Trusts

Question 1

Differences b/w private trusts & charitable trusts

Answer 1

A) private trusts must have ascertainable beneficiaries B) Charitable trusts enforced by a gov’t actor C) Charitable trusts must be formed for a charitable purpose D) Cy pres doctrine only applies to charitable trusts

Question 2

What is required for validity of a trust?

Answer 2

1) Capacity (same as for wills) 2) Intent (no precatory language) 3) Identifiable trust corpus 4) Ascertainable beneficiaries 5) Proper purpose (not against public policy)

Question 3

Mechanics of trust creation

Answer 3

1) via declaration 2) via testamentary transfer (irrevocable)

Question 4

secret v. semi-secret trust. Is extrinsic evidence admissible to prove existence?

Answer 4

1) secret trust – not shown on will, extrinsic evidence may NOT be admitted to prove existence 2) semi-secret trust – on face of will, doesn’t lay out necessary terms. Extrinsic evidence may NOT be admitted.

Question 5

Trustee’s powers can be…

Answer 5

express or implied

Question 6

Trustee’s duty to beneficiaries

Answer 6

ICE LAAD - Impartiality - Care - Earmark assets (keep trust property separate, no commingling) - Loyalty – no self dealing - Administer - Accounting - Diversification

Question 7

Defenses to claim of breach of trustee’s duties

Answer 7

1) exculpatory clause – can relieve trustee of liability falling short of negligence. Not valid for recklessness 2) Consent – beneficiaries may consent to an action resulting in a loss to the trust. If multiple Bs, all must consent 3) equitable remedies – laches/statute of limitations 4) trustee vote – if majority trustees vote and dissenting trustee documents dissent, he is protected

Question 8

What is NOT a good defense to breach of trustee’s duties?

Answer 8

offset profits. Can’t argue that a bad investment was offset by a gain elsewhere

Question 9

Remedies for breach of trustee’s duty

Answer 9

1) surcharge the trustee – i.e., sue him for damages. Can sue for actual damages and potential lost profits 2) rescind transactions that breach duty of trustee (e.g. sale of land) 3) compel trustee to stop – injunction 4) remove trustee

Question 10

Trustee’s liability to third persons

Answer 10

1) if sued for breach and a third party prevails, trustee may have to pay

Question 11

Liability of third parties to the trust

Answer 11

Trustee can sue others on behalf of the trust.

Question 12

In what situations can beneficiaries sue a third party?

Answer 12

1) if trustee fails to sue/refuses to sue, beneficiaries can sue 2) if trustee is at fault/knowingly participates w/ a third party and causes a loss, beneficiaries need not wait to sue 3) if trustee abandons the trust, beneficiaries can sue

Question 13

General rule for transfer of trust interest

CA rule

Answer 13

General rule: beneficiary may freely assign interest in income/principal from a trust.

CA DEFAULT = NOT freely transferrable

Question 14

Discretionary trust

Answer 14

trustee has sole discretion to control income distributions. Obliged NOT to make a distribution when it’s not in the B’s interest

Question 15

Spendthrift clause

Answer 15

DEFAULT IN CA provides trustee w/ sole authority to make decisions as to how the trust fund may be spent for the beneficiary’s benefit

Question 16

What is the main requirement for a valid spendthrift clause?

The effect of that requirement?

Answer 16

Must restrict both voluntary and involuntary transfers. can’t do it simply to avoid creditors

effect = beneficiary can’t transfer an interest in the trust, and a creditor can’t attach that interest. BUT once a beneficiary receives a distribution, creditors can reach that

Question 17

When can creditors break through a spendthrift clause?

Answer 17

1) fed’l gov’t for taxes 2) orders for child support 3) creditors who supply necessities of life (food/lodging)

Question 18

General rule for revocability fo trusts

Answer 18

Trusts are presumed revocable UNLESS expressly made otherwise. XC: any trust created by a will is irrevocable

Question 19

Rules for trust modification

Answer 19

1) settlor can modify a revocable trust (but not too much) 2) beneficiary usually can’t modify - XC: if B can show special circumstances and doesn’t harm a material purpose of the trust, doesn’t go against settlor’s intent, or harm other Bs, then court might agree to a modification

Question 20

Termination of a trust

Answer 20

1) settlor can terminate a revocable trust
2) Beneficiaries can only terminate early if

• unanimous consent of ALL Bs (sometimes impossible if unborn); AND
• doesn’t defeat purpose of trust

Question 21

Cy pres doctrine =

Answer 21

A court can change the benficiary of a charitable trust if it is no longer possible to benefit the intended beneficiary and the settlor had a general charitable purpose

Question 22

Resulting trust = ?

Answer 22

Implied in law from the presumed intent of the settlor. If settlor intends to create a trust but it fails for some reason, court may find that the trustee holds the property on resulting trsut for the settlor or his heir.

Also applies when value of trust property exceeds that needed for trust purposes.

Question 23

Typical situations for a resulting trust

Answer 23

1. trust names no beneficiaries
2. no provision made for a portion of trust property
3. trust purpose is invalid, insufficient, or excessive
4. trust purpose never described or unclear
5. carrying out material purposes of the trust has become impractical or illegal

Question 24

What is a purchase money resulting trust?

Answer 24

Where one party has provided all or party consideration for a propert purhase, but property title is in another’s name, purchase money resulting trust imposed in favor of party providing consideration

Question 25

What is the general rule for trust expenses?

Answer 25

for ordinary expenses, the funds come out of income from the trust’s assets. Extraordinary expenses are paid from the trust’s principal

Question 26

When is a constructive trust created?

Answer 26

When one party is unjustly enriched due to fraud, mistake, undue influence, or breach of fiduciary duty; party seeks to retake property title from wrongdoer; remedy where invalid oral agreement induced by fraud, or where defendant insolvent and damages not available; plaintiff must show all legal remedies inadequate; requires: (1) defendant holds legal title to specific property belonging to claimant; (2) confidential or fiduciary duty breached by defendant; and
(3) retention of property by defendant would result in unjust enrichment

Question 28

When is a trustee entitled to indemnity when sued by a third party?

Answer 28

Trustee entitled to indemnity IF: a) K was properly formed and b) breach was not a result of breach of trustee’s duties

Question 29

When will a trust reminate automatically?

Answer 29

• if the term expires,
• if it is revoked,
• or if the trust purpose is fulfilled

Question 30

When can a trustee terminate a trust in CA?

Answer 30

1. if the trust corpus is less than $20,000; AND
2. trustee is the only beneficiary