TRUSTS & FUTURE INTERESTS Flashcards
VALIDITY OF A TRUST
regarding validity of a trust, most MEE answers state: “a trust of personal property is valid if it has a trustee, a beneficiary, and trust property.”
- Trustee: A trustee manages the trust property and holds it for the benefit of the beneficiaries. Note that a trust will not fail for lack of a specifically appointed trustee. (The court will appoint one.)
- Beneficiary: In a private express trust, beneficiaries must be definite and ascertainable. Further, the same person cannot be the sole trustee and sole beneficiary or the trust collapses.
- **Trust property **(trust res): trust property must be identifiable.
PRESUMPTION OF REVOCABILITY
Under the Uniform Trust Code (UTC), the default rule is that a trust is revocable. An irrevocable trust can still be terminated or modified in some circumstances.
under the UTC, an inter vivos trust is revocable unless the instrument expressly states otherwise.
TERMINATION BY SETTLOR
a settlor may terminate the trust if all beneficiaries are in existence and all agree to the termination.
TERMINATION BY BENEFICIARIES AFTER SETTLOR DIES
Generally, even an irrevocable trust can be terminated if both the income beneficiaries and the remaindermen unanimously consent and if there is no material purpose of the trust yet to be performed. Claflin v. Claflin.
MODIFICATION OF TRUST
Per common law and the UTC, a court may order “equitable deviation” from the trust’s terms when an unanticipated change in circumstances would otherwise “defeat or substantially impair the accomplishment of the trust.” Common law allows for modification of administrative provisions only while the UTC allows for modification of dispositive terms of the trust as well.
DISCREATIONARY TRUST
The trustee has discretion to decide when to make a distribution to a beneficiary. The beneficiary cannot demand any part of the income or principle. Nor can a creditor, unless it shows the trustee acted dishonestly or in a state of mind “not contemplated” by the settlor. (There is an exception under the UTC for child support or alimony.)
SUPPORT TRUST
trustee must pay what is necessary for the beneficiary’s support.
SPENDTHRIFT TRUST
A spendthrift trust restrains “both the voluntary and involuntary transfer of a beneficiary’s interest.”
- Right of a creditor: generally, a creditor may not reach (i.e.,by garnishment or attachment) part of a beneficiary’s distribution prior to the beneficiary reaching it.
- There are some favored creditors that are exceptions to this rule: (1) a child or spousal support creditor (for maintenance and support), (2) a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust (e.g., a lawyer), (3) a claim of the state or United States (usually for taxes), and (4) creditors with claims for necessaries in some states (this fourth category is not recognized in states that follow the UTC).
CHARITBALE TRUST
A charitable trust may be created for a charitable purpose (including for the relief of poverty, the advancement of education, the advancement of religion, the promotion of health, governmental or municipal purposes, or other purposes that are beneficial to the community). It must have a large number of not readily identifiable individuals (rather than a few identifiable individuals). Note that a charitable trust is not subject to the common law rule against perpetuities.
- Modifying a charitable trust: A charitable trust may terminate if the charitable purpose becomes unlawful, impracticable, or impossible. However, cy pres may save the trust. Cy pres is a common law doctrine that is also a part of the UTC. It states: if a particular charitable purpose has become unlawful, impracticable, or impossible to achieve; no alternative charity is named in the trust; and the court finds that the settlor had general, rather than specific, charitable intent, then the court may apply cy pres to modify or terminate the trust by directing that the trust property be distributed in a manner consistent with the settlor’s general charitable intent.
HONORARY TRUST
This is a trust that does not have a charitable purpose or a definite beneficiary. It is often a trust to take care of a thing (e.g. cemetery plot) for a noncharitable purpose. Under the UTC, this is valid but may not be enforced for more than 21 years. Under common law, such a trust would not be valid if it violates the rule against perpetuities, but a court may characterize the trust as a “power” and allow the trustee to exercise that power in accordance with the trust terms for 21 years.
DUTY OWED BY THE TRUSTEE
Duty of loyalty: a trustee has a duty of loyalty to act in the best interest of the beneficiaries.
Duty of care—prudent administration
- Uniform Prudent Investor Act (UPIA): Almost all states have adopted a form of the UPIA. The UPIA states that a trustee must “administer the trust as a prudent person would . . .using reasonable care, skill, and caution.”
- Entire estate portfolio examined to determine prudence: management decisions with respect to individual assets should be evaluated in the context of the portfolio as a whole and as a part of an overall investment strategy rather than in a trustee’s investment and isolation.
- Duty to Diversify: the trustee is not liable for declines in value due to a downturn resulting from general economic conditions - but is liable for failure to diversity
REMEDIES FOR A BREACH OF LOYALTY AGAINST THE TRUSTEE
The remedies include:
1. Suspending or removing a trustee,
2. Decreasing compensation,
3. Compelling a trustee to perform trust duties,
4. Compelling payment of damages,
5. etc. (There are several other remedies, including asking the court to “order any other appropriate relief.”)
ACTIONS TAKEN AGAINST SELF DEALING
The trust beneficiaries may rescind the transaction and ask for the self-dealing purchase to be set aside (the trust property is returned to the trust and the amount paid is refunded by the trust) or recover any profits the trustee made by reason of the breach.
POWERS OF APPOINMENT
know the difference between general and special powers of appointment.
Purpose: a person writing a will or trust can give her beneficiaries a power of appointment, which enables the beneficiary to designate who will receive specific property.
GENERAL POWER OF APPOINTMENT
The class of people that the beneficiary can exercise the power of appointment in favor of is unlimited (she can use it for herself, her creditors, or someone else).
- Majorityview: In most states, a general residuary clause in a will (“Igiveallofmyestate… ”) does not exercise a power of appointment. However, if the general residuary clause is coupled with a blanket exercise clause (e.g., “including all property over which I have a power of appointment”), any power of appointment held by the donee is exercised, unless the donor of the power specifically requires reference to it.
- Minority view: a general testamentary power of appointment can be exercised by general language in the beneficiary’s will (such as the residuary clause) even if it makes no reference to the power in the instrument (e.g., “Everything to my husband”—the husband will get it), unless the creating instrument of the power made an express gift in default or the instrument stated that the power needed to be specifically mentioned.
