Trusts And Future Interests Flashcards
Validity of a trust
A trust of personal property is valid if it has a trustee, a beneficiary, and trust property
Trustee
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
Beneficiary
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.
Trust property
(Trust res) trust property must be identifiable.
Revocability
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
Presumption of revocability
Under the UTC, an inter vivos trust is revocable unless the instrument expressly states otherwise
Termination by the settlor
A settlor may terminate the trust if all beneficiaries are in existence and all agree to the termination
Termination by beneficiaries after settlor dies
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
Pourover will
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
Discretionary trust
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.
Support trust
Trustee must pay what is necessary for the beneficiary’s support
Spendthrift trust
Retains both the voluntary and involuntary transfer of a beneficiary’s interest
Right if a creditor in a spendthrift trust
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
Charitable trust
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
Modifying a charitable trust
A charitable trust may terminate if the charitable purpose becomes unlawful, impracticable, or impossible.
Cy pres doctrine may save the trust
Cy pres doctrine
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.
Honorary trust
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
Duty of loyalty
A trustee has a duty of loyalty to act in the best interest of the beneficiaries
Duty of care—prudent administration
Uniform Prudent Investor Act (UPIA)
Entire estate portfolio examined to determine prudence
Duty to diversify
Uniform Prudent Investor Act
(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
Entire estate portfolio examined to determine prudence
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
Duty to diversify
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.
Remedies for a breach of trust
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”
Remedies for trustee self-dealing
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
Power of appointment
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.
General power of appointment
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)
Majority view on general power of appointment
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
Minority view on general power of appointment
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.
Special (or limited) power of appointment
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.
Rule of convenience
When a gift is made to a group (e.g. “my children”) the class closes when at least one member is entitled to distribution.
UPC approach to class gifts
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.
Common law approach to class gifts
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.
Class gifts in Decedents’ Estates questions
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
