Trusts Flashcards
Summary
A trust for “friends” is invalid because it does not have “definite beneficiaries.” Thus, Amy is not entitled to receive a distribution from the Friends’ Trust. Bob’s appointment of the Child’s Trust assets into a new trust to pay the income to his son David for life is valid. Although the settlor did not expressly state that appointments by the donee of the power of appointment in further trust are permissible, the majority view is that if the donee can appoint trust assets outright, the donee can also create lesser interests, such as a life estate in trust to a permissible object of the power. However, the special power does not authorize Bob to appoint to any person other than issue. Therefore, even though the trust established by Bob is assumed to be valid, a term of the trust is invalid because Charity is an impermissible object of Bob’s special power. Thus, Bob made an
ineffective appointment of the remainder. That remainder interest will pass at David’s death to University, the taker in default of appointment designated by the settlor under the terms of the
Child’s Trust.
Is Amy, the settlor’s friend, entitled to receive a distribution from the Friends’ Trust?
A trust for “friends” is invalid for want of definite beneficiaries. Thus, Amy is not entitled to receive a distribution from the Friends’ Trust.
Rule
To create a valid trust, there must be intent, delivery, and acceptance. Additionally, there must be trust property, a trustee, and one or more beneficiaries. The Friends’ Trust has a trustee and
property of $200,000. The question is whether there is a beneficiary of this trust. Under the common law of trust (applicable here because there are no relevant statutes), a trust
for indefinite beneficiaries is invalid. This rule derives from the principle that trust beneficiaries must be ascertainable in order to ensure that there is someone to enforce the terms of the trust.
See generally Restatement (Third) of Trusts § 46 (2003); George Gleason Bogert, Trusts § 34 (6th ed. 1984). A trust for the benefit of “friends” is a trust with indefinite beneficiaries. See Restatement (Third) of Trusts § 46, General Comment. Thus, the trust is invalid. As noted in the comments to Section 46, if the trustee is directed to distribute trust income “in equal shares among all of the members of an indefinite class, no member of the class can maintain a
proceeding to enforce the intended trust, nor can anyone else. Because the intended trustee is under no enforceable duty to carry out the testator’s direction, no trust is created. Id. cmt. (1) b.
Note
[NOTE: The Restatement (Third) of Trusts takes the position that a trust for friends may be valid if “some ascertainable group of friends . . . was intended . . . or . . . an implied term of the trust authorizes . . . [the trustee] to determine who the friends . . . are. . ..” Id. at Illustration 1. Here, there are no facts to support such a finding.
Application
Furthermore, the disposition cannot be saved by characterizing the Friends’ Trust as a power of appointment because a power that must be exercised (a so-called “imperative power”), here to distribute the income in equal shares, also requires definite beneficiaries. See Clark v. Campbell, 133 A. 166 (N.H. 1926). A discretionary power, vesting in the trustee the power both to select beneficiaries and to determine the shares each receives, on the other hand, is valid and would
permit a trustee to distribute to friends. But here the instrument creating the Friends’ Trust did not give the trustee discretion to select beneficiaries or determine distributions.]
Did Bob validly appoint the assets of the Child’s Trust into a new trust that could pay its income to David for his life?
The donee of a special power of appointment exercisable over a trust can exercise the power by appointing the trust assets into a new trust and creating an income interest in the new trust in favor of a permissible object of the power. Thus, the appointment of a life estate in trust to David is valid.
Rule and Application
The language of the Child’s Trust does not specify whether (i) appointments of an interest that are less than an outright interest or (ii) appointments in further trust (rather than outright) are permissible. In light of the language in the Child’s Trust (“to distribute the principal, during Bob’s life or upon his death, to any or all of his issue”), it could be argued that Bob can appoint only principal to David, and not a mere income interest, and only outright in that the language does not expressly address appointments of lesser interest or appointments in trust. This argument, however, is rejected by the Restatement of Property and the weight of the modern case
law, which takes the position that, if a donee can appoint trust assets (principal) outright, then the donee can also create more limited interests, such as a life estate, in the objects of the power, unless the evidence shows that the donor intended otherwise. See Restatement of Property § 358(e) (1940); Restatement (Second) of Property § 19.3 and accompanying comments (1986). Likewise, the Restatement permits a donee to appoint property in trust for objects of the power. More specifically, the comments to the Second Restatement provide: “It is to be inferred, unless the donor indicates otherwise, that the donor of a non-general power intends the donee to have
the same breadth of discretion in appointment to objects that he has in the disposition of his owned property to objects of the power. . . .” § 19.3, cmt. a. In light of this, the appointment of only a life estate in trust to David is valid.
Assuming that the trust established by Bob in the Deed of Appointment is valid:
(a) Does Charity have an interest in the trust created by that deed?
Even though the trust created by Bob in the Deed of Appointment is assumed to valid, Bob’s purported exercise of his power in favor of Charity in that Deed is invalid because Charity is an impermissible object of the power.
Rule and Application
The donee of a special power of appointment (a power that excludes the donee, the donee’s creditors, and the donee’s estate as permissible objects) can only exercise the special power in
favor of objects designated by the donor of the power. Here, the objects of the power were limited by the settlor (the donor of the power) to Bob’s issue. Thus, Bob’s attempted appointment to Charity under an otherwise valid trust (as assumed here) is invalid. See
Restatement (Second) of Property §§ 19.3, 20.1.
Note
[NOTE: A trust is valid if the trust has a corpus, identifiable beneficiaries, and a trustee. An appointment is valid if its terms conform to the terms set forth by the donor of the power. As is
the case here, a valid trust can have an invalid term. In such a case, the invalid term is struck from the trust; the remainder of the trust is given effect. Examples of this abound both in the law of trusts and elsewhere. For example, a trust to pay the income to A for life with the trust principal payable in a manner that violates the Rule against Perpetuities is a valid trust. A, the named income beneficiary, will receive the income; only the gift of the principal at A’s death is
stricken from the instrument. Likewise, O conveys land to B but prohibits B from ever selling the land. B takes the land free and clear of the invalid term prohibiting the sale of the land.]
Assuming that the trust established by Bob in the Deed of Appointment is valid:
Does University have an interest in the trust created by that deed?
Because of Bob’s partially ineffective exercise of the special power, the remainder of the new trust at David’s death passes to University, the taker in default under the Child’s Trust.
Rule and Application
Bob exercised his special power of appointment by attempting to appoint to objects both permissible (David) and impermissible (Charity). As a general rule, “the ineffectiveness of the
appointments to the non-objects does not affect the appointments to the objects . . . .” Restatement (Second) of Property § 20.1 cmt. g. Thus, the purported appointment to Charity does not invalidate the otherwise effective appointment to David in trust. (See Point Two.)
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 (here the settlor). The Child’s Trust specifies that University is the taker in default of appointment and that University takes to the extent that its interest has not been divested by an
exercise of Bob’s special power. Here, University has been divested of the life estate effectively appointed to David but not the remainder interest ineffectively appointed to Charity. Thus, upon
creation of the new trust, David has a life estate and University has the remainder. Charity has no interest in this trust.
