Trusts

Question 1

what is a bifurcated transfer?

Answer 1

When the trust’s creator property to a trustee to be managed for the benefit of a beneficiary.

This creates two types of ownership: legal and equitable. The trustee holds legal title, and the beneficiary holds equitable title.

Question 2

Is a trust revocable?

Answer 2

Depends on the jurisdiction.

In most jurisdictions and under the UTC, a trust is presumed to be revocable unless it expressly states that it is irrevocable.

Traditionally and in a minority of jurisdictions, the trust is presumed irrevocable unless the trust language states otherwise

Question 3

what’s the difference between a mandatory trust and a discretionary trust?

Answer 3

In a mandatory trust, the trustee must disperse all the trust property per the terms of the trust.

In a discretionary trust, the trustee has the power to distribute income at his discretion. The trustee does not abuse his discretion unless he acts dishonestly or in a way not contemplated by the trust creator.

Question 4

Are trusts subject to the Rule Against Perpetuities?

Answer 4

Yes. A trust may fail if all interests there under may not vest within a life in being plus 21 years

Question 5

What are the 3 types of parties involved in a trust?

Answer 5

Trustee: party tasked with executing the trust for the beneficiary’s benefit

Beneficiary: party benefiting from the trust

Settlor: party who makes the trust and tasks the trustee with handling it

Question 6

Can there be more than 1 trustee?

Answer 6

Yes. A trust can have multiple trustees. An entity/company can also be a trustee.

Question 7

what is a remedial trust?

Answer 7

A trust created by an operation of law to serve as an equitable remedy

Question 8

Does a trust require a trustee to be valid?

Answer 8

No. If a trust doesn’t have a trustee, the trust stays fine.

Question 9

Are pet trusts, i.e., trusts where the pet is the beneficiary, valid?

Answer 9

In the majority of jurisdictions, no.

Question 10

What is an express trust?

Answer 10

a trust created by the settlor based on their express intention to make one

Question 11

What are the two types of express trusts?

Answer 11

1) Private express trust, and 2) charitable trusts

Question 12

what is a private express trust?

Answer 12

trust clearly states the intention of the settlor to transfer property to a trustee for the benefit of one or more ascertainable beneficiaries.

Question 13

What elements are necessary for a private express trust to be created?

Answer 13

1) The settlor had the capacity to create a trust.

2) Settlor clearly expresses a present intent to transfer ownership
of the property to a trustee

3) trustee has duties to perform for the benefit of one or more definite or ascertainable beneficiaries

4) Trustee’s performance for the beneficiaries is a valid purpose

5) the trust has identifiable trust property, described in the trust with reasonable certainty

Question 14

what is a charitable trust?

Answer 14

a type of express trust that has a charitable purpose (ex. benefitting schools, community betterment, etc.)

Question 15

are orally created trusts valid?

Answer 15

Yes, unless it’s one of the types of trust that needs to be in writing:
1) when the statute of fraud applies (i.e., conveying real property)
2) a devise (a trust created via will)

Question 15

what is precatory language, and how does it affect a trust’s creation?

Answer 15

Language that expresses a settlor’s wish or hope that a donee use property a certain way.

A valid trust cannot be created using precatory language. There must be a clear intent that the property must be used a certain way

Question 16

what is the cy pres doctrine?

Answer 16

A rule that the govt can modify a trust (typically a charitable trust) if the purpose of the trust is no longer possible.

The govt will modify it so the trust now benefits something that is similar to the original general purpose of the trust (ex. to benefit education)

Question 17

Does RAP apply to charitable trusts?

Answer 17

No. For public policy reasons to encourage charity, RAP doesn’t apply

Question 18

Under cy pres doctrine, what will the govt do if no general charitable intent can be found in the trust?

Answer 18

They’ll place the property into a resulting trust, which is similar to a residuary in wills

Question 19

Who has standing to enforce a charitable trust?

Answer 19

1) the settlor
2) Attorney General

Question 20

What are the two ways to create a private express trust?

Answer 20

1) inter vivos: created during settlor’s lifetime
2) testamentary: created via a legal instrument upon the death of settlor

Question 21

What are the two ways an inter vivos transfer can create an express trust?

Answer 21

1) declaration of trust: Settlor declares herself holder of the property in trust for beneficiaries, and serves as the trustee as well

2) Deed of trust: Settlor conveys property to a trustee

Question 22

how does a testamentary transfer create a will?

Answer 22

Via a will. Upon the testator’s death, the terms of the will create the trust

Question 23

Is the cy pres doctrine be only applicable to charitable trusts, or can it be used to modify a trust that isn’t a charitable trust?

Answer 23

The cy pres doctrine can only be used to modify charitable trusts

Question 24

What is the single duty of a trustee in a remedial trust?

Answer 24

To convey the property back to the settlor

Question 25

what is a constructive trust?

Answer 25

A type of remedial trust used as a court-created remedy in situations where a person holding title to the property is abusing/taking advantage of the settlor via wrongful conduct

ex. Anne has dementia. Her brother convinces her to disinherit her children and give the whole estate to him. If Anne’s wrongfully created will is invalidated due to undue influence/fraud, the court as a remedy will create a constructive trust and hold the property in there for Anne’s benefit.

Question 25

What are the two types of remedial trusts?

Answer 25

1) resulting trust
2) constructive trust

Question 26

what is a resulting trust?

Answer 26

A type of remedial trust where the court orders that a trustee must give the property back to the settlor or the settlor’s estate. Used when a trust fails

ex. Dan’s will creates a trust and conveys his property to a trustee, Kim, “for the benefit Bob and Bob’s children.” Bob dies without children. A resulting trust is created, and Kim’s sole duty is to give the property back to Dan or Dan’s estate.

Question 27

How can a resulting trust be avoided?

Answer 27

If there’s a gift-over clause in the legal instrument

Question 28

Can a beneficiary freely disclaim/alienate the benefits they’re owed under the trust?

Answer 28

Yes, unless the trust instrument has language that limits that ability

Question 29

When can a creditor take/attach their interest on trust payments going out to the beneficiary?

Answer 29

1) If those trust benefits are alienable by the beneficiary, i.e., if the beneficiary is free to disclaim/throw away the benefits; and

2) If those trust benefits are payable/ripe to the beneficiary

Question 30

what is a spendthirft trust?

Answer 30

A trust that expressly restricts the beneficiary’s ability to alienate their benefits or demand payment.

Question 31

Even if the requirements for a creditor to reach a trust aren’t met, what sort of special creditors can always reach the trust property?

Answer 31

1) spousal or child support
2) Beneficiaries who are having their basic necessities paid for by the trust
3) holders of tax liens on the trust property

Question 32

How can a trust terminate?

Answer 32

1) expiration: the time terms of the trust have been passed (ex. trust giving money to Dave until he reaches 26)
2) Material purpose: the trust’s purpose is fulfilled, so it naturally dies
3) a material purpose has not been fulfilled (also called the Claflin Doctrine)

Question 33

If a trust is irrevocable, can the settlor still terminate or modify it?

Answer 33

Yes, if all the beneficiaries consent

Question 34

What are the 2 situations where a trust can be modified even though the settlor is dead?

Answer 34

1) if all the beneficiaries agree to the modification and it’s consistent with the material purpose of the trust

2) some unforeseen event has frustrated the original purpose of the trust

Question 35

What is the typical reason a trustee is removed?

Answer 35

If they’ve grossly mismanaged the trust property, and/or they’ve breached a fiduciary duty

Question 36

What are the situations where a trustee is likely to be removed?

Answer 36

1) Trustee has a conflict of interest
2) Material breach of duty
3) Trustee became incapable of performing their duties (ex. went to jail)
4) trustee consistently performs poorly either through inaction or inappropriate actions

Question 37

can a trustee voluntarily step down?

Answer 37

Yes, through written notice given either to the settlor if they’re still alive. If settlor is dead, then the notice can be given to co-trustees or the beneficiaries

Question 38

what is the Claflin Doctrine?

Answer 38

If a beneficiary wants to terminate the trust prematurely, the trustee can oppose the termination. The trustee’s opposition to the termination will work so long as the trust is still fulfilling one of its material purposes

Question 39

Under the traditional approach, how should a trustee balance the different interests/desires of current beneficiaries and future ones?

Answer 39

Identify the trust money as either principal or income. The life beneficiary (person currently getting the benefits) is entitled to the income money. The future beneficiaries are entitled to principal money

Question 40

Under the modern approach, how should a trustee balance the different interests/desires of current beneficiaries and future ones?

Answer 40

Governed by the Uniform Principal and Income Act (UPAIA)

Trustee focuses on the total return of the trust portfolio. Trustee can reallocate and reclassify trust money in reasonable ways, as necessary to fulfill the trust’s purposes

Question 41

What are the powers of the trustee?

Answer 41

Look to the trust document. If the document is silent, look to relevant statutes and which approach the state takes.

Question 42

What is the modern approach for determining a trustee’s powers?

Answer 42

Trustee gets all powers necessary to act as a reasonable prudent person.

This can include the power to sell/transfer property, invest money, lease property, or pay taxes

Question 43

how can a trustee’s duty of loyalty be breached?

Answer 43

If they engage in self-dealing, or if there’s a significant conflict of interest

Question 44

Under common law, if a will gives a class gift, what happens to one of those class member’s interest if they predecease the grantor?

Answer 44

Under common law, the rest of the class have a right of survivorship, so they absorb the deceased class member’s interest

Question 45

Under the 3rd Restatement, if a will gives a class gift, what happens to one of those class member’s interest if they predecease the grantor?

Answer 45

the share of the deceased class member goes to their surviving issues (descendants/children)

Question 46

what is a pour-over devise?

Answer 46

a provision in a will that directs the distribution of property to a trust upon the happening of an event

Question 47

what is a secret trust?

Answer 47

A type of testamentary trust. It looks like a testamentary gift, but it is created in reliance on the named beneficiary’s promise to hold and administer the property for another

Question 48

what is a support trust?

Answer 48

a trust where the trustee makes distributions for the purpose of supporting the beneficiary and maintaining the beneficiary’s lifestyle

creditors cannot reach these assets unless providing a
necessity to the beneficiary

Question 49

typically, an express trust must clearly identify who the specific beneficiaries are. What are the 2 exceptions to this rule?

Answer 49

1) when the beneficiaries are unborn children
2) when the beneficiaries are is a charity (charitable trusts)

Question 50

what are the different types of inter vivos trusts?

Answer 50

1) life insurance trusts
2) pour over trusts
3) totten trusts
4) living trusts

Question 51

what is a totten trust?

Answer 51

A type of inter vivos trust that isn’t really a trust. It’s actually a designation given to a bank account where upon the account owner’s (settlor’s) death, all the money will be given to a named beneficiary.

Question 52

what is a living trust?

Answer 52

A type of inter vivos trust where the settlor also serves as the trustee. The settlor/trustee runs the trust while they’re still alive, able to switch out trustees and beneficiaries as they see fit until their death.

Question 53

what is a honorary trust?

Answer 53

a type of charitable trust where there are no private beneficiaries, nor are there charitable beneficiaries.

Typically seen with pet trusts or trusts for noncharitable, public purposes

Question 54

must remedial trusts follow the typical trust requirements (ascertainable assets, ascertainable beneficiaries, etc.)?

Answer 54

no

Question 55

If a trust is revocable, what are the methods by which a settlor can revoke the trust?

Answer 55

By whatever revocation methods/terms are set out in the trust.

If the trust is silent on revocation methods, they can still revoke by manifesting a clear & convincing evidence of intent to revoke (e.g., will/codicil)

Question 56

what is a trustee’s duty of prudence?

Answer 56

the trustee may delegate responsibilities if it would be unreasonable for the settlor
to require the trustee to perform such tasks;

however, any critical function concerning the
trust property not delegable

Question 57

Can a trustee delegate their duties/powers to a third party?

Answer 57

Under the duty of prudence, the trustee can delegate the determination of management
and investment strategies but must oversee the decision-making process

Question 58

Can a trustee invest trust money/property?

Answer 58

Yes. The trustee must be prudent and exercise reasonable care in how they handle the trust investments.

This includes a duty to diversify the portfolio to minimize any potential losses for the trust

Question 59

What sort of duties do trustees owe when it comes to keeping financial records and disclosing expenses?

Answer 59

Trustee has the duties of accounting and disclosure, meaning they must keep records of actions taken on behalf of the trust, and

must give a complete and accurate information about the nature and extent of the
trust property if the trustee
intends to sell a significant portion of the trust assets

Question 60

If a trust is discretionary, but the beneficiary believes that the trustee is abusing/mishandling the trust, how can the beneficiary challenge the trustee?

Answer 60

The beneficiary must show that the trustee is engaging in an abuse of discretion

Question 61

Is a trust modifiable?

Answer 61

Same rule as revocability. In most jurisdictions and under the UTC, a trust is presumed to be modifiable unless it expressly states that it is irrevocable.

Traditionally and in a minority of jurisdictions, the trust is presumed non-modifiable unless the trust language states otherwise

Charitable trusts can also be modified per the cy pres doctrine

Question 62

when will a court not allow the modification or termination of a trust?

Answer 62

If the motivation behind the motivation/termination goes against the material purpose of the trust

However, this will be defeated if the settlor and all the beneficiaries agree to the modification/termination

Question 63

Can a trustee terminate a trust?

Answer 63

No

Question 64

How must an interest be disclaimed?

Answer 64

A disclaimer must be in writing and given within 9 months after the future interest would become indefeasibly vested

Question 65

what happens to a future beneficiary if the current beneficiary disclaims their income interest int the trust (current interest)?

Answer 65

If the future beneficiary has a vested remainder, and the life estate beneficiary (i.e., person who has a current interest in the trust income) disclaims their interest, that future beneficiary gets to move up in line and have their future interest turn into a present interest

Question 66

what happens to a future beneficiary’s interest if they disclaim their future principal interest in the trust?

Answer 66

After the present beneficiary has dies/loses their interest, then the trust property will either:
1) go back to the testator’s estate; or
2) if anti-lapse rules apply due to the future interest holder being a close enough family member, the future interest may pass to that future beneficiary’s issue (children)

Question 67

what remedies are available if a trustee engages in a self-dealing transaction with trust property?

Answer 67

the beneficiaries can either:
1)ratify the transaction but keep the profits from it
2) set aside/cancel the transaction and seek damages from the trustee

Question 68

If there are expenses necessary to repair/upkeep the trust property, how are those expenses paid?

Answer 68

If the expenses are normal/typical expenses (mowing a property’s lawn), those costs get paid out of the trust income (payments going to present beneficiaries)

If the costs are extraordinary, they’re paid out of the trust principal (property/funds that future beneficiaries have an interest in)

Question 69

what is the power of appointment?

Answer 69

A power that works like this: A trust can contain language giving a beneficiary the power to distribute/control certain trust property

Question 70

What is the scope of a power of appointment?

Answer 70

Depends on the language used the in the trust. The power can be general, giving the beneficiary wide discretion to control all kinds of trust property. Or it can be limited, giving the beneficiary the power to only use certain trust property in limited ways.

Question 71

Can a trust be created for any purpose, and have any terms the settlor wants?

Answer 71

Generally, a trust can be created and serve any purpose so long as that purpose isn’t 1) illegal, or 2) against public policy

Question 72

Can a trust legally condition a beneficiary’s interests on them getting or not getting married?

Answer 72

Generally, trusts that restrict a person’s marriage rights have been held to go against public policy, and therefore be invalid.

However, such trusts have been upheld if the underlying motivation of the trust was to provide the beneficiary with enough support while they were single, until they get married.

Question 73

How should assets/profits received by the trustee from trust property (ex. rent from a house that’s part of the trust) be divided between the income and principal?

Answer 73

The allocation must be balanced so as to treat present and future trust beneficiaries fairly.

Typically, any money generated by trust property was income (rent) and any money generated in connection with a conveyance/sale of trust property was principal (selling land).