Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Trusts & Estates > Trusts-End of Semester > Flashcards

Trusts-End of Semester Flashcards

1
Q

Legal Effect of a Trust

A

Legal effect: Provides benefit to worthy individual or charity but stops short of making unrestrictive gift.

•Divides title to property

–Legal title

»Imposes fiduciary duties on trustee

»Manages property pursuant to grantor’s wishes and state law

–Equitable title

»Right to receive benefit from property.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Trust Termination

A

•When property exhausted or grantor’s instructions completed •If property remains, title to property reunited and passes as grantor instructs.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Trust Purposes & Uses

A

Purposes and uses:

  • Provide and protect beneficiaries
    • Minors, spendthrifts
  • Flexible distribution of assets
  • Provides degree of control over gift
  • Protect Settlor
  • Professional Management of Property
  • Utilize expertise and resources of financial professionals
  • Probate avoidance
  • Provides successive enjoyment of property over generations
  • Tax benefits

Irrevocable trusts only:

  • Insulate property from creditors
  • Avoid conflicts of interest
    • Blind trust (a financial arrangement in which a person in public office gives the administration of private business interests to an independent trust in order to prevent conflict of interest)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Trust Elements

A

1) Settlor with capacity
2) Settlor with donative intent

–Split of title (Legal Equitable ??)

3) Beneficiary
4) Duties imposed on trustee
5) Same person is not sole trustee and sole beneficiary.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Actions Giving Rise to Trusts

A
  • Transfer of property to trustee
    • During settlor’s life or at settlor’s death
  • Settlor executes a “Deed of trust”
    • Settlor’s declaration that settlor holds the property as trustee for another’s benefit
  • Settlor executes a “Declaration of trust”
  • Exercise of a power of appointment in favor of a trustee
    • Need not be in writing
    • Clear and convincing evidence required to establish that transfer has taken place
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Settlor’s Capacity: Revocable Trust

A

S must “understand in a general way”:

  • the nature and extent of the property to be disposed
  • the settlor’s relation to those who would naturally claim a substantial benefit from his will, and
  • a general understanding of the practical effect of the trust as executed.

(Same capacity as required for will.)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Settlor’s Capacity: Irrevocable Trust

A
  • S must appreciate that S is relinquishing all rights in the property and the future impact of the irrevocable transfer on S’s property and on those who depend upon S
  • Same capacity as needed for gift –Restatement (3d) of Trusts Section 11–Restatement (3d) of Property Chapter 8
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Settlor’s Intent:

A

Settlor must indicate an intent to create trust UTC 402(a)(2)

  • Present, unequivocal desire/purpose to divide title,
  • imposing fiduciary duties on trustee (legal title) and
  • providing benefits to beneficiary (equitable title)
    • Need not use trust language, but effect must be the division of title
  • Intent must be “definite and particular”; should not use precatory language
  • Must be present intent to transfer, not future
  • Generally need not inform beneficiary of trust to establish trust intent
  • Title division sufficient as long as same individual is not the sole trustee and sole beneficiary
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Settlor’s Intent: Factors that May Determine Intention to Form a Trust

A

Factors that may determine whether property owner intended to create a trust :

  • Writing that completely and unambiguously communicates S’s present intent to impose duties on T and benefits on B
    • Ambiguity arises when text is subject to two different meaning
      • “I hereby direct my son to give this money to the charity of his choice”
    • Ambiguity arises when S fails to impose clear directive or obligation
      • “I hereby direct my son to use this money for the benefit of himself and his children.”
  • If complete and unambiguous no extrinsic evidence permitted to contradict
  • If not complete and/or ambiguous, extrinsic evidence may be permitted.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Trust Element: Property

A
  • Trust relationship must involve property interest.
  • Settlor must transfer property interest into trust.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Pour-Over Provision

A

Pour over provision •UPC 2-511–Trust created inter vivos but not funded until death is valid

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Oral Trusts

A
  • Oral trusts for personal property are generally enforceable under UTC (407)
    • Clear and convincing evidence
  • While the UTC does not proscribe oral trusts for real property, generally, the statute of frauds requires such trusts to be in writing and signed by S or T
  • If not in writing, not void, but also not enforceable
  • Transferee can voluntarily carry out trust terms
    • If Settlor disputes, Settlor cannot argue lack of writing should terminate trust
  • Transferee can refuse to carry out trust terms
    • lack of writing is a defense; trust unenforceable.
  • If transferee begins performance but then stops, doctrine of part performance can compel complete performance.
    • Court may, in equity, chose to impose constructive trust
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Trust Elements: Beneficiary

A
  • Role
    • Enjoy benefits of property; enforce trust purposes
    • Definite beneficiary” UTC 402(a)(3)
      • Ascertained now or in future, subject to applicable rule against perpetuities UTC 402(b)
      • Consider conditions placed on vesting of interests
        • “As long as the property is used as a farm, then to Bob.”
      • Consider class closing rules
        • “Then to my grandchildren”
    • Trustee’s power to select beneficiary from an indefinite class is valid UTC 402(c)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Definite Beneficiary

A

Rule: must have “definite” beneficiary

Common law “Friends” not definite enough

Reason: B must be able to claim benefit (enforce trust)

Remedy: resulting trust; property passes with residue

UTC 402(c) = OK, as long as Trustees can find at least one friend.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Random Facts you should know about Trustees

A
  • Trust MUST impose duties on a trustee:
  • As to trustee –Capacity to serve if “Person” can take and hold property as a true owner
  • Service as trustee is voluntary
  • Upon acceptance of a trusteeship, however, a trustee may only resign by complying with the terms of trust, obtaining consent of all beneficiaries, or obtaining court approval.
  • Trustee compensation must be reasonable
  • The trust may expressly state the terms of trustee compensation.
  • Trust commissions are often expressed as a percentage of the value of property held in trust.
    • Typically, the commission rate decreases as the size of the trust increases.
    • Trust must impose duties on trustee UTC 402(a)(4)
      • Trust will not fail for want of a trustee
        • Court will appoint pursuant to priority order
          • Note that if there were Co-Trustees and at least one remains in office, needed not be filled
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Trustee Duties & Powers

A

Trustee’s duties:

  • Duty of good faith (AKA “obedience”)
  • Duty to inform and report
  • Duty of care (prudence)
  • Duty of loyalty (avoid conflict of interest)
  • Duty of impartiality (d/n favor one B over other Bs) •

Trustee’s powers:

  • Trust terms AND, except as limited by trust,
  • All power that an unmarried, competent owner has over her property
  • Powers necessary to achieve trust purposes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Trust Purposes

A
  • Valid Purpose UTC 404
    • Lawful
    • Not contrary to public policy
    • Possible to achieve
    • Trust must be for benefit of beneficiaries •Common Law
  • Unacceptable purposes
    • (B takes property free of trust)
    • Total restraint on marriage voids trust
    • Conditioned upon divorce
  • Acceptable purposes
    • Restricting B to specific religion
    • Supporting B as long as B stays married
    • Supporting B in the event of divorce or death of other spouse

*Regardless of approach, a trust that defrauds creditor will fail

*Trusts that discriminate are troublesome

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Types of Trusts

A

•Inter vivos

–Funded during life

–Pour over

–Revocable/irrevocable

–Private/charitable

•Testamentary

–Exist within four corners of will

  • Rise and fall with the will
  • Revocable until death

–Private/charitable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Revocable v. Irrevocable Trusts

A

Revocable:

  • S may modify/terminate at will
  • Default rule under UTC 602
  • Creditors, IRS can essentially ignore trusts and reach property within it
  • Intent to create is same as will
  • Capacity to create is same as will

Irrevocable:

  • S’s ability to modify/terminate severely limited
  • If S is alive, S and all beneficiaries must agree
  • If S is dead, beneficiaries can modify/terminate as long as modification/termination does not conflict with material purpose of trust
    • Need court approval
  • S’s creditors/IRS reach severely limited
  • Must declare trust as irrevocable
  • Intent to create is same as intent to give gift
    • Present intent to relinquish all rights in property
  • Capacity to create is same as gift
    • S must have capacity required for wills AND understand the effect that creating a trust has on S’s future financial security and ability to support S’s dependents.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Pros & Cons of Revocable Trusts

A

Why you would want one:

  • S maintains access to property during life
  • S has prescribed plan for who will manage S’s property in the event S become incapacitated.
  • S seeks to distribute property outside of probate
    • Privacy
    • Speed of distributions
    • Real property located out of state
    • Avoid elective share
  • Capacity to create is same as that for will (low)
  • During S’s life T owes duties ONLY to S who is life B
    • No duty of impartiality to Bs who take after S’s death

Why you would not want one:

  • S needs creditor/IRS protection
  • During S’s life, income in revocable trust is taxable
  • At S’s death, assets exposed to estate tax
  • Durable power of attorney can suffice
    • Less expensive
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Perpetual Trusts

A

Under the common law Rule Against Perpetuities a contingent future interest must vest, if at all, within 21 years after the expiration of some life in being in existence upon the creation of the interest.

–Most states, however, have repealed or abrogated the Rule Against Perpetuities.

90-year wait-and-see provisions

•Reformation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Charitable Trusts

A

Beneficiary:

  • Sufficiently indefinite/uncertain/unascertainable
  • General public or segment of public
  • May confer an incidental benefit on a private individual if the individual beneficiary is not selected solely by the settlor and the charitable purpose is advanced by conferring the private benefit.
    • Example: A charitable trust providing scholarships for students demonstrating financial need.

Purpose:

  • Purpose must be lawful, not contrary to public policy, and possible to achieve
    • Same as private trust
    • For favorable tax treatment, a charity must be:
      • “operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition . . or for the prevention of cruelty to children or animals.” IRC 501(c)(3).52

Duration:

  • Exempt from the Rule Against Perpetuities
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Doctrine of Cy Pres

A

Permits a court to change the purposes of a charitable trust if the settlor’s stated purposes are (or become) illegal/impossible/impracticable to accomplish. May alter as close to the donor’s stated purpose as possible.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Doctrine of Equitable Deviation

A

If, because of circumstances unforeseen by the settlor, the means by which the settlor’s charitable purposes are to be accomplished are (or become) illegal/impossible/impracticable the court may alter the administrative terms of the trust to facilitate accomplishment of the donor’s charitable purposes by other means. No change in charitable purpose but in how the purposes are accomplished.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Trust Distribution (Types)

A

•Mandatory •Discretionary •Support •Spendthrift

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Mandatory Distribution

A

•Mandatory Provision

  • Trustee’s duty
    • Must distribute property to beneficiary within a reasonable time.
  • Benificiary’’s rights
    • B may assign right to distribution to Creditor
    • B may compel Trustee to distribute, if trustee fails to do so within reasonable time
  • Creditor’s access
    • Creditor may attach and compel distributions if T fails to distribute within reasonable time
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Discretionary Distribution

A

Discretionary Provision

  • Trustee’s duty
    • Grants trustee discretion regarding distributions
    • Which property? How much? When and/or To whom
    • Discretion can be narrow, broad, specific, or general
  • Beneficiary’s right
    • B may sue T for breach of duty—bad faith
    • B may assign right to distribution to Creditor, though “right” of distribution is severely limited
  • Creditor’s access
    • Creditor may attach, but may not compel distribution, even if Trustee breaches duty in failing to distribute
    • Unless, Creditor = Super Creditor
    • B’s child, spouse, or former spouse, judgment or court order against the beneficiary for support or maintenance
      • “equitable under the circumstances but not more than the amount the trustee would have been required to distribute to or for the benefit of the beneficiary had the trustee complied with the standard or not abused the discretion”
  • Governing Law: UTC 814(a) •“Trustee shall exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.”
  • In determining whether a trustee should make a distribution, the trustee should consider:
    • Trust terms
    • Trust purposes
    • Beneficiaries’ interests
    • Needs?
    • Other available resources?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Support Provision

A

Trustee’s duty:

  • Distribute to Beneficiary pursuant to an ascertainable standard

Beneficiary’s right:

  • Compel distribution if Trustee refuses to comply with standard
  • May not assign to Creditor

Creditor’s access:

  • Creditor may not attach, UNLESS
    • Creditor = Super Creditor or
    • Creditor = Supplier of Beneficiary’s necessities
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Spendthrift Provision

A

Spendthrift Provision:

  • Protects Settlor’s interest in making sure trust property goes to Beneficiary and not Beneficiary’s creditors
  • Language of provision must restrain voluntary AND involuntary transfers of beneficiary’s interest in trust
    • Voluntary = Beneficiary may not assign his right to his interest to another.
    • Involuntary = Creditor may not access beneficiary’s interest in property.
  • Magic words: “spendthrift trust”
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Spendthrift Provision & Mandatory Distribution

A

Spendthrift provision Impact on mandatory provision:

  • Precludes Beneficiary or Beneficiary’s Creditor from accessing property until Trustee has made a distribution
  • If Trustee fails to make a distribution within a reasonable time, Beneficiary OR
  • Beneficiary’s Creditor can obtain a court order compelling distribution
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Spendthrift Provision & Discretionary/Support Provisions

A

Impact on discretionary and support provisions:

  • Creditor cannot attach property, such that if a distribution made, Creditor gets paid before beneficiary
  • As a result, more fully insulates trust property from creditor’s reach.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Spendthrift Super Creditors

A

Judgement or court order against Beneficiary for support or maintenance of:

  • Child, spouse, or former spouse
  • Creditor with judgment who has provided services to trust
    • Attorney or perhaps trustee
  • Government creditor
    • Got to pay your taxes
  • May attach present or future distributions in favor of Beneficiary
    • Mandatory distributions
    • Discretionary distributions, when made
    • Support distributions, when made
      • Cannot use this provision to compel distribution
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Trust Distributions when Settlor is the Beneficiary

A
  • Even if trust includes a spendthrift provision
  • Revocable Trusts

-Trust property is subject to settlor’s creditor’s claims

•Irrevocable Trust

-Settlor’s creditor can reach the amount that the trust authorizes to be distributed to the Settlor.

•If Settlor maintained a revocable trust, at Settlor’s death, Settlor’s creditor can access trust property, but Settlor may direct the source from which debts paid

34
Q

Asset Protection Trusts

A

•16 states allow them •Risky •Transfers into trust can appear fraudulent •Bankruptcy code now has 10-year look back

35
Q

Trust Modification & Termination Factors

A

*Trust Terms

*Entity Seeking Change

*Nature of the Trust

-Revocable or Irrevocable

*Nature of Change

-Administrative or Dispositive

36
Q

Trust Modification & Termination by the Settlor

A

Settlor

•Revocable trust

  • S may revoke or amend trust as S sees fit
  • UTC presumes revocable, if trust otherwise silent
  • Many states reverse presumption and presume trust is irrevocable –>S must state in trust that S can modify

•Irrevocable trust

-Generally S must obtain consent of beneficiaries and assure court that modification will not interfere with material purpose of trust

37
Q

Trust Modification & Termination by the Beneficiary

A

Common Law:

  • If S’s consent is not possible (S dead, incapacitated or refuses to consent) and regardless of whether T agrees,
    • Bs may modify or terminate trust if all Bs agree and the modification or termination will not conflict with a material purpose of the trust
    • Must obtain court approval UTC:
      • UTC 411(b) *Modification
      • Consent of all Bs
      • Court concludes modification is not inconsistent with a material purpose of trust
  • Termination
    • Consent of all Bs
    • Court concludes continuing trust not necessary to achieve any material purpose
    • UTC 411(e)
      • Terminated or modified absent consent of all Beneficiaries, IF court concludes
        • Had all Bs consented, trust could have been modified or terminated AND
        • Not inconsistent with material purpose
          • Interests of a Beneficiary who does not consent adequately protected
            • Split trust? -Custodian/guardian?
38
Q

Trust Modification & Termination: Material Purpose Doctrine

A
  • Expresses historical deference for Settlor’s prescribed distribution of property
  • UTC: “The purpose…is not to disregard the setttlor’s intent but to modify inopportune details to effectuate better the settlor’s broader purposes”
    • Modification not inconsistent with the trust’s purpose.
  • Claflin Doctrine
    • A trust beneficiary may not terminate a trust whose material purpose has not yet been accomplished.
      • Testator has the right to restrict control unless they contravene some positive rule of law or are against public policy
  • Rule does not impose a duty on Trustee to petition for modification
  • Deviation to the Trust include:
    • Change trustee
    • Give/take away trustee powers
    • Terminate trust
39
Q

Court: Trust Reformation

A

Court may reform trust upon Clear & Convincing Evidence of:

  • Settlor’s intent and terms of trust affected by mistake of fact or law
    • Extrinsic evidence OK
    • Evidence that contradicts trust terms OK
    • Not a problem if trust unambiguous •UTC 415
40
Q

Court: Achieve Settlor’s Tax Objectives

A

•Revocable/irrevocable •Any interested party may request modification •Modification must not be contrary to settlor’s intent •Modification may have a retroactive effect •UTC 416

41
Q

Trust Termination by the Trustee

A

•UTC 414:

  • If trust property is less than $50K and trustee concludes trust’s value is insufficient to justify its continuance, trustee may terminate trust
    • Must provide notice
      • Court approval not needed
  • Comments to 414
    • Courts should consider trust purposes
      • Even if admin costs seem excessive, protection of assets from Beneficiary’s mismanagement may be important
        • Administrative expenses could be lowered with appointment of new trustee
        • Trustee can seek termination even if trust has spendthrift clause
42
Q

Trust Modification by Trustee

A

•UTC 417

Upon notice to any qualified beneficiary:

  • Trustee may combine two or more trusts into a single trust OR
  • Trustee may separate trust into two or more separate trusts

As long as doing so does not:

  • impair rights of any beneficiary or
  • adversely affect the trust purposes

Comments to UTC 417:

  • Combine to reduce admin costs or increase pool of investment funds
  • Divide to decrease tax liability, pursue different investment strategies
  • Does not require Beneficiary’s consent or court approval
43
Q

Implied Trusts

A

Remedial doctrines that borrow trust terms

1)Resulting trust

  • Imposes reversion
    • divests transferee of legal title and reverts it back to the transferor (or transferor’s estate)
  • Generally arises when:
    • Trust fails
    • Trust ends and property left over

2) Constructive trust

  • Imposes a trusteeship on title holder and compels individual to convey the property to rightful beneficiary
  • Generally arises when:
    • Titleholder acquires property by wrongful or unfair conduct, enriching self
44
Q

Implied Trusts: Secret Trusts

A

S’s will states:

  • “I give my jewelry to Tom”
  • S and Tom orally agree that Tom is to hold the property for S’s minor children
  • Secret because no trust apparent from will; oral agreement is source of trust
  • Enforceable?
    • YES
    • If enforce oral trust, Trustee takes property only as trustee; children’s interest protected .
    • If not enforce oral trust, Trustee takes fee simple title to property with no obligation to hold for children
    • Thus, majority of courts chose to enforce oral trust
    • Restatement would impose constructive trust, giving property to Settlor’s minor children
45
Q

Implied Trusts: Semi-Secret Trusts

A

Settlor’s will states:

  • “I give property to Tom to hold for my children”
  • Settlor and Trustee orally agree that Trustee is to hold property for Settlor’s minor children and distribute to them as they reach 18 years of age
  • Semi secret because trust apparent but terms are not
    • Enforceable? NO
    • If enforce trust, gives Trustee too much discretion/power over trust property
    • If not enforce trust, property goes back into Settlor’s probate estate for distribution to heirs
    • Thus, majority of courts choose to not enforce the trust, allowing property to flow through will or intestate succession. •Restatement would impose constructive trust
46
Q

Trustee Acceptance

A

Acceptance UTC 701(a)

Expressed

-Substantial compliance with method of acceptance prescribed in trust

Implied

  • Accepting trust property
  • Exercising powers
  • Performing duties

Rejection UTC 701(b)

  • Must be done prior to acceptance
  • If fail to accept within reasonable time, deemed to have rejected

Acts not amounting to acceptance UTC 701(c)

  • Preservation of trust property
  • Inspection or investigation of trust property
47
Q

Trustee Powers and Duties

A

Power = exercise of legal title; often discretionary - Agency problem - Humans, by their nature, are self-interested - Cost-benefit analysis does not always lead to result that safeguards beneficiary’s interests - Supervisory problem - S gone - Bs vulnerable - Solution? - Duty = obligation - Care norm—prescribes objective standard of care - Loyalty norm—proscribes misappropriation

48
Q

Trustee Powers

A
  • Conferred by trust AND
  • All power that an “unmarried competent owner” has over trust property
  • Any other powers necessary to “achieve the proper investment, management, and distribution of trust property” -
  • Any other power conferred by code - UTC 815
  • Ct approval not required Within contours of code, trustee MAY (partial list)
    • Collect trust property
    • Acquire or sell trust property -
    • Acquire undivided interest in trust assets, including mutual funds
    • Exchange, partition, or change character of property
    • Manage stock portfolio
    • Exercise rights as absolute owner
    • Manage real property
    • Repair, improve, demolish, subdivide, develop, dedicate for public use
    • Enter lease
    • Insure property
    • Employ persons to advise or assist trustee in exercise of power - UTC 816
49
Q

Trustee Duties

A

Code’s mandatory duties - Obedience Duties prescribed in Trust Code’s default duties - Loyalty - Care - Impartiality - Inform

50
Q

Duty of Obedience/Good Faith

A

Trustee SHALL administer trust in - “Good faith” - “Accordance with trust terms and purposes” and - “Interests of beneficiary” - UTC 801 - Duty prevails over terms of trust - UTC 105(b)(2)

51
Q

Acting in bad faith - example

A

Trust permitted trustees to pull portion of trust assets for marketing purposes If trustees spent money for other purposes other than marketing, trustees acted in bad faith In re Washington Builders Benefit Trust, 293 P.3d 1206 (Wa Div 2 2013).

52
Q

Acting in good faith - example

A

Co-trustee leased trust-owned farmland to himself Nothing in trust permitted co-trustee to do so, but Co-trustee obtained consent from other trustees; No Bs contested action and court approved it. Wilkins v. Lasater, 733 P.2d 221 (Wa App Div 3 1987).

53
Q

Code’s Default Duties

A

Loyalty -Self-dealing -Conflict of interest Care for trust property (prudence) -Prudent investor rule Impartiality -Allocation of principal and income Inform and report

54
Q

Trustee’s Duty of Loyalty

A

Generally Precludes:

  • Self-dealing
  • Conflict of interest

High duty of care

  • Good faith not a defense
  • Reasonableness/fairness to beneficiary not a defense

Policy

  • Ensures legitimacy of trust
  • Deter wrongful conduct
  • Creates bright line
  • Make proving breach easy for beneficiary
55
Q

Duty of loyalty - self dealing

A

Self dealing—Trustee SHALL administer the trust “solely in the interests of the beneficiaries” - Trustee engages in transaction with trust property - Purchases trust property - Comingles trust funds with personal funds - Uses trust property for personal benefit

56
Q

Duty of loyalty - Conflict of interest

A

Trustee SHALL administer the trust “solely in the interests of the beneficiaries” - Trustee acquires personal benefit from trust decision or transaction - Personally invest in an opportunity offered to the trust - Obtain more favorable treatment from engaging in transaction Trust decision or transaction benefits one close to trustee - T’s spouse - T’s descendants, siblings, parents, or their spouses - T’s agent or attorney

57
Q

Trustee’s Overcome Breach Duty of Loyalty

A

Presumption of breach

T may overcome presumption:

  • Trustee obtained prior authorization from the court to act;
  • Test = fair to Bs and in their best interest
  • Terms of the trust permitted the trustee to engage in transactions otherwise prohibited;
    • Must be explicit/specific
  • Bs failed to timely commence action (section 1005 has SOL)
  • Bs consented to, ratified, or released T
  • T enters into K or acquires claim prior to becoming or contemplating becoming T

T cannot argue:

  • T acted in good faith
  • T’s actions were fair to trust
  • T’s actions were reasonable
  • T received no benefit from transaction
    • “No further inquiry rule”
58
Q

Trustee’s Duty of Loyalty

UTC 802(d); (e)

A

Transactions between trustee and beneficiary

  • Does not concern trust property
  • Arises during existence of trust; or
  • While trustee retains significant influence over beneficiary
  • T obtains an advantage

Voidable unless

  • T proves transaction fair to beneficiary
  • Creates presumption of abuse*

Trust opportunity

  • T enters into competing business
  • T purchases property that trust would want to purchase
  • Voidable unless T proves transaction fair to beneficiary Creates presumption of abuse
59
Q

Duty of loyalty - things that aren’t self dealing

A

T’s actions that fall outside of self-dealing:

  • Proprietary mutual funds 802(f)
    • Corporate trustee may invest in its own mutual funds IF complies with prudent investor rule
  • Voting stock 802(g)
    • Must vote in best interest of Bs
  • Trustee compensation 802(h)(2)
    • As long as compensation is fair, Trustee’s payment of compensation for duties is not breach of loyalty (falls outside duty)
  • Trustee advances money from trust to self for benefit of trust 802(h)(5)
    • Secure insurance; pay taxes; clean up property; make safe
60
Q

Duty of Prudence

A
  • T shall administer trust as a “prudent person,” considering trust “purposes, terms, distributional requirements, and other circumstances.”
  • T shall employ “reasonable care, skill, caution.” - Special Skills or Expertise
  • If trustee has special skills OR
    • if trustee is named trustee in reliance on the trustee’s representation of special skills, trustee shall use those special skills
  • Court will assess T’s conduct at the time of decision, not afterwards
61
Q

Duty of prudence minimum reqs.

A

At a minimum, a trustee must:

  • Understand and be able to administer trust -
    • Terms - Purposes, objectives, restrictions, and prohibitions, as articulated in the trust instrument
    • Ascertain all facts
    • Administer all aspects of the trust with competence, attention, diligence, organization, and care
    • Avoid delegation of duties
62
Q

Duty of Prudence - factors in decision making

A

Factors that a trustee should take into account in making decisions:

  • the terms and purposes of the trust;
  • the value and nature of the trust estate;
  • the likely duration of the trust; -
  • the amount and timing of the trust’s distribution requirements;
  • potential needs for liquidity, stability of income flow, and preservation of (or growth in) the purchasing power of capital; and
  • the needs, independent resources, and other personal and financial circumstances and concerns or goals of the beneficiaries Restatement (Third) of Trusts § 77
63
Q

Duty of Prudence - discretionary power

A

Even if trust grants trustee “absolute” power

  • Trustee must exercise discretionary power in:
  • good faith,
  • Accord with trust terms and purposes, and
  • Interests of beneficiary
  • Court SHALL NOT find an abuse of discretion merely b/c court would have exercised discretion differently or not at all
64
Q

Duty of Prudence: Modern Portfolio Theory

A

Modern Portfolio Theory is premised on two patterns of economic behavior: (1) Risk is inversely correlated with expected returns (2) An investor assumes uncompensated risk by failing to diversify Diversification: - Allows investors to structure their portfolios to maximize total expected returns according to the investor’s unique combination of investment goals and level of risk tolerance - Allows investors to reduce or eliminate the uncompensated default risk for any specific investment - Is a subset of a trustee’s overall duties to exercise care and skill by avoiding taking risks in which there is unwarranted danger of loss without commensurate opportunities for gain. - Diversified portfolios typically consist of a mixture of low-risk bonds which do not appreciate much in value over the long-term and higher-risk equities which may be volatile in the short-term but generate higher long-term returns.

65
Q

Duty of Prudence: Prudent Investor Rule

A

Uniform Prudent Investor Act (UPIA)

  • In making investment decisions, T must
    • Consider trust terms
    • Evaluate existing trust assets
    • Consider overall portfolio of assets
    • Diversify, unless there is a good reason not
  • Reviewed in light of information available at the time of decision

The Prudent Investor Rule’s standard of care is a set of default rules subject to modification by the trust (UPIA § 1(b))

66
Q

Subsidiary Duties: Duty of Impartiality UTC

A
  • If trust has 2 or more beneficiaries, trustee SHALL act impartially in administering trust property, giving due regard to each beneficiary’s interests. UTC 803. - Does not require the trustee to treat all beneficiaries equally - Does require trustee to treat the beneficiaries equitably in light of the terms of the trust - The trustee must act impartially in investment, management, and distributions
67
Q

Subsidiary Duties: Duty of Impartiality Uniform Principal and Income Act § 401

A

Uniform Principal and Income Act § 401 - Income - money received from bond interest payments, cash dividends, rents, and royalties - Principal - proceeds from the sale of trust assets, including assets that appreciate in value - Income beneficiaries tend to prefer short-term gains - Principal beneficiaries tend to prefer long-term growth

68
Q

Duty of Impartiality: Income & Principal Adjustments

A

Uniform Principal and Income Act § 104, the trustee may make adjustments between principal and income if three conditions are met: (1) the trustee invests and manages trust assets as a prudent investor; (2) the terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust’s income; and (3) the trustee determines, after applying the rules in Section 103(a) [general principles governing allocation of receipts and disbursements], that the trustee is unable to comply with Section 103(b) [duty of impartiality]. A trustee may not make adjustments if: - the trustee is a beneficiary of the trust; or -the trustee is not a beneficiary, but the adjustment would benefit the trustee directly or indirectly.

69
Q

Subsidiary Duties: Duty to Inform and Report

A

1) SHALL keep QBs “reasonably” informed about trust administration and the “material” facts necessary for them to protect their interests
2) Trustee SHALL “promptly” respond to B’s request for information relate to trust
3) Upon B’s request, trustee SHALL “promptly” furnish B with copy of trust instrument
4) SHALL notify QBs of Trustee’s acceptance of trust and trustee’s contact information (within 60 days of acceptance)
5) Within 60 days of learning that a trust has become irrevocable, SHALL notify QBs of
i) Trust’s existence
ii) Settlor’s identity
iii) Right to request copy of trust
iv) Right to trustee’s report

***The settlor of a revocable trust may waive all reporting requirements to the beneficiaries***

70
Q

Remedies for Breach of Fiduciary Duty

A

(1) compel the trustee to perform the trustee’s duties;
(2) enjoin the trustee from committing a breach of trust;
(3) compel the trustee to redress a breach of trust by paying money, restoring property, or other means;
(4) order a trustee to account;
(5) appoint a special fiduciary to take possession of the trust property and administer the trust;
(6) suspend the trustee;
(7) remove the trustee as provided in Section 706;
(8) reduce or deny compensation to the trustee;
(9) subject to Section 1012, void an act of the trustee, impose a lien or a constructive trust on trust property, or trace trust property wrongfully disposed of and recover the property or its proceeds;
(10) order any other appropriate relief.

UTC § 1001(b)

71
Q

Remedies for Breach: Money Damages (Surcharge)

A

UTC § 1002. Damages for Breach of Trust (a) A trustee who commits a breach of trust is liable to the beneficiaries affected for the greater of: (1) the amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred; or (2) the profit the trustee made by reason of the breach.

72
Q

Exculpatory Clauses enforceability

A

Enforceable unless:

  • It relieves the trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries; or
  • It was inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor.

If T drafts clause or causes clause to be inserted:

  • Clause is invalid unless:
    • T proves that clause is fair under the circumstances and
    • that its existence and contents were adequately communicated to the settlor
73
Q

Exculpatory Clauses (fairness factors)

A

Fairness factors:

  • 1) whether the instrument was drawn by the trustee or another acting wholly or in part on behalf of the trustee;
  • 2) whether the trustee prior to or at the time of the trust’s creation had been in a fiduciary relationship to the settlor,
  • 3) whether the settlor received competent, independent advice regarding the provisions of the instrument;
  • 4) whether the settlor was made aware of the exculpatory provision and was able to understand and make a judgment concerning the clause; and
  • 5) the extent and reasonableness of the provision.
74
Q

Homestead Allowance

UPC 2-402

A
  • Recipient
    • Surviving Spouse
      • If none
      • Decedent’s minor child and/or dependent child
  • Property
    • $22,500
  • Protections
    • Exempt from claim against estate
    • In addition to any share
      • Under will (unless otherwise provided)
      • At intestacy
      • By elective share

If estate is sufficient, specifically devised property may not be used to satisfy rights to Homestead.

75
Q

Family Allowance

UPC 2-404; 405

A
  • Recipient
    • Surviving spouse, if living
    • Minor children whom Decedent obligated to support
      • Children Decedent actually supported
  • Property
    • Amount necessary to maintain SS/children while estate administered
    • Personal Representative vested with discretion on whether to make payment and if so, how much
    • Not to exceed $2,250/month or $27,000/year, absent court order
      • Limited to one year, if estate is not able to pay all claims
      • “Need is relevant to circumstances”
  • Protections/Limits
    • Exempt from all but Homestead
    • In addition to any share
      • Under will (unless otherwise provided—meaning that T can give more, but not less)
      • At intestacy
      • By elective share
      • No survivorship rights to payment
76
Q

Exempt Property

UPC 2-403; 405

A
  • Recipient
    • Surviving spouse
      • If none
        • Decedent’s children
  • Property
    • $15,000
      • Furniture
      • Automobiles
      • Furnishings
      • Appliances
      • Personal effects
  • Protections/Limits
    • Free of security interests
    • May look beyond property identified above to get to $15,000
    • Homestead and Family Allowance have priority

If estate is otherwise sufficient, specifically devised property may not be used to satisfy rights to property

77
Q

Pretermitted Spouse

UPC 2-301

A
  • IF Testator executes a will and later marries, making no change to will
    • Surviving Spouse receives intestate share that is NOT
    • Devised to Testator’s child born before Testator married Surviving Spouse and not a child of Surviving Spouse OR
    • Passed to T’s child through lapse
  • UNLESS
    • Will indicates intent to omit
    • T provides for Surviving Spouse outside will
78
Q

Omitted Child

Definition

A
  • Definition of omitted child
    (1) T executes will;
    (2) T has child; and
    (3) T does not change will
79
Q

Omitted Child

Rule

A
  • If T has no child living at the time T executes will, omitted child receives
    • Omitted child’s intestate share, UNLESS
      • T’s will devises substantially all property to the other parent of the omitted child;
      • That parent survives T; and
      • That parent is entitled to take under will
  • If T has one or more children living at the time T executes T’s will and T’s will devised property to one or more of T’s children, the omitted child receives
    • A share limited to the devises made to T’s then living children
      • The omitted child’s share is the amount child would have received if T would have included all omitted children and given an equal share to each child
        • Omitted child’s share should be of same character of property as thatawarded to the other children
          • To fund the share, devises to then living children abate on a pro rata basis
80
Q

Omitted Child Rule

Exceptions

A

Exceptions:

  1. Appears from the will omission was intentional OR
  2. T provided for omitted child with nonprobate transfer; AND T’s intent that omitted child should take from transfer shown from T’s statements or reasonably inferred from the amount of transfer or other evidence.

Trusts & Estates (3 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions