Trusts

Question 1

Validity and alienability

Answer 1

• VALID if it contains a trustee, beneficiaries, and assets.

ALIENABLE, DEVISABLE, and DESCENDIBLE unless terms expressly or impliedly provide otherwise.

Question 2

Revocable and irrevocable trust

Answer 2

• MAJ: Trust is presumed irrevocable unless expressly says otherwise.
• UTC: Presumed revocable unless expressly says otherwise.

NOTE: Mention both presumptions, apply majority.

Question 3

When is revocation effective?

Answer 3

When act manifesting intent to revoke occurs, even if trustees or beneficiaries learn of it later.

Question 4

Mandatory vs. discretionary trusts

Answer 4

• MANDATORY: Trustee must distribute all trust income, must follow instructions of the trust instrument.
• DISCRETIONARY: May distribute income at trustee’s discretion.
• • Abuse of discretion: NOT unless the trustee acts dishonestly or in a way not contemplated by the trust creator.

Question 5

RAP

Answer 5

Subject to RAP; some jxs use “wait and see” approach.

Charitable trusts are not subject to the Rule Against Perpetuities and may continue indefinitely. A trust can be created that calls for transfers of interest among charities, but it cannot direct the transfer of interest between a charitable beneficiary and a noncharitable beneficiary.

Question 6

Serving as trustee and sole beneficiary

Answer 6

An individual cannot serve as both trustee and sole beneficiary; would result in lack of enforcement power.

If trustee is sole beneficiary, title MERGES and the trust terminates.

Question 7

Qualifications of trustee

Answer 7

Must have

• CAPACITY to acquire and hold property
• CAPACITY to administer the trust
• Cannot be MINOR or INCOMPETENT (because they cannot administer)

NOTE: statutes may further limit who can serve.

Question 8

Duties to perform

Answer 8

Trustee must be given DUTIES to perform, or trust fails.

• Usually, intent of settlor to create trust + identification of trust property and beneficiaries is enough to INFER duties.

Question 9

Accepting the position of trustee

Answer 9

EITHER:

1. ) Substantially complying with method PROVIDED FOR in the terms of the trust,
   - OR-

2.) If terms do not provide method, or method is not made exclusive, by accepting delivery of the trust property, exercising powers as trustee, performing duties as trustee, or otherwise indicating acceptance.

Question 10

Declining

Answer 10

A designated trustee who does not accept the trusteeship within a reasonable time after knowing of the designation is deemed to have declined the trusteeship. A person designated as trustee may, without accepting the trusteeship, act to preserve the trust property if, within a reasonable time after acting, the person sends to a qualified beneficiary a written statement declining the trusteeship. Such person also may inspect or investigate trust property to determine potential liability under environmental or other law or for any other purpose. If a person does not accept the trusteeship, the court will appoint a successor trustee, unless the settlor expressed an intent that the trust was to continue only as long as a particular person served as trustee.

Question 11

Failure to designate a trustee

Answer 11

If settlor fails to appoint, the court will appoint one.

Question 12

Private Express Trust

Answer 12

ELEMENTS:

1. ) Intent
2. ) Trust Property
3. ) Valid Trust Purpose
4. ) Ascertainable Beneficiaries

Question 13

Determining intent in a private express trust

Answer 13

• The use of common trust terms (such as “in trust” or “trustee”) will create a presumption of intent to create a trust
• Intent is only required to be expressed in writing when the Statute of Wills (i.e., the jurisdiction’s requirements for the execution of a will) or the Statute of Frauds (UCC § 2-207) applies
• CONSIDER:
  i) The specific terms and overall tenor of the words used;

ii) The definiteness or indefiniteness of the property involved;
iii) The ease or difficulty of ascertaining possible trust purposes and terms, and the specificity or vagueness of the possible beneficiaries and their interests;
iv) The interests or motives and the nature and degree of concerns that may be reasonably supposed to have influenced the transferor;
v) The financial situation, dependencies, and expectations of the parties;
vi) The transferor’s prior conduct, statements, and relationships with respect to possible trust beneficiaries;
vii) The personal and any fiduciary relationships between the transferor and the transferee;
viii) Other dispositions the transferor is making or has made of his wealth; and
ix) Whether the result of construing the disposition as involving a trust or not would be such as a person in the situation of the transferor would be likely to desire.

The manifestation of intent must occur either prior to or simultaneously with the transfer of property. If the transfer does not take place immediately, then the intent should be manifested anew at the time of transfer. A promise to create a trust in the future is unenforceable unless the promise is supported by consideration sufficient for the formation of a contract.

Question 14

Ambiguous language

Answer 14

The intent to create a trust differs only slightly from the intent to make a gift. A determination must be made regarding whether a bifurcated transfer was intended and, if so, whether the intent was more than a mere hope or wish.

Question 15

Precatory trusts

Answer 15

If a donor transfers property to a donee using language that expresses a hope or wish (rather than creating a legal obligation) that such property be used for the benefit of another, then the gift may be considered a precatory trust and not an outright gift.

TWO REQUIREMENTS:

1. ) it must contain specific instructions to a fiduciary.
2. ) it must be shown that, absent imposition of a trust, there would be an unnatural disposition of the donor’s property because of familial relations or a history of support between the donor and the intended beneficiary.

Question 16

Trust property requirements

Answer 16

• If a trust that is invalid for lack of assets is later funded, a trust arises if the settlor re-manifests the intention to create the trust.
• The exception is a “pour-over” gift (see § II.A.2.a.4). infra), which is valid even if made before there is identifiable trust property.
• Must be described with reasonable certainty.

Question 17

Trust res vs. debt

Answer 17

The requirement of identifiable trust property, or res, distinguishes a trust from a debt. A trust involves the duty of one party to deal with specific property for another, whereas a debt involves the obligation of one party to pay a sum of money, from any source, to another.

If the recipient of the funds is entitled to use them as if they are his own and to commingle them with his own monies, then the obligation to pay the funds to another is a debt, not a trust.

Question 18

Valid trust purpose

Answer 18

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.

• MARRIAGE: 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.
• ALTERNATE TERMS: Situations in which one of several trust terms is violative of public policy, any alternative terms provided by the settlor will be honored, and, if there are none, the term will be stricken from the trust, but the trust will not fail altogether unless the removal of the term proves fatal.

Question 19

Ascertainable Beneficiaries

Answer 19

• Must be ascertainable (ID’able by name) so that equitable interest can be transferred automatically by operation of law. May refer to acts of independent significance. Can select from indefinite class, unless must distribute equally to all members of the indefinite class. If a beneficiary has died without the settlor’s knowledge prior to the creation of the trust, then the trust will fail for lack of a beneficiary. In this case, a resulting trust in favor of the settlor or his successors is presumed.
• UNBORN CHILDREN: Won’t fail even though child isn’t yet born.
• CLASS GIFTS: Reasonably definite class will be enforced (but entirely indefinite will not be)
• CHARITABLE TRUSTS: Do not need individual beneficiaries.

Question 20

Inter Vivos Trusts

Answer 20

• Lifetime transfers in trust.
• if a 3P trustee is named, delivery must accompany declaration (because settlor is parting w/ dominion and control over the trust property) (doesn’t have to if settlor is also the trustee)
• STATUTE OF FRAUDS: Declaration of trust must satisfy S/F for REAL PROPERTY, but not personal property.
• • EXTRINSIC EVIDENCE is permitted to clarify ambiguities.

Question 21

Constructive trust

Answer 21

• Modern trend: Constructive trust is imposed when the required writing is lacking under the S/F. Court then orders the purported trustee to distribute the real property to the intended beneficiaries outright (instead of in trust)

Question 22

Parol Evidence

Answer 22

Generally, evidence outside of the written agreement is permitted to show the settlor’s intent only if the written agreement is ambiguous on its face. A few states allow the introduction of parol evidence even if the writing is unambiguous.

Question 23

Pour-Over Trust

Answer 23

• Provision in will that directs the distribution of property to a trust upon the happening of an event, so that property passes according to the terms of the trust, without the necessity of the will reciting the entire trust.
  a) Validity

Under the common-law doctrine of “incorporation by reference,” if a will refers to an unattested document in existence at the time the will is signed, then the terms of that document could be given effect in the same manner as if it had been properly executed. Under this doctrine, for example, the terms of an amended revocable trust would not apply to the disposition of the probate estate assets because the amendment was not in existence at the time the will was executed. However, the necessity for this doctrine has been obviated under the Uniform Testamentary Additions to Trusts Act (UTATA), codified at the Uniform Probate Code (UPC) § 2-511. Under the UTATA, a 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. Furthermore, if these requirements are met, the pour-over bequest is valid even if the trust is unfunded, revocable, and amendable. UPC §2-511.

b) Revocation

If the trust is revoked, then the pour-over provision in the will must fail.

Question 24

Totten Trust

Answer 24

5) Totten trusts

A Totten trust is not a true trust because there is no separation of legal and equitable title. Rather, it is a designation given to a bank account in a depositor’s name as “trustee” for one or more named beneficiaries. During the depositor’s life, the depositor retains complete control of the account, including the ability to make deposits and withdrawals for the depositor’s own benefit, and the amount in the account is subject to the claims of the depositor’s creditors. During the depositor’s life, the beneficiary has no rights in the account.

A Totten trust can be revoked by any lifetime act manifesting the depositor’s intent to revoke, or by will. Because the amount in a Totten trust can be devised, a Totten trust is distinguishable from a joint bank account, the proceeds of which pass by law at the death of one joint tenant to the other. If the depositor does not devise the amount in a Totten trust, it passes to the named beneficiaries.

Question 25

UTMA

Answer 25

Every state has enacted the Uniform Transfers to Minors Act (UTMA), which provides a convenient method by which an account can be set up for a minor with a custodian who is required to manage the account until the minor reaches age 21. Such an arrangement is not a true trust because the custodian does not hold legal title to the account.

Question 26

Life-insurance trust

Answer 26

A life-insurance trust provides for the payment of the proceeds from a life insurance policy upon the death of the insured to the trust, with the terms of the trust governing the recipients of the proceeds. Therefore, a life-insurance trust is not funded at its creation. Despite this lack of significant res, a life insurance trust is a valid trust. To avoid adverse tax consequences, the trust is the owner of the insurance policy and the trust is irrevocable.

Question 27

Living trusts

Answer 27

• living or revocable trust created primarily to avoid probate. Transfers some or all assets to revocable trust
• settlor generally named himself trustee and current beneficiary, and names a successor trustee, who upon the death of the settlor distributes assets.

Testamentary trusts occur when the terms of the trust are contained in writing in a will or in a document incorporated by reference into a will. Testamentary trusts must comply with the applicable jurisdiction’s Statute of Wills.

If a testamentary trust does not meet the requirements of the Statute of Wills, it may still be deemed a constructive trust or a resulting trust, depending on whether it is “secret” or “semi-secret.”

1) “Secret” trust

A “secret” trust is not a testamentary trust. It looks like a testamentary gift, but it is created in reliance on the named beneficiary’s promise to hold and administer the property for another. The intended beneficiary is permitted to present extrinsic evidence to prove the promise. If the promise is proven by clear and convincing evidence, then a constructive trust is imposed on the property for the intended beneficiary, so as to prevent the unjust enrichment of the “secret” trustee.

2) “Semi-secret” trust

A “semi-secret” trust is also not a testamentary trust. A semi-secret trust occurs when a gift is directed in a will to be held in trust, but the testator fails to name a beneficiary or specify the terms or purpose of the trust. In this situation, extrinsic evidence may not be presented, the gift fails, and a resulting trust is imposed on the property to be held in trust for the testator’s heirs.

3) Modern trend

Most jurisdictions still respect the common-law distinction between “secret” and “semi-secret” trusts. However, the modern trend and that adopted by the Restatement (Third) of Trusts, § 18, calls for the imposition of a constructive trust in favor of the intended beneficiaries (if known) in both “secret” and “semi-secret” trust situations.

Question 28

Charitable trust purpose

Answer 28

Purposes considered to be charitable include:

i) The relief of poverty;
ii) The advancement of education or religion;
iii) The promotion of good health;
iv) Governmental or municipal purposes; and
v) Other purposes benefiting the community at large or a particular segment of the community.

While a certain political party is not deemed to be a charitable beneficiary, those seeking to advance a political movement may be charitable beneficiaries. A determination as to whether or not a beneficiary is charitable involves an inquiry into the predominant purpose of the organization and the determination of whether or not the organization is aimed at making a profit.

The rules applying to charitable trusts are not applicable to those with both charitable and noncharitable purposes, unless two separate and distinct trust shares are capable of being administered, in which case the rules are applicable to the charitable share.

A charitable purpose can be found even if the settlor created the trust out of noncharitable motives.

The modern trend is to characterize a trust as charitable if possible.

Question 29

Charitable trust purposes

Answer 29

he 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. It is possible that a very small class could still qualify as a charitable beneficiary. Further, even though the direct beneficiary may be a private individual, a charitable trust may be found when the community at large is an indirect beneficiary of the trust; for example, when a trust is established to put a beneficiary through law school, but it stipulates that the beneficiary must spend a certain number of years of legal practice in the service of low-income clients.

Question 30

Cy Pres

Answer 30

In an effort to carry out the testator’s intent, under the cy pres doctrine, a court may modify a charitable trust to seek an alternative charitable purpose if the original charitable purpose becomes illegal, impracticable, or impossible to perform. The court must determine the settlor’s primary purpose and select a new purpose “as near as possible” to the original purpose.

Because the Rule Against Perpetuities is not applicable to charitable trusts, courts are called upon to apply cy pres often. The settlor’s intent controls, so if it appears that the settlor would not have wished that an alternative charitable purpose be selected, the trust property may instead be subject to a resulting trust for the benefit of the settlor’s estate.

Cy pres is not invoked merely upon the belief that the modified scheme would be a more desirable, more effective, or more efficient use of the trust property.

Question 31

Honorary Trusts

Answer 31

Honorary Trusts

An honorary trust is one that is not created for charitable purposes but has no private beneficiaries. The most common example is a trust for the care of a beloved pet. In the case of an honorary trust, the trustee is on her honor to administer the trust because there are no beneficiaries capable of enforcing its terms. Should the trustee fail to do so, a resulting trust may be imposed for the benefit of the settlor’s estate.

A common problem that arises in the context of an honorary trust is the attempted application of the Rule Against Perpetuities. Such application is sometimes circumvented by using the trustee’s life as the life in being, or by assuming that the trust will be exhausted before the perpetuities period has run.

Question 32

Standing to enforce a trust

Answer 32

The attorney general of the state of the trust’s creation and members of the community who are more directly affected than the general community usually have standing to enforce the terms of the trust and the trustee’s duties. Under UTC §405, a settlor also has standing to enforce the trust, even if she has not expressly retained an interest.

Question 33

Resulting Trust

Answer 33

The purpose of a resulting trust is to achieve the settlor’s likely intent in attempting to create the trust.

Resulting trusts may be imposed when there is:

i) A purchase-money resulting trust (i.e., title is taken in the name of one party (the holder), but some other party supplied the consideration), which creates a rebuttable presumption of unjust enrichment of the holder, unless:
a) There is a close familial relationship between the holder of the property and the purchaser; or
b) The purchaser manifests an intention to make a gift or loan to the holder;
ii) A failure of an express trust, either because the trust is void or unenforceable or because the beneficiary cannot be located, unless the trust provides for disposition of the trust property in cases in which the trust may fail; or
iii) There is an incomplete disposition of trust assets due to an excess corpus.

In the case of a purchase-money resulting trust, any valuable consideration other than money is sufficient so long as it is for the purchase of the property rather than for improvements, and the consideration is given at or before the time the trustee takes title. If the party claiming to be the beneficiary can prove by clear and convincing evidence that he supplied the consideration, then there is a rebuttable presumption that a resulting trust was created. However, the trustee may rebut that presumption by indicating that there was no intention to create a trust.

Modern courts will weigh the gravity of the unjust enrichment in making determinations as to whether or not to impose a resulting trust.

Question 34

Constructive Trust

Answer 34

Courts use constructive trusts 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.

There must have been wrongful conduct in order to impose a constructive trust. The tracing doctrine may be applied if trust property has already been sold or otherwise disposed of, allowing the beneficiary of the constructive trust to pursue the sale proceeds or other property received. In such a case, the constructive trust may be imposed either against the seller or against the buyer. However, a breach of a promise will not give rise to a constructive trust unless the promise is fraudulent, the breach is related to the devisee’s or heir’s promise to hold property for a third party, the breach is one in a confidential relationship, or there is a breach by the buyer to the debtor at a foreclosure sale. The burden of clear and convincing evidence is on the party seeking the constructive trust.

A constructive trust will almost always be imposed when one individual commits homicide and thereby benefits from his victim’s estate.

A party with unclean hands will usually be estopped from arguing for the creation of a constructive trust.

Question 35

Gift-Over Clause

Answer 35

Some trusts include gift-over clauses, which provide for a disposition of the trust property in the event the trust purpose fails. Jurisdictions are mixed as to the treatment of such clauses, but many will honor such a clause before imposing an equitable remedy.

Question 36

Rights of beneficiaries

Answer 36

• right to receive income or principal

Question 37

Retrictions on transferability

Answer 37

Generally, once trust property has been distributed to a beneficiary, any attempt to restrain transferability will be invalid.

Question 38

Alienability

Answer 38

• Beneficiary’s equitable interest in trust property is FREELY ALIENABLE unless law or trust instrument limits.

Question 39

Support trust

Answer 39

• Creditors cannot reach assets of support trust, except to extent that a provider of a necessity can be paid directly by the trustee.
• Distributions limited to that necessary for health, education, support, maintenance.

Question 40

Discretionary Trusts

Answer 40

• If trustee exercises discretion to pay, beneficiary’s creditor have SAME RIGHTS as beneficiary (unless SPENDTHRIFT RESTRICTION).
• Creditors CANNOT reach if discretion to pay is not exercised.
• Beneficiary cannot challenge trustee actions unless clear abuse of discretion.

Question 41

Spendthrift Trust

Answer 41

A spendthrift trust expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest. (Note that a trust restricting only involuntary transfers would be void as against public policy.) Spendthrift provisions are often inserted into trusts to protect beneficiaries from their own imprudence.

The spendthrift restriction applies only as long as the property remains in the trust, and it is inapplicable after it has been paid out to the beneficiary. An attempted transfer by the beneficiary in violation of the spendthrift restriction is effective only in that it provides authorization for the trustee to pay funds directly into the hands of the attempted transferee.

EXCEPTION: A beneficiary’s creditors usually cannot reach the beneficiary’s trust interest in satisfaction of their claims if the governing instrument contains a spendthrift clause prohibiting a beneficiary’s creditors from attaching the beneficiary’s interest. Although generally valid, most states allow certain classes of creditors to reach a beneficiary’s assets, notwithstanding the spendthrift clause.

The spendthrift clause exception applies to:

i) Children and spouses entitled to support;
ii) Those providing basic necessities to the beneficiary; and
iii) Holders of federal or state tax liens.

Additionally, courts will not enforce spendthrift clauses if the settlor is also the beneficiary, because this would provide an easy way for individuals to avoid their creditors. When the settlor of a trust is also a trust beneficiary, his creditors are entitled to the maximum amount that could be distributed from the trust to the settlor, even when withdrawals are discretionary or limited by a support standard. If it is unclear whether the settlor is also the beneficiary, the courts will examine who provided the consideration for the creation of the trust.

STATUTORY LIMITATION: f a trust contains a spendthrift clause, then the beneficiary’s interest is not reachable in bankruptcy proceedings. Further, the Employee Retirement Income Security Act (ERISA) mandates that an employee’s pension benefits cannot be reached by creditors.

Question 42

Trust Modification

Answer 42

A trust automatically terminates only when the trust purpose has been accomplished. Subject to the Claflin doctrine, discussed below, a trust may terminate by consent if the settlor is deceased or has no remaining interest in the trust, and if all of the beneficiaries and the trustee consent to the termination. The trustee by herself cannot terminate a trust. If all of the beneficiaries wish to terminate, but the trustee objects, most courts allow the trustee to block the termination if she can show termination would violate the settlor’s intent.

Question 43

Clafin Doctrine

Answer 43

Under the Claflin doctrine, a trustee can block a premature trust termination— NOTE: even one to which all of the beneficiaries have consented—if the trust is shown to have an unfulfilled material purpose.

Examples of a trust that intrinsically has an unfulfilled material purpose include discretionary trusts, support trusts, spendthrift trusts, and age-dependent trusts (those that direct the payment of principal to a beneficiary only after he attains a certain age). The most common example of a trust that has an unfulfilled material purpose is one in which the settlor provided for successive interests, in which case both the present and the future beneficiaries must agree in order for the trust to be terminated prematurely.

Question 44

Revocation by Will

Answer 44

The traditional rule required a trust to expressly provide for its revocability by will. The UTC authorizes trust revocation by will unless the trust expressly provides for another method of revocation.

Question 45

Revocation by divorce

Answer 45

Traditionally, a spousal interest created by a trust, unlike one created by a will, was not revoked upon divorce. However, the trend now is to treat a spousal interest under a trust similarly to one under a will.

Question 46

Equitable deviation

Answer 46

A court may modify the terms of a trust if 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. Uniform Trust Code § 412(a).

Even if circumstances have not changed in an unanticipated manner, a court may modify the terms of a trust that relate to the management of trust property if continuation of the trust on its existing terms would be impracticable, wasteful, or would impair the trust’s administration. Uniform Trust Code § 412(b).

Modification under the doctrine of equitable deviation does not require the court to seek beneficiary consent.

Question 47

Termination by court

Answer 47

A court may prematurely terminate a trust if the trust’s purpose has been achieved, or if it has become illegal, impracticable, or impossible.

Question 48

Settlor intent, modification

Answer 48

In most states, a settlor must expressly reserve the right to modify or terminate a trust in order to be granted such powers. 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.

Although it is possible for a court to modify or terminate a trust over the objections of the settlor, a modification or termination is much more likely to be granted if the settlor joins in the action, because the Claflin material-purpose test is satisfied under such circumstances.

Question 49

Trustee termination

Answer 49

A trustee has no power to terminate a trust unless the trust instrument contains express termination provisions.

Question 50

Traditional allocation of principal and income

Answer 50

Traditionally, money generated by trust property was income, and money generated in connection with a conveyance of trust property is principal.

Question 51

Modern allocation

Answer 51

• Focus on TOTAL RETURN.
• Trustee is empowered to recharacterize items and reallocate returns as deemed necessary to FULFILL TRUST PURPOSE, as long as reasonable and in keeping w/ trust instrument.

This is under the Uniform Principal and Trust Act, which does NOT allow the trustee to make such adjustments if he is also a trust beneficiary.

FACTORS:

• intent of settlor and language of the trust instrument
• nature, likely duration and purpose of trust
• identities and circumstances of beneficiaries
• relative needs for regularity of income, preservation and appreciation of capital, and liquidity.
• net amount allocated to income under other sections of the act; increase and decrease in value of principal assets
• anticipated effect of economic conditions on income and principal
• anticipated tax consequences of the adjustment

Question 52

Unitrusts

Answer 52

Under unitrusts, income vs. principal is not important because the beneficiary is entitled to fixed annual share of the value of the trust principal.

Question 53

Unproductive property rule

Answer 53

Under the traditional approach, if a trust asset produced little or no income upon the asset’s sale, then an income beneficiary was entitled to some portion of the sale proceeds under the theory that such portion represented delayed income thereon. With the emphasis having shifted to the total return from the entire portfolio and away from individual investments, this rule is now seldom applied.

So basically, if trust asset did not produce much income, income beneficiaries were entitled to proceeds as a sort of delayed income.

Question 54

Distribution of stock

Answer 54

• UPAIA and majority: treated as a distribution of principal. (same under Revised Uniform Principal and Income Act)
• RUPIA: trustee has limited power to allocate stock dividend between income and principal when corporation made no distributions to SHs except in the form of dividends paid in stock.

Question 55

Allocation of receipts

Answer 55

• Amounts received in exchange for property are allocated to principal; amount received for use of property is allocated to income.
• Proceeds from life insurance policies and other contracts in which trust/trustee is named as a beneficiary are allocated to principal (unless - K insures trustee against loss - if it does, allocated to income)
• Deferred Compensation Plan Proceeds - income if characterized as such by payor, and principal is so characterized. IF PAYOR DOES NOT CLASSIFY EITHER WAY - 10% is income, 90% is principal
• Liquidating Assets - Proceeds are 10% income, 90% principal.
• Mineral rights - 10% income, 90% principal

Question 56

Allocation of expenses

Answer 56

INCOME:

• 1/2 of regular compensation to trustee and service providers
• 1/2 of accounting, court, etc., costs
• ordinary expenses in entirety (interest, ordinary repairs, regular taxes)
• insurance premiums covering loss of trust asset

PRINCIPAL

• 1/2 regular compensation
• 1/2 of accounting, court, etc., costs
• payments on principal of any trust debt
• expenses of any proceeding that concerns an interest in principal
• estate taxes
• all payments re: environmental matters

Question 57

Multiple

Answer 57

TWO TRUSTEES:
- MAJ: Must act w/ unanimity, absent contrary intent

MORE THAN TWO:
MAJ: Agreement by majority is required.

Question 58

Enlarging powers of trustee

Answer 58

• Cannot be unilaterally enlarged by settlor after trustee has accepted office.
• But can have ADDITIONS CLAUSE, allowing settlor to increase trustee’s responsibilities (subject to rejection by trustee)

Question 59

Trustee powers

Answer 59

• Trustee can petition court for powers not expressly authorized w/in the trust document.
• MODERN TREND: Grant all those powers NECESSARY to act as a REASONABLY PRUDENT PERSON in maintaining trust.
• Power to sell/contract: IMPLIED POWER to contract, sell, lease, or transfer trust property (subject to settlor specifying certain cannot be sold, which then is subject to valid court order saying it’s necessary to SAVE TRUST)
• power to revoke: Settlor as trustee normally has power to revoke.
• power to withdraw: Some trusts give trustee power to withdraw income or principal to carry out purpose. Can also be conferred upon the settlor to do so without revoking.
• power to modify: settlor may include power to modify to give trustee power to change provisions to reflect settlor’s intent

Question 60

Liability of 3Ps for breach of trust

Answer 60

• CL: Purpose of trust was to preserve the property (presumed), so those who contract with trustee must CAREFULLY inspect trust property before dealing.
• MODERN: Presume purpose is to hold and manage property, provides greater protections.
• • UTPA: 3Ps must act in good faith and give valuable consideration. Protected as long as acting w/o ACTUAL KNOWLEDGE that action constitutes breach of trust.

Question 61

Trustee duties

Answer 61

• duty to administer in good faith in accordance with term and purposes and in the interest of the beneficiaries. (beneficiary may challenge and either set aside offending transaction or ratify and recover profits)

TEST: Did trustee act REASONABLY and IN GOOD FAITH?

Question 62

Self-dealing

Answer 62

Generally prohibited:

i) Buying or selling trust assets (even at fair market value);
ii) Selling property of one trust to another trust that the trustee manages;
iii) Borrowing from or making loans to the trust;
iv) Using trust assets to secure a personal loan;
v) Engaging in prohibited transactions with friends or relatives; or
vi) Otherwise acting for personal gain through the trustee position.

Question 63

Self-Dealing: Irrebuttable presumption

Answer 63

• Irrebuttable presumption that trustee violated DoL.
• EXCEPTION: Trustee can employee herself as an attorney and receive reasonable compensation, so long as no breach of trust.
• EXCEPTION: Settlor’s instrument, unanimous benefiiary consent, and court order can also authorize (but STILL must be reasonable and fair)
• EXCEPTION: Many state statutes permit bank trust department to deposit trust assets in its own banking department (and trustees are authorized to receive reasonable compensation for their services)
• NO FURTHER INQUIRY RULE: If self-dealing is established, court doesn’t need to look at reasonableness or good faith.

Question 64

Exculpatory clauses

Answer 64

Courts tend to strictly interpret attempted exculpatory clauses relieving trustees from liability. Complete exculpatory clauses are void as contrary to public policy, and limited clauses are only honored if there is no finding of bad faith or unreasonableness.

Exculpatory clauses that expressly authorize all investments do not protect a trustee who acts in bad faith or recklessly, but they do give trustees more room for minor lapses in judgment.

Question 65

Conflicts of Interest

Answer 65

If CoI but not self-dealing, assess under REASONABLE AND IN G/F STANDARD.

• UTC: Investment in a corporation in which trustee has an interest that might affect best judgment is a PRESUMPTIVE breach of DoL.
• • REBUT: Show fairness of terms, or would have been made by independent party.

Question 66

Legal attacks on trust

Answer 66

• Unless challenge is well-founded, trustee must defend trust against legal attacks.

Question 67

Abuse of discretion

Answer 67

In discretionary trust, occurs when trustee does not act in best interest of trust or beneficiaries.

Question 68

Duty of Prudence

Answer 68

• CL: cannot delegate discretionary responsibilities because contrary to settlor’s intent.
• MODERN: Trustee may delegate if unreasonable for settlor to require trustee to perform such tasks.
• • But if function goes to heart of the trust or is critical function concerning property, discretionary and non-delegable. Otherwise, ministerial and delegable.

Question 69

Duty to oversee decisions

Answer 69

• Even where delegation is prudent, must oversee the decision-making process.
• If not, responsible for ACTUAL LOSSES.

Question 70

Statutory lists

Answer 70

• PERMISSIVE: Trustee may invest in securities not on the list.
• MANDATORY: Must invest only in securities on the list.

Must use reasonable care, caution, and skill either way, and be expressly authorized to carry on the business.

Generally, unsecured loans and second mortgages are improper investments. Other investments such as stocks, bonds, government securities, and mutual funds are considered proper investments.

Question 71

Model Prudent Man Investment Act

Answer 71

• Some states

- Permits any investment that a prudent man would make, barring only speculative investments.

Question 72

Uniform Prudent Investor Act

Answer 72

• Requires trustee to act as a prudent investor would when investing his own property; use reasonable care, skill, and caution unless special skill (then, must utilize)

TO ASSESS FOR BREACH:

i) what were the distribution requirements of the trust?
ii) What were the general economic conditions?
iii) role that investmenrt plays in re: trust’s overall investment portfolio?
iv) Trust’s need for liquidity, regularity of income, and preservation or appreciation of capial

Question 73

Duty to diversify

Answer 73

Must adequately diverssity trust investments. Investing in only one mutual fund may be okay if fund is sufficiently diversified.

Question 74

Individual versus corporate trustees

Answer 74

A presumed greater expertise creates a higher standard for professional or corporate trustees than for individual trustees.

A trustee is justified in not diversifying if the administrative costs of doing so (including tax consequences or changes in controlling interest of a family-run business) would outweigh the benefits.

With respect to a revocable trust, a trustee’s duties are owed exclusively to the settlor. When a trust is irrevocable, acting in accordance with a settlor’s directives is inadequate to absolve a trustee from liability because the trustee’s obligations are owed to trust beneficiaries. However, when there are no income beneficiaries other than the settlor, the settlor may be treated as the effective owner.

Question 75

Duty to make property productive

Answer 75

The trustee must preserve trust property and work to make it productive by pursuing all possible claims, deriving the maximum amount of income from investments, selling assets when appropriate, securing insurance, paying ordinary and necessary expenses, and acting within a reasonable period of time in all matters.

Question 76

Commingling

Answer 76

MODERN TREND: Allow some commingling of trust funds and investment in mutual funds.

• PRESUMPTION: If property is lost or destroyed, presumption is that the lost or destroyed property is trustee’s and remaining belongs to trust (applies if commingled)
• PRESUMPTION: If one part increases in value and another decreases, PRESUME that increase value belongs to trust.

Question 77

Duty to make informed decision

Answer 77

Part of duty of prudence

MODERN: Assess investments based on the total performance of trust, not individual investments.
– Recognizes value of risk.

Question 78

Duty of impartiality

Answer 78

A trustee has a duty to be impartial in dealing with the beneficiaries of a trust. Impartiality does not require that the trustee treat each beneficiary equally, but it does require a trustee not to be influenced by the trustee’s personal favoritism or animosity toward individual beneficiaries in administering the trust. A trustee must balance the often-conflicting interests of the present and future beneficiaries by investing the property so that it produces a reasonable income while preserving the principal for the remaindermen

Question 79

Duty to sell

Answer 79

Regardless of what the trust document says about the trustee’s ability to retain trust assets, a trustee has a duty to sell trust property within a reasonable time if a failure to diversify would be inconsistent with the modern portfolio approach.

Any delay in disposing of under-performing or over-performing property creates a duty in the trustee to reallocate sale proceeds to those beneficiaries who were adversely affected by the delay.

EXAM NOTE: If a fact pattern indicates that either (i) the trust principal is appreciating but not generating a reasonable stream of income, or (ii) the trust is producing a good amount of income but the principal is depreciating, then your analysis should center on the duty of impartiality. In these situations, the trustee may be favoring one class of beneficiaries over the other.

Question 80

Duty to Disclose

Answer 80

A trustee must disclose to the beneficiaries complete and accurate information about the nature and extent of the trust property, including allowing access to trust records and accounts. The trustee must also identify possible breaches of trust and promptly disclose such information to the beneficiaries.

COPY OF INSTRUMENT: The UTC requires the trustee to promptly provide a copy of the trust instrument upon request, unless otherwise provided by the settlor in the instrument.

NOTIFICATION: Unless disclosure would be severely detrimental to the beneficiaries, the trustee must notify the beneficiaries if he intends to sell a significant portion of the trust assets.

ACCOUNT: A trustee must periodically account for actions taken on behalf of the trust so that his performance can be assessed against the terms of the trust. Trustees of testamentary trusts must account to the probate court. The UTC allows the settlor to waive the trustee’s duty to report to the beneficiaries, or the beneficiaries can waive the receipt of reports.

Waiver of the duty to report does not relieve a trustee from liability for misconduct that would have been disclosed by a report.

Question 81

Constructive fraud

Answer 81

Constructive fraud occurs if an accounting includes false factual statements that could have been discovered to be false had the trustee properly investigated.

Question 82

Duty of prudent administration

Answer 82

1. Duty to Secure Possession

The trustee must secure possession of the property within a reasonable period of time. In the case of a testamentary trust, the trustee must monitor the executor’s actions to ensure that the trust receives all of that to which it is entitled.

2. Duty to Maintain

In caring for real property, the trustee must take whatever steps an ordinary owner would take, including insuring, repairing, and otherwise maintaining the property.

3. Duty to Segregate

The trustee must separate his personal property (such as money and stocks) from trust assets to ensure that they cannot be switched if one outperforms the other. An exception to this duty to segregate applies when a trustee invests in bearer bonds.

Under common law, the trustee was strictly liable for damages to the trust property even if they were not caused by a breach of the duty to segregate. The modern trend holds the trustee liable only when the breach causes the damage to the trust property.

Question 83

Powers of appointment

Answer 83

Usually given to a beneficiary, a power of appointment enables the holder to direct a trustee to distribute some or all of the trust property without regard to the provisions of the trust. A special power of appointment allows the donor to specify certain individuals or groups as the objects of the power, to the exclusion of others. The power can be limited as to recipient and time of exercising.

1. Interests Appointable

The donee of a power of appointment can direct the appointment of an interest of equal or lesser value to that specified in the power given to her. Thus, if a donee can appoint trust assets outright, she can also give, for example, a life estate to a permissible beneficiary.

2. Ineffective Appointments

When one with a power of appointment makes an appointment that exceeds the grant given to him, other valid appointments are not invalidated, but the property or interest that was invalidly appointed passes to the “taker in default of appointment”—that party who would have received the interest in the absence of any appointment.

Question 84

Beneficiary right of enforcement

Answer 84

Lost profits, lost interests, and other losses resulting from a breach of trust are the responsibility of the trustee, and beneficiaries may sue the trustee and seek damages or removal of the trustee for breach. The trustee is also not allowed to offset losses resulting from the breach against any gains from another breach. If the beneficiaries joined the breach or consented to the trustee’s actions, however, equity will prevent the beneficiaries from pursuing an action against the trustee. Note, though, that a beneficiary’s failure to object to the breach does not rise to the level of consent.

Question 85

Co-trustee liability

Answer 85

Co-trustees are jointly liable, although the liability may be limited if only one trustee acts in bad faith or benefited personally from the breach. A co-trustee may be liable for breach for:

i) Consenting to the action constituting the breach;
ii) Negligently failing to act to prevent the breach;
iii) Concealing the breach or failing to compel redress; or
iv) Improperly delegating authority to a co-trustee.

Question 86

Liability for Predecessor and Successor Trustees

Answer 86

If a trustee knew of his predecessor’s breach and failed to address it or was negligent in delivering the property, then the trustee will be liable for his predecessor’s breach. Successor trustees can maintain the same actions as the original trustees.

Question 87

Liability for agents

Answer 87

i) Directs, permits, or acquiesces in the agent’s act;
ii) Conceals the agent’s act;
iii) Negligently fails to compel the agent to redress the wrong;
iv) Fails to exercise reasonable supervision over the agent;
v) Permits the agent to perform duties that the trustee was not entitled to delegate; or
vi) Fails to use reasonable care in the selection or retention of agents.

No clear-cut standard for the delegation of duties to agents exists, but it is clear that a trustee cannot delegate his duties in their entirety, but rather should limit the delegation to ministerial duties.

Question 88

Trustee’s liability to 3Ps

Answer 88

Unless otherwise specified in the trust instrument or in the governing contract, a trustee is personally liable on contracts entered into and for tortious acts committed while acting as trustee. If he acted within the scope of his duties, then he is entitled to indemnification from the trust.

Question 89

Liability of 3Ps to trust

Answer 89

When property is improperly transferred as a result of a breach of trust to a third party who is not a bona fide purchaser—one who takes for value and without notice—the beneficiary or successor trustee may have that transaction set aside. If, on the other hand, the third party is a knowing participant in the breach, then he is liable as well for any losses suffered by the trust.

Because only the trustee is allowed to bring a cause of action against the third party, the beneficiary is limited to bringing a suit in equity against the trustee to compel the trustee to sue the third party. In a situation in which (i) the trustee is a participant in the breach, (ii) the third party is liable in tort or contract and the trustee fails to pursue a cause of action, or (iii) there is no successor trustee, the beneficiary is given the option of directly suing the third party.

Question 90

Resignation

Answer 90

i) Providing at least 30 days’ notice to the qualified beneficiaries, the settlor (if living), and any co-trustees; or
ii) Obtaining court approval.

In approving a resignation, the court may issue orders and impose conditions reasonably necessary for the protection of the trust property. In addition, any liability of a resigning trustee or of any sureties on the trustee’s bond for acts or omissions of the trustee is not discharged or affected by the trustee’s resignation.

Question 91

Removal

Answer 91

A trustee may be removed by the court under the following circumstances:

i) The trustee becomes incapable of performing his duties;
ii) The trustee materially breaches one or more of his duties;
iii) A conflict of interest arises;
iv) A serious conflict between the trustee and one or more beneficiaries, or between co-trustees, develops; or
v) The trust is persistently performing poorly as a result of the trustee’s actions or inactions.

If any of the foregoing circumstances exist at the time the trustee is named and are known by the settlor, they will not necessarily suffice as grounds for removal.

Question 92

Actions upon removal/resignation

Answer 92

A trustee who has resigned or has been removed must expeditiously deliver the trust property within the trustee’s possession to the co-trustee, successor trustee, or other person entitled to the trust property. A trustee who has resigned or has been removed has the duties of trustee and the powers necessary to protect the trust propertyunless a co-trustee remains in the office of trustee or the court orders otherwiseand until the trust property is delivered to a successor trustee or other person entitled to the trust property.

Question 93

Future Interests

Answer 93

3. Grantor’s Future Interest

If a grantor retains a future interest, then it is a reversion, a possibility of reverter, or a right of entry.

4. Beneficiary’s Future Interest

If a beneficiary is given a future interest, then it is either a remainder or an executory interest.

Reversion

The most common future interest in the grantor is a reversion, in which the grantor has the right to possess the property after a finite estate ends. At common law, the three finite estates were the life estate, the estate for a term of years, and the fee tail.

If the grantor does not convey his entire interest but does not explicitly retain an interest, then a reversionary interest is implied.

Possibility of Reverter

When the grantor conveys a fee simple determinable estate, he is deemed to have retained a possibility of reverter, wherein the right to possession reverts to the grantor, and the fee simple estate automatically ends, upon the happening of a specified condition or event.

Right of Entry

When the grantor conveys a fee simple estate subject to a condition subsequent, then upon the happening of the condition subsequent, the grantor is deemed to have retained the right to enter or retake possession, but the fee simple does not end automatically.

Vested Remainder

A remainder is vested if the holder of the interest is ascertainable and there is no express condition precedent required before the interest becomes possessory. Under the common law, if a vested remainder is created by a trust, and the trust provides that should the beneficiary predecease the life tenant, the remainder should pass to the beneficiary’s child, then the remainder divests only if the beneficiary has issue. In contrast, if the beneficiary dies without issue, the remainder does not divest, and it passes to the beneficiary’s estate. Under the UPC, the result differs. Future interests under the UPC are contingent on the beneficiary surviving the distribution date. If the beneficiary does not survive the distribution date, then the interest does not vest and does not pass to either the beneficiary’s issue or the beneficiary’s estate.

Remainder as Class Gift

If the class is vested as to some but still open so that others can join it, then new members partially divest the previous members of the class in order to share the property equally.

Executory Interests

If someone other than the grantor holds an interest that is followed by either a vested remainder subject to divestment or a fee simple subject to an executory limitation, then that person holds an executory interest.

Question 94

Destructibility of Contingent Remainders

Answer 94

At common law, legal contingent remainders in real property were destroyed if they failed to vest before or at the moment the preceding estate ended. The modern trend abolishes the destructibility of contingent remainders.

Question 95

Acceleration Into Possession

Answer 95

A vested remainder accelerates into possession as soon as the preceding estate ends for any reason, such as the disclaiming of the estate by its holder(s), whereas a contingent remainder does not vest until all conditions precedent have been satisfied. If the income beneficiary of a trust disclaims her interest, then the trust principal becomes immediately distributable to the presumptive remainder beneficiaries of the trust, provided no one would be harmed by making a distribution to them earlier than it would have been made had the income beneficiary not disclaimed.

Question 96

When disclaimer is effective

Answer 96

Almost all states have enacted statutes that permit beneficiaries of trusts to disclaim their interest in the trust property. In most states, a disclaimer is not effective unless it is reduced to writing within nine months after the future interest would become “indefeasibly vested.” For a revocable trust or a testamentary trust, the future interest in a named beneficiary becomes “indefeasibly vested” when the settlor dies. When the holder of a future interest effectively disclaims that interest, the disclaimant is deemed to have predeceased the life tenant.

1) State law

Under the laws of some states, if a life tenant disclaims a gift, the disclaimer is effective as long as it is executed within nine months of the indefeasible vesting of the interest.

2) Federal tax laws

Under federal tax laws, the disclaimer must be executed within nine months of the creation of the interest in question to avoid estate or gift taxes.

Question 97

Generation-skipping transfer tax

Answer 97

An estate tax may be owed when a decedent passes property at his death. When a decedent passes property to remote descendants, a generation-skipping tax may be owed.

Question 98

Class Gifts

Answer 98

When a future interest in a trust is in the form of a gift to a group of individuals (i.e., a class gift), the class remains open and may admit new members until (i) at least one class member is entitled to obtain possession of the gift, or (ii) the preceding interest terminates (e.g., the holder of the present life interest dies).

1. Gifts to Surviving Children

Unless the governing instrument provides otherwise, the general rule is that the gift is expressly limited to the transferor’s surviving children, so that the surviving issue of a deceased child does not take.

a. Interpretation of “surviving”

When an inter vivos trust specifies the beneficiaries as the settlor’s “surviving children,” but there is an intermediary interest in another party for a term of years, the question arises whether “surviving” refers to the life of the settlor or the expiration of the other interest, should the settlor die before such expiration. Most states construe “surviving” as referring to the time of distribution, such that only those beneficiaries who survived to the end of the intermediary interest would receive. However, the minority, common-law approach is to vest the interests of the beneficiaries at the settlor’s death.

Under the UPC, if a class gift is limited in favor of a class of children, then only those children alive at the time of distribution are entitled to possession of the property. However, if a child who survives the settlor but then predeceases the time of distribution has surviving issue, that issue receives the share to which the parent would have been entitled had the parent been alive at the time of distribution (i.e., a substitute gift). UPC § 2-707(b)(3).

EXAM NOTE: This concept is a somewhat controversial one. If presented with a fact pattern involving a trust that creates a vested remainder in a person and then provides that the remainder should pass to that person’s child if the remainderman predeceases the life tenant, the result differs depending on whether the jurisdiction follows the UPC or common-law approach. Your discussion should include this fact and explain the difference. Under common law, the remainder is divested only if the remainderman has a child; otherwise, the remainder is not divested and passes to the remainderman’s estate. Under the UPC, however, the remainder vests only if the remainderman survives the life tenant. If he does not, then the remainder does not vest in him and therefore does not pass to the remainderman’s estate.

Question 99

Gifts to Issue/Descendants

Answer 99

The Restatement (Second) of Property presumes that the per capita distribution applies to gifts to “issue” in written instruments regardless of the state’s default approach to intestate distributions to issue. The majority approach follows the default rule of the jurisdiction.

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 100

Implied Gifts

Answer 100

When a trust that creates a class gift fails to specify the recipients of the gift in a contingency that actually occurs, e.g., the gift is made to “grantor’s nieces and nephews if grantor dies without issue” and the grantor in fact dies with issue, some courts will infer a gift to the issue, while others will simply revert the gift to the settlor’s estate.

Question 101

Adopted children

Answer 101

In the absence of a specific provision addressing whether adoptive children are to be considered children for the purpose of taking under a written instrument, the transferor’s intent controls.

At common law, adoptive children did not qualify as beneficiaries in written instruments. The modern trend is to presume that “children” includes adopted children absent a contrary intent. Under the UPC, an adopted person is included in the class gift in accordance with the UPC rules for intestate succession, which provide that an adopted person is the child of his or her adoptive parent.

EXAM NOTE: If a fact pattern indicates that a child is adopted, consider it a hint that the bar examiners want to see at least one sentence discussing that the adopted child is treated as a biological child for the purpose of a trust. In many cases, the date of the adoption is also a factor, in which case a discussion about when a class closes is likely warranted.

Question 102

Gifts to heirs

Answer 102

Qualification as an heir is determined upon the death of the transferor or at the time of distribution.

Question 103

Doctrine of Worthier Title

Answer 103

The Doctrine of Worthier Title is a rule of construction similar to the Rule in Shelley’s Case, except that it prevents remainders in the grantor’s heirs, and it still applies in some states. The presumption is of a reversion to the grantor.