Trusts And Future Interests

Question 1

Validity of a trust

Answer 1

A trust of personal property is valid if it has a trustee, a beneficiary, and trust property

Question 2

Trustee

Answer 2

A trustee manages the trust property and holds it for the benefit of the beneficiaries.

Note that a trust will not fail for lack of a specifically appointed trustee

Question 3

Beneficiary

Answer 3

In a private express trust, beneficiaries must be definite and ascertainable.

The same person cannot be the sole beneficiary and the sole trustee or the trust collapses.

Question 4

Trust property

Answer 4

(Trust res) trust property must be identifiable.

Question 5

Revocability

Answer 5

Under the UTC, the default rule is that a trust is revocable.

Even if a trust is irrevocable, it can still be terminated or modified in certain circumstances

Question 6

Presumption of revocability

Answer 6

Under the UTC, an inter vivos trust is revocable unless the instrument expressly states otherwise

Question 7

Termination by the settlor

Answer 7

A settlor may terminate the trust if all beneficiaries are in existence and all agree to the termination

Question 8

Termination by beneficiaries after settlor dies

Answer 8

Generally, even an irrevocable trust can be terminated if both the income beneficiaries and the remaindermen unanimously consent and there is no material purpose of the trust yet to be performed

Question 9

Pourover will

Answer 9

A will that makes a gift to a trust is valid so long as the trust is identified in the will and the terms are incorporated in a writing executed before or concurrently with the execution of the will.

Modern approach: later made amendments to the trust are valid

Common law: amendments made after execution of the will are not valid

Question 10

Discretionary trust

Answer 10

The trustee has discretion to decide when to make a distribution to a beneficiary.

The beneficiary cannot demand any part of the income or principal.

A creditor cannot demand distribution unless it shows the trustee acted dishonestly or in a state of mind not contemplated by the settlor.

The UTC has an exception to this rule for alimony and child support.

Question 11

Support trust

Answer 11

Trustee must pay what is necessary for the beneficiary’s support

Question 12

Spendthrift trust

Answer 12

Retains both the voluntary and involuntary transfer of a beneficiary’s interest

Question 13

Right if a creditor in a spendthrift trust

Answer 13

Generally, a creditor may not reach part of a beneficiary’s distribution prior to the beneficiary reaching it.

Exceptions:

1) child or spousal support creditor
2) judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust (like a lawyer)
3) claim of the state or United States (usually for taxes)
4) in some states (not the UTC) creditors with claims for necessaries

Question 14

Charitable trust

Answer 14

A charitable trust may be created for a charitable purpose (including for the relief of poverty, the advancement of education the advancement of religion, the promotion of health, governmental or municipal purposes, or other purposes that are beneficial to the community.

It must have a large number of not readily identifiable individuals as beneficiaries. (i.e. not just your family or a similarly small group)

Not subject to the common law rule against perpetuities

Question 15

Modifying a charitable trust

Answer 15

A charitable trust may terminate if the charitable purpose becomes unlawful, impracticable, or impossible.

Cy pres doctrine may save the trust

Question 16

Cy pres doctrine

Answer 16

If 1) a particular charitable purpose has become unlawful, impracticable, or impossible to achieve, 2) no alternative charity is named in the trust, and 3) the court finds that the settlor had general, rather than specific, charitable intent, then the court may apply cy pres to modify or terminate the trust by directing that the trust property be distributed in a manner consistent with the settlor’s general charitable intent.

Question 17

Honorary trust

Answer 17

A trust that does not have a charitable purpose or a definite beneficiary. It is often a trust to take care of a thing (e.g. a cemetery plot) for a non charitable purpose.

Under the UTC, this is valid but may not be enforced for more than 21 years.

Under common law, such a trust would not be valid if it violates the rule against perpetuities, but a court may characterize the trust as a “power” and allow the trustee to ezercise that power in accordance with the trust terms for 21 years

Question 18

Duty of loyalty

Answer 18

A trustee has a duty of loyalty to act in the best interest of the beneficiaries

Question 19

Duty of care—prudent administration

Answer 19

Uniform Prudent Investor Act (UPIA)

Entire estate portfolio examined to determine prudence

Duty to diversify

Question 20

Uniform Prudent Investor Act

Answer 20

(UPIA) almost all states have adopted a form of this law.

A trustee must administer the trust as a prudent person would, using reasonable care, skill, and caution

Question 21

Entire estate portfolio examined to determine prudence

Answer 21

A trustee’s investment and management decisions with respect to individual assets should be evaluated in the context of the portfolio as a whole and as part of an overall investment strategy rather than in isolation

Question 22

Duty to diversify

Answer 22

One of the hallmarks of prudent investing

The trustee is not liable for declines in value due to a downturn resulting from general economic conditions, but is liable for failure to diversify absent directions to the contrary.

Question 23

Remedies for a breach of trust

Answer 23

1) Suspending or removing a trustee
2) Decreasing compensation
3) Compelling a trustee to perform trust duties
4) Compelling payment of damages
5) Others, including asking the court to “order any other appropriate relief”

Question 24

Remedies for trustee self-dealing

Answer 24

Trust beneficiaries may:

1) rescind the transaction and ask for the self-dealing purchase to be set aside (The trust property is returned to the trust and the amount paid is refunded by the trust), OR
2) recover any profits the trustee made by reason of the breach

Question 25

Power of appointment

Answer 25

A person writing a will or trust can give her beneficiaries a power of appointment, which enables the beneficiary to designate who will receive specific property.

Question 26

General power of appointment

Answer 26

The class of people that the beneficiary can exercise the power of appointment in favor of is unlimited (she can use it for herself, her creditors, or someone else)

Question 27

Majority view on general power of appointment

Answer 27

Majority view: a general residuary clause in a will (I give all of my estate…”) does not exercise a power of appointment.

However, if the general residuary clause is coupled with a blanket exercise clause (e.g. “ including all property over which I have a power of appointment”) any power of appointment held by the donee is exercised, unless the donor of the power specifically requires reference to it

Question 28

Minority view on general power of appointment

Answer 28

A general testamentary power of appointment can be exercised by general language in the beneficiary’s will (such as the residuary clause) even if it makes no reference to the power in the instrument (e.g. “everything to my husband” —the husband will get it), unless the creating instrument of the power made an express gift in default or the instrument stated that the power needed to be specifically mentioned.

Question 29

Special (or limited) power of appointment

Answer 29

The class of people that the beneficiary can exercise the power in favor of is limited. A special testamentary power needs to be specifically exercised.

The Uniform Probate Code (UPC) adopts a substantial compliance rule which says that if it could be shown that the power holder intended to exercise a power, a blanket exercise clause may be sufficient.

Question 30

Rule of convenience

Answer 30

When a gift is made to a group (e.g. “my children”) the class closes when at least one member is entitled to distribution.

Question 31

UPC approach to class gifts

Answer 31

The UPC states that when a class gift is made, each living beneficiary will take their share and the deceased beneficiary’s share will pass to their surviving descendants. If there are no surviving descendants, that gift will fail.

This applies even if the beneficiary is not related to the settlor, which is a contrast to anti lapse statutes.

Question 32

Common law approach to class gifts

Answer 32

If the gift or remainder to a deceased beneficiary has already vested and there is no applicable statute, then it will go to whomever the instrument says it should go to or whomever the deceased person has specified in their will or through intestate.

This also applies to gifts that are not made to classes.

Question 33

Class gifts in Decedents’ Estates questions

Answer 33

If a testator gives a gift to a group of unrelated individuals and one predeceased him, the deceased would not take, and neither would his descendents, unless the anti-lapse statute saved the gift