the court has declared such a trust to exist, the trustee’s sole duty is to convey legal title to the beneficiary.
• The trustee must also account for profits taken from the property or fair rental value of the trustee’s use of it from the time of the occurrences raising the implied trust.
• There is no duty on the trustee to invest trust property.

Question 280

Actions to impress constructive or resulting trusts are in ____.

However, the rule that an ____ bars equitable relief is not applicable—except to ____

Answer 280

equity (and most equitable principles are fully applicable)

“adequate remedy at
law”; the breach of an oral promise to make a will, or to hold property purchased at a foreclosure sale for the benefit of the promisee.