Trusts and Future Interests Flashcards
Can the trustee of a revocable trust, who is required by the terms of the trust instrument to pay all trust income to the settlor, accumulate income upon the settlor’s written direction?
It was proper for the trustee to accumulate trust income because Settlor retained a power to revoke the trust during her lifetime in a written instrument, and the trustee accumulated income based on written directions from Settlor during her lifetime.
Retained power to revoke a trust
A retained power to revoke a trust includes the power to modify or amend the trust instrument. See Restatement (Third) of Trusts § 63 cmt. (g). Courts have taken this position to avoid the triumph of form over substance; the contrary position would require a settlor who wants to amend a trust and lacks clear authority to do so to first revoke, and then to completely restate, the terms of the trust with the intended amendment. Such cumbersome formalities should not be encouraged; thus, the power to revoke includes the power to amend.
The Uniform Trust Code (UTC) follows this approach; under UTC § 602, a trust is both revocable and amendable unless the trust instrument expressly provides otherwise. Under the UTC, the power to revoke or amend is exercisable by will unless, as here, the trust instrument provides otherwise. See Unif. Trust Code § 602(c).
Can the holder of a testamentary power of appointment exercisable in favor of the holder’s children exercise the power by appointing trust assets to the holder’s grandchildren?
Settlor could not appoint an interest in the trust to her son’s children (Settlor’s grandchildren) because they were not permissible objects of her power of appointment.
Permissible appointees
The donee of a special (nongeneral) power can appoint the property over which the power is exercisable only to “permissible appointees” or “objects” of the power. Restatement (Third) of Property: Wills and Other Donative Transfers § 19.14 (2011). See also Restatement (Second) of Property: Donative Transfers § 19.3. Permissible appointees are “the persons to whom an appointment is authorized.” Id. § 17.2(c). Appointments to impermissible appointees are invalid. Id. § 19.15. However, objects of a power include only those who receive a “beneficial interest.” Thus, when, as here, property is appointed in further trust, the trustee is not an impermissible appointee. See id. § 19.15 cmt. e.
Under Settlor’s will and the trust instrument, what, if any, is Charity’s interest in the trust assets? Explain
As the named taker in default of appointment, Charity is entitled to the portion of the trust ineffectively appointed to Settlor’s grandchildren. It is not entitled to any interest appointed to the son.
Portion of the trust ineffectively appointed
“If part of an appointment is ineffective and another part, if standing alone, would be effective, the effective part is given effect, except to the extent that the donee’s scheme of disposition is more closely approximated by concluding that some or all of the otherwise effective part should be treated as ineffective.” Restatement (Third) of Property: Wills and Other Donative Transfers §19.20 (2011). To the extent that a power is ineffectively appointed, the ineffectively appointed property passes to the so-called “taker in default of appointment” (here, Charity) designated byt he donor of the power (here, Settlor). See id.
Can the surviving spouse of the decedent settlor of a revocable trust claim an elective share of assets in that trust even though the spouse is not a named beneficiary of the trust?
Settlor’s husband may be entitled to an elective (i.e., forced) share of Settlor’s revocable trust assets under the illusory-transfer doctrine, the fraudulent-transfer doctrine, or a like doctrine. He is also entitled to one-third of the probate assets.
Surviving spouse’s elective share
Although many states have statutes under which a surviving spouse’s elective (forced) share of the decedent spouse’s estate extends to assets placed into a revocable trust by the decedent spouse (see, e.g., Unif. Probate Code §§ 2-201 et seq.), here, the jurisdiction’s elective-share statute provides that the spousal right of election extends only to probate assets. Because the disposition of assets in a revocable trust is determined by the terms of the trust instrument, trust assets are not probate assets. Thus, the statute does not give Settlor’s husband any claim to assets in her revocable trust. Assuming that the husband has no claim to the trust assets, he will not claim an elective share because that share ($33,333) would be less than the amount he is entitled to under the will ($50,000).
Illusory-transfer doctrine
Under the illusory-transfer doctrine, a surviving spouse can reach assets transferred during the marriage by the deceased spouse into a revocable trust on the theory that the transfer is economically “illusory” because, by the simple expedient of exercising the power of revocation—typically with nothing more than a signature on a piece of paper—the deceased spouse could have recaptured the assets she had placed in the trust. See, e.g., Newman v. Dore, 9 N.E.2d 966 (N.Y. 1937)
Fraudulent-transfer doctrine
Under the fraudulent-transfer doctrine, a surviving spouse can reach assets transferred into a revocable trust on the theory that, as to the surviving spouse, the transfer was “fraudulent.” The assumption behind this doctrine is that a state statute providing surviving spouses with an elective-share entitlement gives spouses a legitimate expectancy in assets that would have been included in the decedent spouse’s probate estate but for their transfer into a revocable trust; such a transfer is treated as defrauding the surviving spouse of his or her expectancy. See, e.g., In re Estate of Froman, 803 S.W.2d 176 (Mo. Ct. App. 1991).
Application
Thus, if this jurisdiction recognizes one of these doctrines or another similar doctrine, Settlor’s husband will be entitled to receive one-third of the combined probate ($100,000) and trust estate ($500,000) or $200,000 (1/3 of $600,000). However, this $200,000 would be reduced to $150,000 to take account of the fact that he received $50,000 under the will.
Not all jurisdictions recognize such a doctrine, however. In those jurisdictions that do not, the husband would receive nothing beyond the $50,000 he would receive under the will because that amount exceeds the elective share (1/3 of $100,000).
