Trusts

Question 1

What is a trust?

Answer 1

Legal construct allowing for legal title to be held by a trustee for the benefit of beneficiaries under terms and conditions imposed by the creator of the trust, a settlor.

Question 2

Who is the trustee?

Answer 2

The holder of legal title who has duties to manage the property, report to the beneficiaries, and act in a prudent fashion.

Question 3

What are the five requirements for a valid trust?

Answer 3

1) Settlor (person who creates the trust and has legal capacity to do so)
2) Delivers trust property: must convey full legal title.
3) To a trustee (w/ legal capacity)
4) For the benefit of beneficiaries
5) With the intent to create a trust i.e. attachment of enforceable duties that can be supervised to the transfer of property.

Question 4

What if a trustee is not named in the trust creating document?

Answer 4

No trust fails for lack of a trustee. The court will appoint a suitable successor to execute the trust. CAVEAT: if settlor says only B can serve as trustee and B is not available, then court can’t appoint an alternate.

Question 5

How may a trustee accept appointment to trustee role?

Answer 5

1) Signature signifying acceptance of the trust and commencing duties of trustee.
2) Acceptance by conduct: by performing duties of the trust, trustee accepts responsibility.
BUT any person designated as trustee may w/o accepting trusteeship inspect trust property to determine potential liability under environmental law.

Question 6

Does a trustee have to post a bond?

Answer 6

No. Unless the court determines it’s necessary to protect the interests of the beneficiaries.

Question 7

What are the three kinds of beneficiary?

Answer 7

1) Private trusts: benefit individuals and requires definite, ascertainable beneficiaries. Can’t just say “to my best friends.”
2) Charitable trusts: can’t benefit identifiable individuals and must have purpose of benefiting “edu, health, religion, govt, public good” for an indefinite group. (No RAP)
3) Honorary trusts: for pets and cemeteries. Not for human individuals but for a particular private purpose.

Question 8

Does the RAP apply to trusts?

Answer 8

Yes ma’am. Make sure to discuss the CL RAP (vest w/in 21 years of a measuring life in being) and USRAP (actually vests w/in 90 years).

Question 9

What is the lawful purpose requirement?

Answer 9

Any trust that has the objective of 1) furthering commission of a crime or 2) calling for destruction of property was wasteful = invalid as against public policy.
EX: can’t encourage divorce, but can provide for spouse until remarriage. Partial restraints on marriage are okay as long as they are reasonable.

Question 10

What is the rule as to oral trusts in VA?

Answer 10

Oral trusts of all property both real and personal are VALID if the terms of the trust are proven by CLEAR AND CONVINCING EVIDENCE.

Question 11

What are the dominant non-probate wealth transfer devices in the U.S.?

Answer 11

1) Intervivos trust
2) Joint tenancy
3) Joint accounts
4) payable on death accounts

Question 12

What is an intervivos trust?

Answer 12

Requires all elements of a trust. May be revocable or irrevocable. BUT must be validly created during lifetime of settlor to be an effective non-probate transfer.

Question 13

Are intervivos trusts revocable and who can revoke?

Answer 13

All intervivos trusts presumed revocable unless expressly made irrevocable. A conservator of an incapacitated settlor or settlor’s guardian or agent under a durable power of attorney may revoke or amend a revocable trust distribution of trust property only 1) if expressly authorized by the trust or 2) if authorized by the court for good cause shown.

Question 14

What is a pour over will?

Answer 14

The will makes a bequest to an existing and valid intervivos trust. Property so bequeathed is added to and administered under the terms of the trust, including any amendments made to the trust after the will was signed.
VA statute allows intervivos trusts to receive life insurance and employee death benefits.

Question 15

What is self-declaration of trust?

Answer 15

Settlor names himself as trustee, is a beneficiary, and there is another remainder beneficiary. Settlor gets income and right to revoke for life, and upon death/incapacity, another trustee takes over and remaindermen take.

Question 16

If a trust is to be contested, when must it occur?

Answer 16

Contest of validity of a revocable trust must be brought w/in earlier of:

1) 2 years of settlor’s death, or
2) 6 mos. after the trustee sent the person commencing the judicial proceeding a copy of the trust instrument, the trustee’s name and address, and notice of time allowed for contesting trust.

Question 17

What is the trustee’s duty/liability when a trust is being contested?

Answer 17

Trustee may proceed to distribute trust property in accordance w/ terms of trust and not be subject to liability unless:

1) Trustee knows of a pending judicial proceeding contesting the validity of the trust, or
2) Potential contestant has notified trustee of a possible judicial proceeding and proceeding is in fact commenced w/in 60 days after the contestant sent the notification.

Question 18

What is the beneficiary’s duty/liability when the trust is being contested?

Answer 18

A beneficiary of a trust that is determined to have been invalid is liable to return any distribution received; no other liability.

Question 19

What is a durable power of attorney?

Answer 19

Authorizes another person to act on behalf of the principal. Power terminates on principal’s death, but 3d parties who act in reliance on a durable power w/o actual knowledge it has been revoked (principal has died) are protected.

Question 20

What are the unique features of the charitable trust?

Answer 20

1) Not subject to RAP
2) Must be for a charitable purpose
3) Must be in favor of an indefinite number of beneficiaries at large and can’t benefit private identifiable individuals
4) Enforcement of terms rests w/ attorney general (or settlor if she is alive).
5) When stated charitable purpose can’t be accomplished, it may be reformed, in a judicial proceeding, under cy pres “as near as possible”

Question 21

What happens if the particular charitable purpose becomes unlawful, impracticable, impossible to achieve or wasteful?

Answer 21

1) Trust doesn’t fail in whole or part
2) Trust property doesn’t revert to settlor or settlor’s successors in interest
3) Court may apply cy pres to modify or terminate the trust by directing that the property be applied or distributed in whole or in part in a manner consistent w/ settlor’s charitable purposes.

Question 22

May settlor’s heirs claim property under a resulting trust if charitable trust can no longer be accomplished and settlor mandates a resulting trust to his or her heirs?

Answer 22

NO. Resulting trust provision is valid only if 1) it is to go to settlor and settlor is still living OR 2) it may go to settlor’s heirs if fewer than 21 years have elapsed since the date of trust’s creation. Otherwise, cy pres applies.

Question 23

What is an honorary trust?

Answer 23

If no human or living beneficiary, trustee expected to do the honorary thing and provide for beneficiary even though beneficiary can’t complain.

Question 24

When does an honorary trust apply?

Answer 24

1) Only to animals alive during settlor’s lifetime can be beneficiaries. Trust terminates at death of last surviving animal.
2) Cemeteries or disposition of property to be used for maintenance or care of any cemetery or monument or other erections about such cemetery or burial lot.

Question 25

What is a constructive trust?

Answer 25

An equitable device used to remedy a bad act. Arises automatically and doesn’t require the necessary five elements of a trust.
EX: A kills B, his father who has no will. C and D are A’s children. They will take A’s share as though A predeceased B.

Question 26

When will the court find a constructive trust?

Answer 26

When someone who would otherwise take under a trust engaged in wrongful conduct and will be unjustly enriched if allowed to take. If but for a bad act by A, B would take, create a constructive trust in favor of B.

Question 27

What is a resulting trust?

Answer 27

1) Purpose of trust can’t be achieved because of impossibility, so the remaining assets of the trust result back to settlor.
2) Purchase money resulting trust: when A purchases land for B w/o any reason for doing so, a PMRT resulted and there is a presumption that A may demand return of land. May rebut presumption by clear and convincing evidence that this was a gift or loan of purchase price. BUT if A and B are related, presume there was a gift.

Question 28

What is a spendthrift trust?

Answer 28

A trust meeting all elements trust to which settlor added a clause to trust instrument that seeks to restrict the ability of a creditor from reaching the trust assets.

Question 29

What are the public policy exceptions indicating when a spendthrift trust will not be enforced?

Answer 29

1) Child support obligations;
2) Lawyer who provided legal services for protection of beneficiary’s interest;
3) Claims of U.S. govt, VA, county, city, or town;
4) Claims of state agency for reimbursement for public assistance;
5) Creditor may reach a mandatory distribution of income or principal if trustee hasn’t made the distribution w/in a reasonable amount of time.

Question 30

If a spendthrift trust provision is violated, may the beneficiary recover from creditor?

Answer 30

Not if the beneficiary participated in the breach of the trust terms: estoppel will apply.

Question 31

May creditors reach income after it has been distributed to beneficiary from a spendthrift trust?

Answer 31

Yes. Once income distributed, it is no longer subject to trust or its clauses. BUT creditor must file suit each time beneficiary receives a distribution i.e. remedies of garnishment or attachment are more efficient remedies.

Question 32

May settlor create a qualified self-settled spendthrift trust and retain right to receive future payments from trust at an independent trustee’s discretion and have trust immune from claims of settlor’s creditors?

Answer 32

In VA, yes as long as:

1) Trust irrevocable during settlor’s lifetime
2) Trust complies w/ state law applicable to trust validity and there’s a spendthrift clause
3) Qualified trustee who is legally authorized to participate in trust business and management in VA
4) When distributions are made to settlor there must also be at least one other beneficiary or distributee under the trust
5) Settlor has no right to disapprove of trust distributions.

Question 33

What words are required to create a spendthrift trust?

Answer 33

No specific words are necessary, but to the extent a beneficiary’s interest isn’t subject to a spendthrift provision, court may authorize a creditor or assignee of beneficiary to reach beneficiary’s interest by attachment.

Question 34

What are the trustee’s obligations?

Answer 34

Can’t perform any action in reference to trust that appears to benefit the trustee or someone close to the trustee. No self-dealing unless beneficiary consents to an action that would otherwise be self-dealing. There is no consent if consent induced by improper conduct or beneficiary was unaware of rights and material facts.

Question 35

What are the five things trustee cannot do because of his fiduciary obligations?

Answer 35

1) Can’t buy or sell trust assets to himself.
2) Trustee can’t borrow trust funds.
3) Trustee can’t loan funds to the trust.
4) Trustee can’t profit from serving as trustee.
5) Corporate trustee can’t buy its own stock as a trust investment.

Question 36

When do self-dealing rules apply?

Answer 36

To loans or sales to a relative, and to a business entity of which trustee is an officer, employee, partner, or principal SH.

Question 37

What is the SOL for actions against a trustee?

Answer 37

1) One year if trustee gives beneficiary a report (accounting) that a) discloses facts that show existence of a potential breach of trust and b) informs beneficiary of the time allowed for commencing an action.
2) In all other cases, 5 years after the first to occur of a) trustee’s removal, resignation or death, b) termination of beneficiary’s trust interest, or c) termination of trust.

Question 38

May a settlor authorize trustee to waive self-dealing rules?

Answer 38

Yes, but settlor must be made fully aware of the consequences.

Question 39

What are the rules regarding trustee’s duties that settlor cannot waive?

Answer 39

1) reckless indifference tot eh purposes of the trust or the interests of the beneficiaries.
2) acts resulting from an abuse of a confidential relationship
3) can’t limit requirement that trust can’t be created for illegal purpose, require trustee to commit illegal or anti-pub pol act
4) eliminate duty of trustee to act in GF
5) exculpate trustee from liability for breach committed in bad faith, intentionally, or w/ reckless indifference to interest of beneficiary
6) limit SOL for commencing suit
7) limit power of court to exercise its jurisdiction to modify or terminate a trust, to remove a trustee, to require fiduciary bond, or to deny a trustee’s compensation

Question 40

Other than duty of loyalty/self-dealing, what other duties does the trustee have?

Answer 40

1) act prudently
2) impartiality in investing and managing trust property
3) control and protect trust property
4) collect trust property and enforce/defend claims
5) segregate trust property from own property
6) keep adequate records
7) keep beneficiaries reasonably informed
8) furnish copy of trust instrument upon request of a beneficiary

Question 41

What is the 60 day notice provision and what does it require trustee to do?

Answer 41

W/in 60 days of accepting trusteeship, must notify beneficiaries of 1) trust’s existence, 2) identify settlors, 3) right to request a copy of trust instrument, 4) right to annual report, and 5) trustee’s name, address, and phone number.

Question 42

When is there a trust protector situation?

Answer 42

When settlor wants a corporate trustee to manage assets but permits another person (a trust protector) to make sensitive personal decisions.

Question 43

When there is a trust protector, what are the corporate trustee’s liabilities?

Answer 43

New law provides that 1) settlor must incorporate code provisions in trust instrument and 2) corporate trustee must avoid instances of willful misconduct or gross negligence in following trust protector’s direction. If this is met, corporate trustee shifts any potential liability for actions taken at direction of trust protector to the trust protector.

Question 44

What are the trustee’s powers?

Answer 44

If fee simple owner of property can perform an act in reference to the trust property, trustee may do so as well as long as there is no self-dealing EXCEPT as limited by settlor.

Question 45

What does the Uniform Prudent Investor Act mean for trustees?

Answer 45

It uses a portfolio theory of diversified investments, each element of which was deemed prudent not individually but in reference to the portfolio, the beneficiary’s needs, and terms specified by settlor at the time of investment not in hindsight.
**This is a change from old law which would find investing in certain companies w/o history too speculative.

Question 46

What is trustee’s obligation of prudence?

Answer 46

Trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements, and other circumstances of the trust. Must exercise reasonable care, skill, and caution.

Question 47

What is a trustee’s obligation if the trustee has been selected because of her special skills and expertise?

Answer 47

Trustee held to that level of expertise in the evaluation of prudence.

Question 48

What is the duty of impartiality between income and remaindermen beneficiaries?

Answer 48

Trustee must act impartially between the income and the remainder beneficiaries: income beneficiary seeks high income and remaindermen seek an increasing and valuable portfolio. Two ways to accommodate expectations of both 1) adjustment and 2) unitrusts.

Question 49

What is the trustee’s power of adjustment?

Answer 49

It allows trustee to allocate some of the capital gains income so as to promote fairness between income and remainder beneficiaries. Trustee must distribute income items to the income beneficiary and then add capital gains to the corpus of the trust, but capital gains may be allocated under certain conditions.
10% is a good standard for trustee under allocation.

Question 50

What are the considerations for when may be capital gains allocated?

Answer 50

1) To comply w/ purpose and expected duration of trust
2) Protect intent of settlor as to beneficiary interests
3) Net amount of ordinary income and capital gain
4) Circumstances of beneficiaries
5) need for liquidity, regular income
6) increase or decrease in value of trust assets
7) whether trust gives trustee power to distribute principal
8) effect of economic conditions
9) anticipated tax consequences of adjustment

Question 51

How should trustee distribute trust expenses?

Answer 51

Trustee fees: 1/2 charged to income; 1/2 charged to principal.
Ordinary expenses: charged against income
Capital expenses: charged against principal
Allocation: can allocate capital gains to income where appropriate.

Question 52

What is a unitrust?

Answer 52

Trustee may w/o judicial approval elect to make an income trust into a total return unitrust, in which income beneficiary automatically receives between 3-4% of the FMV of the trust regardless of income generated.
**Trustee must give notice to qualified beneficiaries.

Question 53

When may the trustee delegate powers under the trust?

Answer 53

May delegate all powers and duties including investment power. Trustee not liable for any actions taken by agent if trustee exercised reasonable care in:

1) selecting the agent
2) establishing the terms of the delegation AND
3) periodically reviewing the agent’s actions

Question 54

Is a trustee liable for torts?

Answer 54

1) Not personally liable on K properly entered into by trustee as long as trustee acted in fiduciary capacity, trustee disclosed fiduciary capacity, K is part of administering the trust, and K doesn’t state otherwise.
2) Personally liable for torts committed in course of administering the trust only if trustee is personally at fault.

Question 55

Is trustee liable in contract law?

Answer 55

No personally liable on K entered into on behalf of trust unless trustee’s fiduciary capacity isn’t disclosed in K (other party doesn’t know he’s dealing w/ trustee). Co-trustee has no liability for actions taken by other trustees if co-trustee dissents, doesn’t join the action, and notifies the other trustees.

Question 56

When may a trust be modified during settlor’s lifetime and how?

Answer 56

1) All trusts (after July 1, 2006) deemed revocable during settlor’s lifetime unless express language to contrary;
2) If settlor and all beneficiaries consent, court can order modification or termination of trust even if inconsistent w/ a material purpose of the trust;
3) If all beneficiaries but not a living settlor consent to modification or termination, court may consent to petition if continuance of trust isn’t necessary to achieve any material purpose of the trust.

Question 57

When may there be modification of a trust after settlor’s death?

Answer 57

1) All beneficiaries consent and court finds modification not inconsistent w/ a material trust purpose or continuation not necessary to achieve any material trust purpose.
2) Not all beneficiaries agree but court finds that if all beneficiaries agreed trust could be modified or terminated AND interests of a beneficiary who doesn’t consent will be adequately protected.

Question 58

When may trustee/court modify or terminate the trust w/o all beneficiaries’ consent?

Answer 58

1) Because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust;
2) Modify in way that achieves settlor’s tax objectives;
3) No trust purpose remains to be achieved OR purpose of the trust has become unlawful, contrary to public policy, or impossible to achieve;
4) Trust has value of less than $100K and trustee determines that trust value is insufficient to justify admin costs. Must give notice to interested parties.

Question 59

What is the rule for how to divide or combine trusts?

Answer 59

After giving notice to qualified beneficiaries, a trustee may w/o court approval merge two or more trusts into a single trust or divide a trust into 2+ trusts if the result materially doesn’t adversely affect achievement of the trust purposes.

Question 60

When may there be reformation to correct mistakes?

Answer 60

Court may reform terms of trust even fi terms are unambiguous if it is proved by clear and convincing evidence that both the settlor’s intent and the trust terms were affected by a mistake of fact or law.