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

HIGH

**EXPRESS TRUST ELEMENTS (5)

Answer 5

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 6

MED

*REVOCABLE vs. IRREVOCABLE TRUSTS

Answer 6

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 7

MED

*TESTAMENTARY TRUSTS

Answer 7

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 8

HIGH

**DEVIATION FROM THE TRUST (3)

Answer 8

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 9

HIGH

**CY PRES DOCTRINE

Answer 9

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 10

HIGH

**THE TRUSTEE’S DUTY OF CARE

Answer 10

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 11

HIGH

**EXCULPATORY CLAUSES

Answer 11

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 12

MED

*THE TRUSTEE’S DUTY OF LOYALTY

Answer 12

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 13

MED

*RULE AGAINST PERPETUTIES

Answer 13

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.