Trusts Flashcards
STEP 1: ID Type of Trust (can be more than one)
**Context: ** A beneficiary’s equitable interest in trust property is freely alienable unless a statute or trust instrument limits this right
Support trust—directs the trustee to pay income or principal as necessary (more than bare essentials, but not luxuries) to support the trust beneficiary and maintain lifestyle;
==> creditors cannot reach these assets ** unless providing a necessity ** to the beneficiary (trustee can pay directly)
Discretionary trust—the trustee is given complete discretion regarding whether or not to apply payments of income or principal to the beneficiary; creditors have the same rights as a beneficiary if the trustee exercises discretion to pay
==> look 4 “sole discretion” language
Mandatory trust—the trustee has no discretion; the trust document explains in detail how and when trust property is to be distributed
Spendthrift trust—expressly **restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest; ** Creditors usually cannot reach the trust interest if the governing instrument contains a spendthrift clause
==> EXCEPTIONS child or spousal support, tax lien holders,
and sometimes basic necessities providers.
==> SCOPE applies only as long as the property remains in the trust, and it is inapplicable after it has been paid out to the beneficiary.
Trust Modification & Termination
A court may modify a trust** if events that were unanticipated by the settlor have occurred and the changes would further the purposes of the trust. **
==> To the extent possible, the modification must be made in accordance with the settlor’s probable intention, and the court need not seek beneficiary consent to make the modification.
Even if circumstances have not changed in an unanticipated manner, a court may modify the terms of a trust that relate to the management of trust property if continuing the trust on its existing terms would be impracticable, wasteful, or impair the trust’s administration.
court may modify/terminate a trust
without seeking beneficiary consent
(i) due to unanticipated circumstances or an inability to manage the trust effectively, or if the trust is uneconomic;
or (ii) to correct mistakes or achieve
the settlor’s tax objectives
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 (i.e. termination would violate settlor’s intent). **
Cy Pres
In an effort to carry out the testator’s intent, under the cy pres doctrine, a court may modify a charitable trust to seek an alternative charitable purpose if the original charitable purpose **becomes illegal, impracticable, or impossible to perform. **
The settlor’s intent controls. If it appears that the settlor would not have wished that an alternative charitable purpose be selected, the trust property may instead be subject to a resulting trust for the benefit of the settlor’s estate. However, , there is a rebuttable presumption that the settlor had a general charitable purpose.
STEP 2: Allocation
All assets received by a trustee must be** allocated to either income or principal. **
income = goes to life beneficiaries
principal = goes to remainderman
The allocation must be balanced so as to treat present and future trust beneficiaries fairly, unless a different treatment is authorized by the trust instrument.
Traditional approach = assumed…
==> any money generated by trust property was income **
==> and that any money generated in connection with a conveyance of trust property was principal. **
UPAIA
a **trustee is empowered to re-characterize items and reallocate investment returns **as he deems necessary to fulfill the trust purposes, as long as his **allocations are reasonable and are in keeping with the trust instrument. **
EXCEPT ==> A distribution of stock is treated as a distribution of principal under the UPAIA.
Disclaiming Trust Property
Almost all states have enacted statutes that permit beneficiaries of trusts to disclaim their interest in the trust property.
When the holder of a future interest effectively disclaims that interest, the disclaimant is deemed to have predeceased the life tenant.
==> look to see if a SOL exists in fact pattern
Pre-deceasing x Class Gift
the share of a deceased class member is paid to that class member’s surviving
issue;
by statute, the modern trend is that a substitute gift is created in the descendants of the deceased issue so that a predeceased beneficiary’s interest in a trust will not lapse
Unless the governing instrument 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. .
However, under the UPC, if a class gift is limited in favor of a class of children, only those children alive at the time of distribution are entitled to possession of the property.
?????
If a child who survives the settlor but then predeceases the time of distribution has surviving issue, that issue would have a right to the parent’s share of the gift. Thus, if the UPC applies, Trustee is correct in that termination would require the consent of all potential beneficiaries, including the future grandchildren with potential rights.
How long does a class remain open
A class remains open and may admit new members until
(i) at least one class member is entitled to obtain possession of the gift, or
(ii) the preceding interest terminates (such as when the holder of the present life interest dies).
When does a trustee’s responsibilities terminate?
A trust is a fiduciary relationship wherein the trustee is called upon to manage, protect, and invest certain property and any income generated therefrom for the benefit of one or more named beneficiaries.
The trustee holds the legal interest or title to the trust property. **Should the trust be terminated, title would merge and would vest in the beneficiaries. **
Thus, if the trust was terminable and the trustee distributed the trust principal pursuant to the beneficiaries’ directions, the trustee would not be violating any fiduciary duty. The beneficiaries would be entitled to distribute trust proceeds as they saw fit. Even if such a distribution could be deemed breach of a fiduciary duty, because the beneficiaries directed it (i.e., joined the breach), equity will prevent them from pursuing an action against the trustee.
