trusts

Question 1

trust

Answer 1

an arrangement under which the trustee holds legal title of property for the benefit of the beneficiaries

• -subject to fiduciary obligations
• -cannot use trust property as his own

Question 2

when must a trust be delivered and when does it not have to be delivered?

Answer 2

–delivered = for interviews trusts with third party as trustee –> must be a delivery of the subject matter of the trust

–no need to deliver = self-declaration or testamentary trusts

Question 3

Do you have to have intent to create a trust?

Answer 3

YES–> must intend to create a trust in order for it to be valid

• -cannot have precatory language such as “I hope, or I wish to create, or it’s my desire that you”
• • if precatory language is used then it’s the trustees property or money to do with as he pleases

Question 4

can you have a forfeiture clause based on if someone marries?

Answer 4

• -the trust is good but the forfeiture condition is void
• -this would be an unreasonable restraint on marriage –> violates public policy
• –> provisions which encourage divorce or the commission of crimes and provisions restraining the right to procreate or the free practice of religion

Question 5

what are the elements to create an express trust?

Answer 5

1) a settlor with capacity to convey
2) a present intent to create a trust relationship
3) a competent trustee with duties
4) a definitie beneficiary
and
5) the same person is not the sole beneficiary and sole trustee

Question 6

when is a oral trust valid

Answer 6

when the oral trust is of personal property

Question 7

what must the settler’s intent be?

Answer 7

the settlor’s intent must be that the trust take effect IMMEDIATELY, not at some future time –> although a future interest can be trust property

Question 8

how does a trustee accept?

Answer 8

a person accepts a trusteeship by
1) substantially complying with the acceptance terms in the trust instrument
or
2) accepting delivery of trust property, exercising powers or performing duties as trustee or indicating acceptance

Question 9

how do you remove a trustee and who can remove them?

Answer 9

• -a court can remove a trustee on its own motion or upon request by the settlor, beneficiary, or co-trustee
• -grounds for removal include
  a. a serious breach of the trust
  b. lack of cooperation among co-trustees
  c. unfitness, unwillingness, or persistent failure to administer
  d. a substantial change in circumstances

Question 10

how can a beneficiary disclaim a gift in a trust

Answer 10

• -a beneficiary may disclaim an interest by filling a written instrument with the trustee or with the probate court
• -most state disclaimer statutes require that a disclaimer be made within 9 months of the interest’s creation
• -time limit is not applicable to a beneficiary who is under 21 (but then will start clicking once the beneficiary turns 21)

Question 11

can a beneficiary be estopped from disclaiming

Answer 11

yes
– a beneficiary may be estopped from disclaiming if she has exercised any dominion or control over the internet or accepted benefits under the trust

Question 12

definite beneficiary requirement

Answer 12

–in private trusts–> there must be a definite beneficiary
–beneficiaries may be definite even though not yet ascertained (unborn)
BUUT…beneficiaries must be ascertainable by the time their interests are to come into enjoyment

Question 13

is a writing required for a trust?

Answer 13

for the trust of land yes!!
–a written instrument signed by the person entitled to impress the trust upon the property is commonly required under the statute of frauds

Question 14

secret trust

Answer 14

where. a will makes a gift that is absolute on its face, but was in fact made in reliance on the benhfeificary’s promise to hold the property in trust for another
- -the intended beneficiary may present extrinsic evidence of the promise
- -must prove by clear and convincing evidence to create a constructive tryst in favor of the intended beneficiary

Question 15

semi-secret trust

Answer 15

the will makes a gift in trust but fails to name the beneficiary

• -the gift fails and the trustee holds the property on a resulting trust for the testator’s heirs
• -extrinsic evidence not allowed

Question 16

charitable trust differs from private trust in three distinct ways

Answer 16

• • must have indefinite beneficiaries
• -it may be perpetual
• –the cy pres doctrine applies

Question 17

charitable trusts

Answer 17

• -must have a charitable purpose considered to benefit the public
• -ex: relief of poverty, advancement of sciences, education, religion, the promotion of health, and the accomplishment of governmental purposes
• -suits to enforcea charitable trust can be brought by the settlor, the beneficiary, of the state AG’s

Question 18

cy pres

Answer 18

“as near as possible”

• -when a charitable purpose selected by the settlor is impracticable, unlawful, no longer exists, or is impossible to achieve, the court may select an alternative under the cy pres doctrine
• -ascertain the settlor’s primary purpose and try to stick to that as near as possible

Question 19

honorary trusts q

Answer 19

PETS!!

• -trusts that are established for the benefit of pets or for the maintenance of burial places
• -trust property may be applied ONLY to carry out the terms of the trust
• –typically the RAP applies here (21 years)
• -the trust terminates when the animal dies

Question 20

can a trust beneficiary transfer his gift in a trust?

Answer 20

yes– absent a statute or trust instrument stating otherwise, a beneficiary may freely transfer his interests in the trust
–the assigned interest remains subject to all previous conditions and limitations

Question 21

spendthrift trust

Answer 21

–restricts or precludes the beneficiary from voluntarily or involuntarily transferring his interest in the trust and his creditors are precluded from reaching it to satisfy their claims

Question 22

discretionary trusts

Answer 22

• -the trustee is given discretion whether to apply or withhold payments of income or principle (or both) to a beneficiary
• -before the trustee decides to make payments to the beneficiary –> the beneficiary’s rights are unassignable and the beneficiary’s creditors cannot reach his trust property
• -if the trustee has notice of an attachment by creditors and he decided to make payments to the beneficiary, he must make these payments directly to the creditors unless the beneficiary’s interest is protected by a spendthrift clause

*** beneficiary has not right to payment that he can enforce against the trustee

Question 23

support trusts

Answer 23

• -directs the trustee to pay only so much of the income or principal (or both) is necessary for the beneficiary’s support
• -creditors right here are the same as with discretionary trusts
• —in deterring a beneficiary’s support needs, it is a question of the settlor’s intent as to whether the beneficiary’s other resources should be considered

***** A trust to “pay all of the income to A for his support” ==> NOT a support trust (says all of the income and “for his support” is just the motive)

Question 24

when will a trust terminate?

Answer 24

a trust will terminate automatically upon the expiration fo the term specified in the instrument or when all of the purposes of the trust have been accomplished or have become unlawful. impossible, or contrary to public policy

Question 25

revocation of a trust

Answer 25

under the UTC– a settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable
–however MANY states follow the traditional rule–> a trust is irrevocable unless the settlor expressly reserves the power to revoke or modify the trust

Question 26

when can a beneficiary modify or terminate a trust?

Answer 26

• -a trust may be terminated or modified upon the consent of the settlor and ALL beneficiaries even if the modification or termination conflicts with a material purpose of the trust
• –> a trust may also be terminated or modified on the consent of ONLY ALL THE BENEFICIARIES but only if NO MATERIAL PURPOSE of the trust would thereby be frustrated

*** ALL beneficiaries –> includes unborn and unascertained beneficiaries (party appointed to represent their interests) as well as beneficiaries of future interests no matter how uncertain or contingent

Question 27

when can a trustee terminate a trust?

Answer 27

a trustee can terminate a trust if the trust property is less than $50,000 and the amount is insufficient to justify the cost of administration as long as the trustee provides the qualified beneficiaries with notice

Question 28

what are the duties of the trustee?

Answer 28

–duty to administer the trust in Goode faith and in a prudent manner
–duty of undivided loyalty to the trust and its beneficiaries
(cannot engage in self-dealing with the trust or trust property)
–duty to report
–duty to separate trust property and keep records (no commingling)
–duty to enforce claims and defend trust from attack
–duty to preserve trust property and make it productive

Question 29

trustee investments of trust property

Answer 29

“prudent investor rule”–> only prudent investments are permissible regardless of the trust’s terms
“legal list” jx–> trust language giving the trustee broad discretion is likely to free the trustee from the list and permit investment similar to that under the prudent investor rule

• -a trustee myst exercise reasonable care, skill, and caution when investing and managing the trust assets
• -a trustee must DIVERSIFY the investments of the trust
• -a trustee must act exclusively for the beneficiary when investing and managing trust assets
• -investment decisions are looked and evaluated under the context of the ENTIRE PORTFOLIO (overall investment strategy)

Question 30

can the trustee delegate someone else to make the investment decisions?

Answer 30

yes..
BUT the trustee must act prudently in
–selecting the agent
–establishing the scope and terms of the delegation
–periodically reviewing the agent’s actions

* must be a professional with expert knowledge of investing (cannot be your nephew who dabbles in investments during late nights*

Question 31

remedies for a breach of the trust by the trustee

Answer 31

if a trustee commits, or is about to commit, a breach of his trust duties, the court may:

1) enforce specific performance of the trustee’s duties
2) enjoin the trustee from committing a breach of trust
3) compel the trustee to pay money or restore property
4) suspend or remove the trustee

Question 32

when is a trustee not liable for his breach of the trust?

Answer 32

a trustee is not liable to a beneficiary for the breach of the trust when:

1) he acted in reasonable reliance on the terms of the trust or
2) the beneficiary consented to the conduct, released the trustee from liability, or ratified the transaction so long as the beneficiary was not improperly induced

Question 33

when will a co-trustee be liable for the other co-trustee’s breach

Answer 33

generally, a co-trustee will not be held liable for the breach of his co-trustee if he did not join in the action AND he exercised reasonable care in preventing the breach of trust or compelling the co-trustee to redress the breach

Question 34

liability of third party to the trust

Answer 34

• -a BFP cuts off the beneficiaries equitable interests
• -a beneficiary or successor trustee can set aside transactions that are breaches of trust if the property is not in the hands of a BFP

Question 35

Uniform principal and income act (UPAIA)

Answer 35

• -applies to all trusts and estates unless the governing instrument provides otherwise
• -gives the trustee or personal representative ADJUSTMENT POWERS to reallocate investment portfolio returns
• -this act authorizes the trustee to characterize items such as capital gains, stock dividend, etc. as income if the trustee deems it appropriate or necessary to carry out the trust purpose

Question 36

what are the factors to be considered in order for the trustee or personal rep to adjust and reallocate the principle and income of the trust

Answer 36

• -the nature, purpose, expected duration of the trust
• -the intent of the settlor
• -the identity and circumstances of the beneficiaries
• -the needs for liquidity, regularity of income, and preservation and appreciation of capital
• -the nature of the trust’s assets
• -the net amount allocated to income under the other sections of the act and the increase or decrease in the value of the principal assets
• -the anticipated tax consequence of the adjustment

Question 37

receipts from entity

Answer 37

• -money received from an entity such as corporation is characterized as income unless the money is capital gains for tax purposes
• -all property other than money received from an entity (stock dividends) is characterized as principal
• –proceeds from a life insurance policy or other contract are allocated to principal
• -if the contact insures the trustee against a type of loss—> the proceeds are allocated to income

Question 38

what expenses are charged to the income

Answer 38

–1/2 of the regular compensation of the trustee and of any other person providing investment advisory or custodial services; 1/2 of all expenses of accounting, judicial proceedings and other matters

Question 39

what expenses are charged to the principal

Answer 39

–the remaining 1/2 of the compensation of the trustee and any person providing investment advisory or custodial services,; the remaining 1/2 of all expenses of accounting, judicial proceedings, and other matters affecting both income and remainder interests

Question 40

will substitutes (revocable inter vivos trusts)

Answer 40

• -if a person wants to transfer property at the moment of death– he must comply with formal requirements for making a will
• -the test for distinguishing a trust from a will is whether the transfer creates some PRESENT gift, even if that gift is of a future interest subject to divestment

Question 41

Totten trust

Answer 41

a bank accountant depositor declares himself a trustee of the account for a person who is to receive the money in the account at the time of the depositor’s death

• -depositor retains full control of the money int he account during his lifetime
• -revocable by: (1) the withdrawal of funds, (2) any lifetime act manifesting the intent to revoke, and (3) specific contradiction provisions in the will

Question 42

gifts causa mortis

Answer 42

• -a gift or personal property made in contemplation of immediately approaching death
• -donor must be suffering from a condition that realistically confronts her with a fear of death
• -subject to the same delivery and acceptance rules are inter vivos gifts
• -revocation can be done by an affirmative act indicating an intent to reinvest the ownership to the donor, by operation of law if the donor recovers, and by operation of law if the donee predeceases the donor

* gift is valid even if the donor dies of a different cause*

Question 43

constructive trusts

Answer 43

created by the courts to prevent unjust enrichment

Question 44

resulting trusts

Answer 44

created by the courts for reversionary interests and are based on the presumed intent of the settlor

Question 45

when will a resulting trust arise?

Answer 45

• -purchase money resulting trusts
• -resulting trust arising from the failure of an express trust
• -resulting trusts arising from an incomplete disposition of trust assets

Question 46

purchase money resulting trusts

Answer 46

• -is presumed whenever X (the beneficiary) furnishes the consideration (money) for the acquisition of real or personal property but, with X’s consent, title is taken in the name of Y (the trustee)
• -BOP on X to prove by clear and convincing evidence that he supplied the consideration to Y
• -Y can rebut the presumption by sowing that no trust was intended (payment was just a gift or a loan)

EXCEPTIONS:
–no trust presumption where parties are closely related

Question 47

when will a constructive trust be imposed

Answer 47

• -fraudulent promise
• -breach of promise by one in a confidential relationship
• -breach of promise by the decedent’s devisee or heir to hold property for the benefit of a third person
• -breach of promise by the decedent to devise property to one rendering services in reliance thereon
• -breach of promise to the debtor by the buyer at the foreclosure sale to hold the property for the debtor, causing the debtor to forgo bidding at the sale

Question 48

trustee’s duties to the constructive and resulting trust

Answer 48

• -passive trust

- -> trustee’s sole duty is to convey legal title to the beneficiary