Trusts & Future Interest

Question 1

Class Gift Closing

Answer 1

When a gift is made to a class of persons, the class closes when some member of the class can call for a distribution of her share of the class gift. (ex. closing upon settlers death = class is determined at date of death).

Question 2

Disclaimer

Answer 2

A beneficiary of a trust has the right, within a reasonable time after learning of the trust, to disclaim the beneficial interest, absent some act of expressed or implied acceptance.

Upon disclaimer, any interest that otherwise would pass to that person under the trust passes as though the disclaiming party predeceased the life tenant.

In most states, this is not effective unless in writing and filed within nine months of the decedent’s death.

Question 3

Antilapse Statues

Answer 3

Generally do not apply to trusts.

In states that have adopted anti-lapse statutes applicable to trusts, such as UPC 2-707, if a gift is made in trust to a class described as “children,” the property to which a deceased beneficiary would have been entitled if he had survived passes to his surviving descendants by representation.

Question 4

Duty to act prudently

Answer 4

The trustee must exercise reasonable care, skill, and caution.

Question 5

Duty to act impartially

Answer 5

If there is more than one beneficiary, the trust generally must act impartially in managing the trust assets, taking into account the beneficiaries’ differing interests.

However, when the trust is revocable the settlor is treated as the owner of the trust assets, and the trustee’s duties are owed to the settlor.

Question 6

Creation of Valid Private Trust

Answer 6

1. Settlor with capacity 2. Present intent to create a trust (manifested by settlor’s words, writing, or conduct) 3. Trustee (inter vivos trusts only; a testamentary trust will not fail for lack of a trustee) 4. Definite beneficiary(ies) (same person cannot be sole trustee and sole beneficiary) 5. Trust property (res) 6. Valid trust purpose (one that is not illegal, against public policy, or impossible to achieve, and does not violate the Rule Against Perpetuities)

To create a valid trust, there must be a settlor who, intending to create a trust for a valid trust purpose, delivers the trust property to the trustee to hold for the benefit of one or more beneficiaries.

Question 7

Secret Trust

Answer 7

An absolute gift in a will made in reliance on beneficiary’s promise to hold the property in trust for another

Extrinsic evidence is allowed

A constructive trust is imposed in favor of the intended beneficiary

Question 8

Semi-Secret Trust

Answer 8

A gift in a will to a person “in trust,” but does not name the trust beneficiary.

Extrinsic evidence is NOT allowed.

The “trustee” holds on resulting trust for the testator’s legatees or heirs.

Question 9

Termination of Trust

Answer 9

Can be terminated by settlor if revocable

Can be terminated by beneficiaries if: (1) all beneficiaries agree AND the trust purpose is not frustrated (all beneficiaries includes unborn and unascertained which must be virtually represented according to state law)

Question 10

Duty to diversify

Answer 10

A trustee must diversify the investments of the trust unless they reasonably determine that the purposes of the trust are better served without diversification.

If it is a revocable trust and the settlor directs the trustee to make nondiverse investments the trustee may be relieved of their duty to diversify because they owe their duties to the settlor in many states.

Question 11

Duty to Administer the trust

Answer 11

The trustee must act prudently, in good faith, and impartially.

Question 12

Duty of Loyalty

Answer 12

The trustee cannot represent both his personal interest and the interest of the trust. Absent court approval or a contrary trust provision, a trustee cannot enter into any transaction with the trust.

Ex. avoid conflicts of interest and no self-dealing.

Question 13

Duty to Report

Answer 13

The trustee must respond to beneficiaries’ request and provide accounting.

Question 14

Duty to separate and earmark property

Answer 14

The trust assets must be kept physically separate from the trustee’s personal assets and assets of other trusts.

Ex. no comingling

Question 15

Duty to preserve and make the trust property productive

Answer 15

The trustee must use reasonable care to invest the property (prudent investor rule), collect claims due, lease or manage land, record documents, pay taxes, and secure insurance.

Question 16

Interference with Discretionary trust

Answer 16

Not allowed unless the trustee abuses their power.

Abuse of power depends on the extent of discretion conferred on the trustee.

If absolute discretion court will still interfere if the trustee acts in bad faith or dishonestly.

Question 17

Remedy for self-dealing

Answer 17

(I) set aside transaction; (ii) recover the profit made by the trustee; or (iii) ratify the transaction

Question 18

Cy pres

Answer 18

Applied when the beneficiary no longer exists and the settlor had a general charitable intent.

The court will direct that the property be applied to another charitable purpose as close as possible to the original, rather than permit the trust to fail and become a resulting trust.

In states following the UTC general charitable intent is conclusively presumed. In other states, fact dependent.

Question 19

Named beneficiary no longer exists

Answer 19

Follow any alternate provisions in the trust document.

If not alternate provisions, the general rule is that a resulting trust arises in which the settlor is the beneficiary, but see cy pres for charitable trusts.

Question 20

Promise to create a trust in the future

Answer 20

Valid only if: (I) supported by consideration, or (ii) he manifests anew an intention to create the trust when the assets come into existence

Question 21

Valid Pourover Will

Answer 21

Under traditional view: to create a valid pour over gift from a will to a revocable trust, the trust must be in existence or must be executed at the time of the will’s execution.

Under the prevailing view: the trust may be established after the will is executed but before the testator’s death.

Pour over gifts are valid even if the trust is unfunded or amended during the testator’s lifetime.

Question 22

Spendthrift trust

Answer 22

prohibits the beneficiary from voluntarily or involuntarily transferring his interest in the trust (such as a tort claim against beneficiary), however, a settlor-beneficiary cannot protect his own interest from creditors by a spendthrift provision.

Question 23

What happens when a portion of a trust fails for lack of a beneficiary?

Answer 23

A resulting trust in favor of the settlor or the settlor’s successors in interest is presumed.

Question 24

What happens to an insolvent beneficiary in the absence of a statutory prohibition or a spendthrift clause?

Answer 24

Generally the interest of an insolvent beneficiary can be reached to satisfy the claims of his creditors, but only the INTEREST of the beneficiary and not the trust property itself.