Trusts

Question 1

Private express trust

Answer 1

Clearly states the intention of the settlor to transfer property to a trustee for the benefit of one or more ascertainable beneficiaries

Question 2

Private express trust – elements

Answer 2

1. Intent – to make a gift orally/in writing/by conduct
2. Trust property – identifiable and described with reasonable certainty
3. Valid trust purpose – any purpose not illegal or against public policy
4. Ascertainable beneficiaries – must be named
   - Exception – unborn children or reasonably definite class and charitable trusts

Question 3

Precatory trust

Answer 3

Expresses a hope or wish that the property transferred be used for the benefit of another rather than creating a legal obligation

• Must contain specific instructions to fiduciary
• Must be shown that absent imposition of a trust, there would be an unnatural disposition

Question 4

Inter vivos trust

Answer 4

• Delivery – settlor must part with dominion and control
• Writing – only for real property
• Parol evidence – only permitted if written agreement is ambiguous

Question 5

Pour-over trust

Answer 5

Provision in a will that directs the distribution of property to a trust upon the happening of an event (i.e., poured over from will into inter vivos trust)

• Valid as long as identified in the will and its terms are set forth in written instrument
• Passes outside reach of creditors as long as the trust was executed before or simultaneously with the will

Question 6

Totten trust

Answer 6

Designation given to a bank account in a depositor’s name as trustee for named beneficiary

Question 7

Living trust

Answer 7

Typically settlor names himself as trustee until death

• Can change successor trustee and beneficiaries until death
• Not protected from creditors or federal taxation

Question 8

Testamentary trust

Answer 8

Occurs when terms of trust are contained in writing in a will or in document incorporated by reference into a will

Question 9

Resulting trust

Answer 9

When a trust fails, a court will create a resulting trust requiring the holder of the property to return it to the settlor or his estate to prevent unjust enrichment

Question 10

Constructive trust

Answer 10

Used to prevent unjust enrichment if the settlor causes fraud, duress, undue influence, breach of duty, or detrimental reliance by a third party on a false representation

Question 11

Beneficiary’s rights – alienation

Answer 11

Beneficiary’s equitable interest in trust property is freely alienable unless a statute or trust instrument limits the right

Question 12

Support trust

Answer 12

Directs the trustee to pay income or principal as necessary to support the trust beneficiary
- Creditors cannot reach these assets unless providing a necessity to the beneficiary

Question 13

Discretionary trust

Answer 13

Trustee is given complete discretion regarding whether or not to apply payments of income or principal to the beneficiary
- If trustee exercises discretion, creditors have the same rights as a beneficiary

IL DIS: “trust decanting” is recognized; trustee may be able to make trust distributions to second trust instead of outright to beneficiary

Question 14

Mandatory trust

Answer 14

Trustee has no discretion; trust document explains in detail how and when trust property is to be distributed

Question 15

Spendthrift trust

Answer 15

Expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest
- Creditors generally cannot reach, unless for child or spousal support, basic necessities providers, and tax lien holders

IL DIS: may not be established for settlor’s own benefit

Question 16

Termination

Answer 16

A trust terminates

• Automatically only when the trust purpose has been accomplished;
• If settlor is deceased and all beneficiaries and trustee consent; or
• By a court if the purpose has been achieved or becomes illegal, impracticable, or impossible

Question 17

Revocability

Answer 17

A revocable trust can be terminated by the settlor at any time, and an irrevocable trust usually cannot be terminated

Majority rule (and IL) – trust is presumed to be irrevocable
- Right to modify or terminate must be expressly reserved by settlor

IL DIS: a will may revoke a trust unless the trust expressly provides for another method of revocation

Question 18

Unfulfilled material purpose

Answer 18

A trustee can block a premature trust termination if the trust is shown to have an unfulfilled material purpose

Question 19

Doctrine of equitable deviation

Answer 19

Court may modify terms of trust without seeking beneficiary consent

• Due to unanticipated circumstances if the changes would further the purposes of the trust; or
• The terms relate to management of trust property and existing terms would be impracticable or wasteful or impair the trust’s administration

Question 20

Allocations of principal and income

Answer 20

Income – life beneficiaries
Principal – remaindermen

Generally, amount received in exchange for trust property is allocated to principal; amount received for use of trust property is income

Question 21

Trustee – powers

Answer 21

Trustee has the powers necessary to act as a reasonably prudent person in managing the trust

Question 22

Duty of loyalty and good faith

Answer 22

Duty to administer the trust in good faith (subjective) and to act reasonably (objective) when managing the trust

Self-dealing – when trustee personally engages in transaction involving trust property, a conflict of interest arises between duties and own personal interest
- Irrebuttable presumption that trustee breached the duty of loyalty when self-dealing is an issue

Question 23

Duty of prudence

Answer 23

Trustee may delegate responsibilities if it would be unreasonable for the settlor to require the trustee to perform such tasks

• BUT, critical function concerning the property is discretionary and NOT delegable
• Can delegate management but must oversee the decision-making process

IL DIS: a trustee cannot generally delegate authority

Question 24

Powers of appointment

Answer 24

Usually given to beneficiary and enables holder to direct a trustee to distribute some of all of the trust property without regard to the provisions of the trust

Question 25

Class gifts

Answer 25

The share of a deceased class member is paid to that class member’s surviving issue