Trusts

Question 1

Express Trust

Answer 1

Express trust arises when the settlor expressly indicates the intent to create a trust

Elements:
- Intent (“trust words”) -
- Trust res - the property in the trust
- Trust purpose - must not be illegal or contrary to public policy
- Ascertained beneficiary - except for unborn children

Question 2

Oral trusts

Answer 2

Valid in most cases, but SOF applies to trusts conveying real property or pour-over-trusts (trusts created by will)

Question 3

Testamentary trusts

Answer 3

A testamentary trust is created in writing in a will or in a document incorporated by reference into a will.

Trust must exist or be created at the time the will was executed

Question 4

Intent

Answer 4

Intent may be manifested orally, in writing, or by conduct.

Manifestation of intent must occur prior to or simultaneously with transfer of property

Question 5

Trustee

Answer 5

Court will appoint if none is named

Question 6

Charitable Trust

Answer 6

Must (1) have a stated charitable purpose, and (2) exist for the benefit of the community at large or for a specific segment of the community

Question 7

Mandatory trust

Answer 7

Trustee has no discretion as to when to make distribution.

Trust governs when and how trust property is to be distributed

Question 8

Discretionary trusts

Answer 8

Trustee is given complete discretion as to whether she will make a distribution

Question 9

Support trust

Answer 9

Directs trustee to pay income or principal as necessary to support trust beneficiary

Creditors cannot reach trust property because beneficiary cannot demand payment

Question 10

Alienability - General Rule

Answer 10

Beneficiary’s equitable interest in trust res is freely alienable (unless trust instrument or statute restricts alienation)

A creditor cannot reach the trust principal or income until such amounts become payable to the beneficiary or are subject to the beneficiary’s demand

Question 11

Spendthrifth trusts

Answer 11

Trust expressly restricts beneficiary’s power to alienate her interest

Creditors cannot reach until trustee makes a paymetn

Question 12

Creditors who can reach trust property

Answer 12

Creditors usually cannot reach the trust interest unless money is owed for child or spousal
support, basic necessities, or tax lien holders.

Question 13

Revocable trust

Answer 13

Settlor has right to modify or terminate

In CA, trusts are presumed to be revocable

Question 14

Irrevocable trust

Answer 14

Modification or termination while settlor is still alive can occur only with (1) the
consent of all beneficiaries and (2) if the proposed change will not interfere with a primary purpose of the trust.

Question 15

Unfulfilled Material Purpose

Answer 15

A trustee can block a premature trust termination by the beneficiaries if the trust is shown to have an unfulfilled material purpose.

Question 16

Termination of trust

Answer 16

(1) Automatically when trust purpose has been accomplished

(2) by court if purpose becomes illegal, impracticable, or impossible,

(3) Settlor can terminate - if revocable, without anyone’s consent; if irrevocable - with consent of all beneficiaries

(4) if settlor is deceased and all beneficiaries consent (but look out for unfulfilled material purpose!!)

(5) changed circumstances - a court may modify or terminate a trust if, because of circumstances not anticipated by the settlor, termination will further the purposes of the trust. To the extent practicable, the modification or termination must be made in accordance with the settlor’s probable intention.

Trustee does not have power to terminate unless such power is reserved for trustee

Question 17

Removal of a trustee

Answer 17

A court can remove a trustee if purpose of the trust would be frustrated by the trustee’s continuance or if trustee violated a fiduciary duty

Question 18

Fiduciary Duties of Trustee

Answer 18

Duty of Care (includes numerous subduties) - duty to act as a reasonably prudent person in managing the trust. Must treat trust property as if it were his/her own.

Duty of Loyalty
Duty to act in good faith, avoid conflicts of interest (including self dealing), and in the best interests of beneficiaries.

Duty to disclose/inform beneficiaries - must disclose information about trust property to beneficiaries

Duty to Account - Must periodically account for actions taken on behalf of the trust so that trustee’s performance can be assessed

Duty to make property productive - must preserve trust property and work to make it productive by pursuing all possible claims, driving maximum amount of income, and selling assets when appropriate.

Question 19

Duty of care

Answer 19

Reasonable Prudent Person -
Follow trust directions

Investments
- Prudent investor Rule - when investing trust assets, trustee must act as a reasonably prudent investor would if investing his/her own assets. Must exercise necessary care, diligence, and skill when investing.
- Duty to diversify - trustee must diversify trust investments to spread risk of loss under a total performance portfolio approach

Duty to make property productive
- must pursue all possible claims
- derive maximum amount of income from investments
- sell assets when appropriate
- secure insurance and pay expenses

Duty of impartiality
- must balance interests of present beneficiaries and future beneficiaries (cannot favor one over the other). This includes investing assets to produce a reasonable income for present beneficiaries while preserving principal for remainder beneficiaries

Question 20

Duty of loyalty

Answer 20

Self-dealing
- prohibited transactions - cannot do anything for personal gain
- self-dealing is a per se breach (courts apply no further inquiry rule where in they do not assess the reasonableness or good-faith of the transaction)

Non-self-dealing transaction
assessed under reasonable and good-faith test

Question 21

Remedies of breach of fiduciary duty

Answer 21

Lost profits or interests resulting from breach of trust

other damages

removal of trustee

Question 22

More on duty of care

Answer 22

General duty to act as a reasonably prudent person and treat the trust property as if it was his/her own.

Duty to follow the trust directions and carry them out in accordance with the trust.

Question 23

Lack of trustee

Answer 23

A designated trustee may decline to serve as trustee for a trust. In such cases, the trust does not fail; rather, the court may appoint an alternative trustee unless the settlor expressly intended for the trust to fail without the designated trustee

Question 24

Private Express Trust

Answer 24

A private express trust clearly states the intention of the settlor to transfer property to a trustee for the benefit of one or more ascertainable beneficiaries. To be valid, there must be a settlor, a trustee, intent, trust res, ascertainable beneficiaries, and a valid trust purpose.

Question 25

Trustee powers

Answer 25

A trustee can only act in accordance with the express powers and instructions provided by the settlor

Question 26

Duty of a co-trustee

Answer 26

Must make decisions jointly with other trustee

Question 27

Charitable Trust Standing

Answer 27

Typically the AG of the state of a charitable trust’s creation and members of the community who are more directly affected that the general community have standing to enforce the terms of a charitable trust.

Question 28

Duty to notify

Answer 28

Must disclose intent to sell a significant portion of trust assets

Question 29

Omitted Spouse

Answer 29

An omitted spouse is one who marries the settlor after the creation of a trust (or marries a testator after the creation of a will) - spouse is entitled to intestate share of settlor’s estate unless
(1) omission was intentional
(2) spouse was provided for outside of trust or will and such provision was intended to be in lieu of devise or trust gift
(3) there was a valid agreement waiving right to spouse’s estate