Trusts and Future Interests

Question 1

What are the elements to form a valid Trust?

Answer 1

1. Definitive beneficiary;
2. Settlor with capacity;
3. Intent to create a trust;
4. Trustee;
5. Valid trust purpose; AND
6. Compliance with any State formalities.

Priority: HIGH

Question 2

How is intent to create a trust established?

Answer 2

By a promise that creates enforceable rights in another person who holds these rights as Trustee. An oral promise supported by consideration is sufficient.

Priority: HIGH

Question 3

What is Precatory Language?

Does it create any legal obligation?

Answer 3

Language/words in a will/trust that merely express a settlor’s desire regarding the disposition of his property (i.e. “hope” or “request”).

Such words DO NOT create a legal obligation to act in accordance with that desire, and will not create a valid trust.

Priority: Medium

Question 4

What are the majority and minority views for a Trust’s revocability?

Answer 4

Majority View & UTC: Trusts ARE revocable, unless stated otherwise.

Minority View: Trusts are irrevocable by default, unless expressly stated otherwise. (Trust cannot be modified or revoked after creation).

Priority: HIGH

Question 5

What is a Testamentary Trust?

Answer 5

A Trust created through the provisions of a Settlor’s Will, which does not take effect until the Settlor’s death.

To create a Testamentary Trust:

1. The will must state the essential trust terms (beneficiaries, purpose, and trust property); AND
2. Intent to create a trust must be found from either:
   
   • the express terms of the will, or
   • incorporation by reference of a document/writing in existence at the time the will was executed.

Priority: Low

Question 6

What is a Pour-Over Provision?

How is it different than a Testamentary Trust?

Answer 6

It gifts property to a previously established Trust.

It is distinguished from a Testamentary Trust because it does NOT create a trust. Instead, it transfers property to a trust already in existence (must be connected to an inter vivos trust).

Priority: HIGH

Question 7

What is a Charitable Trust?

Answer 7

One created by a Settlor to confer a substantial benefit to society (charitable purpose).

(The rule against perpetuities DOES NOT apply here)

Even if a Charitable Trust fails to state a specific purpose or beneficiary, the trust will NOT fail. Instead, the court will select a purpose/beneficiary consistent with the Settlor’s intent.

Priority: Medium

Question 8

What is a Discretionary Trust?

Answer 8

When a Trustee has absolute discretion and power to determine when and how much of the trust property is distributed to the beneficiaries of the trust.

The exercise of discretion must be in good faith.

Priority: HIGH

Question 9

What is an Illusory Trust?

Answer 9

When the Settlor retains significant control over the trust property indicating a lack of intent to create a trust.

Priority: Low

Question 10

What is a Support Trust?

What can a beneficiary do if the Trust contains an Ascertainable Standard Provision?

Answer 10

A trust that contains a provision directing the trustee to pay the beneficiary as much income and principal as is necessary for the beneficiary’s support.

If it contains an ascertainable standard, a beneficiary may compel a trustee to make payments in accordance with that standard.

Priority: Medium

Question 11

What is the Cy Pres Doctrine?

Answer 11

An equitable doctrine that applies to charitable bequests and charitable trusts.

Courts will apply it to modify a charitable trust to be consistent with and “as near as possible” with the settlor’s or testator’s intent, if the purpose of the trust or bequest is frustrated.

*Only applies if the testator had a general charitable intent.

Priority: HIGH

Question 12

What is a Spendthrift Provision?

When is it valid?

Answer 12

It prevents the transfer of a beneficiary’s interest, and it is valid ONLY IF it restrains both voluntary AND involuntary transfers.

*A spendthrift interest means that the interest CANNOT be sold or assigned by the beneficiary, nor may any creditors reach it.

Priority: HIGH

Question 13

What are the 5 exceptions allowing a creditor to reach a beneficiary’s interest despite a Spendthrift Provision?

Answer 13

1. A judgment creditor who has provided services for the protection of a beneficiary’s interest;
2. A creditor who furnishes necessities (only in some jurisdictions);
3. An Order for child support or alimony;
4. Any claim by the state/federal government; OR
5. A self-settled trust where the settlor retains an interest.

*Spendthrift Trusts DO NOT provide protection for mandatory distributions of trust property.

Priority: HIGH

Question 14

What happens if a beneficiary’s interest is NOT subject to a Spendthrift Provision?

Answer 14

Then the court may authorize a creditor to reach the beneficiary’s interest by attachment of present or future distributions to the beneficiary.

*Whether or not a trust contains a spendthrift provision, a creditor CANNOT compel a distribution that is subject to the trustee’s discretion.

Priority: HIGH

Question 15

When will a court NOT permit the invasion of trust principal, even if a beneficiary will eventually receive the trust payment?

Answer 15

When the invasion would:

• Be contrary to the Settlor’s intent; OR
• Adversely affect other beneficiaries.

*A Trustee cannot use trust property to pay income beneficiaries when trust income is insufficient, unless there is an express or implied power of invasion.

Priority: Low

Question 16

Under the majority view, how may a Trust be Modified by a Settlor?

Answer 16

It can be modified by a settlor:

• Who expressly reserved the power to modify the trust; OR
• Who has power to revoke the trust (including power to amend).

Priority: Medium

Question 17

How may a Trust be modified under the Uniform Trust Code (UTC)?

Answer 17

In any of the following instances:

1. By the settlor while alive or later with evidence of his intent.
2. With the settlor and the beneficiaries consent.
3. With the beneficiary’s consent and if modification is not inconsistent with the trust purpose.
4. If it will further the purposes of the trust.
5. The Cy Pres doctrine applies.
6. The value of the trust property is insufficient to justify the cost of administration.
7. It’s necessary to conform to the settlor’s intent.

Priority: Medium

Question 18

What does the Equitable Deviation Doctrine permit?

Answer 18

It permits the court to modify the administrative provisions or procedures of a trust if modification would further the trust purpose because of circumstances not anticipated by the settlor.

Priority: Low

Question 19

Under the UTC, when may a trust be Terminated?

Answer 19

1. It is revoked or expires pursuant to its terms;
2. The material purpose of the trust has been achieved;
3. The trust has become unlawful, contrary to public policy, or impossible to achieve;
4. The settlor and all beneficiaries consent;
5. All beneficiaries consent and the court decides continuation isn’t necessary;
6. Termination will further the purpose of the trust;
7. The Cy Pres doctrine applies; OR
8. The court or trustee determines that the value of the trust property is insufficient to justify the cost of administration.

Priority: HIGH

Question 20

Generally, a condition in a Will or Trust that prohibits marriage is void. When may a restraint on marriage be upheld?

Answer 20

• If it is a restraint on remarriage; OR
• The language of the bequest/gift indicates that it’s intended purpose is to take care of a person’s daily needs until they are able to obtain such support through marriage.

Priority: Medium

Question 21

Under the UTC, how must a Trustee administer a Trust?

Answer 21

1. In good faith;
2. In accordance with the trust purpose and terms; AND
3. In the interests of the trust beneficiaries.

Priority: HIGH

Question 22

What are the 5 exceptions to a Trustee’s Duty of Loyalty involving self-dealing?

Answer 22

Exceptions:

1. If the transaction was authorized by the terms of the trust;
2. If the transaction was approved by the court;
3. The beneficiary did not commence a judicial proceeding within the required time;
4. The beneficiary consented to the conduct, ratified the transaction, or released the trustee of liability; OR
5. The transaction occurred before the person became trustee.

Priority: HIGH

Question 23

What is the No Further Inquiry Rule?

Answer 23

That a transaction involving trust property entered into by the Trustee for the Trustee’s own benefit is automatically presumed to be a conflict of interest and is voidable without further inquiry into the fairness of the transaction or possible intent or motivation for self-dealing.

Priority: Medium

Question 24

What does the Prudent Investor Rule require a Trustee to do?

Answer 24

To exercise the degree of care, skill, and prudence of a reasonable investor investing in his own property.

This includes diversifying assets, avoiding risky investments, and keeping trust assets productive.

Priority: HIGH

Question 25

What is required for a Trustee to delegate a duty?

Answer 25

The Trustee must exercise reasonable care, skill, and caution in:

1. Selecting an agent;
2. Establishing the scope and terms of the delegation; AND
3. Periodically review the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation.

*The trustee is NOT liable for actions of an agent if he meets the above requirements.

Priority: Low

Question 26

What Trust disbursements and receipts must be allocated to income and principal?

Answer 26

Allocated to Income: Receipt of rental payments from real/personal property; money received from an entity; and ordinary expenses and repairs.

Allocated to Principal: Proceeds from the sale of a principal asset; all other property received (other than money received from an entity); and extraordinary expenses and repairs.

Priority: HIGH

Question 27

What is the liability of a Trustee who wrongfully invades trust assets?

Answer 27

Liable to the beneficiaries for the greater of:

• The amount required to restore the value of the trust property and distributions; OR
• Any profit made by the Trustee from the breach.

Priority: Low

Question 28

When are Remainder Beneficiaries entitled to receive Trust property?

Answer 28

At the termination of the trust.

Priority: HIGH

Question 29

When is a Substitute Gift created in the deceased beneficiary’s surviving descendants?

Answer 29

If:

1. The beneficiary of a future interest does not survive the distribution date; AND
2. A State’s anti-lapse statute applies to trusts (most DO NOT apply).

Priority: Medium

Question 30

Under the UTC, what happens if a beneficiary of a future interest DOES NOT survive the distribution date?

Answer 30

The following applies:

• If the gift is not a class gift, a substitute gift is created in the deceased beneficiary’s surviving descendants who take the property the beneficiary would have received; OR
• If the gift is a single generation class gift, a substitute gift is created in the surviving descendants of any deceased beneficiary.

Priority: Medium

Question 31

Under Common Law, what happens if a Remainder Person dies before a Life Tenant?

Answer 31

The remainder interest vests in the remainder person’s heirs (if no heirs, the interest passes to the remainder person’s estate).

Priority: HIGH

Question 32

How may a person’s Future Remainder Interest be Accelerated?

Answer 32

If the present holder:

• Loses his legal right to the property; OR
• Disclaims his present interest in the property.

Priority: Medium

Question 33

What is a Power of Appointment, and how is it granted?

Answer 33

When a testator/settlor gives another person the power to decide where and to whom the testator’s property will go (that person then has power of appointment).

It is granted when the testator DOES NOT leave any conditions or restrictions as to the appointment of the property – therefore the donee may grant the appointment to anyone (including himself).

Priority: HIGH

Question 34

How is Donee’s Power of Appointment effectively exercised in a written instrument?

Answer 34

Only if:

1. The instrument is valid under State law;
2. The terms indicate the holder’s intent to exercise the power and are consistent with the conditions imposed by the testator; AND
3. The appointment is permissible.

Priority: HIGH

Question 35

A General Residuary Clause expresses an intention to exercise a Power of Appointment ONLY if what?

Answer 35

Only if:

• The testator’s Will manifests an intention to include the property subject to the power; OR
• The power is a general power AND the creating instrument does not contain a gift if the power is not exercised.

Priority: HIGH

Question 36

What is a Special Power of Appointment?

Answer 36

When the donee may only appoint property to those authorized by the donor. The donor MUST indicate certain individuals or definite groups.

*Appointments made to those NOT authorized by the donor are ineffective.

Priority: Medium

Question 37

When is an interest valid under the common law Rule Against Perpetuities (RAP)?

Answer 37

The interest MUST vest within a life in being at the time of the grant plus 21 years.

RAP invalidates any interest that will not vest during the time period AND those that hypothetically may not vest within the time period.

Priority: HIGH

Question 38

What are the modern modifications to the Rule Against Perpetuities adopted in some States?

Answer 38

A non-vested property interest is invalid ONLY IF it actually DOES NOT vest within 21 years after the death of a life in being at the time the interest was created.

Rather than invalidate the interest on the possibility that it will not vest, this approach waits to see if the interest will actually not vest.

Some statutes modify an age contingency to 21 years if it violates RAP.

Priority: HIGH

Question 39

When does a Class Gift vest under the Rule Against Perpetuities?

Answer 39

Class gifts vest under RAP when:

1. The class closes; AND
2. All conditions for every member of the class are satisfied.

Priority: HIGH

Question 40

A Class Gift is a gift to a group of persons described collectively. When do Class Gifts close?

Answer 40

Class gifts generally close at the death of the testator/settlor.

Under the Rule of Convenience, the class is closed when any member of the class is entitled to possession of the gift.

Priority: HIGH

Question 41

Class Gifts to Predeceased Members

Class Specifically Named

vs.

Class Members Named as a Group

Answer 41

Whether the gift to a predeceased member of the class will go into the residuary estate or be divided amongst the other class members depends on:

Specifically Named: The gift will lapse and fall into the residuary estate UNLESS an anti-lapse statute applies.

Named as a Group: The predeceased member’s share will be divided amongst the other members, UNLESS there is a provision to the contrary or an anti-lapse statute applies.

Priority: HIGH