Trusts and Future Interests

Question 1

What is needed to form a valid 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: A trust will not fail for lack of specifically appointed trustee, the court will appoint one.

Question 3

Beneficiary

Answer 3

In a private express trust, beneficiaries must be definite and ascertainable. The same person cannot he tue sole trustee and sole beneficiary or the trust collapses.

Question 4

Trust Property

Answer 4

(Trust Res)
Trust property must be identifiable.

Question 5

Default Rule for Revocability Under UTC

Answer 5

The default rule is that a trust is revocable. An irrevocable trust can still be terminated or modified in some circumstances.

Question 6

Presumption of Revocability

Answer 6

Under the UTC an inter vivos trust is revocable unless the intrument expressly states otherwise.

Question 7

Termination by 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 terminatee if both the income beneficiaries and remaindermen unanimously consent and if there is no material purpose of the trust yet to be performed.

Question 9

What types of trusts can be created?

Answer 9

• Pourover will
• Discretionary Trust
• Support Trust
• Spendthrift Trust
• Charitable Trust
• Honorary Trust

Question 10

Pourover Will

Answer 10

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 the execution of the will are not valid.

Question 11

Discretionary Trust

Answer 11

The trustee has discretion to decide whent to make a distribution to a beneficiary. The beneficiary can not 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.

Note: There is and exception under the UTC for child support or alimony.

Question 12

Support Trust

Answer 12

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

Question 13

Spendthrift Trust

Answer 13

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

Right of Creditor: Generally a creditor may not reach part of a beneficiary’s distribution prior to recieving it

Exceptions:
• child or spousal support creditor (for maintainence and support)
• a judgement creditor who has provided services for the perfection of a beneficiary’s interest in the trust
• a claim in of the state or United States (usually for taxes)
• creditors with claims for necessaries in some states

Question 14

Charitable Trust

Answer 14

May be created for a charitable purpose. It must have a large number of not readily identifiable individuals. Not subject to RAP.

May be terminated if charitable purpose becomes unlawful, impracticable, or impossible. Doctrine of Cy Pres may save trust.

Question 15

Doctrine of Cy Pres

Answer 15

Common law doctrine that is also a part of the UTC. The doctrine states: if a particular charitable purpose has become unlawful, impracticable, or impossible to acchieve; 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 16

Honorary Trust

Answer 16

A trust that does not have charitable purpose or a definite beneficiary. Often a trust to take care of a thing (i.e. cemetary plot or pet) for a noncharitable purpose.

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

Under the Common Law, trust would not be valid if it violates RAP, but court may characterize the trust as a “power” and allow trustee to exercise that power in accordance with the trust terms for 21 years.

Question 17

Duty of Loyalty

Answer 17

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

Question 18

Duty of Care — Prudent Administration

Answer 18

Uniform Prudent Investor Act (UPIA):
Adopted by almost all states. The UPIA states that a trustee must administer the trust as a reasonable person would using reasonable care, skill, and caution.

Entire Estate Portfolio Examined to Review 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 as a part of an overall investment strategy rather than in isolation.

Duty to Diversify:
Hallmark of prudent investing. The Trustee is not liable for declines in value due to a downturn resulting from economic conditions but is liable for failure to diversify absent directions to the contrary.

Question 19

Remedies for Breach of Trust

Answer 19

Include:
• suspending or removing a trustee
• decreasing compensation
• compelling a trustee to perform trust duties
• compelling payment of damages, etc.

Question 20

Remedies in Self-Dealing Case

Answer 20

Trust beneficiary’s may rescind the transaction and ask for the self-dealing purchase to be set asside (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 21

Power of Appointment

Answer 21

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

Question 22

General Power of Appointment

Answer 22

The class of people that the beneficiary can exercise the power of appointment in favor of is unlimited.

Majority View: In most states, a general residuary clause in a will (“ I give all 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 specificslly required reference to it.

Minority View: A general testamentory power of appointment can be exercised by general language in the beneficiary’s will (such as a 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 the power needed to be specifically mentioned.

Question 23

Special (or limited) Power of Appointment

Answer 23

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

The 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 24

Rule of Convenience

Answer 24

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 25

UPC Approach to Class Gifts

Answer 25

The UPC states that when a class gift is made, each living beneficiary will taje their share and the deceased beneficiary’s share will pass to their surviving descendants. (If there are no surviving descendants 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 26

Common Law Approach to Class Gift

Answer 26

Under the common law, if the gift or remainder 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 27

Gift to a class in a Decendents’ Estates Question

Answer 27

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.