Trusts and Future Interests

Question 1

What are the requirements for a valid trust?

Answer 1

“a trust of personal property is valid if it has a trustee, a beneficiary, and trust property.”

Question 2

What is a trustee?

Answer 2

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

Question 3

What if a trust does not have a specifically appointed trustee?

Answer 3

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

(The court will appoint one.)

Question 4

What are the requirements for a beneficiary?

Answer 4

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

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

Question 5

Trust property must be ______

Answer 5

identifiable

Question 6

Is a trust revocable or irrevocable?

Answer 6

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

Question 7

How can a settlor terminate a trust?

Answer 7

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

Question 8

How can a trust be terminated after the settlor dies?

Answer 8

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

Question 9

What is required of a pour over 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.

Under the modern approach, later made amendments to the trust are valid.

Under common law, amendments made after execution of the will are not valid.

You are expected to articulate the differences between
these two approaches on the MEE.

Question 10

How does a discretionary trust work?

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 principle.

Nor can a creditor, unless it shows the trustee acted dishonestly or in a state of mind “not contemplated” by the settlor.

(There is an exception under the UTC for child support or alimony.)

Question 11

How does a support trust work?

Answer 11

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

Question 12

How does a spendthrift trust work?

Answer 12

a spendthrift trust restrains “both the voluntary and involuntary transfer of a
beneficiary’s interest.”

Question 13

What are the rights of a creditor under a spendthrift trust?

Answer 13

• generally,a creditor may not reach (i.e.,bygarnishment or attachment)
  part of a beneficiary’s distribution prior to the beneficiary reaching it.

this rule has exceptions to it

Question 14

What are the creditor exceptions for a spendthrift trust?

Answer 14

There are some favored creditors that are exceptions to this rule:
(1) a child or spousal support creditor (for maintenance and support),
(2) a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust (e.g., a lawyer),
(3) a claim of the state or United States (usually for taxes),
and
(4) creditors with claims for necessaries
in some states (this fourth category is not recognized in states that follow the UTC).

Question 15

When may a charitable trust be created?

Answer 15

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 (rather than a few identifiable individuals).

Question 16

Is a charitable trust subject to RAP?

Answer 16

Note that a charitable trust is not subject to the common law rule against perpetuities.

Question 17

How is a charitable trust modifed?

Answer 17

A charitable trust may terminate if the charitable purpose becomes unlawful, impracticable, or impossible. However, cy pres may save the trust.

Question 18

What is cy pres?

Answer 18

Cy pres is a common law doctrine that is also a part of the UTC.

It states: if a particular charitable purpose has become unlawful, impracticable, or impossible to achieve; no alternative charity is named in the trust; and 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 19

What is an honorary trust?

Answer 19

This is 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. cemetery plot) for a noncharitable 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 exercise that power in accordance with the trust terms for 21 years.

Question 20

What is a trustee’s duty of loyalty?

Answer 20

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

Question 21

What is the UPIA??

Answer 21

• Uniform Prudent Investor Act (UPIA): Almost all states have adopted a form of the UPIA. The UPIA states that a trustee must “administer the trust as a prudent person would . . .
  using reasonable care, skill, and caution.”

Question 22

Duty of care: how is an estate portfolio examined to determine prudence

Answer 22

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

Question 23

Duty of care: what is the duty to diversify?

Answer 23

This is one of the hallmarks of prudent investing.

Thet 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 24

What are the remedies for a breach of trust?

Answer 24

The remedies include:

Suspending or removing a trustee, decreasing compensation, compelling a trustee to perform trust duties, compelling payment of damages, etc. (There are several other remedies, including asking the court to “order any other appropriate relief.”)

Question 25

What can trust beneficiaries do if self dealing occurs?

Answer 25

In a self-dealing case, the trust beneficiaries may 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 recover any profits the trustee made by reason of the breach.

Question 26

How are general and special powers of appointment decided?

Answer 26

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 27

What are general powers of appointment?

Answer 27

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 28

What is the majority view for general powers of appointment?

Answer 28

Majority view: In most states, a general residuary clause in a will (“Igiveallofmyestate… ”) 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 29

What is the minority view for a general power of appointment?

Answer 29

Minority view: 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 30

What is a special or limited power of appointment?

Answer 30

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 powerholder intended to exercise a power, a blanket exercise clause may be sufficient.

Question 31

What is the rule of convenience?

Answer 31

When a gift is made to a group, such as “my children,” the class closes when at least
one member is entitled to distribution.

Question 32

What is the UPC approach for gifts to a class?

Answer 32

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 then the gift will fail.)

Note: this applies even if the beneficiary is not related to the settlor (and thus differs from most antilapse statutes).

Question 33

What is the common law approach for class gifts?

Answer 33

Under the common law, 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 intestacy. (This also applies to gifts that are not made to classes.)

Question 34

If you see a gift to a class in a Decedents’ Estates question:

Answer 34

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 descendants, unless the antilapse statute saved the gift.