Trusts

Question 1

What is a trust?

Answer 1

A fiduciary relationship where one party holds legal title to property for the benefit of another who holds equitable title.

Question 2

Express trusts

Answer 2

Created intentionally.

+ Private trusts - created to benefit private, non-charitable beneficiaries.

+ Charitable trusts - created for some charitable purpose or to benefit charitable beneficiaries.

Question 3

Implied trusts

Answer 3

Created by operation of law.

+ Constructive trust - imposed to deprive a wrongdoer from retaining improperly obtained property.

+ Resulting trust - imposed irrespective of wrongdoing when the circumstances require it.

Question 4

Can a sole trustee be the sole beneficiary?

Answer 4

NO - interests merge and trust collapses.

Question 5

Requirements for a Valid Trust

Answer 5

SETTLOR with requisite capacity who express a PRESENT intent to create a trust.

DELIVERY of specific trust property

ASCERTAINABLE BENEFICIARY - at least one.

PURPOSE - Must have a proper trust purpose

TRUSTEE

ACTIVE DUTIES imposed on trustee

Question 6

Satisfying delivery requirement of a valid trust.

Answer 6

+ delivered to trustee with intent to do it right now (not in the future)

+ must be some certainty over what is the trust property (can’t be expectation or unearned profits)

Question 7

Satisfying ascertainable beneficiary requirement of a valid trust.

Answer 7

+ determinable when trust is to be distributed

+ need some objective standard (reasonable basis) to identify beneficiaries.

Question 8

What is a proper trust purpose?

Answer 8

A trust can be created for any purpose except those that are illegal, fraudulent or against public policy.

Question 9

Inter Vivos Trust

Answer 9

Created during Settlor’s lifetime.

Trust property must be placed into the trust

Question 10

Testamentary Trust

Answer 10

Created by Settlor’s will.

Can include “pour over” provision. Directs the transfer of Decedent’s property into a trust established by either Decedent during his lifetime or another person.

Question 11

Totten Trust

Answer 11

Arrangement with a bank that allows the depositor to open a bank account in his own name, as trustee for other parties.

Beneficiary’s only right is to take whatever is left in the account when depositor dies (if beneficiary is still alive)

Question 12

Is the Rule Against Perpetuities applicable to trusts?

Answer 12

All private, non-charitable trusts must comply with RAP.

Common law RAP has been modified in MAJORITY of jxs – WAIT AND SEE approach: Whether a trust violates the RAP depends upon what actually happens rather than what might happen.

Question 13

What are the sources of a Trustee’s powers?

Answer 13

+ Trust instrument (expressly or by implication), AND

+ Statute or implied in law as necessary or appropriate to accomplish the trust’s purposes.

Question 14

What are a Trustee’s implied powers?

Answer 14

Unless expressly precluded by the trust, the trustee can settle/abandon claims against the trust, borrow money, sell/lease trust assets, and incur reasonable expenses necessary to maintain trust property.

Question 15

Trustee’s Duty of Loyalty

Answer 15

Trustee owes beneficiary a duty of LOYALTY and GOOD FAITH.

Prohibited from:

+ self-dealing with trust (even if done in good faith

+ obtaining a personal benefit other than the agreed-upon compensation

+ obtaining a personal benefit for a third party with respect to dealings involving the trust estate

Even if the trust has an exculpatory clause, the trustee still can’t breach the fair-dealing standard – any profits earned from self-dealing with the trust belong to the trust.

Question 16

Trustee’s duty to preserve and enhance trust property

Answer 16

Trustee has an AFFIRMATIVE DUTY to preserve and enhance trust property.

“Prudent Business Person” Rule:
Trustee must use the degree of skill, care, and prudence exercised by a reasonable business person to use trust property in a productive manner.

+ if trustee possess superior business expertise or is a professional fiduciary – higher standard. Held to the care, skill, and prudence of an individual or entity possessing those capabilities.

Question 17

Uniform Principal and Income Act

Answer 17

Specifies the distribution of receipts between trust principal and income.

+ Rents and cash dividends received are allocated to trust income, and then are distributed to trust’s income beneficiary.

+ Sales proceeds and stock dividends are allocated to principal of trust.

Question 18

What is the liability of a Trustee?

Answer 18

Trustee is liable for damages caused by his breach of duty.

+ If the trustee uses trust assets to buy property that increases in value – must return both trust property and increased value.

+ If the trustee breaches duty of care in investing – must personally repay the trust for its losses.

Question 19

May a beneficiary assign his rights?

Answer 19

A beneficiary may assign his right to receive income or principal from a trust (unless the trust provides otherwise).

Question 20

Spendthrift Trust

Answer 20

Beneficiary’s interest is inalienable, beneficiary cannot voluntarily transfer property and a creditor cannot attack it.

EXCEPTION - Cannot be used to defeat a claim of:
+ Alimony or child support
+ Creditors who furnish necessities to beneficiary
+ Government claims against beneficiary.

Question 21

Discretionary Trust

Answer 21

Trustee pays as much income as he believes desirable.

Beneficiary’s creditors can get a lien on the trust but cannot get trust property until a distribution is made.

Question 22

Support Trust

Answer 22

Distributions are based on the beneficiary’s needs.

Question 23

Termination of a Trust by the Settlor

Answer 23

COMMON LAW - Presume trusts are irrevocable unless stated otherwise.

UTC - Presume trusts are revocable unless stated otherwise.

Settlor may terminate an irrevocable trust only with consent of all the beneficiaries who must be living at that time.

Question 24

Termination of Trusts

Answer 24

By Settlor

By merger

By operation of law

By Beneficiaries after Settlor’s death.

Question 25

Termination of a trust by operation of law

Answer 25

Where:

+ the trust property has been consumed, destroyed, or lost;

+ the trust’s purposes have been fully accomplished; OR

+ accomplishment of the material purposes of the trust have become illegal, impossible, or impractical.

Question 26

Termination of a trust by beneficiaries

Answer 26

After Settlor’s death, if the material purpose of the trust has not yet been accomplished, the trust cannot be terminated before the time specified by the Settlor even if all of the beneficiaries agree.

Question 27

When does a Resulting trust occur?

Answer 27

Arises when an express trust makes an incomplete disposition of assets or fails after property has been conveyed to the trustee.

Settlor is left holding the equitable interest in a resulting trust.

Question 28

When does a Constructive Trust occur?

Answer 28

A trust is erected on the holder of specific property to redress wrongdoing or prevent unjust enrichment.

Question 29

Distinguishing characteristics of Charitable Trusts

Answer 29

+ Cannot have ascertainable beneficiaries (unless charitable organizations)

+ RAP doesn’t apply

+ When the trust purpose has been accomplished or has become impracticable or impossible to accomplish, the trust doesn’t necessarily end. Cy pres doctrine allows to continue.

Question 30

Requirements of a Charitable Trust

Answer 30

Must have a charitable purpose.

i.e. relief of poverty, advancement of education/religion, promotion of health, performance of gov. and municipal purposes, or other purposes beneficial to the community.

Beneficiaries must be indefinite.

Question 31

Cy Pres Doctrine

Answer 31

If exact charitable purpose cannot be carried out, court may direct the trust property be used for another charitable purpose that approximates Settlor’s intentions.

Cy pres may be used if:
+ Settlor’s specific charitable purposes becomes impossible, practicable, or illegal to carry out
AND
+ Settlor had, in addition to this specific charitable purpose, a general charitable intent.