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Rocking the Bar Exam > Trusts (Essay Only) > Flashcards

Trusts (Essay Only) Flashcards

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1
Q

terms

trust

A

management device
bifurcated transfer - legal and equitable ownership split up
trustee owns legal title, manages the property for benefit of beneficiary
beneficiaries have equitable interest

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2
Q

terms

principal

A

original trust property and any increase in value

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3
Q

terms

income

A

money invested by the trust

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4
Q

terms

revocable vs. irrevocable trust

A

revocable trust - can be revoked at any time during settlor’s life
irrevocable trust - can’t be revoked

  • traditional rule - trust presumed irrevocable unless trust doc says otherwise
  • UTC reverses this presumption, trust is revocable unless trust doc says otherwise

mention both rules

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5
Q

terms

settlor

A

person who creates the trust

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6
Q

terms

UTC

A

Uniform Trust Code

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7
Q

terms

types of trust distributions –> mandatory, discretionary, support trusts

A
  • mandatory trust - trustee must make distributions from the trust, no discretion
  • discretionary trust - trustee may make distributions in their discretion, complete discretion
  • support trust - trustee makes distributions to support the beneficiary
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8
Q

terms

trustee

A

manages the trust, holds legal title to the property
has power to manage the property
can be individual, bank, or trust company
will NOT fail for lack of trustee

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9
Q

terms

beneficiary

A

receives benefit of the trust
holds equitable title to the property
has power to enforce the trust investment
can be multiple classes of beneficiaries

animal may NOT be direct beneficiary of a private trust

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10
Q

express trusts

express trusts (in general)

A

owner expressly indicates the intent to create a trust
may be private or charitable

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11
Q

express trusts

private express trust - what are the elements to create one?

A

RIC PAT

1. res - trust res (property)

  • can’t be a trust if there’s no property in it (no empty trusts)
  • EXCEPT pour-over trust (trust terms must be in writing at time will is executed, properly need not be in trust at time of will)

2. settlor’s intent

  • “trust words” create a presumption of a trust (“in trust” “for the benefit of”)
  • oral trusts are valid
  • minority rule: valid trust must be in writing
  • precatory language does not create a trust (“hope” “wish”)

BUT trust must be in writing in certain situations

  • SOF (conveying real property)
  • devise

3. capacity of settlor

4. trust purpose - valid if not illegal or contrary to pbpl

5. ascertained beneficiary - either specific person or criteria to determine (ex. Chatterbox students)
EXCEPT

  • unborn children
  • class gifts must be definite
  • charitable trusts

6. trustee has duties

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12
Q

tip

trust vs. gift

A

look at intent
gift is a revocable, outright gift
trust involves a bifurcated transfer - settlor gives the property to one person for the benefit of another

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13
Q

tip

trust vs. debt

A

debt - obligation to pay money, source of money to repay doesn’t matter
trust involves a segregated source of funds

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14
Q

express trusts / charitable trusts

charitable trusts

A

must have a charitable purpose
ex. relief of poverty, advancement of education or religion, promotion of good health, govt, benefit the community at large or a specific segment, etc.

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15
Q

express trusts / charitable trusts

charitable trusts - does RAP apply?

A

no wooo

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16
Q

express trusts / charitable trusts

cy pres doctrine

A

court can modify a trust if the trust’s charitable purpose is no longer possible
to modify, you need a general charitable purpose
want to make the new purpose as close as possible to the original purpose
if there is no general charitable purpose, property goes to a resulting trust

like if the trust is to support the school’s pottery program, but the pottery program ends so the trust’s money can go to the painting program instead b/c the larger charitable purpose is art, not just pottery

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17
Q

express trusts / charitable trusts

standing - who has standing to enforce terms of charitable trust?

A
  • Attorney General’s Office has standing to enforce the terms of a charitable trust
  • UTC gives settlor standing too
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18
Q

express trusts / creation

what are the ways to create an express trust

A
  1. inter vivos transfer - created during settlor’s life
  2. testamentary transfer - created according to terms of a will
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19
Q

express trusts / creation

inter vivos transfer

A

created during settlor’s life

  1. declaration of trust
    settlor declares herself holder of property in trust for beneficiaries
    settlor also serves as trustee
  2. deed of trust
    settlor conveys property to a trustee
    settlor is NOT trustee
20
Q

remedial trusts

remedial trusts (general info)

A
  • not driven by interest
  • equitable remedy created by operation of law
  • passive in nature - trustee’s only duty is to convey the property back to the settlor
  • two types - resulting trust + constructive trust
21
Q

remedial trusts

resulting trusts

A

used when trust fails (ex. property is supposed to go to A’s kids and A dies without any kids –> trust fails, property goes back to O)
trustee must return property to seller or settlor’s estate
goal is to avoid unjust enrichment
avoid a resulting trust by creating a gift-over clause (ex. if A dies without kids, then the property goes to B)

purchase-money resulting trust
P1 buys property but it’s taken in P2’s name
If P2 is not the natural object of P1’s bounty (not a close friend or relative), court will create this type of trust

22
Q

remedial trusts

constructive trust

A
  • remedy used to prevent unjust enrichment if 3p takes advantage of a settlor
  • wrongful conduct like fraud, duress, undue influence, breach of a duty, detrimental reliance by 3p
23
Q

tip

FLAG: bad actor involved in a trust

A

think of a constructive trust

24
Q

creditors’ rights

alienability of trust property and creditors’ ability to reach –> two basic rules

A

1. beneficiary’s equitable interest in trust property is freely alienable
creditor can reach beneficiary’s equitable interest
EXCEPTION: trust instrument or statute limits this rights

2. creditor CANNOT reach trust principal or income until such amounts become payable to beneficiary or beneficiary can demand it
has to be in beneficiary’s hand for creditor to get it

25
Q

creditors’ rights

asset protection trusts

A

goal: shield beneficiaries from creditors’ claims

  • support trust
  • discretionary trust
  • spendthrift trust
26
Q

creditors’ rights / asset protection trust

support trust

A

creditors cannot reach trust property b/c beneficiary can’t demand payment
creditors can reach when trustee makes support payment

27
Q

creditors’ rights / asset protection trust

discretionary trust

A

creditors cannot reach trust property b/c beneficiary cannot demand payment
creditors can reach when trustee makes a payment

lecture handout has this as basically a repeat of support trust, not an error

28
Q

creditors’ rights / asset protection trust

spendthrift trust

A

trust expressly restricts beneficiary’s power to alienate her interest
creditors cannot reach trust property until trustee makes a payment
EXCEPT creditors can reach trust property if spousal or child support, creditor provides basic necessities to beneficiary, holder of federal or state tax liens

29
Q

trust termination

expiration

A

express trust can expire at end of stated term

30
Q

trust termination

material purpose

A

if trust has been satisfied, it auto terminates

31
Q

trust termination

unfulfilled material purpose doctrine / Claflin Doctrine

A

if settlor is dead and beneficiary wants to terminate the trust prematurely and trustee opposes termination (beneficiary wants their money early)

trustee can block premature termination if the trust is still serving some material purpose
discretionary trust, support trusts, age-dependent trusts

32
Q

trust termination

settlor’s power

A

settlor can unilaterally terminate unless trust is irrevocable
trusts are presumed revocable so a settlor doesn’t need to expressly reserve right to terminate

33
Q

trust modification

if settlor is alive

A
  • can unilaterally modify unless trust is irrevocable
  • if trust is irrevocable, seller can terminate if all beneficiaries consent
34
Q

trust modification

if settlor is dead

A
  • all beneficiaries agree to a modification consistent with material purpose of trust
    OR
  • an unforeseeable event has frustrated purpose of the trust (equitable dedication)

if fact pattern involving unforeseen events, think clearly about purpose of the trust

35
Q

trust termination + modification

can trustee terminate or modify a trust through unilateral action?

A

no!

36
Q

trust modification

removal of a trustee

A
  • removal of a trustee is a remedy when trustee has breached a fiduciary duty or grossly mismanaged the property

likely to be granted if

  • trustee became incapable of performing duties
  • material breach of a duty
  • trustee develops a conflict of interest
  • serious conflict b/c trustee and beneficiary
  • trust persistently performs poorly as a result of trustee’s action/inaction
  • if settlor is alive, trustee can resign with written notice to co-trustee and beneficiaries
37
Q

principal vs. income

what is principal vs. income about?

A

how should the trustee balance interests of multiple beneficiaries when their interests are different?

  • lifetime beneficiaries want quick return, remainder holders want greater growth over time
  • All assets received by a trustee must be allocated to either income or principal
  • The allocation must be balanced so as to treat present and future trust beneficiaries fairly, unless a different treatment is authorized by the trust instrument

additional info from Essay 3571

38
Q

principal vs. income

old rule

A

classified income and principal based on nature of money
life beneficiary entitled to income
holder of remainder interest was entitled to trust principal

money generated by trust property = income
money generated in connection with conveyance of trust property = principal

additional info from Essay 3571

39
Q

principal vs. income

modern approach

A

more holistic
governed by Uniform Principal and Income Act
trustee focuses on total return of trust portfolio

trustee can re-characterize items and reallocate investment returns as necessary
distrbution of stock = principal

additional info from Essay 3571

40
Q

where does trustee get their powers?

A
  • look at trust document first
  • if trust doc is silent, statutory + common law principles apply
  • modern trend is to grant trustee all those powers necessary to act as a reasonably prudent person
  • ex. powers to sell or transfer, lease trust property, pay taxes, sever or consolidate trust property
  • trustee owns legal title and can act as owner
41
Q

trustee’s duties (in general)

like fiduciary duties not admin tasks

A
  • duty of loyalty + duty of care
  • ANY beneficiary has standing to enforce these duties
42
Q

trustee’s duties - duty of loyalty

A
  • objective standard - did trustee act reasonably
  • self-dealing is breach –> no further inquiry rule (if established self dealing, that’s a per se breach)
  • even if trust docs allow self dealing, transaction must still be reasonable + fair for trustee to avoid liability
  • conflicts of interest may still breach - reasonable and good faith tests
43
Q

trustee’s duties - duty of care (duty of prudence)

A
  • subjective standard - did trustee act in good faith
  • care that a person of ordinary prudence would practice in the care of their own estate
  • trustee should treat property as their own
  • trustee must use their special skills - held to heightened standard

delegation

  • common law rule: trustee can never delegate authority
  • modern rule: permits delegation when unreasonable for trustee to undertake such functions (ex. investment decisions), trustee has duty to oversee

investments

  • old rule: trustees were limited to specific list of acceptable investments, breach if outside the list
  • modern rule (Prudent Investor Rule): trustee has discretion to invest and manage property as a prudent investor, expected to diversify, look at portfolio as a whole

duty of impartiality

  • trustee has duty to balance the competing interests of present and future beneficiaries
  • old rule: life beneficiary entitled to income, remainder holder to principal
  • modern rule: allocation b/t income and principal must be balanced, treat them fairly
44
Q

trustee’s duties - administrative duties

A
  • duty to inform beneficiaries about nature of trust
  • duty to account for actions taken on behalf of the trust, report on health of trust portfolio
45
Q

tip

make sure to review future interests in property notes

A

you’ve got this!

46
Q

how does a spendthrift clause work in a discretionary trust?

Essay 4984

A

w/o clause: if trustee pays beneficiary, then beneficiary’s creditors have same rights as beneficiary

  • spendthrift trust expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest
  • applies only as long as the property remains in the trust, and it is inapplicable after it has been paid out to the beneficiary
  • creditors can’t reach the beneficiary’s trust interest
  • most states allow certain classes of creditors to reach a beneficiary’s interest even w/ clause
  • some states have exception for a provider of necessities to the beneficiary

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