Trusts

Question 1

Who are the parties to a Trust?

Answer 1

1. ) Settlor
2. ) Beneficiaries
3. ) Trustee

Question 2

What are the elements of a Private Express Trust?

Answer 2

1. ) Intent
2. ) Property
3. ) Valid Purpose
4. ) Ascertainable beneficiaries

Question 3

What are the two types of Express Trusts?

Answer 3

1. ) Inter Vivos

2. ) Testamentary

Question 4

What is the difference between a Revocable vs. Irrevocable Trust?

Answer 4

A revocable trust can be terminated by the settlor at any time.

An irrevocable trust usually
cannot be terminated.

Question 5

What is the Majority Rule regarding Revocable and Irrevocable Trust?

Answer 5

a trust is presumed to be irrevocable unless it expressly states otherwise.

Question 6

What is a mandatory versus Discretionary Trust?

Answer 6

A mandatory trust requires the trustee to distribute all trust income. In a discretionary trust,
the trustee is given the power to distribute income at his discretion. The trustee does not abuse
his discretion unless he acts dishonestly or in a way not contemplated by the trust creator.

Question 7

How does the Rule Against Perpetuities apply to Trusts?

Answer 7

Trusts are subject to the Rule Against Perpetuities. Therefore, a trust may fail if all interests
thereunder may not vest within the applicable period of perpetuities (usually a life in being plus
21 years).

Some jurisdictions take a “wait and see” approach to the application of the rule, refraining from invalidating future interests until it is clear that they will not vest within the
perpetuities period.

Question 8

What does a Private Express Trust do?

Answer 8

A private express trust clearly states the intention of the settlor to transfer property to a trustee
for the benefit of one or more ascertainable beneficiaries.

Question 9

What must the settlor intend to make a trust?

Answer 9

The settlor must intend to make a gift in trust. The settlor’s intent may be manifested
orally, in writing, or by conduct

Question 10

What is Trust Property?

Answer 10

A valid trust must contain some property that was owned by the settlor at the time the trust
was created and was at that time transferred to the trust or to the trustee.

Any property 
interest, including real property, personal property, money, intangibles, partial interests, or 
future interests (whether vested or contingent) are sufficient.

Question 11

What is a Valid Trust Purpose?

Answer 11

A trust can be created for any purpose, as long as it is not illegal, restricted by rule of law or
statute, or contrary to public policy. Terms that violate public policy will be stricken from
the trust; the trust will not fail overall unless the removal of the terms is fatal.

Question 12

How are Trust provisions that restrain a first marriage handled?

Answer 12

Trust provisions that restrain a first marriage have generally been held to violate public policy. However, a restraint on marriage might be upheld if the trustee’s
motive was merely to provide support for a beneficiary while the beneficiary is single.

Question 13

Who are “Ascertainale beneficiaries”?

Answer 13

The beneficiaries must be identifiable so that the equitable interest can be transferred
automatically by operation of law and directly benefit the person.

Question 14

What are the exceptions to the need to have identifiable beneficiaries?

Answer 14

1. Indefinite class - A trustee can select a beneficiary from an indefinite class (such as 
“my friends”), unless the trustee must distribute equally to all members of the 
indefinite class (not valid).

2. Unborn children - Trusts for the benefit of unborn children are valid, even though
   the beneficiaries are not yet ascertainable at the time the trust is created.
3. Class gifts - Trusts for a reasonable definite class (such as my brothers, or my grandchildren ) will be upheld
4. Charitable trusts - Trusts that exist for the good of the public at large) must not have individual ascertainable beneficiaries.

Question 15

What is an inter vivos Trust?

Answer 15

An inter vivos trust is a trust created while the trustor is living that transfers some or all of
the trustor’s property into a trust. The trustor can designate himself or a third party as the
trustee.

Question 16

What is a pour over provision?

Answer 16

A pour-over is a provision in a will that directs the distribution of
property to a trust upon the happening of an event, so that the property passes according to the terms of the trust without the necessity of the will reciting the entire
trust.

Question 17

Can a pour over will our estate assets into a trust?

Answer 17

will may “pour over” estate assets into a trust, even if the trust
instrument was not executed in accordance with the Statute of Wills, as long as the trust
is identified in the will, and its terms are set forth in a written instrument.

Question 18

What are the other two points about “pour over Trusts” that you need to know?

Answer 18

A later amendment to the trust will apply to the assets passed to the trust by the
previously executed pour-over will.

• The amendment does not have to be executed with formalities prescribed for the
execution of a will. No witness or signature requirements!

Question 19

What is a testamentary Trust?

Answer 19

A testamentary trust is created in writing in a will or in a document incorporated by reference into a will.

The will containing the trust must meet the attested or holographic
will requirements.

Question 20

What is a charitable trust?

Answer 20

For a trust to be considered charitable, it must have a stated charitable purpose and it must exist for the benefit of the community at large or a class of persons the membership in which varies.

Question 21

What is considered a charitable purpose?

Answer 21

Purposes considered to be charitable include the relief of poverty, the advancement of education or religion, and other purposes benefiting the community at large or a particular
segment of the community.

Question 22

Who are indefinite beneficiaries?

Answer 22

The community at large, or a class comprising unidentifiable members, not a named individual or a narrow group of individuals, must be the beneficiary of a charitable trust

Question 23

We trust subject to the rule against perpetuities?

Answer 23

No, charitable trusts are not subject to the rule against perpetuities and may continue indefinitely

Question 24

What is the cy pres doctrine?

Answer 24

A court may modify a charitable trust to seek an alternative charitable purpose if the original one becomes illegal, impracticable, or impossible to perform.

Look for facts indicating that a trust was created for the benefit of
a charity that no longer exists (such as a retirement home, college or university, or zoo). There will usually be a similar charity that is in existence and it will ask the court to modify the trust and substitute it as the beneficiary of the trust.

Question 25

How do you determine specific or general intent trusts?

Answer 25

Look for facts indicating that a trust was created for the benefit of
a charity that no longer exists (such as a retirement home, college or university,
or zoo). There will usually be a similar charity that is in existence and it will ask
the court to modify the trust and substitute it as the beneficiary of the trust.

Question 26

If there is specific intent, may the court modify the trust?

Answer 26

Yes, and the trust will be terminated and become a resulting trust ( an implied trust that is held for the settlor of his/her heirs)

Question 27

What will a court do if there was general intent, regarding a cy pres trust?

Answer 27

If there is general intent, the court will substitute a similar charity

The modern approach is to presume a general intent and apply the cy pres doctrine

Question 28

To earn full credit on the exam concerning cy pres Trusts, what must you do?

Answer 28

Carefully analyze whether the trustor intended for the trust to only benefit one specific charity (such as the one specific retirement hone), or if the trustor intended to generally benefit charity ( all retirement homes)

Question 29

What is a resulting trust?

Answer 29

When a trust fails in some way or when there is an incomplete disposition of trust property, a court may create a resulting trust requiring the holder of the property to return it to the settlor or to the settlor’s estate.

When a testamentary trust fails, the residuary legatee succeeds to the
property interest. The purpose of a resulting trust is to achieve the settlor’s likely intent in
attempting to create the trust.

Question 30

What is an income beneficiary?

Answer 30

Receive income from the trust

Example: profits from a business held by the trust)

Question 31

What are remainder beneficiaries entitled to?

Answer 31

Entitled to trust principal upon termination of the trust

Question 32

When may creditors reach trust principal or income?

Answer 32

Only when such amounts become payable to the beneficiary or are subject to his demand

Question 33

What is alienation regarding trusts?

Answer 33

A beneficiary’s equitable interest in trust property is freely alienable (it can be sold or used as collateral for a loan) unless a statute or trust instrument limits this right.

Question 34

What are support trusts?

Answer 34

A support trust directs the trustee to pay income or principal as necessary to support the trust beneficiary.

Creditors cannot reach the assets of a support trust, except to the extent that a provider of a necessity to the beneficiary can be paid directly by the trustee.

Question 35

What is a discretionary trust?

Answer 35

The trustee is given complete discretion regarding whether or not to apply payments of
income/principal to the beneficiary.

If the trustee exercises his discretion to pay, then the beneficiary’s creditors have the same
rights as the beneficiary, unless a spendthrift restriction exists. If the discretion to pay is not
exercised, then the beneficiary’s interest cannot be reached by his creditors.

The beneficiary of a fully discretionary trust lacks standing to challenge the actions or inactions
of the trustee unless there is a clear abuse of discretion.

Question 36

How much discretion does the trustee of a mandatory trust have?

Answer 36

No discretion - the trust governs when Trust property is to be distributed

Question 37

What is a spendthrift trust?

Answer 37

A spendthrift trust expressly restricts beneficiary’s power to voluntarily or involuntarily transfer
his equitable interest (this is called a spendthrift clause).

Creditors usually cannot reach the trust interest, unless money is owed for child/spousal
support, or to basic necessities providers, or tax lien holders.

Question 38

What is the settlers power to revoke or amend?

Answer 38

If a settlor of a trust retains the power to revoke a trust, she also has a power to modify or
amend the trust. In the absence of such a reservation, modification or termination can occur only with the consent of all beneficiaries and if the proposed change will not interfere with a primary purpose of the trust.

Question 39

Under the majority rule, a trust is presumed to be what?

Answer 39

Irrevocable unless it expressly states otherwise

Question 40

Under th UTC, in a minority of jurisdictions, a trust is presumed to be what?

Answer 40

Revocable unless it expressly states that it is irrevocable

Question 41

Does an amendment to a trust need witnesses or signatures under the UTC?

Answer 41

No witness or signature is required, does not have to be executed with the formalities prescribed for the execution of a will.

Question 42

When does a trust terminate automatically?

Answer 42

When the trust purpose has been accomplished

Question 43

If a settlor dies, may a trust terminate?

Answer 43

Yes, if the settlor dies and the trust has no remaining interest, and all the beneficiaries consent.

Question 44

Does the trustee have the power to terminate?

Answer 44

No, unless the trust Fontaine’s express termination provisions

Question 45

How does a court deal with removal of a trustee?

Answer 45

A court can remove a trustee if the purpose of the trust would be frustrated by the trustees continuance in office of if the trustee violated a duty.

Question 46

Can a beneficiary disclaim their interest in trust property?

Answer 46

Yes, most states have enacted statutes that permit them to disclaim their interest.

Question 47

In most states, is a disclaimer effective for a beneficiary who wants to disclaim?

Answer 47

Not effective unless it is reduced to writing within nine months after the future interest would become “indefensible vested.”

If the income beneficiary of a trust disclaims here interest then the trust principal becomes immedialty distributable to the remainder beneficiaries of the trust if the remainder is vested.

Question 48

Are class gifts generally permissible?

Answer 48

Yes. The settlor can make “my children” the beneficiaries of the trust

Question 49

What is “lapse” of a gift?

Answer 49

In most states, anti-lapse statutes do not apply to nonprobate gifts, and, therefore, if a gift to
“issue” fails by reason of the non-survival of the issue, then children and further descendants of
the deceased issue will not take under the trust.

However, some states have enacted UPC § 2-707 or a similar statute, under which a substitute
gift is created in the descendants of the deceased issue. When such statutes govern, even
words of survivorship (e.g., “to those of my issue who are living”) will not cut off this substitute
gift.

Question 50

What powers are granted to the trustee?

Answer 50

The trustee has powers granted expressly in the trust, and powers necessary to act as a
reasonably prudent person in managing the trust, including the implied power to contract, sell,
lease, or transfer the trust property.

Question 51

How does the duty of loyalty apply to trusts?

Answer 51

Duty to administer trust in good faith (subjective standard) and to act reasonably (objective
standard) when investing property and otherwise managing the trust solely in the best interests
of the beneficiaries.

No self dealing

No conflicts of interest

Question 52

What is a “prohibited transaction” (self dealing) regarding trusts?

Answer 52

buying/selling trust assets, selling property between trusts
that trustee manages, borrowing from or making loans to trust, using trust assets to secure personal loan, engaging in prohibited transactions with friends/relatives, or
otherwise acting for personal gain through trustee position.

There is an irrebuttable presumption that trustee breached duty of loyalty when self-
dealing is an issue; no further inquiry into trustee’s reasonableness or good faith is
required because self-dealing is a per se breach.

Question 53

How does a trustee overcome an alleged conflict of interest?

Answer 53

By showing the transaction was fair or that the transaction would have been made by an otherwise independent party.

Question 54

What is the duty of prudence regarding trustees?

Answer 54

To treat the trust property as if it were his own.

Question 55

What is the “prudent investor rule” regarding trusts?

Answer 55

Requires trustee to act as a prudent investor would act when investing his own property (putting less emphasis on risk level); trustee must exercise
reasonable care, caution, and skill when investing and managing trust assets.

Question 56

What is the duty to diversify regarding trusts?

Answer 56

Trustee must adequately diversify the trust investments in order to
spread the risk of loss under a total performance portfolio approach, but not if administrative costs would outweigh the benefits.

Question 57

What is the duty to make property productive regarding trusts?

Answer 57

Pursue all possible claims, derive the maximum
amount of income from investments, sell assets when appropriate, secure insurance,
pay expenses, and act within a reasonable period of time in all matters.

Question 58

Would the failure of a trustee to attempt to rent out real property belonging to the trust, be a breach?

Answer 58

Yes, breach of duty to make property productive.

Question 59

What is the duty to be impartial regarding trusts?

Answer 59

Balance interests of the present beneficiaries (must not favor one of the present beneficiaries of the others, unless trust provides for it)

Example 5: Settlor’s trust states that Trustee is to equally distribute the rent
from an apartment to S’s three children, A, B, and C. A suffers from a health condition and is unable to work. Trustee distributes 2/3 of the rent from the apartment to A and only 1/3 to B and C. Trustee has breached his duty of impartiality

Question 60

What is the duty to disclose regarding trusts?

Answer 60

Disclose complete and accurate information about nature and extent of
the trust property, including allowing access to trust records and accounts.

Question 61

What is the duty to account regarding trusts?

Answer 61

Periodically account for actions taken on behalf of the trust so that
trustee’s performance can be assessed against the terms of the trust.

Question 62

What are the remedies for violation of trustees duty?

Answer 62

Lost profits, interests, and other losses resulting
from a breach of trust are trustee’s responsibility; beneficiaries may sue the trustee and
seek damages or removal of the trustee for breach of duties.

Question 63

The Uniform Trust Code and the Restatement (Third) both presume …

Answer 63

a general charitable purpose and authorize applying cy pres even if the settlor’s intent is not known

Question 64

May a court alter the rights of beneficiaries due to changed circumstances?

Answer 64

No, but it may interpret certain changes as frustrating to the trust purposes in order to make such modifications.

Question 65

A court may modify a trust under the doctrine of equitable deviation if …

Answer 65

events that were unanticipated by the trustee have occurred, and the changes would further the purposes of the trust. To the extent possible, the modification must be made in accordance with the settlor’s probable intention, and the court need not seek beneficiary consent to make the modification.