Trusts

Question 1

Trust

Answer 1

A trust of personal property is valid if it has a trustee, a beneficiary, and trust property.

To create a valid trust, there must be a settlor, who intending to create a trust for a valid trust purpose, delivers the trust property to the trustee to hold for the benefit of one or more beneficiaries

Question 2

Trustee

Answer 2

A trustee manages the trust property and holds it for the benefit of the beneficiaries.

Note that a trust will not fail for lack of a specifically appointed trustee. (The court will appoint one.)

Question 3

Beneficiary

Answer 3

There must be definite and ascertainable beneficiaries to have a private express trust (only needs to be ascertainable at execution of trust)

The sole trustee may not be the sole beneficiary

Disclaimer: Beneficiary may disclaim interest if they haven’t accepted any benefits

Competency: May be incompetent

Question 4

Trust Property

Answer 4

Trust property is required, and the property must be identifiable

Separation: The trust property must be identifiable and segregated from other property, but It can be a portion of specific property

Question 5

Presumption of Revocability

Answer 5

Under the UTC, an inter vivos trust is revocable unless the instrument expressly states otherwise.

Question 6

Termination By Settlor

Answer 6

A trust may be terminated or modified upon the consent of the settler and all beneficiaries, even if modification or termination conflicts with a material purpose of the trust

Question 7

Claflin Doctrine: Termination By Beneficiaries After Settlor Dies

Answer 7

Generally, even an irrevocable trust can be terminated if both the income beneficiaries and the remaindermen unanimously consent and if there is no material purpose of the trust yet to be performed.

Question 8

Termination By The Trustee

Answer 8

A trustee can terminate a trust if the trust property is less than $50,000 and the amount is insufficient to justify the cost of administration, as long as trustee provides beneficiaries with notice

Question 9

Pour-Over Gift from Will to Trust

Answer 9

A will that makes a gift to a trust is valid so long as:
1. The trust is identified in the will and
2. The terms are incorporated in a writing executed before or concurrently with the execution of the will.

Under the modern approach, later made amendments to the trust are valid.

Under common law, amendments made after execution of the will are not valid.

Pour-over property may be initial trust funding if: (1) The trust is identified in the will, and (2) The trust is executed before the testators death

Question 10

Discretionary Trust

Answer 10

The trustee is given discretion whether to apply or withhold payments of income or principal to a beneficiary

Creditors Rights: Beneficiary has nothing to transfer until the trustee decides to distribute money, so there is nothing for creditors to reach

Exception: The court can force the trustee to satisfy a judgement or order against the beneficiary for the support or maintenance of the beneficiary’s child, spouse, or former spouse(Child support, spousal support, alimony)

Question 11

Spendthrift Trust

Answer 11

A spendthrift trust precludes the beneficiary from voluntarily or involuntarily transferring their interests in the trust, and the beneficiary’s creditors are precluded from reaching it to satisfy their claims
The trust document typically specifies how much and when the beneficiary receives distributions.

Beneficiary may not transfer interest, however once the trustee pays the beneficiary, the beneficiary may transfer the property received and creditors may reach it

Limitations on Spendthrift Provisions:
1. Ineffective if settler is the beneficiary
2. Ineffective for claims of child support, spousal support or claims by government

Question 12

Support Trust

Answer 12

Directs the trustee to pay only so much of the income or principle as is necessary for the beneficiary’s support.

The trustee does not have discretion to refuse to pay bills necessary for the beneficiaries support

Question 13

Charitable Trusts

Answer 13

A charitable trust may be created for a charitable purpose such as:
1. The relief of poverty,
2. The advancement of education or religion
3. The promotion of health,
4. The accomplishment of government purposes(Such as parks, museums, and playgrounds)

It must have a large number of not readily identifiable individuals (rather than a few identifiable individuals).

Note that a charitable trust is not subject to the common law rule against perpetuities

Cy Pres Doctrine
A court may modify a charitable trust when the 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.

The court has discretion to determine the settlors primary charitable intent

Question 14

Honorary Trust

Answer 14

This is a trust that does not have a charitable purpose or a definite beneficiary.

It is often a trust to take care of a cemetery or pet

Under the UTC, this is valid but may not be enforced for more than 21 years.

Question 15

Trustees Duty of Loyalty

Answer 15

A trustee owes a duty of undivided loyalty to the trust and its beneficiaries and must avoid self-dealing

Trustees duty of care extends to all beneficiaries equally including remaindermen

Question 16

Trustees Duty of Care

Answer 16

Uniform Prudent Investor Act (UPIA): The UPIA states that a trustee must “administer the trust as a prudent person would using reasonable care, skill, and caution.”

Entire estate portfolio examined to determine prudence: A trustee investment and management decisions with respect to individual assets should be evaluated in the context of the portfolio as a whole and as a part of an overall investment strategy rather than in a trustee’s investment in isolation.

Duty to diversify: The trustee is not liable for declines in value due to a downturn resulting from general economic conditions—but is liable for failure to diversify absent directions to the contrary.

Question 17

Remedies For Breaching Trustee

Answer 17

The remedies include:
1. Suspending or removing a trustee
2. Decreasing compensation
3. Compelling a trustee to perform trust duties
4. Compelling payment of damages

In the case of self-dealing, the beneficiary may have a choice of the following remedies:
1. Affirm the transaction if the trust profited
2. Set aside the transaction if the trust lost money

If a trustee commits a breach of trust the trustee is liable to the beneficiaries for the greater of:
1. The amount necessary to restore the trust property and distributions to what they would have been absent the breach, or
2. The trustees profit from the breach

Question 18

Power of Appointment

Answer 18

A person writing a will or trust can give her beneficiaries a power of appointment, which enables the beneficiary to designate who will receive specific property.

Question 19

General Power of Appointment

Answer 19

Majority view: In most states ,a general residuary clause in a will(“I give all of my estate… ”) does not exercise a power of appointment.

Minority view: a general testamentary power of appointment can be exercised by general language in the beneficiary’s will (such as the residuary clause) even if it makes no reference to the power in the instrument

Question 20

Special Power of Appointment

Answer 20

The class of people that the beneficiary can exercise the power in favor of is limited.

A special testamentary power needs to be specifically exercised.

The UPC Substantial Compliance Rule states that if it could be shown that the power holder intended to exercise a power, a blanket exercise clause may be sufficient.

Question 21

Rule of Convenience

Answer 21

When a gift is made to a group, such as “my children,” the class closes when at least one member is entitled to distribution.

Question 22

Class Gifts

Answer 22

UPC approach: The UPC states that when a class gift is made, each living beneficiary will take their share and the deceased beneficiary’s share will pass to their surviving descendants. (If there are no surviving descendants then the gift will fail.) Note: This applies even if the beneficiary is not related to the settlor (and thus differs from most anti-lapse statutes

Common law approach: Under the common law, if the gift or remainder to a deceased beneficiary has already vested and there is no applicable statute, then it will go to whomever the instrument says it should go to or whomever the deceased person has specified in their will or through intestacy. (This also applies to gifts that are not made to classes)