Trusts

Question 1

Express Trust Definition

Answer 1

Legal device that allows an owner of property to make transfers of property and to have those assets managed by someone else

Question 2

Two kinds of express trusts

Answer 2

Lifetime- set up during the lifetime of the settlor

Testamentary- created by the settlor’s will

Question 3

Requirements for valid trust (8)

Answer 3

1) Settlor
2) Delivery of legal title
3) Property
4) Trustee
5) Beneficiary
6) Intent to create trust
7) Lawful purpose
8) Validly executed

Question 4

Requirements for settlor

Answer 4

1) Must be 18 or older

2) Must have capacity to enter into contracts

Question 5

Requirements for property that can be transferred in trust

Answer 5

1) Owned by settlor (not merely an expectancy)

2) Must be identified property, not subject to future determination

Question 6

Who can be a trustee?

Answer 6

For a lifetime trust- pretty much everyone

For a testamentary trust- anyone other than

a) Those under 18
b) Judicially declared incompetents
c) Convicted felons
d) Those incapable because of drunkenness, dishonesty, want of understanding, or improvidence

Question 7

Non-resident alien can serve as trustee only if

Answer 7

1) Related to settlor AND

2) A New York resident serves as co-fiduciary

Question 8

Intent requirement for trusts

Answer 8

Settlor must intend to create enforceable trust; precatory language insufficient

Question 9

Three implications of lawful purpose requirement

Answer 9

1) Trust cannot call for commission of a crime
2) Trust cannot call for destruction of property
3) Trust cannot have a condition against public policy

Question 10

Requirements for trust execution

Answer 10

Must be in writing signed by both settlor and trustee AND EITHER

1) Notorized
2) Signed by two witnesses

Question 11

All trusts are presumed ______

Answer 11

Irrevocable unless provided otherwise

Question 12

Pour-Over Gifts

Answer 12

Testamentary gifts to an existing revocable trust

Question 13

Requirements for pour-over gifts

Answer 13

1) Trust must be in existence or

2) Executed concurrently with the will

Question 14

Ways to make life-insurance proceeds payable to trust

Answer 14

1) Create unfunded revocable insurance trust and name the trustee as the policy beneficiary
2) Have the trust be testamentary and have the life insurance policy contract name “the trustee named in my will” as beneficiary

Question 15

Totten trust

Answer 15

Bank account in depositor’s name “as trustee for” a beneficiary (no particular words needed)

Question 16

Two things to remember about Totten trusts

Answer 16

1) Depositor makes deposits and withdrawals as he wishes during his lifetime
2) Beneficiary has no beneficial interest in the trust until depositor dies

Question 17

Ways to revoke Totten trust (4)

Answer 17

1) Withdraw all money in account
2) Express revocation during lifetime by making a writing (i) naming beneficiary (ii) and financial institution (iii) and having the revocation notarized (iv) and delivered to the bank
3) Revocation in a will (complying with express revocation requirements)
4) Death of beneficiary

Question 18

Change of beneficiary of Totten trust

Answer 18

Must comply with same requirements for revocation (making a writing (i) naming beneficiary (ii) and financial institution (iii) and having the revocation notarized (iv) and delivered to the bank)

Question 19

UTMA

Answer 19

Uniform Transfers to Minors Act

Question 20

Duties of UTMA custodian

Answer 20

1) Hold, manage, and invest the property under a “prudent person” standard
2) Pay over to the minor or for the minor’s needs what part of the property the custodian deems advisable
3) Pay what is left of the property to the minor when he turns 21 (18 for a pre-1997 gift)

Question 21

UTMA Tax Consequences

Answer 21

1) If donor names himself as custodian- amount of gift includible in estate for tax purposes
2) If donor names someone else, amount of gift is not includable

Question 22

Charitable Trust Key Points (5)

Answer 22

1) Must have indefinite beneficiaries in a reasonably large group (no specific, named beneficiaries)
2) Must be held for a charitable purpose
3) May be perpetual
4) Cy pres can be used to change the trust if stated purpose of charitable trust can no longer be accomplished
5) AG has duty of representing beneficiaries and is therefore an indispensable party (with standing to sue)

Question 23

Honorary Trusts

Answer 23

Trust where no human being is beneficiary

Question 24

Exceptions where honorary trust valid

Answer 24

1) Pet trusts for duration of pet’s life

2) Cemetery trusts (treated as charitable, so no RAP problem)

Question 25

Constructive trusts

Answer 25

Disgorges unjust enrichment. Trustee has a duty to convey the property to the rightful owner in equity

Question 26

Purchase Money Resulting Trust (rule and exceptions)

Answer 26

Purchaser buys property and has title put in someone else’s name. Generally not recognized.

Exceptions:

1) Creditors of purchaser will not be defeated by the transfer
2) If clear and convincing evidence that transferee originally planned to reconvey, constructive trust is created

Question 27

Spendthrift Rule

Answer 27

Prohibits voluntary and involuntary transfers of the beneficiary’s interest

Question 28

NY’s Spendthrift Rule automatically protects

Answer 28

Income interests in irrevocable trusts, not in principal

Question 29

Exceptions to spendthrift clause (5)

Answer 29

1) Supplier of necessaries
2) Federal tax liens
3) Child support and alimony
4) Excess income beyond that needed for support and education (LAST RESORT)
5) 10% levy for judgment creditors provided by CPLR

Question 30

Spendthrift protection does not apply to (3)

Answer 30

1) Principal interests
2) Interest retained by settlor
3) Revocable trusts

Question 31

Modification of trust only permitted where

Answer 31

The objectives of the trust would be defeated or substantially impaired if the trust is not modified

Question 32

Claflin doctrine

Answer 32

Purpose of the trust overrides specific directions

Question 33

Invasion of Principal

Answer 33

Court can authorize where income is not enough to carry out the settlor’s purpose

Question 34

Terminability of Irrevocable Trust

Answer 34

Trustee can terminate with consent of all beneficiaries in being (requires them to be born)

Termination of trust by beneficiaries- Requires that all the beneficiaries consent and there is no further trust purpose to be served (based on Claflin)

Spendthrift trusts may not be terminated

Question 35

Trustee’s powers are controlled by ______

Answer 35

New York Fiduciary Powers Act (FPA)

Question 36

Trustee may not (3)

Answer 36

1) Engage in self-dealing
2) Borrow money
3) Continue a business

Question 37

Prohibitions of self-dealing (5)

Answer 37

1) Borrow trust funds
2) Lend money to the trust (any interest earned must be returned and security given is invalid)
3) Cannot buy or sell trust assets to himself
4) Cannot profit from serving as trustee (including taking advantage of confidential information)
5) Corporate trustee cannot buy its own stock as a trust investment

Question 38

Affirmative duties on self-dealing (2)

Answer 38

1) Segregate assets from personal assets

2) Earmark trust assets by titling them in trustee’s name

Question 39

Remedies for breach of fiduciary responsibility

Answer 39

1) Beneficiary can sue to remove the trustee
2) Beneficiary can ratify the transaction and waive the breech
3) Beneficiary can sue for any loss

Question 40

Actions against a 3rd party for trustee self-dealing

Answer 40

Cannot recover if 3rd party was BFP (will be BFP unless he knows that he was dealing with a trustee and that there is self-dealing)

Question 41

Exculpatory clauses for trustee misconduct

Answer 41

Can be used for lifetime trust, not for testamentary trust

Question 42

Personal Liability of Trustee in Contract

Answer 42

If signed only on behalf of trust, no personal liability

If signed personally and merely mentioned trust, personal liability imposed

Question 43

Where there is personal liability for trustee in contract, he can recover if

Answer 43

1) Contract was within the powers of the trustee AND

2) Was acting in the course of proper administration of the trust

Question 44

Personal Liability for Trustee in Tort

Answer 44

Personally liable for all torts by him or his employees

Question 45

Trustee can seek reimbursemet from trust in tort if

Answer 45

1) Trustee was acting within his powers AND

2) Trustee was not personally at fault

Question 46

Trustee’s investment powers governed by

Answer 46

Uniform Prudent Investor Act

Question 47

Under UPIA, trustee can pursue the

Answer 47

modern portfolio where he creates a “custom-tailored investment strategy

Question 48

Two Key factors under UPIA

Answer 48

1) Trustee must consider the role each investment plays within the overall trust portfolio
2) Trustee must consider the expected total return from income and capital gain

Question 49

NY Rule Against Suspension

Answer 49

Any interest is void if it suspends the power of alienation for a period longer than lives in being plus 21 years, that is there are no persons who together could transfer a fee simple absolute

Question 50

Suspension of alienation is a concern where

Answer 50

1) Spendthrift income interests are in the trust

2) Life estate is create in an unborn, or an open class may possibly included unborn persons