Trusts Flashcards
Validity of a trust–A trust is valid if:
it has a trustee, a beneficiary, and trust property. Additionally, the person making the trust (called the settlor) must have the present intent to create a trust.
Duties of the trustee
Duty of care
Duty of loyalty
Duty to allocate property to principal and income
Duty to allocate property to principal and income:
Dictates whether receipts earned during the administration of the trust should be allocated to the income or the principal.
Most states have adopted the Uniform Principal and Income Act, which specifies how receipts should be allocated.
The general rule is that ordinary expenses should be allocated to income and extraordinary expenses should be allocated to the principal.
Duty of loyalty:
Requires the trustee to administer the trust solely in the interest of the beneficiaries.
This means that the trustee may not engage in self-dealing regarding the trust assets. (No taking an opportunity belonging to the trust)
Courts follow the “no further inquiry rule” regarding trustee self-dealing, which says that the court will not inquire about the trustee’s motivation or the fairness of the action and will only seek to determine the measure of damages.
Duty of care:
Requires the trustee to invest and manage the trust’s assets as prudent investor would.
(A trustee’s investments should not be evaluated in isolation but in the context of the portfolio as a whole and as a part of an investment strategy)
Proper Allocations to Principal and Income
Principal
-Money received from principal asset
-Life insurance proceeds
-Eminent Domain Awards
-All property other than money received from an entity
-Distribution of Stock
Income
-rental income
-Interest
-Money
Revocability
Under the Uniform Trust Code (UTC), an inter vivos trust is presumed to be revocable unless the instrument expressly states otherwise.
A revocable trust is amendable even if the trust instrument does not expressly grant the settlor the power to amend. If a trust is revocable, the settlor may terminate the trust at any time.
If the trust is irrevocable, the settlor may terminate the trust if all beneficiaries are in existence, and all agree. After the settlor dies, 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.
Cy Pres
Cy pres is a common-law doctrine that is also part of the UTC.
Under the UTC, if (1) a particular charitable purpose has become unlawful, impracticable, or impossible; (2) no alternative charity is named in the trust; and (3) the court finds that the settlor had a general, rather than a specific, charitable purpose, then the court may apply the doctrine of cy pres and direct that the trust property be distributed in a manner consistent with the settlor’s general charitable intent.
Powers of appointment
A person writing a will or trust can give their beneficiaries a power of appointment, which enables the beneficiary to designate who will receive specific trust or estate property.
There are two types of powers of appointments. A general power of appointment provides for an unlimited class of people in favor of whom the beneficiary can exercise a power of appointment.
A special (or limited) power of appointment provides for a limited class of people in favor of whom the beneficiary can exercise a power of appointment.
Appointments to impermissible appointees are invalid.
Pourover will:
One type of trust is one that is created when a will makes a gift to a trust. These types of will provisions are valid so long as the trust is identified in the will and the terms are incorporated in a writing executed before or concurrently with the execution of the will.
Discretionary trust:
In this type of trust, the trustee has discretion to decide when to make a distribution to a beneficiary. The beneficiary cannot demand any disbursements. Neither can a creditor, except for child support or alimony in some states.
Support trust:
In this type of trust, the trustee must pay what is necessary for the beneficiary’s support. The meaning of “support” is fact dependent. (If you’re rich you get money to keep up that lifestyle)
Spendthrift trust:
This type of trust restrains both the voluntary and involuntary transfer of a beneficiary’s interest.
The only creditors that can reach a beneficiary’s distribution before it reaches the beneficiary are child or spousal support creditors, a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust, the state or the United States, or a creditor with a claim for necessaries (only some states recognize this exception).
Charitable trust:
Charitable trust, or a trust created for a charitable purpose.
The beneficiaries must be a large number of individuals who are not readily identifiable. This type of trust may be terminated if the charitable purpose becomes unlawful, impracticable, or impossible. However, the doctrine of cy pres may save the trust
