Trusts

Question 1

What is a trust?

Answer 1

A trust is a fiduciary relationship wherein one (trustee) is given legal title/interest by the creator (settlor) to hold and protect the property for the benefit of another (beneficiary) who takes the equitable title/interest and therefore possesses the power to enforce the trust

Question 2

What are the rules for the presumption of the revocability of trusts?

Answer 2

• UTC (majority)—trusts are presumed to be revocable
• Traditional rule (minority)—trusts are presumed to be irrevocable

Question 3

When is a trust created?

Answer 3

• S must intend to make a gift in trust; look for words of trust, e.g., “for the benefit of”
• Manifestation of intent may be oral, in writing, or through conduct (delivery); a writing is required if created in a will (Statute of Wills) or the subject matter is land (Statute of Frauds)
• Ambiguous language—precatory words such as “hope” or “desire” are insufficient; precatory language will suffice if accompanied by specific instructions to another, and failure to impose a trust would result in an unnatural disposition of donor’s property or enforcing a trust would be consistent with a history of support between the donor and beneficiary

Question 4

When is a promise to create a trust in the future enforceable?

Answer 4

Promise to create a trust in the future is unenforceable unless it is supported by consideration or the intent is manifested anew upon transfer.

Question 5

What is required for trust property?

Answer 5

Presently identifiable and not a mere expectancy, unless it qualifies as a pour-over devise from a will

Question 6

When are beneficiaries ascsertainable? When do they not have to be?

Answer 6

• Must be presently identifiable or (UTC) capable of being identified by the time the beneficiaries receive their interest
• Exceptions—class gifts, unborn children, and charitable trusts

Question 7

What are the three types of express trusts?

Answer 7

• Inter vivos (living) trust –> either settlor as trustee (declaration of trust, must be in writing for real property) or someone else (deed of trust, must be in writing always)
• Pour-over gift from will (must be in writing and identified in will)
• Testamentary (funded independently of will)

Question 8

What are secret trusts and semi-secret trusts?

Answer 8

• Secret Trust: What appears to be an outright gift in a will is actually based upon a promise by the devisee (trustee) to the testator (settlor) to hold the property for another’s benefit
  ◦ Burden of proof is clear and convincing evidence
  Remedy is constructive trust
• Semi-Secret Trust: A will directs a gift be held in trust without naming a beneficiary
  ◦ Common law—prevents extrinsic evidence to prove the trust so the gift fails
  ◦ Remedy is a resulting trust in favor of the testator’s heirs; modern trend would impose a constructive trust in favor of the intended beneficiary, if known

Question 9

What is a charitable trust and what are the valid purposes?

Answer 9

A trust created for a charitable purpose benefiting the community
* Charitable purpose—advancement of health, education, religion, government, relief of poverty, or other purpose benefiting the community at large or a particular segment
* Large class of unidentifiable beneficiaries—the beneficiaries must not be ascertainable, such as the community at large or a segment of unidentifiable members
* NOTE: Not subject to RAP

Question 10

What is the cy pres doctrine?

Answer 10

• Allows the court to modify the terms of a charitable trust when it cannot be performed as written, so long as consistent with settlor’s intent; UTC allows even if intent unknown
• The court will seek a similar charitable purpose if the original purpose becomes illegal, impracticable or impossible to perform
  Enforced by the Attorney General; UTC also allows the settlor to enforce.

Question 11

What is an honorary trust?

Answer 11

An honorary trust is one without a charitable purpose and without a definite human beneficiary to enforce the trust (e.g., to care for a pet or tend to a grave)
* Usually terminates upon death of last surviving animal or limited by statute (e.g. 21 years under UTC)

Question 12

What are three trust substitutes?

Answer 12

• Totten Trust—a fully revocable designation on a bank account where the depositor is named “trustee” for one or more named beneficiaries and retains control through her lifetime
• UTMA (Uniform Transfers to Minors Act)—account for a minor managed by custodian
• Life Insurance Trust—policy paid at death; okay even though not funded until settlor dies

Question 13

What are the limits of the alienability of a beneficiary’s interest in a trust?

Answer 13

The beneficiary’s interest (right to receive income or principal) is freely transferable unless limited by law or the trust. Certain devices put a restraint on alienation. Once the property is distributed to the beneficiary however, there can be no restraint on alienability.

Question 14

When can a creditor reach a beneficiary’s interest in a discretionary/support trust?

Answer 14

Until the T exercises her discretion, the beneficiary’s interest cannot be reached;
* Once T makes payment, if she has notice of a creditor assignment/attachment, T must pay the creditor (absent a spendthrift provision)
* EXCEPTIONS: creditors who provide necessities (health, education, support) can reach the assets

Question 15

What is a spendthrift trust? What are its exceptions?

Answer 15

Restricts the beneficiary’s power to transfer his equitable interest; creditors cannot reach the assets until the property has been paid out to the beneficiary. Cannot be reached in bankruptcy proceedings or if an employee pension.
* Exceptions—claims for child/spousal support or holders of tax liens (in some jurisdictions, also creditors providing necessities)

Question 16

When can an interest in a trust be disclaimed and what effect does it have?

Answer 16

C/L (renunciation) allowed anytime
* By statute in most states, a disclaimer is valid if it is in writing and executed within nine months after the future interest would become indefeasibly vested (e.g., for a revocable or testamentary trust, when the settlor dies)
* The beneficiary will be treated as having predeceased
* When the income beneficiary disclaims, the principal becomes immediately distributable to the remainder beneficiaries

Question 17

What are the differing rules for gifts to surviving children (e.g., Inter vivos trust specifies beneficiaries as the settlor’s “surviving children” after an intermediary interest in another for a term of years)

Answer 17

• C/L—“surviving” is measured at settlor’s death
• UPC/majority—“surviving” is measured at the end of the prior intermediary interest; if a child who survives the settlor but then predeceases the time of distribution has surviving issue, that issue receives the share to which the parent would have been entitled had the parent been alive at the time of distribution (i.e., a substitute gift)

Question 18

What are the differing rules for gifts to issue and their descendants (e.g., Gift to issue but issue predeceases grantor)

Answer 18

• Traditional rule—anti-lapse statutes do not apply to nonprobate gifts, so the gift fails
• UPC (modern rule)—has an anti-lapse provision for trusts creating a substitute gift in the descendants of the deceased issue, even if there is language to the contrary, e.g., “to my issue who are living”

Question 19

When will a trust automatically terminate?

Answer 19

A trust will automatically terminate when (i) the trust is revoked or expires pursuant to its terms; (ii) it has no remaining unfulfilled purpose; or (iii) its purpose becomes unlawful, contrary to public policy, or impossible to achieve.

Question 20

When can a revocable trust be terminated or amended?

Answer 20

Can be amended or terminated by the settlor:
* By substantial compliance with the terms of the trust; or
* If no exclusive method is provided, by (i) a later will or codicil or (ii) any other method manifesting clear and convincing evidence of the settlor’s intent

Question 21

When can a noncharitable irrevocable trust be modified?

Answer 21

• Can be amended or terminated by:
• Consent of all beneficiaries—permitted if (i) continuance is not necessary to achieve any material purpose of the trust, or (ii) modification is not inconsistent with a material purpose of the trust
• Consent of all beneficiaries and the settlor—permitted even if inconsistent with a material purpose of the trust

Question 22

What is the Claflin doctrine?

Answer 22

If the settlor dies and all beneficiaries agree to terminate, the trustee can block termination if contrary to a material trust purpose (e.g., support trust, spendthrift trust, age-dependent trust, trust with a future interest).

Question 23

When can a court modify or terminate a trust?

Answer 23

The court can modify or terminate (i) if unanticipated changes prevent trust’s purpose of create an inability administer the trust effectively, (ii) if the trust is uneconomic, (iii) to correct mistakes of fact or law, or (iv) to achieve the settlor’s tax objectives.

Question 24

When can a trustee resign or be removed?

Answer 24

A T may resign on 30 days’ notice to the beneficiaries, S (if living), and any co-Ts, or with court approval
* Unless the terms otherwise provide, neither S nor the beneficiaries have the right to remove T
* The court can remove T if the trustee becomes incapable or materially breaches a duty, a conflict of interest or serious conflict with the beneficiaries arises, or for poor performance

Question 25

How should trust assets be allocated between lifetime and remainder beneficiaries?

Answer 25

C/L gave income to the lifetime beneficiary and the principal to the remainder holder
* MODERN RULE (UPAIA)—focus is on total return; T may re-characterize and re-allocate between principal and income to fulfill trust purposes, so long as allocations are fair and reasonable
Factors to balance:
* Intent of settlor and terms of trust;
* Nature, duration, and purpose of the trust;
* Identities and circumstances of the beneficiaries;
* Anticipated effect of economic conditions; and
* Anticipated tax consequences.

Question 26

What is the difference become income and principal for trust purposes?

Answer 26

• Income examples: Interest from a loan or bank account, stock dividends, rent from a lease
• Principal examples: Capital gains, life insurance proceeds, stock split, sale of trust asset
• Generally, amounts received in exchange for trust property = principal, amounts received for the use of trust property = income

Question 27

How are expenses divided between lifetime and remainder interests?

Answer 27

Accounting costs, compensation to T and to advisors split 50-50
1. Income expenses—ordinary expenses and insurance premiums
2. Principal expenses—payments on debt going to the principal, estate taxes

Question 28

What is the duty of a trustee?

Answer 28

A trustee has a fiduciary duty to administer the trust in good faith in the best interests of the beneficiaries; a breach might result in personal liability for the trustee. Both a subjective (duty of care) and objective (duty of loyalty) standard.

Question 29

When does a trustee breach their duty?

Answer 29

• Duty of Care: T’s discretionary decisions may be challenged if T failed to exercise good judgment; decisions based solely on personal reasons may be set aside; must use special skills
• Duty of Loyalty: T cannot do the following:
  ◦ Buy or sell trust assets for himself;
  ◦ Transfer property between trusts;
  ◦ Borrow funds from or make loans to the trust;
  ◦ Use trust assets to secure a personal loan;
  ◦ Engage in prohibited transactions with friends or relatives; or
  ◦ Otherwise act for personal gain through the trustee position

Question 30

What is the “no further inquiry” rule?

Answer 30

If T engages in self-dealing, the court will not inquire further into T’s motives because it is a per se breach of duty
♦ Exception—even if the terms or the beneficiaries authorize self-dealing, the transaction must be fair and reasonable; otherwise T will be in breach
* Conflict of interest—a conflict that is not self-dealing will be reviewed to analyze if T acted reasonably and in good faith

Question 31

What is the prudent investor rule?

Answer 31

T has a duty to invest and manage as a prudent investor would when investing his own property, including utilizing any special skills or expertise he possesses.
◦ Success is measured by looking at the entire portfolio and its overall return
◦ Breach is determined by many factors based upon facts at the time of the investment
* Duty to diversify unless the costs would outweigh the benefits
* Duty to make property productive (e.g., pursue claims, act timely, get insurance, etc.)
* Duty to earmark funds and not commingle with other trust funds and T’s own property

Question 32

What are three miscellaneous duties of trustees?

Answer 32

Duty of Impartiality—T must balance the interests of the present and future beneficiaries by investing property so it produces income while preserving the principal
*C/L gave income to the lifetime beneficiary and the principal to the remainder holder
*Modern rule requires allocation between principal and income to be balanced and fair
*T must sell property and reallocate proceeds as necessary to maintain balance
Duty to Inform—T must keep the beneficiaries informed about the trust property (includingany plan to sell a large portion of the assets) and allow access to records and accounts
Duty to Account—T must periodically account to the beneficiaries unless waived by S

Question 33

What are remedies for a trustee’s breach?

Answer 33

Beneficiaries rights:
*Remove the trustee
*Damages—sue T for lost profits or interests; gains from a breach may not offset loss
*Ratify—beneficiaries may consent to T’s actions, waive the breach and keep the profits
*Tracing—may force T to sue 3P to trace and recover property in the hands of a 3P who is not a bona fide purchaser
Third-party rights: T may be personally liable in contract or tort to a 3P but can seek indemnity if T was acting within the course of and scope of her duties
Co-trustee liability: Liable unless no knowledge and could not have prevented the breach
Successor trustee liability: A successor trustee is not liable unless she knew or should have known of the prior trustee’s breach and did nothing to correct the problem

Question 34

What are the two types of remedial trusts and when do they occur?

Answer 34

Resulting Trust—to avoid unjust enrichment, the trustee is required to convey the property to thesettlor under one of the following circumstances:
* Failure of an express trust—presumes intent of S is for T to convey back to S
* Incomplete disposition of trust assets—leftover after trust fulfilled goes back to S
Constructive Trust—an equitable remedy to avoid unjust enrichment caused by wrongful conduct
* Defendant must hold title to property to be subject to the constructive trust
* Wrongful conduct caused settlor to convey property:
*Homicide, theft, conversion
*Fraud, undue influence
*Breach of fiduciary duty
* Must prove by clear and convincing evidence
* If the subject matter has been transferred to a third party (not a BFP), the beneficiary may trace the property and recover the property, its proceeds, or other property received
* Defenses: unclean hands; laches