Trusts

Question 1

Administrative Duties of a Trustee

Answer 1

1. Duty to Inform Beneficiaries - about the nature of the trust property
2. Duty to Account: for actions taken on behalf of the trust and report on the health of the trust portfolio

Question 2

Duty of Impartiality of a Trustee

Answer 2

Trustee has a duty to balance the competing interests of present and future beneficiaries:

Modern Rule: The allocation between income and principal must be balanced to treat life tenants and remainder holders fairly

Question 3

Trustee Duty Towards Investments

Answer 3

Modern Rule: Prudent Investor Rule, A trustee has discretion to invest and manage property as would a prudent investor. Trustee is expected to diversify assets to spread the risk of loss. Measure the success of a portfolio as a whole.

Question 4

Trustee Duties - In General

Answer 4

A trustee has two duties: a duty of loyalty and a duty of care. The trustee must act in the best interest of the beneficiaries. Any beneficiary has standing to enforce these fiduciary duties.

Question 5

Duty of Loyalty of a Trustee

Answer 5

Objective standard: Did the trustee act reasonably?

Self-dealing is a breach of the duty governed by the no-further inquiry rule. If you have established self-dealing, the court does NOT inquire into the reasonableness or good faith. It’s a per se breach of the duty of loyalty.

IF the trust document allows self-dealing, the transaction must still be reasonable and fair for the trustee to avoid liability.

Conflict of Interest: Non-self-dealing transaction, assessed under reasonable and good faith test.

Question 6

Duty of Care

Answer 6

The care that a person of ordinary prudence would practice in the care of his own estate. A trustee should treat the trust property as his own. Special skill: trustee must use those special skills, trustee is held to a heightened standard.

Question 7

Delegation

Answer 7

Modern law - permits delegation. if it would be unreasonable for settlor to undertook such functions as investments decisions, but trustee has a duty to oversee the delegation.

Question 8

What determine’s a trustee’s powers?

Answer 8

The trust documents first. IF the trust documents are silent, then refer to statutory and common-law principles. Modern trend is to grant the trustee all those powers necessary to act as reasonably prudent person.

Since trustee owns legal title to the trust, they act as power.

Question 9

Is a trust revocable?

Answer 9

Presumed irrevocable, unless the trust document states otherwise

Question 10

Mandatory trust

Answer 10

Trustee must make distributions from the trust

Question 11

Discretionary trust

Answer 11

trustee may make distributions in her discretion

Question 12

Remedial Trust

Answer 12

AN equitable remedy created by operation of law, can be a resulting trust or a constructive trust

Question 13

Private Express Trust

Answer 13

-Settlor expressly states the intent to create a trust.

You need:

1. Intent - watch out for prefatory language
2. No writing needed unless subject to SOF (property is real property) or Created by will (trust me in existence at the time the will was made or created simultaneously)
3. Property - Trust res
4. Trust purpose - valid if not illegal or contrary to public policy
5. Beneficiaries - must be an ascertained beneficiary - by name or by class membership
   Exceptions for unborn children and class gifts (must be definite - have t be able to close the class) and charitable trusts
6. Trustee - but won’t fail without one

Question 14

Charitable Trust

Answer 14

• Must have a charitable purpose (relief of poverty, advancement of religion or education, promotion of good health, government or municipal purposes, other purposes benefiting the community at large or a particular segment of the community) Modern trend is to validate a charitable trust.
• NOT SUBJECT TO RAP

Cy Pres Doctrine - court can modify a trust if the trust’s charitable purpose is no longer possible. You need to establish a general charitable purpose, goal is to make the new purpose as close as possible to the original purpose.

If no charitable purpose, goes to a resulting trust.

AG’s office has standing to enforce the terms of the charitable trust and under the UTC, so does the settlor.

Question 15

Creation fo Express Trusts

Answer 15

Intervivos transfer: created during the settlor’s life. Settlor declares herself holder of the property in trust for beneficiaries, settlor also serves as trustee.

Deed of Trust: settlor conveys property to a trustee, settlor is not the trustee.

Testamentary transfer: created according to the terms of a will

Question 16

Remedial Trust

Answer 16

It is an equitable remedy created by operation of law. It is passive in nature and the trustee’s sole duty is to convey the property back to the beneficiary or to the beneficiary’s estate. Two types of remedial trusts: resulting and constructive.

Question 17

Resulting Trust

Answer 17

Used when. trust fails

Trustee must return the priority to the settlor or the settlor’s estate. Goal is to avoid unjust enrichment.

Question 18

Purchase-Money Resulting Trust

Answer 18

Person one pays for property, but title is taken in Person Two’s name. If Person Two is not the natural object of Person One’s bounty (not a close friend or relative), a court will create a PM resulting trust.

Question 19

How to avoid a resulting trust?

Answer 19

Use a gift-over clause. Ex: Oliver’s will provides that if Archer dies without children, the remaining trust property is to go to Henry or Henry’s heirs.

Question 20

Constructive Trust

Answer 20

A remedy used to prevent unjust enrichment if a third party takes advantage of the settlor. Key characteristic: WRONGFUL conduct (fraud, undue influence, duress) directed toward the settlor.

Question 21

Support Trust

Answer 21

Trustee makes distributions to support (discretionary trust) the beneficiary

Question 22

Alienability of Trust Property and Creditors’ Ability to Reach

Answer 22

A beneficiary’s interest in trust property is freely alienable, unless the trust instrument or a statute limits the right.

A creditor cannot reach trust principal or income until such amounts become payable to the beneficiary or are subject to the beneficiary’s demand.

Question 23

What kinds of trusts shield beneficiaries from creditor’s claims?

Answer 23

1. Pour-over trust - testator’s creditors cannot reach the testator’s assets
2. Support trust - creditors can’t reach trust property because beneficiary cannot demand payment, can only reach when payment is made
3. Discretionary rust - same
4. Spendthrift Trust: Trust expressly restricts beneficiary’s power to alienate her interest (voluntarily and involuntarily).

Creditors cannot reach trust property until trustee makes payment. Except for: Spousal or child support, those providing basic necessities to the beneficiary, holders of federal or state tax liens.

Question 24

How can a trust terminate?

Answer 24

1. Expires at the end of a stated term
2. Unfulfilled Material pUrpose: Claflin Doctrine - Beneficiary wants to terminate a trust prematurely and trustee opposes termination, and the settlor is no longer alive.

Rule: A trustee can block premature termination if the trust is still serving some material purpose.

3. Settlor is alive: can unilaterally terminate, if settlor expressly reserved the right to terminate in the trust documents, if the sector did not expressly provide for termination, can still terminate with the permission of all beneficiaries.

Question 25

Trust Modification

Answer 25

1. Settlor can do it if expressly reserved the right in trust document, if he did not, then all beneficiaries must consent and proposed change must not interfere with the primary purpose of the trust
2. Changed circumstances (settlor is dead): All beneficiaries agree and modification is consistent with material purpose of the trust; OR an unforeseen event frustrates the purpose of the trust

Question 26

Removal of a Trustee

Answer 26

Generally a remedy when the trustee has breached a duty or grossly mismanaged property.

Will likely be granted if: 1) trustee became incapable of performing duties; material breach of a duty; trustee develops a COL; a serious conflict between a trustee and a beneficiary; and trust persistently performs poorly because of trustee’s action r inaction

Question 27

Resignation of a Trustee

Answer 27

In CA, a trustee who has accepted the trust may resign only:

1) as prided in the trust documents
2) in the case of a revocable trust, with the consent of the person holding power to revoke the trust;
3) in the case of a trust that is not revocable, with the consent of all beneficiaries; or
4) pursuant to a court order

Question 28

Principal and Income

Answer 28

UPAIA Governs.

Trustee must focus n the total return of the trust portfolio. Allocation must be reasonable. Factors that trustee must balance: intent of settlor; nature, duration, and purpose of the trust; identities and circumstances of the benficiairies; anticipated effect of economic conditions; and anticipated tax consequences.

Question 29

Future interest Holders

Answer 29

• Has a right to future possession and has a present equitable interest in the trust property and has standing to challenge the trustee’s management
• If its a class gift, ex: to my son for life, then to my grandchildren, with my great-grandchildren taking their parents place. What if grandchild dies before the son with no kids?

Common law: dead grandchild estate’ takes the interest
Uniform Propate COde: future interests under a trust are contingent that the beneficiary survives until distribution - distribution is when the son dies, so grandchild’s estate takes nothing

*Contingent remainders and executory interests are subject to RAP - period of time in which the future interest must vest (lifetime plus 21 years)