Trusts

Question 1

What is a trust?

Answer 1

A fiduciary relationship where the trustee holds legal title to property for the benefit of another.

Question 2

What is an implied trust?

Answer 2

A constructive trust - imposed by a court to fix a wrong

A resulting trust - imposed by a court where circumstances require, even if no wrongdoing

Question 3

What is a settlor?

Answer 3

The party who sets up the trust.

Question 4

What is a trustee?

Answer 4

The one who receives legal title to the trust assets, the one who controls the trust.

A trust must have a trustee, but failure to appoint one will lead the court to appoint a trustee.

Question 5

What is a beneficiary?

Answer 5

The person who receives equitable title to the trust assets and enjoys the property.

There must always be a beneficiary in existence who can enforce the trust against the trustee.

Question 6

What are the types of beneficiaries to a trust?

Answer 6

Income beneficiary - present interest in the trust

Remainder beneficiary - remainder interest in the trust, typically the principal. Intended to take effect after the natural termination of the trust.

Question 7

Where a trust remainder is given to a class, when does the class close?

Answer 7

When there is no outstanding income interest and at least one member of the class is entitled to demand possession of their share of the remainder.

Question 8

What is an inter vivos trust?

Answer 8

One created during the settlor’s lifetime, and usually as a gift.

Question 9

What is an illusory trust?

Answer 9

Appears to be a trust, but because of overwhelmingly broad powers retained by the settlor over the trust fund, it is not a trust.

Question 10

How is a trust created?

Answer 10

The settlor creates the trust by transferring assets to the trustee with manifest intent to create a trust relationship.

Question 11

What are the rights of the beneficiaries of a trust?

Answer 11

Equitable, beneficial owners of trust assets, but cannot affect or alter the dispositive or administrative provisions of the trust.

Question 12

What are the elements necessary to create a trust?

Answer 12

• a settlor with capacity who expresses a present intent to create a trust
• delivery of specific trust property
• an ascertainable beneficiary
• active duties imposed on the trustee
• a proper trust purpose
• a trustee

Question 13

What kind of property can be subject to a trust?

Answer 13

Almost anything, except mere expectation or unearned profits.

Must be some certainty over what is the trust property.

Question 14

What are ascertainable beneficiaries of a trust?

Answer 14

Must be determinable when the trust is to be distributed, must include some sort of objective standard or criteria that provides a reasonable basis for identification.

Question 15

What is a valid trust purpose?

Answer 15

Anything that isn’t illegal, fraudulent, or against public policy - like encourage divorce or discouraging marriage.

Try to construe to avoid public policy violations, delete offending language or reinterpret.

Question 16

What is a Totten trust?

Answer 16

An arrangement with a bank that allows the depositor to open a bank a count in the depositor’s own name, as trustee for other parties. Beneficiary has the right to take whatever is in the account when the depositor dies.

Question 17

What trusts are exempt from the Rule against Perpetuities?

Answer 17

• purely charitable purpose
• charity-to-charity

Question 18

What powers do trustees have?

Answer 18

Express and implied

1. Settle or abandon trust claims
2. Borrow money
3. Sell or lease trust assets
4. Incur reasonable expenses, including the purchase of insurance, that are necessary to maintain trust property

Question 19

What is the standard for trustee discretion?

Answer 19

Generally not attacked unless abuse of discretion.

Standard of the beneficiary’s health, education, maintenance, and support.

Question 20

What duties do trustees have?

Answer 20

Duty of loyalty and good faith

• avoid self-dealing
• avoid even apparent conflicts of interest

Affirmative duty to preserve and enhance trust property

Question 21

What is the principal of the trust?

Answer 21

The amount originally received, plus capital gains and minus debts, expenses, and capital losses

Question 22

What is the income of a trust?

Answer 22

The interest, receipts, dividends, and other income earned on the principal

Question 23

What charges are taken from the income?

Answer 23

Ordinary expenses incurred in connection with the preservation of trust property, including ordinary repairs

Question 24

What gains are allocated to the income?

Answer 24

Rents and cash dividends received

Question 25

What gains are allocated to the principal?

Answer 25

Sales proceeds and stock dividends

Question 26

What charges are taken from the principal?

Answer 26

Extraordinary repairs, beyond the usual or customary kind

Question 27

What is the prudent businessperson rule for trusts?

Answer 27

In investing, trustees must use the degree of skill, care, and prudence that would be reasonably used by a business person in their own personal affairs.

Trustees are held to a superior standard when they possess superior business expertise.

Question 28

May a trustee delegate duties?

Answer 28

Generally no, but can (and must if lacking background) delegate investment functions.

Question 29

What is a trustee liable for if he breaches the duty of care in investing?

Answer 29

Must personally compensate trust for loses if the trust declines in value

Question 30

When is a trustee liable for a prior trustee’s breach?

Answer 30

When the trustee:
- knew or should have known of prior trustee’s breach
- failed to take appropriate action to minimize effects/pursue appropriate remedies

Question 31

What is an exculpatory clause in a trust and when it is a valid waiver?

Answer 31

A provision in the trust instrument that relieves the trustee of liability for potentially wrongful acts.

Acts as a waiver when a beneficiary has full knowledge of the material facts and expressly approves of the action by the trustee.

Question 32

When can a trustee be removed?

Answer 32

For cause

Question 33

When can a trustee resign?

Answer 33

At any time

Question 34

Can a beneficiary alienate their interests?

Answer 34

Yes, can assign.

Unless there’s a restrictive covenant that is reasonable and doesn’t violate public policy.

Question 35

Can a beneficiary alienate their interests?

Answer 35

Yes, can assign.

Unless there’s a restrictive covenant that is reasonable and doesn’t violate public policy.

Question 36

What is a support provision in a trust?

Answer 36

Directs the trustee to provide only so much as is necessary for the beneficiary’s support, measures in terms of the lifestyle to which the beneficiary has become accustomed.

Question 37

What is a discretionary interest in at trust?

Answer 37

Trustee pays as much income as the trustee believes desirable.

Cannot be attacked unless abuse of discretion or bad faith.

Question 38

What is a spendthrift provision in a trust?

Answer 38

A beneficiary cannot voluntarily transfer their property nor can creditor attack it. Unalienable until actually distributed to beneficiary free of trust.

-> settlor cannot make their interest subject to a spendthrift provision

Question 39

When are trusts revocable?

Answer 39

Presumed irrevocable.

UTC - opposite

Question 40

When can an irrevocable trust be terminated?

Answer 40

With consent of all beneficiaries who must be living at the time.

Question 41

When can trusts in will be revoked?

Answer 41

Whenever the will itself can be revoked or amended.

Question 42

When is a trust terminated by merger?

Answer 42

When a sole trustee becomes the only beneficiary.

Question 43

When is a trust terminated by operation of law?

Answer 43

• the trust property is consumed, destroyed, or lost
• the purposes of the trust have been fully accomplished
• accomplishment of the purpose is illegal, impossible, or impractical

Question 44

What happens to a trust upon settlor’s death?

Answer 44

Trust cannot be terminated at settlor’s death before the time specified by settlor, even if all the beneficiaries agree, if the material purpose has not yet been accomplished.

Question 45

What is a resulting trust?

Answer 45

When an express trust makes an incomplete disposition of assets or fails after property has been entrusted to trustee.

Rights will merge and transfer title back to those with equitable rights - settlor, heirs, etc.

Question 46

What is a constructive trust?

Answer 46

Equitable remedy whereby a trust is imposed to redress wrongdoing or prevent unjust enrichment

Question 47

What are the differences between a private trust and a charitable trust?

Answer 47

Charitable trust does not need ascertainable beneficiaries, not subject to RAP, doesn’t necessarily end when the purpose has been accomplished or is impracticable or impossible.

Question 48

What is cy pres for charitable trusts?

Answer 48

If settlers exact charitable purpose cannot be met, the court mau direct the application of the trust property to another charitable purpose that approximates the settlor’s intent.

Question 49

What is an honorary trust?

Answer 49

For the care of an animal or gravesite. Lacks definite beneficiaries, and violates rule against perpetuities.

But can stand, trustee only has moral or honorary obligation.