Trusts

Question 1

Create a Valid Trust

(Requirements)

Answer 1

A valid express trust requires:
(1) a definitive beneficiary (the beneficiary can be ascertained now or in the future);
(2) a settlor with capacity;
(3) an intent to create a trust;
(4)a trustee;
(5) a valid trust purpose;
(6) trust property (the res); AND
(7) compliance with any State formalities (i.e. signed in front of notary).

Question 2

Res

(Requirements)

Answer 2

The res is the trust property. The res must be certain and identifiable.

Question 3

What happens if a settlor promises to create a trust before the res exists?

Answer 3

If a settlor promises to create a trust before the res exists and the promise is gratuitous, a trust will arise only if the settlor remanifests their intent to create the trust when the res comes into existence. They may remanifest their intent either expressly or impliedly.

If the settor’s promise is supported by consideration, then it may be enforced on contract principles.

Question 4

What happens if the settor creates an empty trust?

Answer 4

An otherwise empty trust is valid if the settlor names the trust as a beneficiary of:

1. A life insurance policy;
2. A pension plan death benefit;
3. Their will.

Question 5

What happens if the settlor fails to name a trustee or the named trustee dies?

Answer 5

If the settlor fails to name a trustee or the named trustee dies, then the court will appoint a trustee.

⇒ Exception: Powers personal to the named trustee.

Question 6

Powers Personal to the Named Trustee

Answer 6

If the court finds that the settlor intended that the trust powers be personal to the named trustee, and the named trustee is unable to serve as trustee, then the trust will terminate.

⇒ This is very rare! The court will generally find that the settlor intended that the trust continue for its indicated purpose.

Question 7

Beneficiaries

(Basic Requirements)

Answer 7

Beneficiaries must be ascertainable.

Question 8

Class Beneficiaries

(Requirements)

Answer 8

The members of a class of beneficiaries must be ascertainable.

⇒ A settlor cannot give a trustee discretion to name beneficiaries, although a settlor may give a trustee discretion to determine the shares that each beneficiary is entitled to.

Question 9

What happens if a settlor fails to name an ascertainable class of beneficiaries?

Answer 9

Under the traditional rule, the trust would fail. However, under the modern rule, the trust will be allowed to continue as a power of appointment.

Question 10

Honorary Trust

Answer 10

An honorary trust is a trust that is not for the benefit of a living person. It may be for the benefit of animals or graves. At common law, honorary trusts violate the Rule Against Perpetuities. Under the UTC:

1. Honorary trusts are valid (e.g., for the life of the animal);
2. The court will appoint someone to enforce the trust;
3. If the purpose of the trust is fulfilled, the remaining trust corpus will be returned to the estate by resulting trust.

Question 11

Is a revocable trust valid?

Answer 11

The majority view is that trusts are irrevocable by default UNLESS expressly stated otherwise. Generally, an irrevocable trust CANNOT be modified or revoked by the settlor after its creation.

The minority view and the rule under the Uniform Trust Code (UTC) provides that a trust is revocable unless stated otherwise.

Generally, a revocable trust is valid.

Question 12

Pour-Over Clause

(Requirements)

Answer 12

A pour-over clause is a clause in a will that leaves property to a revocable trust. It is valid if:

1. The trust instrument is written;
2. The will identifies the trust.

Question 13

What happens if the settlor alters the terms of a trust that is named as the beneficiary of a pour-over clause?

Answer 13

Nothing. The pour-over clause succeeds even though the trust was amended without testamentary formalities.

Question 14

When must the settlor create that trust that is the beneficiary of a pour-over clause?

Answer 14

The settlor may create the trust that is the beneficiary of a pour-over before, concurrently with, or after, the will is executed.

Question 15

May the settlor name herself as both trustee and beneficiary of a revocable trust?

Answer 15

Yes, as long as the settlor is not both the sole trustee and sole beneficiary of the trust.

Question 16

Are oral inter vivos trusts valid?

Answer 16

Yes, oral inter vivos trusts are valid, UNLESS the Statute of Frauds applies, such as to trusts taht create an interest in land.

Question 17

Is an oral contract to devise property by will enforceable?

Answer 17

Yes, if:

1. The contract is supported by consideration;
2. The contract can be established clear and convincing evidence;
3. The Statute of Frauds doesn’t apply to the contract.

Question 18

Secret Trust

Answer 18

A secret trust is a testamentary trust that combines an absolute devise by the settlor’s will with trustee’s oral promise to hold the property.

• “secret trust”—if settlor relies on a will beneficiary’s promise to hold property in trust for someone else, then clear and convincing evidence can create a constructive trust

Question 19

What happens if a secret trust’s trustee claims that there is no trust?

Answer 19

If a secret trust’s trustee claims that there is no trust, extrinsic evidence may be used to demonstrate by clear, convincing, and satisfactory evidence that a trust exists.

Question 20

What happens if a trustee of a secret trust was never told about the trust?

Answer 20

If the trustee of a secret trust was never told about the trust, then the trust takes the property free of any trust obligations.

Question 21

Semi-Secret Trust

Answer 21

A semi-secret trust is a testamentary trust that combines an absolute devise in trust with an oral agreement as to beneficiaries.

The trustee cannot comply with the trust. The trustee instead takes the property in resulting trust for the testator’s heirs.

• “semi-secret trust”—if will makes a gift in trust but doesn’t say the beneficiary, then gift fails and named trustee holds trust for the testator’s successors in interest

Question 22

Charitable Trusts

The Four Rules

Answer 22

Charitable trusts . . .

1. Are not subject to the Rule Against Perpetuities;
2. Must be for a charitable purpose;
3. Must benefit a reasonably large and unidentifiable segment of the public;
4. Can be reformed by the doctrine of cy pres.

Question 23

Doctrine of Cy Pres

Answer 23

Under the doctrine of cy pres, if the specific purpose of a charitable trust can no longer be accomplished, the court may reform the trust to serve a new charitable use that conforms as closely as possible with the settlor’s original intent.

A court will not apply cy pres if the settlor’s intent was limited to the original charitable purpose of the trust. (Court’s rarely decline to apply cy pres.)

Question 24

What is the private trust companion to the doctrine of cypres?

Answer 24

Deviation from trust administrative terms because of changed circumstances.

• If continuing a trust on its existing terms would be ** impracticable or wasteful**, courts may apply the Equitable Deviation Doctrine to modify the terms of the trust. The doctrine permits the court to modify the administrative provisions or procedures of a trust if modification would further the trust purpose because of circumstances not anticipated by the settlor.
• Under the common law, the equitable deviation doctrine only applied to modification of administrative provisions of a trust. However, under the Uniform Trust Code (UTC), dispositive provisions in a trust may be modified if modification will further the purposes of the trust when circumstances arise that were not anticipated by the settlor.

Question 25

May a trustee alienate or assign her income interest in a trust?

Answer 25

Yes.

Question 26

Spendthrift Trust

Answer 26

A spendthrift trust is a trust whose interest a beneficiary cannot voluntarily or involuntarily transfer. Spendthrift trusts are valid only if they prohibit both voluntary and involuntary transfer.

Question 27

When may a third party obtain a right to a beneficiary’s interest in a spendthrift trust?

Answer 27

When:

1. The third party has a claim for necessities;
2. To secure alimony or child support;
3. When the claimant is the U.S. or a state.

Question 28

What special rules apply to trusts that benefit the settlor?

Answer 28

1. Spendthrift clauses are unenforceable;
2. If the trust is revocable, then creditors may access the trust corpus;
3. If the trustee has discretion to make distributions to the settlor, then creditors may access the trust corpus.

Question 29

May a beneficiary sue a trustee to make distributions from a discretionary trust?

Answer 29

Generally, a trustee cannot force distributions. However, a court may order a trustee to distribute in order to satisfy claims by the beneficiary’s child, spouse, or former spouse. (Read: alimony and child support.)

Question 30

Trustee’s Fiduciary Duties

Answer 30

1. Duty to Administer the Trust
2. Duty of Care:
   * Prudent Administration, Take Control, and Protect
   * Failure to Test the Market
   * Investments and Prudent Investor Rule
3. Duty of Loyalty:
   * Self-Dealing
   * Conflicts of Interest
   * Duty to Act Impartially
4. Duty to Account and Inform

Question 31

Duty to Invest Prudently

Answer 31

Under the duty to invest prudently, a trustee is required to manage the trust property as a prudent investor would, taking into account the trust’s purpose and terms. In so doing, the must exercise reasonable care, skill, and caution.

1. Duty not to commingle assets;
2. Duty to balance risk and return;
3. Duty to diversify;
4. Duty to keep the trust property productive.

Whether a trustee satisfies their duty to invest prudently is judged from a whole portfolio view.

Question 32

If multiple trustees administer a trust, how do they make decisions?

Answer 32

By majority vote.

Question 33

What actions may a beneficiary take if a trustee breaches their fiduciary duties?

Answer 33

The beneficiary may:

1. Ratify the transaction;
2. Surcharge the trustee for the loss;
3. Trace and recover lost property for the trust.

Question 34

Is one trustee liable for another trustee’s breach?

Answer 34

No, unless the trustee is also responsible for the breach or for failing to correct it.

Question 35

Who does the trustee of a revocable trust owe fiduciary duties to?

Answer 35

The trustee of a revocable trust owes fiduciary duties only to the settlor. They don’t owe fiduciary duties to other beneficiaries.

Question 36

Resulting Trust

Answer 36

A resulting trust is implied when:

1. An express trust fails;
2. An express trust’s purpose is accomplished and the trust corpus is not exhaused.

The trust corpus reverts to the settlor’s estate.

Question 37

Purchase Money Resulting Trust

Answer 37

A purchase money resulting trust is presumed to arise when consideration is paid for property by one person, but title in that property is taken by another person.

Question 38

Constructive Trust

Answer 38

A constructive trust is implied if a person obtains title to property wrongfully. The trust is implied in order to remedy unjust enrichment.

Question 39

Power of Appointment

Answer 39

If a donor creates a power of appointment, the power of appointment entitles the donee to designate the person who will recieve the property that the power applies to.

• A power of appointment is general if the donee may appoint herself, her estate, or the creditors of either to recieve the property.
• A power of appointment is specific if the donee may not appoint herself, her estate, or the creditors of either.

Question 40

Termination of Trust

Answer 40

Question 41

Duty to Administer the Trust

Answer 41

Under the common law, the trustee owed beneficiaries the duty to act with care, skill, and prudence.

Under the Uniform Trust Code, a trustee MUST administer the trust: (1) in good faith; (2) in accordance with the trust purpose and terms; AND (3) in the interests of the trust beneficiaries.