Trusts Flashcards
valid trust creation
To create a valid trust, there must be:
* intent
* delivery, and
* acceptance
Additionally, there must be:
* trust property,
* trustee, and
* one or more beneficiaries.
ascertainable beneficiaries
Under the common law of trust, a trust for indefinite beneficiaries is invalid. Trust beneficiaries must be ascertainable in order to ensure that there is someone to enforce the terms of the trust.
UTC Section 409 exception to ascertainable beneficiaries requirement
Under Section 409 of the Uniform Trust Code, a trust may be created for a noncharitable purpose without a definite or definitely ascertainable beneficiary. This could include a trust for a general noncharitable purpose which is benevolent.
Under the principles of the Second and Third Restatements of Trust, when there is no definite beneficiary designated, the transferee has power to apply the property to the designated purpose so long as it does not go beyond the period of the rule against perpetuities, or the purpose is capricious. Presumably, the 21-year period under this exception runs from the date the trust was created.
Charitable trust
A charitable trust can only be created for a charitable purpose. Charitable purposes include
* the relief of poverty,
* the advancement of education,
* the advancement of religion,
* the promotion of health,
* governmental or municipal purposes, and
* other purposes the accomplishment of which is beneficial to the community.
When a trust discharges a governmental function, thus relieving taxpayers of the duty to provide the function, the trust is charitable.
duration of a charitable trust
A charitable trust can last in perpetuity. It is not subject to the rule against perpetuities.
can a donee of a power of appointment create limited interests? (e.g., life estate)
Under the Restatement of Property and modern case law, if a donee can appoint trust assetes (principal) outright, then the donee can also created limited interests, such as a life estate, in the objects of the power, unless the evidence shows that the donor intended otherwise. The Restatement permits a donee to appoint property in trust for objects of the power.
Irrevocable trust termination
Generally, an irrevocable trust can be terminated prior to the death of all income beneficiaries if both the income beneficiaries and the remaindermen unanimously consent. However, if there is a material purpose of the trust yet to be performed, the beneficiaries alone may not terminate the trust.
Irrevocable trust termination: “material purpose”
A material purpose should not be inferred from the mere fact that the settlor created a trust for successive beneficiaries. If the continuance of the trust is necessary to carry out a material purpose of the trust, the beneficiaries cannot compel its termination.
Irrevocable trust termination: manner of termination
If trust beneficiaries properly terminate a trust, trust assets vest in them. After termination, the beneficiaries may themselves distribute trust assets in any manner they choose. They may also direct a trustee to distribute trust assets as their agent. A trustee who complies with such directions does not violate any fiduciary duty.
Class gift
A class gift is a gift to a group of persons described collectively, typically by their relationship to a common ancestor.
class gift survivorship distribution under common law
Under the common law, if a member of such a class fails to survive until the time of distribution, that member’s share passes to his or her estate, not to his or her issue.
class gift survivorship distribution under UPC
Under the UPC, when a beneficiary does not survive to the distribution date, the beneficiary’s interest passes to his or her issue unless the trust instrument specifies an alternate disposition.
class gift: closing of class
When a class gift is made to a group of individuals, the class does not “close” until the named person dies or one class member becomes entitled to distribution.
trustee discretion
When a trustee’s discretion is uncontrolled, there is no abuse of discretion if the trustee acts honestly and in a state of mind contemplated by the trust creator.
class gifts: adopted children
Under the Uniform Probate Code, adopted individuals may be included in class gifts and are considered a child of their adopting parents.
vested remainder in class member
At common law, when a trust creates a vested remainder in a person or member of a class and then provides that the remainder should pass to that person’s child if the remainder person predeceases the life tenant, the remainder is divested only if the deceased remainder person has a child. If, on the other hand, the remainder person dies childless, the remainder is not divested and passes to the remainder person’s estate.
By contrast, under the Uniform Probate Code, future interest can only vest if the beneficiary survives the distribution date.
trust reformation: equitable deviation
Under the common law, a court may order “equitable deviation” from administrative terms of a trust when an unanticipated change in circumstances would otherwise defeat or substantially impair the accomplishment of the purposes of the trust. The Uniform Trust Code expands this doctrine by allowing modification or termination if it will further the purposes of the trust. Also, even if circumstances have not changed in an unanticipated manner, an administrative provision may be modified if continuation of the trust on its existing terms would be impracticable, wasteful, or impair the trust’s administration.
equitable deviation: “dispositive terms of a trust”
Unlike common law, the UTC and modern statutes allow courts to modify the dispositive terms of a trust if because of unanticipated circumstances, modification will further the purposes of the trust. To the extent practicable, the modification must be aligned with the settlor’s probable intention.
Cy pres
Under common law, when trust property to be used for a charitable purpose could not be distributed as directed in the trust instrument, the trust did not necessarily fail. Instead, the court determined whether to exercise its cy press power and redirect the charitable gift to another like charity.
The common law cy pres doctrine requires an initial inquiry into the settlor’s intent: if the court determines that the settlor had a specific charitable intention limited to the charitable purpose stated in the trust instrument, the property reverts to the settlor or the settlor’s estate. If the court determines that the settlor had a general charitable intention, it substitutes for the named charity another one with activities consistent with the settlor’s intentions. The common law and the Restatement of Trusts both presume that a settlor has a general charitable intent. The Uniform Trust Code also appears to establish a conclusive presumption of general charitable intention.
donee with special power of appointment
The donee of a special power of appointment (a power that excludes the donee, the donee’s creditors, and donee’s estate as permissible objects) can only exercise the special power in favor of objects designated by the donor of the power.
Objects must be designated by donor in the trust instrument to be permissible. If they were only mentioned in the will, then they are not considered “objects of the power.”
duty of loyalty
A trustee owes trust beneficiaries a fiduciary duty of loyalty.
Under common law, a trustee is prohibited from making transactions that place the interest of the trustee or another above the interest of trust beneficiaries.
The duty of loyalty prohibits two types of transactions: self-dealing, where the trustee deals with trust property for the trustee’s personal benefit, and conflict of interest, where the trustee acts on behalf of others to whom the trustee also owes obligations.
no further inquiry rule
Under the no-further-inquiry rule, it is immaterial that the trustee may be able to show that the action in question was taken in good faith, that the terms of the transaction were fair, and that no profit resulted to the trustee. A self-dealing transaction is voidable by trust beneficiaries.
Shorter rule: Under the no-further-inquiry rule, there is no need to inquire into the motivation for the self-dealing transaction or even its fairness.
duty of care
Under both the Restatement of Trusts and the Uniform Trust Code, a trustee must exercise reasonable care, skill, and caution. A trustee must take reasonable steps to take control of and protect the trust property.
duty to administer trust diligently
A trustee has the duty to administer the trust diligently and in good faith in accordance with the terms of the trust and applicable law.
Under the Uniform Principal and Income Act, all ordinary expenses incurred in connection with the preservation of the trust are allocated to income. Extraordinary expenses are allocated to trust principal. Ordinary expenses are expenses that relate to day-to-day activities. Extraordinary expenses relate to unusual or unforeseen occurrences that does not destroy the asset but renders it less suitable for intended use.
future interest/vested remainder
Under common law, vested remainders are devisable. If the remainderman is not living when the remainder becomes possessory, it passes to the devisee of the interest under the deceased remainderman’s will. There is no reversionary interest.
Power to revoke
A retained power to revoke a trust includes the power to modify or amend the trust instrument. Under the Uniform Trust Code, a trust is both revocable and amendable unless the trust instrument expressly provides otherwise. The power to revoke or amend is exercisable by will unless the trust instrument provides otherwise.
Facts: settlor directed trustee to do something different than what the trust terms said. Settlor retained the power to revoke the trust “during the settlor’s lifetime”
if power of appointment has been ineffectively exercised
As a general rule, the ineffectiveness of appointments to non-objects does not affect the appointments to the objects. If a power has been ineffectively exercised, the property subject to the power not effectively exercised passes to the so-called “taker in default of appointment” designated by the donor of the power.
beneficiaries: surviving spouse share
Although many states have statutes under which a surviving spouse’s elective (forced) share of the decedent spouse’s estate extends to assets placed into a revocable trust by the decedent spouse, a specific statute may dictate otherwise. However, in many states, case law permits a surviving spouse to claim an elective share of assets contained in a revocable trust under either the illusory-transfer doctrine, the fraudulent-transfer doctrine, or a like doctrine.
beneficiaries: illusory-transfer doctrine
Under the illusory-transfer doctrine, a surviving spouse can reach assets transferred during the marriage by the deceased spouse into a revocable trust on the theory that the transfer is economically “illusory” because, by the simple expedient of exercising the power of revocation—typically with nothing more than a signature on a piece of paper—the deceased spouse would have recaptured the assets she had placed in the trust.
beneficiaries: fraudulent-transfer doctrine
Under the fraudulent-transfer doctrine, a surviving spouse can reach assets transferred into a revocable trust on the theory that, as to the surviving spouse, the transfer was “fraudulent.” The assumption behind this doctrine is that a state statute providing surviving spouses with an elective-share entitlement gives spouses a legitimate expectancy in assets that would have been included in the decedent spouse’s probate estate but for their transfer into a revocable trust; such a transfer is treated as defrauding the surviving spouse of his or her expectancy.
Trust provisions restraining first marriage
Trust provisions that restrain a first marriage have generally been held to violate public policy and are thus void. Although courts have upheld some restrictions on marriage (e.g., remarriage), none have upheld a complete restraint on a first marriage.
remedy to self-dealing
Any trust beneficiary can cause a self-dealing purchase by a trustee to be set aside or obtain a damages award.
* Set aside—If a beneficiary elects to set aside the transaction, the trust property purchased by the trustee is returned to the trust and the amount the trustee paid for the property is refunded by the trust.
* Damages—If a beneficiary seeks damages, those damages are based on the difference in the fair market value of the trust assets at the time of the self-dealing transaction and the amount paid by the trustee.
duty to invest prudently
A trustee shall administer the trust as a prudent person would using reasonable care, skill, and caution. One of the hallmarks of prudent investing is diversification. A balanced portfolio reduces aggregate risk by investing in different investment categories. Diversification thus is strong evidence of prudent investing. A trustee’s investment and management decisions will be evaluated in the context of the trust portfolio as a whole. The trustee should consider the purposes, terms, distribution requirements, and other circumstances affecting the trust. A trustee, however, is not liable for declines in value due to a downturn resulting from general economic conditions.
