Trusts

Question 1

What must a trustee allocate all assets received as. and how must the allocation be performed?

Answer 1

Income or Principal, allocated in a manner that is balanced to treat the present and future trust beneficiaries fairly, unless otherwise directed by the trust instrument.

Traditional Rule: money generated by trust property is income; money generated by conveyance of trust property is principal.

UPAIA: trustee is empowered to re-characterize items and reallocate investment returns as he deems necessary to fulfill trust purposes, acting reasonably and keeping with the trust instrument. However, stock distribution is treated as a distribution of principal under the UPAIA.

Factors to consider:
1. Intent of settlor and language of trust instrument
2. Nature, duration, and purpose of trust
3. Identities and circumstances of beneficiaries
4. Anticipated effect of economic conditions
5. Anticipated tax consequences

Question 2

Is there an automatic right of survivorship in the gift to a class from a trust?

Answer 2

YES. And the class must remain open and admit new members until:
1) At least one class member is entitled to obtain possession of the gift, OR
2) the preceding interest terminates.

Question 3

Trusts: What effect does a beneficiary disclaiming her income interest have on vested remainders in the gift of a trust principal?

Answer 3

The vested remainder accelerates and the trust principal becomes immediately distributable to the presumptive remainder beneficiaries of the trust, unless someone would be harmed by making a distribution to them earlier than it would have been had the income beneficiary not disclaimed.

Question 4

Trusts: When the holder of a future interest validly disclaims their interest in gifts from the trust, what is the legal effect on the disclaimant and beneficiaries?

Answer 4

The disclaimant is deemed to have predeceased the life tenant.

Question 5

What should the trustee do when a trust instrument explicitly directs income to be paid to a particular beneficiary for life, but the beneficiary attempts to disclaim their interest prior to their death, but not in compliance with trust beneficiary disclaimant rules?

Answer 5

The trustee should continue to perform exactly as the trust instrument instructs them to.

Question 6

How can a person accept trusteeship?

DEPO

Answer 6

DEPO
Delivery Exercising Performing Otherwise

A person designated as a trustee can accept the position by substantially complying with a method of acceptance provided for in the terms of the trust.

If the terms of the trust do not provide a method of acceptance, or the method is not made exclusive, then
1) by accepting delivery of the trust property,
2) exercising powers as a trustee
3) performing duties as a trustee
OR
4) otherwise indicating acceptance of the trusteeship

Question 7

Trusts: When must the manifestation of intent occur?

Answer 7

The manifestation of intent must occur either prior to or simultaenously with the transfer of property.

Question 8

What is the most restrictive type of trust?

Answer 8

Mandatory trust: essentially the opposite of a discretionary trust.

The trustee of a mandatory trust has no discretion regarding payments; instead, the trust document explains specifically and in detail how and when the trust property is to be distributed.

Question 9

What is the rule regarding delivery for an inter vivos trust?

Answer 9

Although a simple declaration of trust will usually suffice if the settlor is also the trustee, delivery must accompany the declaration if a third-party trustee is named, whereby the settlor parts with dominion and control over the trust property.

Question 10

What is a totten trust?

Answer 10

It is a designation given to a bank account in a depositor’s name as trustee for a named beneficiary (no separation of legal and equitable title), and it can be revoked by any lifetime act manifesting the depositor’s intent to revoke, or by will.

Question 11

What is a “semi-secret” trust?

Answer 11

A semi-secret trust occurs when a gift is directed in a will to be held in trust, but the testator fails to name a beneficiary or specify the terms or purpose of the trust; extrinsic evidence may not be presented, the gift fails, and a resulting trust is imposed on the property to be held in trust for the testator’s heirs.

Question 12

Trusts: What are the exceptions to the rule requiring ascertainable beneficiaries?

Answer 12

Unborn Children
Charitable Trusts

Question 13

Trusts: What is a pour-over devise?

Answer 13

A pour-over devise is a provision in a will that directs the distribution of property to a trust upon the happening of an event, so that the property passes according to the terms of the trust without the necessity of the will reciting the entire trust.

Question 14

What is a “secret” trust?

Answer 14

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; if the promise is proven by clear and convincing evidence, then a constructive trust is imposed on the property for the intended beneficiary, so as to prevent the unjust enrichment of the “secret” trustee.

Question 15

Trusts: How are adopted children treated under the modern trend and the UPC with regards to a class gift?

Answer 15

The modern trend is to presume that “children” includes adopted children absent a contrary intent. Under the UPC, an adopted person is included in the class gift in accordance with the UPC rules for intestate succession, which provide that an adopted person is the child of his or her adoptive parent.

Question 16

What is an honorary trust?

Answer 16

An honorary trust is a legally enforceable trust that is not created for charitable purposes but has no definite human beneficiaries (such as animal trusts and noncharitable purpose trusts).

Question 17

Why must benficiaries of a private trust be ascertainable?

Answer 17

So that equitable interest can be transferred automatically by operation of law and directly benefit the person.

Note that the settlor may refer to acts of independent significance when identifying trust beneficiaries.

Question 18

Can a third party be held liable for her role in a breach of trust?

Answer 18

YES. Common law presumed that the purpose of the trust was to preserve trust property, requiring those dealing with trustees to carefully inspect the trust property before dealing with the trustee. The modern trend presumes that the purpose of the trust is to hold and manage trust property, and it provides greater protection to third parties.

Question 19

What are the methods for revoking a trust?

MLE

Answer 19

MLE
Method Later Evidence

1. By substantial compliance with a method provided in terms of the trust.

If no method is provided in the trust, then:
2. By a later will / codicil that expressly refers to the trust or specifically devises property trust that otherwise would have passed according to the terms of the trust; OR
3. By any other method manifesting clear and convincing evidence of the settlor’s intent.

Question 20

In what five instances can a court modify or terminate a trust?

Answer 20

1. Unanticipated changes
2. Inability to administer the trust effectively
3. Trust becomes uneconomic
4. To correct mistakes
5. To achieve the settlor’s tax objectives

Question 21

What is a trustee’s liability to third parties?

Answer 21

A trustee is personally liable on contracts entered into and for tortious acts committed while acting as trustee.

If the trustee acted within the scope of the trustee duties, then the trustee is entitled to indemnification from the trust.

Question 22

What is a trustee’s liability for agents?

En CoCo DiSuSe

Answer 22

En CoCo DiSuSe
Entitled Conceals Compel Directs Supervision Selection

A trustee is not liable for breaches committed by an agent unless the trustee:
1. Directs, permits, or acquiesces in the agent’s act
2. Conceals the agent’s act
3. Negligently fails to compel the agent to redress the wrong
4. Fails to exercise reasonable supervision over the agent
5. Permits the agent to perform duties that the trustee was not entitled to delegate
6. Fails to use reasonable care in the selection or retention of agents

Question 23

Trusts: How should expenses be allocated?

Answer 23

Expenses charged to income:
-1/2 trustee’s compensation
-1/2 accounting / court costs
-ordinary expenses
-insurance premiums

Expenses charged to principal:
-1/2 trustee’s compensation
-1/2 accounting / court costs
-payments on the principal of trust debt
-expenses for any proceeding concerning an interest in principal
-estate taxes
-payments related to environmental matters

Question 24

What are prohibited transactions with trust property under the rule of self-dealing?

FLAG BS

Answer 24

FLAG BS
Friends Loan Another Gain Buying Secure

1. Buying or selling trust assets (even at fair market value)
2. Selling property of one trust to another trust that the trustee manages
3. Borrowing from or making loans to the trust
4. Using trust assets to secure a personal loan
5. Engaging in prohibited transactions with friends or relatives
6. Otherwise acting for personal gain through the trustee position

Question 25

What are the beneficiary’s rights of enforcement?

Answer 25

Lost profits, lost interests, and other losses resulting from a breach of trust are the responsibility of the trustee, and beneficiaries may sue the trustee and seek damages or removal of the trustee for breach.

Question 26

What is the trustee’s liability for distributions made pursuant to a trust when the trustee did not know that the trust had been revoked or amended?

Answer 26

A trustee who does not know that a trust has been revoked or amended is not liable to the settlor or settlor’s successors in interest for distributions made and other actions taken on the assumption that the trust had not been amended or revoked

Question 27

When is a disclaimer to trust property effective?

Answer 27

A disclaimer is not effective unless it is reduced to writing within nine months after the future interest would become indefeasibly vested.

Question 28

What is a co-trustee’s liability?

Answer 28

Co-trustees are jointly liable, although the liability may be limited if only one trustee acts in bad faith or benefited personally from the breach. A co-trustee may be liable for breach for:

-Consenting to the action constituting the breach
-Negligently failing to act to prevent the breach
-Concealing the breach or failing to compel redress
-Improperly delegating authority to a co-trustee

Question 29

What is the trustee’s duty to make property productive?

IM PEST

Answer 29

IM PEST
Insurance Maximum Pursuing Expenses Selling Time

The trustee must preserve trust property and work to make it productive by:

-Pursuing all possible claims
-Deriving the maximum amount of income from investments
-Selling assets when appropriate
-Securing insurance
-Paying ordinary and necessary expenses
-Acting within a reasonable period of time in all matters

Question 30

What is the trustee’s duty to be impartial?

Answer 30

A trustee 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, and sell trust property within a reasonable time if a failure to diversify would be inconsistent with the total performance portfolio approach. The duty does not require that the trustee treat each beneficiary equally, but it does require a trustee not to be influenced by the trustee’s personal favoritism or animosity toward individual beneficiaries in administering the trust.

Question 31

Trusts: What are a beneficiary’s powers of appointment?

Answer 31

Usually given to a beneficiary, a power of appointment enables the holder to direct a trustee to distribute some or all of the trust property without regard to the provisions of the trust

Question 32

What happens to a predeceased beneficiary’s interest in a trust under the modern trend?

Answer 32

A predeceased beneficiary’s interest in a trust will not lapse; rather a substitute gift is created in the descendants of the deceased issue

Question 33

TRUSTS VOCAB
What, in essence, is a trust?
What is the key feature of a trust?
Principal
Income
Revocable Trust
Settlor
Irrevocable trust
Mandatory Trust
Discretionary Trust
Remedial Trust
Does R.A.P. apply to all trusts?
Trustee
Beneficiary

Answer 33

What, in essence, is a trust? - A management device

What is the key feature of a trust? - bifurcated transfer (legal/equitable title)

Principal - original trust property and increase in value

Income - money invested by the trust

Revocable Trust - can be revoked at any time during settlor’s life

Settlor - person who creates the trust

Irrevocable trust - generally, cannot be revoked

Mandatory Trust - trustee must make distributions from the trust based on instrument directions

Discretionary Trust - trustee may make distributions at her discretion

Remedial Trust - aka a “passive trust,” created by operation of law. Trustee has one power: to transfer the property

Does R.A.P. apply to all trusts? - Yes, except for charitable trusts. Jurisdictions use the “wait and see” approach

Trustee - person who manages the trust

Beneficiary - person who receives the benefit of the trust

Question 34

Irrevocable Trust (Traditional/Modern Approaches)

Answer 34

Under the traditional rule, a trust was presumed to be irrevocalbe unless the trust documents say otherwise

UTC (majority approach) reverses this presumption; a trust is revocable unless the trust documents say otherwise

Analyze an MEE with both approaches unless directed otherwise

Question 35

Trustee basics

Answer 35

Holds legal title to the property
Has power to manage the property (sell, transfer, invest)
Can be an individual, bank, or trust company
A trust WILL NOT fail for lack of a trustee

Question 36

Beneficiary Basics

Answer 36

Holds equitable title to the property
Has power to enforce the trust instruments
Can have multiple classes of beneficiaries
All jurisdictions permit the creation of pet trusts for the care of one or more animals alive during the settlor’s time. However, an animal may not be the direct beneficiary of a private trust because animals are incapable of taking and holding property

Question 37

What is an express trust?

Answer 37

An express trust is a trust created when an owner expressly indicates the intent to create a trust. May be private or charitable.

Question 38

What language is sufficient for creating a trust, and in what form?

Answer 38

“Trust words” create a presumption of a trust (e.g. “in trust,” “for the benefit of”).

Majority rule: Oral trusts are valid.
Minority rule: a valid trust must be in writing

However, when a trust conveys real property, the statute of frauds requires that the trust be in writing.

Question 39

Devise creation of trust

Answer 39

Trust created in a will
-Property is not transferred by the will in this case, but rather by the trust
-Trust must be in existence at the time the will was made or created simultaneously
-Trusts avoid probate

Question 40

Precatory Langauge

Answer 40

Language that expresses donor’s hope or wish that the donee use property in a certain way.

Precatory language does NOT create a trust

Question 41

Distinguishing a trust from a gift

Answer 41

Intent is tested frequently on the bar. Ask yourself, “who has the beneficial interest?” That should distinguish it from a gift. Unlike a gift, a trust involves a bifurcated transfer - the settlor gives the property to one person for the benefit of another

Question 42

Trust Res & the requirements of property in a trust

Answer 42

Empty Trust = a trust without property

There is no trust unless there is some piece of property in it. (Pour-Over Trust is the exception)

Pour-Over Trust Notes:
-Trust terms must be in writing at time will is executed
-Property need not be in trust at time of will

Question 43

Purpose - what purposes are sufficient to create a trust?

Answer 43

Any purpose for a trust is valid, so long as it is not illegal or contrary to public policy

Question 44

Requirement of Beneficiaries

Answer 44

There must be an ascertained beneficiary, either a specific person or some criteria to determine who the person is

Exceptions:
-Unborn children
-Class gifts (class, however, must be definite)
-Charitable Trusts

Question 45

Charitable Trusts - basics and requirements

CHAP G

Answer 45

CHAP G
Community Health Advancement Poverty Government

A charitable trust must have a charitable purpose, such as:
1. Relief of poverty
2. Advancement of education or religion
3. Promotion of good health
4. Government or municipal purposes
5. Other purposes benefitting the community at large or a particular segment of the community

Modern Trend is to validate a charitable trust

Rule Against Perpetuities: does not apply to charitable trusts

Question 46

Cy Pres Doctrine

Answer 46

If a charitable trust’s purpose no longer exists or is possible, court can modify the trust. Modification requires a general charitable purpose, and the goal is to make the new purpose as close as possible to the original purpose

UTC presumes a general charitable purpose
If there is no general charitable purpose, the property goes to a resulting trust

Question 47

Standing re: Charitable Trusts

Answer 47

Attorney general’s office has standing to enforce the terms of a charitable trust

UTC approach: settlor also has standing

Question 48

How to create an express trust

DDT

Answer 48

DDT
Declaration Deed Testamentary

Inter Vivos transfer: created during the settlor’s life in one of the following ways:
1. Declaration of trust - settlor declares herself holder of the property in trust for beneficiaries; settlor also serves as trustee
2. Deed of Trust - settlor conveys property to a trustee; settlor is NOT the trustee

Testamentary Transfer: created according to the terms of a will

Question 49

Remedial Trusts - Basics

Answer 49

Not driven by intent, rather remedial trusts are equitable remedies created by operations of law

Key characteristics: it is passive in nature; trustee’s only duty is to convey the property back to the settlor

Question 50

What are the two types of Remedial Trusts, and what are their characteristics?

RC

Answer 50

RC
Resulting Constructive

1. Resulting Trust
2. Constructive Trust

Resulting Trust
-Used when trust fails
-Trustee must return property to settlor or settlor’s estate
-Goal is to avoid unjust enrichment

Purchase Money Resulting Trust
-A buys property but title is taken in B’s name
-If B is not the natural object of A’s bounty (not a close friend or relative), a court will create a purchase money resulting trust
-Creating a gift-over clause avoids the creation of a resulting trust

Constructive Trust
-Remedy used to prevent unjust enrichment if a third party takes advantage of the settlor
-Key characteristic: wrongful conduct (e.g. fraud, undue influence)
-Look for: fraud, duress, undue influence, breach of duty, detrimental reliance by third party

Question 51

Types of Trust Distributions

MDS

Answer 51

MDS
Mandatory Discretionary Support

Mandatory Trusts: trustee has no discretion as to whether he will make a distribution
-language such as “trustee to pay all income,” “trustee to distribute $1,000 every month,” “trustee to distribute tuition for next three years.”

Discretionary Trusts: trustee has complete discretion as to whether she will make a distribution
-language such as “trustee to make payments for the health and care of beneficiary,” “trustee to make payments, in her discretion, for the education of the benficiary.”

Support Trusts: trustee has complete distributions to support the beneficiary
-language: “trustee to make distributions for the support of the beneficiary”

Question 52

Alienability of Trust Property and Creditors’ Ability to Reach Property - Two Rules

Answer 52

Rule 1: a beneficiary’s equitable interest in trust property is freely alienable, unless trust instrument or a statute limits right
-Creditors can reach the beneficiary’s equitable interest

Rule 2: a creditor cannot reach trust principal or income until such amounts become payable to the benificiary or the beneficiary can demand it

Question 53

Asset Protection Trusts: goal and three types

Answer 53

Goal: to shield beneficiaries from creditors’ claims

Support Trust: creditors cannot reach trust property, beceause the beneficiary cannot demand payment. Creditors can reach WHEN TRUSTEE MAKES SUPPORT PAYMENT

Discretionary Trust: creditors cannot reach trust property, because the beneficiary cannot demand payment. Credits can reach WHEN TRUSTEE MAKES A PAYMENT

Sprendthrift Trust: trust expressly restricts the beneficiary’s power to alienate her interest. Creditors cannot reach trust property untiil TRUSTEE MAKES A PAYMENT
-Exceptions: the following creditors can reach spendthrift trust property:
–Spousal or child support
–Those providing basic necessities to the beneficiary
–Holders of federal or state tax liens

Question 54

Spendthrift Trusts - which creditors can reach trust property before trustee makes a payment

SNT

Answer 54

SNT
Support Necessities Tax

1. Spousal or child support
2. Those providing basic necessities to the beneficiary
3. Holders of federal or state tax liens

Question 55

Basic Routes to Terminating a Trust

EM

Answer 55

EM
Expiration Material

Expiration: an express trust can expire at the end of a stated term
Material Purpose: if the trust has been satisfied, the trust automatically terminates

Question 56

Unfulfilled Material Purpose Doctrine (Claflin Doctrine)

Answer 56

After settlor’s death, when beneficiary wants to terminate trust prematurely but trustee opposes

Rule: a trustee can block premature termination if the trust is still serving some material purpose
Applies to:
-Discretionary Trusts
-Support Trusts
-Age-dependent Trusts

Question 57

Settlor’s Power to Terminate Trust

Answer 57

Settlor can unilaterally terminate a revocable trust

Settler can terminate an irrevocable trust if all beneficiaries consent

Because trusts are presumed revocable, settlor does not need to expressly reserve right to terminate

Question 58

Modification of a Trust while Settlor is Dead

Answer 58

Trust can be modified by trustee when:
1. All beneficiaries agree to a modification consistent with material purpose of trust; OR
2. An unforeseen event has frustrated purpose of trust (equitable deviation)

If you see a fact pattern involving unforeseen events on the exam, be very clear about what the purpose of the trust is
A TRUSTEE cannot unilaterally terminate or modify a trust

Question 59

Modification of a trust when settlor is alive

Answer 59

Settlor can unilaterally modify unless trust is irrevocable

Settlor can modify/terminate an irrevocable trust if all beneficiaries consent

Settlor need not expressly reserve right to modify because trusts are presumed revocable

Question 60

What is a discretionary trust?

Answer 60

A discretionary trust is one where the trustee is given complete discretion regarding whether to apply payments of income or principal to the beneficiary

Question 61

What is a support trust?

Answer 61

A support trust is one where the trustee is directed to make payments to the beneficiaries of the trust as is necessary for their support

Question 62

In interpreting the word “necessary,” is a support trust limited to the bare essentials?

Answer 62

NO. A support trust is not necessarily limited to the bare essentials, unless the trust instrument directs the trustee to limit distributions to only bare essentials.

Question 63

What types of duties must a trustee honor, even when the trustee is given complete discretion?

PFI

Answer 63

PFI
Purpose Faith Impartiality

The trustee must nonetheless
1. Honor the purpose of the trust
2. Employ a duty of good faith
3. Maintain impartiality regarding his duties to the beneficiaries

This is not an exhaustive list!

Question 64

What rights do the beneficiary’s creditors have with regard to a discretionary trust, and what clause can preclude those creditors’ rights?

Answer 64

In a discretionary trust, if the trustee exercises his discretion to pay, then the beneficiary’s creditors have the same rights as the beneficiary. A spendthrift restriction, however, can block these creditors’ rights.

Question 65

What is the effect of a spendthrift clause in a trust?

Answer 65

A spendthrift trust expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest.
The spendthrift restriction applies only as long as the property remains in the trust, and it is inapplicable after it has been paid out to the beneficiary.
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.

However, most states allow certain classes of creditors to reach a beneficiary’s interest, even when there is a spendthrift clause. Some states also recognize an exception for a provider of necessities to the beneficiary.

These classes of creditors would typically include debts like those to obligees of child support payments and healthcare debt.

Question 66

Under what circumstances is removal of a trustee likely to be granted?

Answer 66

Generally, removal of a trustee is a remedy when the trustee has breached a fiduciary duty or grossly mismanaged the property.

Removal is likely to be granted when:
1. Trustee became incapable of performing duties
2. Material breach of duty
3. Trustee develops a conflict of interest
4. A serious conflict between trustee and a beneficiary
5. The trust persistently performs poorly as a result of the trustee’s actions or inaction

Trustee can resign with written notice, if settloris alive, to co-trustees and beneficiaries

Question 67

What is the modern trend for which powers are granted to the trustee?

Answer 67

Modern trend is to grant the trustee all those powers necessary to act as a reasonably prudent person, including powers to:
Sell or transfer
Lease trust property
Pay taxes
Sever or consolidate trust property

Question 68

What are the trustee’s duties, which can be enforced by any beneficiary?

Answer 68

1. Duty of loyalty
   -Self-dealing is an automatic breach of duty of loyalty. (No Further Inquiry Rule: court does NOT inquire into reasonableness or good faith). Even if trust documents allow self-dealing, must be fair and reasoanble
   -Conflicts of interest: assessed under standards of reasonableness and good faith
2. Duty of care (aka duties of prudence)
   -Requires the care that a person of ordinary prudence would practice in the care of his own estate
   -Any special skills possessed must be used by trustee, and will raise standard of duty of care
   -Delegation: trustee is permitted to delegate parts of trustee role, but has a duty to oversee delegatees
   -Investments: trustee has discretion but must act as a prudent investor and diversify assets. Portfolio Approach: court will measure the success of the portfolio as a whole
3. Duty of impartiality: must balance competing interests of present and future beneficiaries. Must be reasonable and can reallocate property so long as it fulfills trust purpose
4. Duty to inform beneficiaries: must inform beneficiaries about the nature of the trust property
5. Duty to Account: must account for actions taken on behalf of trust and report on health of the trust portfolio

Question 69

Trusts: Class gifts

Answer 69

A gift to a class comes with an automatic right of survivorship. If a member of the class dies, their share is redistributed to the other members.
However, the 3d Restatement states that the deceased member’s share goes to the member’s surviving issue

Question 70

What would the outcome be nder the minority common law rule, majority common law rule, and uniform probate code in this scenario:

Trust directs support to son of testator, then grandchildren, with the children of any deceased grandchildren taking their place, and a grandchild dies without issue BEFORE son?

Answer 70

Minority Common Law Rule: the survival of a grandchild is not essential. The deceased remainderman’s estate takes the interest.

Majority Common Law Rule: the interest is shared among only those class members alive upon Son’s death and the deceased’s estate would take nothing

Uniform Probate Code: future interests under a trust are contingent on this beneficiary surviving until the distribution

Question 71

When a trust or will grants the power of appointment to a beneficiary, if the power of appointment is not exercised, what is the result?

Answer 71

A beneficiary with a power of appointment to (right to designate) the recipients of a beneficial property interest must exercise this power/right, or the property will go to the designated remainderman.

The power of appointment can be either:
General - there are NO limitations on the disposition of the property
OR
Non-General - there ARE limitations on the disposition of the property

Question 72

How does a settlor terminate a revocable trust?

MLE

Answer 72

MLE
Method Later Evidence

A settlor may amend or revoke a revocable trust:

1. By substantial compliance with a method provided in terms of the trust;

OR

2. If the terms of the trust do not provide a method or the method provided is not expressly made exclusive, by:

a) A later will or codicil that expressly refers to the trust or specifically devises property that otherwise would have passed according to the terms of the trust
OR
b) any other method manifesting clear and convincing evidence of the settlor’s intent

Question 73

How can a noncharitable irrevocable trust be terminated or modified by consent of all beneficiaries?

Answer 73

A noncharitable irrevocable trust can be terminated or modified by:
1. The consent of all beneficiaries if
2. A court concludes that continuance is not necessary to achieve any material purpose of the trust
OR
3. That modification is not inconsistent with with a material purpose of the trust

The consent of the settlor or trustee is not required, but the settlor, trustee, or beneficiary may commence a proceeding to approve or disapprove a proposed modification or termination

*A spendthrift provision, by itself, is generally not sufficient to disable the premature termination of an irrevocable trust

Question 74

How can a noncharitable irrevocable trust be terminated or modified by consent of all beneficiaries AND settlor?

Answer 74

A noncharitable irrevocable trust may be modified or terminated by the consent of all beneficiaries AND the settlor, EVEN IF the modification or termination is inconsistent with a material purpose of the trust.

Trustee’s consent is not required, but the trustee, settlor, or a beneficiary may commence a proveeding to approve or disapprove of a proposed modification or termination.

More jurisdictions than not do not require judicial approval of a modification or termination.

Question 75

Trusts: What is the Claflin Doctrine?

Answer 75

When all the beneficiaries to a noncharitable irrevocable trust have consented to modify or prematurely terminate an irrevocable trust, the trustee may block the modification/termination if the trust is shown to have an unfulfilled material purpose, UNLESS the settlor is alive and also consents to the termination.

Question 76

How is trust property distributed if the trust terminates by consent of all the beneficiaries?

Answer 76

If a trust is terminated by consent, the trustee must distribute the trust property as agreed by the beneficiaries, even if that distribution does not comport with the terms of the trust.

Question 77

Whose consent is required to terminate a trust after the Settlor’s death?

Answer 77

A trust may terminate by consent if all beneficiaries and the trustee consent to the termination. Under the Claflin Doctrine, a trustee can block a premature trust termination - even one to which all beneficiaries have consented - if the trust is shown to have an unfulfilled material purpose. Most courts allow the trustee to block the termination if it can be shown that termination would violate the settlor’s intent.

Question 78

Does a class gift in a trust come with an automatic right of survivoship?

Answer 78

YES.

A gift to a group of individuals with an automatic right of survivorship is a class gift.

Question 79

When is a trust’s remainder gift vested?

Answer 79

A trust’s remainder gift is vested when the holders are ascertainable and there is no express condition precedent that is required before the interest becomes possessory.

Question 80

What is the default rule regarding a trust’s class gifts and surviving the settlor/testator?

Answer 80

Common Law Default: Unless the governing instrsument provides otherwise, the common law general rule is that the gift is expressly limited to the transferor’s surviving children, so that the surviving issue of a deceased child does not take.

UPC Default: Unless the governing instrument provides otherwise, the UPC rule is that if a class gift is limited in favor of a class of children, when a class member predeceases distribution, because the interest in the class vests at distribution, this distribution includes any issue of the deceased class member, who take that predeceasing member’s share.

Question 81

Do unborn children of members of an open class gift to transferor’s children in a trust have to consent as beneficiaries in order to terminate the trust?

Answer 81

Common Law: NO. A class gift, unless otherwise specified, is limited to surviving children of the transferor, so any issue of children who would predecease distribution are not potential class members.

UPC: YES. Because interest in a class gift does not vest until distribution, this allows issue of deceased children to take their parent’s share, which thus requires their consent to terminate the trust early, even if they are not born yet.

Question 82

When does the class of a class gift in a trust close?

Answer 82

Absent specific language in the instrument to the contrary, the class will close when
a) at least one member of the class is entitled to immediate possession or
b) when no new members could possibly be added to the class

Question 83

Based on the theory of bifurcated legal and equitable ownership of a trust, why is a distribution of trust property that differs from the settlor’s intent NOT a breach of fiduciary duty when the trust is prematurely terminated?

Answer 83

If the trust is terminated, the legal and equitable ownership would merge in the beneficiaries. The trustee would not have any duty to the trust because its legal ownership would have terminated. If the beneficiaries opt to distribute the property differently than the settlor had intended, they would be barred by equity from suing the trustee for breach.