Trusts

Question 1

what type of trust is this? “Trustee to pay all income”

Answer 1

Mandatory Trust

Question 2

Administrative Duties

Answer 2

1. Duty to Inform Beneficiaries (About the nature of the trust property)
2. Duty to Account
   o For actions taken on behalf of the trust
   o Report on the health of the trust portfolio

Question 3

Will a trust fail for lack of a trustee?

Answer 3

no

Question 4

Unfulfilled Material Purpose Doctrine: Claflin Doctrine

Answer 4

Beneficiary wants to terminate trust prematurely and trustee opposes termination; settlor is no longer alive

Rule: A trustee can block premature termination if the trust is still serving some material purpose

• Discretionary trusts
• Support trusts
• Age-dependent trusts (i.e., example above)

Question 5

general rule w/r/t alienability of trust income

Answer 5

A beneficiary’s equitable interest in trust property is freely alienable

A creditor cannot reach trust principal or income until such amounts payable to the beneficiary or the beneficiary can demand.

Question 6

modern approach w/r/t principal and income

Answer 6

Governed by a statute: Uniform Principal and Income Act (UPAIA)

o Trustee is to focus on the total return of the trust
portfolio
o Trustee can re-characterize and reallocate items as necessary to fulfill the trust’s purposes
o Allocations must be reasonable
o Factors that trustee must balance:
–intent of settlor and language of trust instrument
–nature, duration, and purpose of trust
–Identities and circumstances of the beneficiaries
–Anticipated effect of economic conditions
–Anticipated tax consequences

Question 7

A trust is presumed revocable or irrevocable?

Answer 7

A trust is presumed irrevocable, unless the trust document states otherwise.

Question 8

what type of trust is this? “Trustee to distribute law school tuition for the next three years”

Answer 8

Mandatory Trust

Question 9

what type of trust is this? “Trustee to make payments for the health and care of beneficiary”

Answer 9

Discretionary Trust

Question 10

Does RAP apply?

Answer 10

you bet it does

but not for charitable trusts

Question 11

how can a still-living settlor terminate or modify a trust?

Answer 11

o Can unilaterally terminate or modify if settlor expressly provided right to terminate in the trust documents

o If settlor did not expressly provide for termination or modification, can still terminate if settlor and all the beneficiaries consent. If modifying, must not interfere w/ the primary purpose of the trust

Question 12

removal of trustees

Answer 12

can be removed when the trustee has breached a fiduciary duty or grossly mismanaged the property

Removal likely to be granted:
o Trustee became incapable of performing duties (i.e., in jail, incapacitated, seriously ill)
o material breach of a duty
o Trustee develops a conflict of interest
o A serious conflict between a trustee and a beneficiary
o The trust persistently performs poorly as a result of the trustee’s action or inaction

trustee can resign with written notice to co-trustees and beneficiaries if settlor is alive

Question 13

Cy pres doctrine

Answer 13

Court can modify a charitable trust if the trust’s charitable purpose is no longer possible

to modify you need a general charitable purpose

RST and Uniform Trust Code presume a general charitable purpose

If there is no general charitable purpose, the property goes to a resulting trust

Question 14

Modification for Changed Circumstances: (settlor is dead)

Answer 14

o All beneficiaries must agree; and

o An unforeseen event has frustrated the purpose of trust

Question 15

Trustee’s ability to delegate (common vs modern law)

Answer 15

o Common law: Trustee could not delegate authority

o Modern law: Permits delegation

Question 16

what type of trust is this? “Trustee to make distributions for the support of the beneficiary”

Answer 16

Support Trust

Question 17

Do trusts need to be expressed in writing?

Answer 17

no, oral trusts are valid

Exceptions: Must be in writing:

1. Statute of Frauds (i.e., conveying real property)
2. A devise (i.e., trust created in a will)
   - Property is not transferred by the will, but rather by the trust
   - Trust must be in existence at time will was made or created simultaneously
   - Trust avoids probate
3. Minority: A valid trust ______________________ be in writing

Question 18

req for beneficiaries

Answer 18

There must be an ascertained beneficiary. Either a specific person or some criteria to determine who the person is

exceptions:

• unborn children
• class gifts
• charitable trusts

Question 19

what must you determine in order to show a self-dealing transaction violated the duty of loyalty?

Answer 19

nothing: governed by the no further inquiry rule
per se breach of the duty of loyalty

Even if the trust documents allow self dealing, the transaction must still be reasonable and in good faith for the trustee to avoid liability

Question 20

resulting trusts (general functions; purchase-money resulting trust; avoiding a resulting trust)

Answer 20

• Used when a trust fails
• Trustee must return property to the settlor or settlor’s estate
• Goal is to avoid unjust enrichment

• Purchase-Money Resulting Trust:
o Person One buys the property, but title is taken in Person Two’s name
o If Person Two is not the natural object of Person One’s bounty (i.e., not a close friend or relative), a court will create a purchase-money resulting trust

• Avoiding a Resulting Trust:
Create a gift over clause

Question 21

Duty of Impartiality

Answer 21

Trustee has a duty to balance the competing interests of present and future beneficiaries

Old Rule:

• Life beneficiary entitled to income
• Remainder holder entitled to principal

Modern Rule:

• The allocation between income and principal must be balanced to treat life tenants and remainder holders fairly
• Look at the total return
• Trustee can reallocate as long as it is fulfilling the trust purpose
• Must be reasonable

Question 22

Asset Protection Trust examples and exceptions

Answer 22

(Shields beneficiaries from creditors’ claims)

Pour-Over Trust: Testator’s creditors cannot reach the testator’s assets

Support Trust:
• Creditors cannot reach trust property, because beneficiary cannot demand payment
• Creditors can reach when trustee makes a support payment

Discretionary Trust:
• Creditors cannot reach trust property, because beneficiary cannot demand payment
• Creditors can reach when trustee makes a payment

Spendthrift Trust:
• Trust expressly restricts beneficiary’s power to alienate her interest
• Creditors cannot reach trust property until trustee makes a payment

Exceptions: Following creditors can reach trust property:
-Spousal or child support
-Those providing basic necessities to the
beneficiary
-Holders of federal or state tax liens

Question 23

old rule w/r/t principal and income

Answer 23

The life beneficiary was entitled to income

The holder of the remainder interest was entitled to the principal

Question 24

old rule and new rule for investments

Answer 24

Old Rule:

• Trustees were limited to a specific list of acceptable investments
• A trustee breached by making investments outside the list

Modern Rule: Prudent Investor Rule

• A trustee has discretion to invest and manage property as would a prudent investor
• Trustee is expected to diversify assets to spread the risk of loss
• Portfolio Approach: Measure the success of the portfolio as a whole

Question 25

what type of trust is this? “Trustee to distribute $1,000 every month”

Answer 25

Mandatory Trust

Question 26

when might duty of care be heightened?

Answer 26

Special skills:

• Trustee must use those special skills
• Trustee is held to a hightened standard

Question 27

Constructive Trusts

Answer 27

• A remedy used to prevent unjust enrichment if a third party takes advantage of the settlor
• Key characteristic: wrongful conduct (i.e., fraud, undue influence)
• Wrongful conduct must be directed toward settlor that caused the settlor to create the trust

Question 28

Types of remedial trusts, general characteristics

Answer 28

• resulting trust
• constructive trust

Passive in nature; Trustee has one duty: To convey the property back to the beneficiary

Question 29

Standing to enforce charitable trusts

Answer 29

o Attorney General’s office has standing to enforce the terms of a charitable trust
o Uniform Trust Code: Settlor also has standing

Question 30

Types of Trusts

Answer 30

• Mandatory Trust: Trustee must make distributions from the trust
• Discretionary Trust: Trustee may make distributions in her discretion
• Remedial Trust: Is a equitable remedy; created by operation of law
o Often called “passive trusts”
o Trustee only has one power – transfer the property