Trusts Flashcards
Spendthrift Trust
A spendthrift trust expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest. Spendthrift provisions are often inserted into trusts to protect beneficiaries from their own imprudence.
A beneficiary’s creditors usually cannot reach the beneficiary’s trust interest in satisfaction of their claims if the governing instrument contains a spendthrift clause prohibiting a beneficiary’s creditors from attaching the beneficiary’s interest.
Valid Testamentary Trust
Testamentary trusts are a type of private express trust which are created when the terms of the trust are contained in writing in a will or in a document incorporated by reference into a will.
Spendthrift Clause Exception: Basic Necessities
Some jurisdictions permit a creditor who provided the beneficiary with basic necessities, like healthcare, to reach the beneficiary’s interest in satisfaction of any unpaid debt despite a spendthrift clause in the trust instrument.
Spendthrift Clause Exception: Spousal and Child Support
Under one exception to spendthrift clauses, children and spouses entitled to support are permitted to reach a beneficiary’s trust interest even when a valid spendthrift clause exists.
Trustee Fiduciary Duty: Duty of Loyalty and Good Faith
A trustee is charged with safeguarding trust property and following the settlor’s instructions. The trustee is a fiduciary who has all of the powers set forth in the trust instrument and all powers necessary to act as a reasonably prudent person in managing the trust.
Under the trustee’s duty of loyalty and good faith, the trustee must administer the trust in good faith, in accordance with its terms and purposes, and in the interests of the beneficiaries.
Even if the trustee is granted complete discretion in the trust instrument, the trustee’s actions are not immune from review if the trustee failed to exercise good judgment. Any decision based exclusively on reasons personal to the trustee and unrelated to the settlor’s goals can be overturned.
Trustee Fiduciary Duty: Duty of Impartiality
A trustee has a duty to be impartial. He must balance the interests of the present and future beneficiaries by investing the property so that it produces a reasonable income while preserving the principal for the remaindermen.
Trust Termination: Material Purpose
A revocable trust is one that may be amended or terminated by the settlor. A non-charitable irrevocable trust can be terminated or modified by the consent of all beneficiaries without the consent of the trustee if the court concludes that continuance is not necessary to achieve any material purpose of the trust.
Typically, a trust has a material purpose if it has a spendthrift provision; however, some courts do not treat a spendthrift provision as sufficient by itself to create a presumption that the provision is a material purpose of the trust.
If terminating the trust would not violate a material purpose of the trust and the settlor has died, the trust may terminate with the consent of all beneficiaries even if the trustee objects.
Trust Termination: Unanticipated Circumstances
A court may modify or terminate a trust if, because of circumstances not anticipated by the settlor, termination will further the purposes of the trust. To the extent practicable, the modification or termination must be made in accordance with the settlor’s probable intention.
