Trusts Flashcards
what type of trust is this? “Trustee to pay all income”
Mandatory Trust
Administrative Duties
- Duty to Inform Beneficiaries (About the nature of the trust property)
- Duty to Account
o For actions taken on behalf of the trust
o Report on the health of the trust portfolio
Will a trust fail for lack of a trustee?
no
Unfulfilled Material Purpose Doctrine: Claflin Doctrine
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)
general rule w/r/t alienability of trust income
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.
modern approach w/r/t principal and income
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
A trust is presumed revocable or irrevocable?
A trust is presumed irrevocable, unless the trust document states otherwise.
what type of trust is this? “Trustee to distribute law school tuition for the next three years”
Mandatory Trust
what type of trust is this? “Trustee to make payments for the health and care of beneficiary”
Discretionary Trust
Does RAP apply?
you bet it does
but not for charitable trusts
how can a still-living settlor terminate or modify a trust?
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
removal of trustees
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
Cy pres doctrine
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
Modification for Changed Circumstances: (settlor is dead)
o All beneficiaries must agree; and
o An unforeseen event has frustrated the purpose of trust
Trustee’s ability to delegate (common vs modern law)
o Common law: Trustee could not delegate authority
o Modern law: Permits delegation
what type of trust is this? “Trustee to make distributions for the support of the beneficiary”
Support Trust
Do trusts need to be expressed in writing?
no, oral trusts are valid
Exceptions: Must be in writing:
- Statute of Frauds (i.e., conveying real property)
- 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 - Minority: A valid trust ______________________ be in writing
req for beneficiaries
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
what must you determine in order to show a self-dealing transaction violated the duty of loyalty?
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
resulting trusts (general functions; purchase-money resulting trust; avoiding a resulting trust)
- 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
Duty of Impartiality
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
Asset Protection Trust examples and exceptions
(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
old rule w/r/t principal and income
The life beneficiary was entitled to income
The holder of the remainder interest was entitled to the principal
old rule and new rule for investments
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
