Trusts & Estates (Future Interests)

Question 1

MED

TRUST CREATION AND TITLE DIVISION

Answer 1

A trust is a fiduciary relationship between the trustee(s) and the trust beneficiaries. When a trust is created, title to property is divided between legal and equitable title:

1. The trustee holds legal title to the property and becomes the owner of record for the property.
2. The beneficiary holds equitable title to the property and is entitled to the financial benefits of the property.

Question 2

MED

THE SETTLOR

Answer 2

The settlor is the person who creates the trust (usually the person who places the original assets into the trust).

Question 3

MED

THE TRUSTEE

Answer 3

The trustee is the person who holds the assets of the trust for the benefit of the beneficiaries. The trustee manages the trust and its assets under the terms of the trust.

Question 4

MED

THE BENEFICIARY

Answer 4

The beneficiary is the person who is entitled to the assets or profits of the trust.

Question 5

lowest

EXPRESS TRUST vs. IMPLIED TRUST

Answer 5

An express trust is created when a person has the intent to create a trust and complies with the requisite formalities to create that trust.

An implied trust is created by conduct, regardless of whether there was intent to create a trust (e.g., constructive trusts imposed by courts).

Question 6

HIGH

EXPRESS TRUST ELEMENTS

Answer 6

A valid express trust is created if the following five elements are met:

1. The settlor has intent to create the trust;
2. There is trust property (i.e., the res);
3. An ascertainable beneficiary exists;
4. The trust has a trustee; AND
5. All parties comply with the requisite formalities.

Question 7

MED

REVOCABLE vs. IRREVOCABLE TRUSTS

Answer 7

Under the common law (majority view), a trust is irrevocable UNLESS the settlor expressly retains the right to revoke or amend the trust.

Under the Uniform Trust Code (minority view), a trust is revocable UNLESS the trust expressly provides otherwise.

Question 8

MED

TESTAMENTARY TRUSTS

Answer 8

A testamentary trust is created through provisions of the settlor’s will and does not come into existence until the settlor dies (must meet the same formalities as the will).

Question 9

lowest

POUROVER PROVISIONS

Answer 9

A pourover provision in a will devises property to a previously existing trust under the terms of that trust. A pourover provision is distinguishable from a testamentary trust, as a pourover provision does NOT create a trust; it transfers property to a trust already in existence. Therefore, a pourover provision CANNOT devise property to a testamentary trust (because a testamentary trust does not come into existence until the settlor dies).

Question 10

lowest

CHARITABLE TRUSTS

Answer 10

A charitable trust is a trust that has the purpose of accomplishing a substantial amount of social benefit to the public at large or to a reasonably large class. The beneficiary of a charitable trust may be indefinite, named, or contain a class of persons described by the trust. The rule against perpetuities does NOT apply to charitable trusts.

A charitable trust will NOT be invalidated for failure to state a specific charitable purpose or beneficiary. Generally, courts will select a purpose or beneficiary that is consistent with the settlor’s intent if the settlor had a general charitable intent.

Question 11

LOW

DISCRETIONARY TRUSTS

Answer 11

A discretionary trust grants the trustee absolute power and discretion to make good faith determinations regarding when and how much of the trust property should be distributed to the beneficiaries of the trust. Courts may interfere if the trustee is making such determinations in bad faith.

Question 12

LOW

SUPPORT TRUSTS

Answer 12

A support trust is a trust that contains a provision directing the trustee to pay to the beneficiary as much of the income or principal as is necessary for the beneficiary’s education and support.

Support trusts can be pure or discretionary.

Pure support trusts limit the trustee’s discretion. The trustee is obligated to spend only so much of the available trust property as is necessary for the education and maintenance of the beneficiary.

Question 13

lowest

SPENDTHRIFT TRUSTS

Answer 13

Spendthrift trusts contain provisions designed to protect beneficiaries from their own carelessness. Generally, spendthrift provisions serve two main functions:

1. The beneficiary is NOT permitted to sell or assign his beneficial interest; AND
2. The beneficiary’s creditors CANNOT reach the beneficiary’s beneficial interest UNLESS:
   
   1. the settlor is the beneficiary of the spendthrift trust (i.e., self-settled trust);
   2. the creditor is seeking reimbursement for providing necessaries; or
   3. the creditor has an order for child support or alimony.

Question 14

LOW

RIGHTS OF CREDITORS IN TRUST PROPERTY

Answer 14

The creditors of the beneficiary of a trust have NO greater rights in the trust property than the rights of the beneficiary.

However, absent a spendthrift provision, the beneficiary’s creditors are able to reach the beneficiary’s interest by attachment of the interest income to the beneficiary. Whether or not the trust contains a spendthrift provision, creditors can reach the beneficiary’s interest once it is distributed to the beneficiary.

Question 15

lowest

ALIENABILITY OF TRUST INTERESTS

Answer 15

Trust interests are alienable, devisable, and descendible unless the terms of the trust provide otherwise.

Question 16

lowest

INVASION OF TRUST PRINCIPAL

Answer 16

Generally, an income beneficiary is only entitled to trust income (not the trust principal) UNLESS:

1. Only one beneficiary exists;
2. The beneficiary will ultimately receive the trust principal;
3. There is a significant change in circumstances; OR
4. The trust grants the trustee discretion to invade the principal (can be express or implied through the settlor’s words or conduct).

Question 17

HIGH

DEVIATION FROM THE TRUST

Answer 17

Trustees and beneficiaries can request that the court permit a deviation from administrative provisions in the trust instrument. Generally, a court will permit a deviation if the purposes of the trust:

1. Have been satisfied;
2. Have become unlawful; OR
3. Are impossible to carry out.

Question 18

HIGH

CY PRES DOCTRINE

Answer 18

If it becomes unlawful, impossible, or impracticable to carry out the purpose of a charitable trust, the Cy Pres doctrine allows the court to modify the terms of the charitable trust “as near as possible” to the original intention of the settlor in order to prevent the trust from failing.

Question 19

lowest

MODIFICATION OF THE TRUST BY THE PARTIES

Answer 19

Generally, a trust is irrevocable and CANNOT be modified unless the settlor retained the right to do so in the terms of the trust instrument. However, in a minority of jurisdictions, the settlor is free to modify or revoke the trust instrument WITHOUT express authorization to do so.

Question 20

LOW

TERMINATION OF TRUSTS

Answer 20

Generally, a trust may be terminated if:

1. The trust is revoked or expires pursuant to its terms;
2. The material purpose of the trust has been satisfied or becomes unlawful, contrary to public policy, or impossible to carry out;
3. The settlor and all of the beneficiaries unanimously agree to terminate;
4. All of the beneficiaries agree and no material purposes for the trust remain;
5. Termination will further the purpose of the trust due to circumstances that were not foreseen by the settlor; OR
6. The court or trustee determines that the value of the trust property is too low to justify the cost of administration.

Question 21

LOW

FIDUCIARY REQUIREMENTS OF THE TRUSTEE

Answer 21

A trustee is a fiduciary holding legal title to the trust property. As a fiduciary, the trustee MUST:

1. Manage the trust property exclusively for the benefit of ALL the trust’s beneficiaries; AND
2. Administer the trust in good faith pursuant to the terms and purposes of the trust.

Question 22

HIGH

THE TRUSTEE’S DUTY OF CARE

Answer 22

The trustee possesses a duty to exercise the degree of care and skill as a person of ordinary prudence would exercise in dealing with his own property. In making this determination, the focus is on the trustee’s conduct, not the results of such conduct.

The Uniform Prudent Investor Act requires the trustee to exercise the degree of care and skill as an investor of ordinary prudence would exercise in investing his own property.

Question 23

HIGH

EXCULPATORY CLAUSES

Answer 23

Under the majority view, the settlor may limit the potential liability of a trustee by including an exculpatory clause in the trust instrument. However, exculpatory clauses do not excuse the trustee for acts done in bad faith.

Question 24

MED

THE TRUSTEE’S DUTY OF LOYALTY

Answer 24

The trustee owes a duty of loyalty to the beneficiaries where the trustee may NOT obtain any personal gain from administering the trust, except for fees.

The settlor may expressly waive the trustee’s duty of loyalty in the trust instrument. However, a waiver will not excuse the trustee for acts done in bad faith.

Question 25

lowest

THE TRUSTEE’S DUTY TO ACT IMPARTIALLY

Answer 25

The trustee possesses a duty to be impartial with respect to ALL the beneficiaries of the trust when investing, managing, and distributing the trust property (i.e., cannot favor one beneficiary over another).

Question 26

LOW

TRUST INCOME ALLOCATIONS

Answer 26

The following newly acquired assets generally must be allocated to the trust income:

1. Receipt of rental payments from trust property; AND
2. Corporate distributions (e.g., cash dividends, return on investments, etc.).

Question 27

LOW

TRUST PRINCIPAL ALLOCATIONS

Answer 27

The following newly acquired assets generally must be allocated to the trust principal:

1. Funds received from the sale of trust property; AND
2. Repayment of loan principal.

Question 28

MED

RULE AGAINST PERPETUTIES

Answer 28

Common Law. Under the common law, a future interest MUST vest within 21 years of the death of a life in being. If there is ANY possibility that the future interest will not vest within this time period, the interest will be invalidated.

Wait and See. In many jurisdictions, courts will “wait and see” if the future interest actually does fail to vest within 21 years after the death of a life in being, rather than invalidating the interest for any possibility that it will fail to vest within the time period.

Modern Trend. Under a modern trend, some courts will reduce age contingencies exceeding 21 years to validate a conveyance that otherwise violates the common law rule against perpetuities.