Trusts & Future Interests Flashcards
Incorporation-by-Reference Doctrine
- This is a common law doctrine, under which a testator may direct the distribution of his
probate assets in accordance with the terms of another instrument that exists when the
testator’s will was executed and which is specifically referred to in the will
Pourover Will (Pour-Over to Trust)
- Under the Uniform Testamentary Additions to Trust Act and Uniform Probate Code, a
person may bequeath assets to a trust created during the testator’s lifetime, by the testator
or another, so long as the trust is identified in the testator’s will and its terms are
incorporated in a writing executed before or concurrently with the execution of the
testator’s will.
NOTE - Under the modern approach, later made amendments to the trust are valid. Under common law, amendments made after execution of the will are not valid.
- Such a bequest is valid even if the trust is unfunded, revocable, and amendable.
Trust Creation
- A trust of personal property is valid if it has a trustee, a beneficiary, and trust property.
- Under the UTC, a writing is not necessary to create an enforceable inter vivos trust.
- If a trust that is invalid for lack of assets is later funded, a trust arises at that time if the
settlor re-manifests the intention to create the trust.
Support Trust
trustee must pay what is necessary for the beneficiary’s support.
- Trusts for support can be divided into two broad categories: a pure support trust and a
discretionary support trust. - A pure support trust is a trust under which payments are limited for a beneficiary’s
support.
a. If the beneficiary has a support need, Trustee may pay the beneficiary trust
property (income or principal, depending on the terms of the trust) to the extent of
available funds. - A discretionary support trust is a trust under which a trustee has discretion to withhold
payments of trust property from a beneficiary who has a support need. - A beneficiary of a support trust has an enforceable legal right to trust property that, under the terms of the trust, must be distributed in satisfaction of the beneficiary’s support need when that need arises.
a. The beneficiary has no right to compel payment of trust property as long as
Trustee is not abusing its discretion by withholding payments.
Discretionary Trusts
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.)
- Discretionary trusts may also be created to provide for more than a beneficiary’s support
needs.
Spendthrift Trust
A spendthrift trust is a type of trust that includes a spendthrift provision, designed to protect the trust’s assets from being claimed by the beneficiary’s creditors. This provision restricts both the voluntary and involuntary transfer of the beneficiary’s interest in the trust, meaning the beneficiary cannot sell or pledge their interest in the trust as security for a loan, and creditors cannot reach the beneficiary’s interest to satisfy debts.
Short version: 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).
- Some jurisdictions follow a theory that a spendthrift trust is indestructible on the theory
that the spendthrift clause evidences that a material purpose of the trust would be
defeated if the trust were terminated. - When the settlor of a trust is also a trust beneficiary, his creditors are entitled to the
maximum amount that could be distributed from the trust to the settlor, even when
withdrawals are discretionary or limited by a support standard.
Trust Termination (REVOCATION)
the default rule is that a trust is revocable. An
irrevocable trust can still be terminated or modified in some circumstances.
- Presumption of revocability: 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.
- Modification of a 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.
- A trust may be revoked with the unanimous agreement of the settler/grantor and all of the trust’s beneficiaries.
a. if there are unborn or incompetent beneficiaries, the trust cannot be revoked since
their consent to revoke cannot be obtained. (Some jurisdictions may permit a guardian ad litem to appear and consent on their behalf.)
b. if the grantor is dead, court approval can substitute for the testator’s consent, even in the case of an irrevocable trust. - For the court to approve a revocation of a trust, the court must find that all material
purposes of the trust have been performed.
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.
Charitable 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” andallow the trustee to exercise that power in accordance with the trust terms for 21 years.
Be familiar with the duty of loyalty and duty of care. The duty of care is heavily tested.
- 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: a trustee’s investment and 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
isolation.
- Duty to diversify: This is one of the hallmarks of prudent investing. The trustee is not liable
for declines in value due to a downturn resulting from general economic conditions—but is
liable for failure to diversify absent directions to the contrary. - The remedies include: Suspending or removing a trustee, decreasing compensation, compelling a trustee to perform trust duties, compelling payment of damages, etc. (There are several other remedies, including asking the court to “order any other appropriate relief.”)
NOTE: In a self-dealing case, 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.
be familiar with the (four) different approaches to giving gifts to a class.
- Rule of convenience: when a gift is made to a group, such as “my children,” the class closes when at least one member is entitled to distribution.
- UPC approach: The UPC states that when a class gift is made, each living beneficiary will take their share and the deceased beneficiary’s share will pass to their surviving descendants. (If there are no surviving descendants then the gift will fail.) Note: this applies even if the beneficiary is not related to the settlor (and thus differs from most antilapse statutes).
- Common law approach: Under the common law, if the gift or remainder to a deceased beneficiary has already vested and there is no applicable statute, then it will go to whomever the instrument says it should go to or whomever the deceased person has specified in their will or through intestacy. (This also
applies to gifts that are not made to classes.) - If you see a gift to a class in a Decedents’ Estates question: if a testator gives a gift to a group of unrelated individuals and one predeceased him, the deceased would not take, and neither would his descendants, unless the antilapse statute saved the gift.
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).
- Majority view: In most states, a general residuary clause in a will (“I give all of my estate . . .”) 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. - Special (or limited) power of appointment: The class of people that the beneficiary can exercise the power in favor of is limited. A special testamentary power needs to be specifically exercised. The Uniform Probate Code (UPC) adopts a substantial compliance rule which says that if it could be shown that the powerholder intended to exercise a power, a blanket exercise clause may be sufficient.
