Trusts and Future Interests

Question 1

Validity of trust

Answer 1

Regarding validity of a trust, most MEE answers state: “a trust of personal property is valid if it has a trustee, a beneficiary, and trust property.” (J2022, O2020, F2007, F2006, J2005, J2001, F1997)

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. (The court will appoint one.)

Question 3

Beneficiary:

Answer 3

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 4

Trust property (trust res):

Answer 4

Trust property must be identifiable.

Question 5

Key principle #2: Under the Uniform Trust Code (UTC)

Answer 5

Under the Uniform Trust Code (UTC), 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 instrument expressly states otherwise. (J2022, F2017, J2007)

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 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. (J2012, F2003, J1995)

Question 9

Key principle #3:

Answer 9

Be familiar with the variety of trusts that can be created. The following have been tested:

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 execution of the will are not valid. You are expected to articulate the differences between these two approaches on the MEE. (J2008, F2006, J2002, J1997)

Question 11

Discretionary trust:

Answer 11

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.) (F2019, F2011, J2009, J1999)

Question 12

Support trust:

Answer 12

Trustee must pay what is necessary for the beneficiary’s support. (F2019, J1995)

Question 13

Spendthrift trust:

Answer 13

A spendthrift trust restrains “both the voluntary and involuntary transfer of a beneficiary’s interest.” (F2022, F2019, F2007, F2006, F2003, F2001, F1996)

Question 14

Right of a creditor:

Answer 14

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

Question 15

There are some favored creditors that are exceptions to this rule:

Answer 15

(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 thestate 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 16

Charitable trust:

Answer 16

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). Note that a charitable trust is not subject to the common law rule against perpetuities. (J2022, J2020, J2011, J2009, F2007, J1997, Decedents’ Estates—F2000)

Question 17

Modifying a charitable trust:

Answer 17

A charitable trust may terminate if the charitable purpose becomes unlawful, impracticable, or impossible. However, cy pres may save the trust. 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 18

Honorary trust:

Answer 18

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. (J2020)

Question 19

Duty of loyalty:

Answer 19

A trustee has a duty of loyalty to act in the best interest of the beneficiaries. (F2019, J2018, J2015, J2009, F2008)

Question 20

Duty of care

Answer 20

Prudent administration (F2019, J2018, J2015, F2010, F2008, F2004, J1998, J1996)

Question 21

Uniform Prudent Investor Act (UPIA):

Answer 21

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

Entire 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 of the portfolio as a whole and as a part of an overall investment strategy rather than in isolation.

Question 23

Duty to diversify:

Answer 23

This is 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 24

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.”) (J2015, J2009, J1998, J1996)

Question 25

self-dealing case:

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

Purpose:

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. (F2022, O2020, F2017, J2007, J2005; Decedents’ Estates—J2009, F2002, F1996)

Question 27

General power 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

Majority view:

Answer 28

In most states, 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 29

Minority view:

Answer 29

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

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

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. (J2012, F2011, F2010)

Question 32

UPC approach:

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). (J2012, F2011, F2010, J2008, J2004, J2002)

Question 33

Common law approach:

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.) (J2018, J2004, J2002)

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.