Trusts Flashcards
Allocation of receipts in a trust under the Uniform Principal and Income Act
rents and cash dividends = income
sales proceeds and dividends paid in stock = principal
Rule of convenience
When a trust remainder is given to a class, the class closes (no new persons can join the
class) when there is no outstanding income interest, and at least one member of the class is then entitled to demand possession of his or her share of the remainder.
A class member may demand poss of her share of the remainder…
upon termination of the income interest only when the class member’s interest is not otherwise subject to a condition precedent.
Disclaimer
When a beneficiary timely disclaims an interest in a trust, that beneficiary is treated as if he had predeceased the testator.
Effect of renouncing a life estate at common law
remainder interest accelerates and becomes immediately distributable to the remaindermen of the trust if the remainder is vested but not if the remainder is contingent.
Trustee has obligations until the trust become distributable
the trustee must continue to hold trust
assets until the ultimate remaindermen are ascertained
Three separate approaches to distribution of trust income
- have the trustee distribute the trust income to the testator’s heirs on the theory that the income represents property that was not disposed of by the testator’s will and which thus passes by partial intestacy to the testator’s heirs
- have the trustee accumulate trust income for distribution to the ultimate remaindermen. Under this approach, only those individuals ultimately entitled to the principal would share in the income.
- have the trustee distribute trust income to those individuals who would be the remaindermen if the trust were to terminate when the income is received by the trustee
provisions of trust that violate public policy are…
void
Trust provisions that restrain a first marriage have generally been held to…
violate public policy
Trustee viol duty of loyalty when
Engaging in self-dealing
(purchase of trust assets by the trustee in his indvidiaul capactity)
no further inquiry rule
dont need to inquire into the trustee’s motivation for the self-dealing transaction or even its fairness
This strict approach is justified on the grounds that it may be difficult for a trustee to resist temptation when personal interests conflict with fiduciary duty.
Trust beneficiary’s remedies if trustee breaches duty of loyalty
Have the self-dealing purchase by a trustee to be set aside or obtain a damages award.
If set aside - trust property purchased by the trustee is returned to the trust and the amount the trustee paid for the property is refunded by the trust.
If damages - damages are based on the diff in the FMV of the trust assets at the time of the self-dealing transaction and the amount paid by the trustee.
UTC § 602 - revoking/amending trust
a trust is both revocable and amendable unless the trust instrument expressly provides otherwise
power to revoke/amend is exercisable by will unless trust provides otherwise
Restatement 2nd of Trusts §331 - power to revoke/modify
if a settlor has a power to revoke, that retained power ordinarily includes a power to amend
Permissible appointees
the persons to whom an appointment is authorized
Appointments to impermissible appointees are invalid
“objects” of the power
include only those who receive a “beneficial Interest
illusory-transfer doctrine
a surviving spouse can reach assets transferred during the marriage by the deceased spouse into a revocable trust on the theory that the transfer is economically “illusory” because, by the simple expedient of exercising the power of revocation—typically with nothing more than a signature on a piece of paper—the deceased
spouse could have recaptured the assets she had placed in the trust
fraudulent-transfer doctrine
a surviving spouse can reach assets transferred into a revocable trust on the theory that, as to the surviving spouse, the transfer was “fraudulent.”
The assumption behind this doctrine is that a state statute providing surviving spouses with an elective-share entitlement gives spouses a legitimate expectancy in assets that would have been included in the decedent spouse’s probate estate but for their transfer into a revocable trust; such a transfer is treated as defrauding the surviving spouse of his or her expectancy
Abuse of discretion by a trustee (Restatement third)
depends upon the terms of the trust instrument and the other duties of the trustee, such as the duty to administer the trust in accordance with its terms, the duty to act impartially, and the duty of care
trustee abuses discretion by acting in bad faith or with an improper motive
section 50 of the Restatement (Third)
when there are multiple trust beneficiaries, the trustee’s duty of impartiality requires that, in making distributions, the trustee act “with due regard for the diverse beneficial interests created by the terms of the trust
Discretionary trusts
the terms of a trust provide for a beneficiary to receive distributions in the trustee’s discretion.
a creditor of the beneficiary is entitled to receive any distributions the trustee is required to make in the exercise of that discretion
spendthrift clause
puts trust assets out of the reach of most creditors of a trust beneficiary until such time as trust assets are distributed to that beneficiary
even when a trust provides spendthrift protection, claims against a beneficiary for unpaid child support may still be enforced against the trust.
if in addition to a spendthrift clause, distributions are discretionary w/ the trustee, the creditor who provided the beneficiary w/ a necessary cannot…
compel a distribution in the absence of an abuse of discretion
discretionary support trust subject to a spendthrift clause
When a trust instrument grants the trustee of a support trust discretion whether or not to pay a beneficiary’s support-related expenses, the trustee’s judgment controls unless the trustee abuses his discretion.
trustee’s decisions in a discretionary trust can be overruled by court if
trustee acted in bad faith or w/ an improper motive
trustee’s abuse of discretion in a discretionary trust Restatement 3rd
depends on terms of trust instrument and other duties of the trustee - duty to administer the trust in accordance w/ its terms, duty to act impartially, and duty of care
these duties entitle beneficary to general information concerning the baes upon which the trustee’s discretionary judgments have been or will be made
support trust
permits distributions from the trust to enable the beneficiary to maintain his accustomed standard of living
support is measured in terms of lifestyle to which the beneficiary has become accustomed even if trust instrument doesnt expressly refer to that lifestyle
child support + medical care are always support
to create a valid trust, there must be
intent, delivery, and acceptance
also must be trust property, a trustee, and one or more beneficiaries
A trust for indefinite beneficiaries is…
invalid under the common law of trust bc the trust beneficiaries must be ascertainable in order to ensure that there is someone to enforce the terms of the trust.
donee of a special power of appointment
a power that excludes the donee, the donee’s
creditors, and the donee’s estate as permissible objects
(anything that’s not a general pwoer of appt)
general power of appointment
any power of appt that the person can exercise in favor of one or more of the following
1) the donee (the person who has the power of appt),
2) in favor of donee’s estate,
3) in favor of creditors,
4) exercise it against creditors of my estate
an irrevocable turst can be terminated prior to the death of all income beneficiaries if
both the income beneficiares and remaindermen unanimously consent unless there’s a material purpose of the trust yet to be performed, then the beneficiares alone may not terminate the trust
in the absence of additional circumstnaces indicating a further purpose, the inference is that the material purpose of the trust was
intended to allow one or more persons to enjoy the benefits of the prop during the period of the trust and to allow other beneficiaries to receive the property thereafter
1st and 2nd restatement of trusts - termination of irrevocable trust
if the continuance of the trust is necessary to carry out a material purpose of the trust, the beneficiaries cannot compel its termination
class gift
a gift to a group of persons described collectively typcially by their relationship to the a common ancestor
common law - if a member of the class fails to survive until the time of distribution, that members share passes to…
her estate
NOT to her descendants
UPC §2-707 (modern approach) - if a member of the class fails to survive until the time of distribution, that members share passes to…
her descendants
unless trust instrument specifies an alternate disposition
there is no abuse of trustee discretion if
the trustee acts honestly and in a state of mind contemplated by the trust creator
UPC §2-705(a) - adopted individuals + class gifts
adopted individuals are included in class gifts in accordance w/ the rules for intestate succession
UPC §2-114(b) - adopted individuals
an adopted individual is the child of his/her adopting parents
a class closes when..
named person dies or the gift becomes possessory
one person becomes entitled to possession of the remainder interest
UPC section 2-707(b) - future interests
makes future interests under the terms of a trust contingent on the beneficiaries suriving to the distribution date
doctrine of equitable deviation
court may order equitable deviation from terms of trust when an unanticipated change in circumstances would otherwise defeat or substanitally impair the accomplishemnt of the purpose of the trust
Under the UTC, an administrative provision of a trust may not be modified if
because of circusmtaces not anticipated by settlor, modification or termination will futher purposes of the turst
an administrative provision of a trust is one
relating to the mgmt of trust property instead of the allocation of benefits among trust beneficiaries
UTC §412(a) - modification of dispositive terms of a trust
a court may modify the dispositive terms of a term if bc of circumstances not anticipated by settlor, modification will further the purpose of the trust.
must be in accordance with settlor’s probable intention
Cy pres doctrine
under common law when trust property to be used for charitable purpose couldnt be distributed as directed, the court can exercise this power and redirct the charitable gift to another like charity.
cy pres requires an initial inquiry into the settlor’s intent. if court determines settlor had a specific charitable intention limited to the charitable purpose stated in the instrument, property reverts to settlor/settlor’s estate.
if settlor had general intent, court subsitutes for named charity anohter one w/ activities consistent w/ settlor’s intention
CL & restatment 3rd presume S has a general chariatble intent
a charitable trust can only be created for a charitable purpose. a charitable purpose includes…
1) relief of poverty,
2) advancement of education,
3) advancement of religion,
4) promotion of health,
5) gov. or municipal purposes, or
6) other purposes the accomplishemnt of which is beneficial to the community
a noncharitable trust ordinarily must have ascertainable beneficiaires, but UTC §409 says…
a trust without an ascertainable beneficiary but otherwise having a valid purpose, can be created but may not be enforced for more than 21 years
consanguinity method heirship is determined by…
degree of relationship; all persons of the same degree of relationship to deceased person take equally
parenelic method of heirship is determined by…
descendant’s of decedent’s parents take to the exclsuion of descendant’s of decedent’s grandparents
undue influence
wrongdoer exerted such influence over the testator that it overcame T’s free will and cuased T to make a donative transfer they wouldnt have otherwise made
Will contestant must establish that
1) T was suspectible to undue influence,
2) alleged influencer had the opportunity to exert undue influence upon T,
3) alleged influencer had the disposition to exert undue influence,
4) will appears to be the product of undue influence
A will or provision procured by fraud is invalid. Fraud occurs when…
a testator is deceived by a misrepresentation and is thereby led to execute a will that the testaor would not have otherwise made.
Under majority appraoch, a residuary article in a donee’s will that makes no refernce to a power of appointment is not an effective exercise of a general power
Under the minority view, a genearal residuary clause does not effectively exercise a power of appointment.
UPC and Simultaneous Death act says…
in beneficiary fails to survive testator by 120 hours then beneficiary is deemed to have predeceased testator.
testator can change time requirement in their will
under UTC onlu requirements for creating a valid inter vivos trust are
intent
specification of beneficiaries
designation of trustee
*inter vivos trust that doesnt involve real estate can be created orally
*doesnt need to be witnessed like in a wil
under the uniform testatementary additions to trusts acts, a revocable trust may be amended..
at any time prior to the settlor’s death and the amendment applies to probate assets poured into the trust at the settlor’s death pursuant to ssettlor’s will even when the will was executed prior the date of the amendment
if a trust is revocable, the period during which the common law RAP requires that the interest vests (21 years + lives in being) began to run from…
date settlor no longer had power of revocation (death), not the date on which the trust was created
under the UTC, an inter vivos trust is
revocable unless the trust expressly states otherwise
pourover will
a will that makes a gift to a trust is valid so long as the trust is indentified in the will and the terms are incorporated in a writing executed before or concurrently with the execution of the will.
under modern approach, later made amendments to te trust are valid
under common law, amendments made after execution of the will are not valid
honorary trust
doesnt have a charitable purpose or a definite benficary and is often a trust to take care of a thing
valid under UTC but may not be enforced for more than 21 years
under common law such a trust would not be valid if it viols RAP but a court may characterize the trust as a power and allow the trustee to exercise that power in accorddance w/ the trust terms for 21 years
trustee’s duty of loyalty
duty of loyalty to act in the best interest of the beneficiaries
trustee’s duty of care
UPIA states that the trustee must admisnter the trust as a prudent preson would using reasonable care, skill, and caution
diversify assets and invest portfolio
