Trusts & Future Interests

Question 1

Formation of Trusts

HIGH

Answer 1

A valid express trust requires:
* a definitive beneficiary (beneificary must be able to be reasonably ascertained now or in the future; can be individuals, corporations or other organizations)
* a settlor with capacity
* intent to create a trust
* a trustee
* a valid trust purpose
* Trust property AND
* compliance with any state formalities

Note: Under Uniform Trust Code, no execution formalities are required

Question 2

Trustee - Formation

Answer 2

Trustee myust have duties to perform.

Same person cannot be the sole trustee and sole beneficiary.

Trust will not fail solely because the trustee refuses to act as trustee, dies, is removed or resigned. The court will appoint a new trustee.

Question 3

Valid Property - Formation

HIGH

Answer 3

A trust is not created until it receives valid property.

The property interst does not need to be substantial and does not have to be transferred contemporaneously with the signing of the trust instrument.

A trust instrument signed during the settlor’s lifetime is valid even if the property was transferred to the trustee at a much later date, including after the settlor’s death.

Question 4

Trust for the Benefit of “Friends”

HIGH

Answer 4

A trust for benefit of “friends” has indefinite beneficiaries.

If a trustee is instructed to distribute trust assets to an indefinite class, no member of that class may enforce the trust.

Exception: a trust for friends may be valid if:
* some ascertainable group of friends was intnded OR
* an implied term of the trust authorizes the trustee to determine who the friends are

Question 5

Precetary Language - Formation

MED

Answer 5

Precatory language are words in a will or trust (such as “hope” or “request”) that merely express a settlor’s desire regarding the disposition of his property.

Precetory lenguage do not create a legal obligation t oact in accordance with that desire, and will not create a valid trust.

There must be specific settlor intent.

When there is familial or fiduciary relationship between the parties, the court may presume the settlor intended to creat a legal obligation.

Question 6

Promise to Create a Trust

MED

Answer 6

A promiste to create a trust in the future is unenforceable unless the promise is deemed to be a valid contract.

Question 7

Revocable vs Irrevocable Trust

HIGH

Answer 7

The trust instrument may state whether the trust is irrevocable or revocable by the settlor.

If no designation is made, then state law will govern whether the trust is revocalbe or irrevocable by default.

Majority View/UTC: A trust is revocable by default unless stated otherwise

Minority View: Trusts are irrevocable by default Unless expressly stated otherwise.

Question 8

Revocable Trust

HIGH

Answer 8

Generally, an irrevocable trust cannot be modified or revoked by the settlor after its creation.

A revocable trust becomes irrevocable upon death or incpacity of the settlor.

Question 9

Pour over Provision in a Will

HIGH

Answer 9

A pour over provision in a will gifts property to a previously established trust, and distributes the peroperty according to the terms of the trust.

A pour over will provision is distinguished form a testmentary trust because it does not create a trust.

A pour over will must be connected to an inter vivos trust (a trust made during the testator’s life).

Question 10

Charitable Trusts

MED

Answer 10

A charitable trust is one created by a settlor to confer a substantial benefit to society.

Beneficiaries: The beneficiary may be indefinite or contain a class of persons described by the trust.

No specific purpose: A general charitable trust that fails to state a specific purpose or beneficiary will not fail. Instead the court will select a purpose or beneficiary consistent wit hthe settlor’s intent.

Specific purpose: When the trust names a specific charitable beneficiary, the trust will terminate upon that specified charity’s termination. However, if settlor had a general charitable intet, the cy pres doctrine may be used to continue the trust consistent with that intent.

RAP does not apply to charitable trusts.

Question 11

Charitable purposes of Charitable Trusts

MED

Answer 11

Charitable purposes include:
* the relief of proverty
the advancement of education or religion
the promotion of health
governmental or municipal purposes
other purposes that benefit the community.

A trust to beautify a city or provide aesthetivc enjoyment to the community is deemed charitable.

A trust made to help a profit-making business is not chartiable.

Intent of the settler does not determine nature of the benefit provided by the trust; only the trust instrument determines whether the benefit is chartiable vs non charitable

Question 12

Illusory Trust

LOW

Answer 12

When settlor retains significant control over trust pproperty indicating a lack of intent to createa trust, the trust will be deemed illusory and invalid.

Question 13

Resulting Trusts

LOW

Answer 13

If a trust fails for lack of a beneficiary, a resulting trust is implied by law, and all trust property returns to the settlor or their estate.

Question 14

Discretionary Trust

HIGH

Answer 14

A discretionary trust occurs when a trustee has absolute discretion and power to determine when and how much of the trust property is distributed to the beneficiaries of the trust.

The trustee’s exercise of discretion must be in good faith. A court will not interfere with a trustee’s exercise of discretion, unless the trustee is abusing such power.

Trustee abuse of discretion depends on:
* terms of the trust instrument AND
* the other duest of the trustee (ex: duty to administer trust according to its terms, duty to act impartialy, duty of care)

Question 15

Support Trusts

MED

Answer 15

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

Support trusts may be pure (when trustee has no discretion) or discretionary.

Discretionary: If a provision contains an ascertainable standard, a beneficiary may compel a trustee (via abuse of discretion standard) to make payments in accordance with that standard.
* a common ascertainable standard is one that provides for an individual’s health, education, support or maintanence.
* “Support” is fact dependent. It is measured by the lifestyle the beneficiary has been accustomed to, and includes more than just necessities and bare essentials.
* Always includes: necessities and reasonable amounts for child support

Question 16

Passing of Trust Assets

LOW

Answer 16

Trust assets pass acording to the terms of the trust.

When a testamentary trust or distribution fails, the trust property passes:
* under the residuary clause in a will OR
* to the settlor’s heirs by intestacy (if no applicable residuary clause)

Question 17

Cy Pres Doctrine

HIGH

Answer 17

Courts will apply cy pres to modify a charitable trust to be consistent with and “as near as possible” with the settlor’s or testator’s intent if hte purpose of the trust or bequest is fustrated.

Cy Pres doctrine only applies if the testator had a general charitable intent.

A settlor has general charitable intent when the settlor provides a particular charitable purpose, rather than naming a specific charity.

Majority/UTC presume a general charitable intent.

The absence of a reverter clause is also an indiciation of a general chartiable intent.

Question 18

Spendthrift Trust

HIGH

Answer 18

A spendthrift provision in a trust (one preventing the transfer of a beneficiary’s interest) is valid only if it rstrains both voluntary and involuntary transfers.

A spendthrift trust means that the interst cannot be sold or assigned by the income beneficiary, nor may any creditors reach it.

Spendthrift trusts do not provide protection for mandatory distributions of trust property.

Spendthirft provision does not prevent a beneficiary form reaching trust assets if the trustee abused his discretion in failing to make payments.

Note: Creditor may attempt to collect directly from the beneficiary after a payment is made from the trust.

Question 19

Spendthrift Trust - Exceptions

HIGH

Answer 19

Exceptions (when creditor can reach beneficiary’s interest)
* a judgment creditor who has provided services for the protection of a beneficiary’s interst in the trust
* a creditor who furnishes necessities (only some jurisdictions)
* an order for child support or alimony
* any claim by the state or federal government
* a self-settled trust where the settlor retains an interest (revocable trust)

Question 20

Rights of Creditors - Generally

HIGH

Answer 20

No spendthrift: If a beneficiary’s interest is not subject to a spendthrift provision, then the court may authorize a creditor to reach the beneficiary’s interest by attachment of present or future distributions to the beneficiary.

Spendthrift: If subject to a spendthrift provision, a creditor is generally prohibited from attaching that interest, and may only attempt to collect directly from the beneficiary after a payment is made.
* if the creditor is a remainder beneficiary, the creditor will need t owait until the trust terminates to recieve the trust property

Question 21

Rights of Creditors - Discretionary Trust

Answer 21

A creditor cannot compel a distribution to a beneficiary that is subject to the trustee’s discretion, even if:
* the discretion is expressed in the form of a standard of distribution OR
* the trustee has abused their discretion.

If a judgment or order exists against the beneficiary for unpaid spousl or child support, the court may order a distribution to satisfy the judgment and direct the trustee to pay the child, spouse or former spouse and equitable amount of the judgment/order.

Question 22

Modification of a Trust

MED

Answer 22

Majority View: A trust may onl ybe modified by a settlor:
* who expressly reserved the ower to modify the trust OR
* who has power to revoke th etrust

Minority View: A settlor is free to amend or revoke a trust without express authority to do so (unless the trust states otherwise). Amendments must be made in writing and signed by the settlor.

UTC: A trust may be modified in the following instances: (equitable deviation doctrine)
* by the settlor while alive, by a later will, or any other method manifesting clear and convincing evidence of the settlor’s intent
* with the settlor and the beneficiaries consent
* with the beneficiaries consent and the court determines tha tthe modification is not inconsistent with the trsut purpose
* modification will further the purposes of the trust because of circumstances not anticipated by the settlor
* the cy pres doctrine applies
* the court determines that the value of the trust property is insufficient to justify the cost of administration and provides notice to all beneficiries
* it is necessary to conform to the settlor’s intent or tax objectives

Question 23

Additions Clause

LOW

Answer 23

When the settlor anticipates changing trsut assets, an additions clause should be added to the trust instrument.

A trustee retains the specific power to accept or reject additions to the trust property from a settlor or any other person.

Question 24

Termination of a Trust

HIGH

Answer 24

UTC: A trust may be terminated in the following instances:
* it is revoked or expires purusant to tis terms
* the material purpose of the trust has been achieved
* the trust has become unlawful, contrary to public policy or impossible to achieve
* the settlor and all beneficiaries consent
* all beneficiaries consent and the court decides that continuance is not necessary to achieve any purpose of the trust
* termination will further the purpose of the trust because of circumstances not anticipated by the settlor
* the court applies the cy pres doctrine to terminate the trust
* the court or trustee determines tha tthe value of the trust property is insufficinet to justify the cost of administration

Remainder beneficiaries are not entitled to receive trust poperty until termination of the trust.

Question 25

Distribution of Trust Assets Upon Termination

LOW

Answer 25

Upon termination of trust, trustee shall proceed expeditiously to distribute the trust property to those entitled to ti.

THe trustee may retain a reasonable reserve for the payment of debts, expenses and taxes.

Question 26

Conditions that Prohibit Marriage or Require Divorce

MED

Answer 26

A condition on a gift in a will or trust that prohibits a first marriage or requires divorce are void as against public policy.

A restraint on marraige may be upheld if:
* it is a restraing on remarriage (a condition on surviving spouse’s interest) OR
* the langauge of the bequest or gift indicates that its intended purpose it to take care of a person’s dialy needs until the yare able to obtain such support through marriage.

Note: Also a rule in wills.

Question 27

Trustee Duty to Adminsiter Trust
(General)

HIGH

Answer 27

The trustee msut ocntinue to administer the trust until the trust terminates, and must hold the trust assets until the remainderment are determined.

Common Law: Trustee owed beneficiaries the duty to act with cae, skill and prudence.

UTC: Trustee must administer the trust:
* in good faith
* in accordance with the trust purpose and terms AND
* the interests of hte trust beneficiaries

Trustee must exercise his powers in good faith and in accordance wit hthe terms nad purposes of the trust and the interests of the beneficiaries, even if the trust grants the trustee broad range of discretion.

Question 28

Trustee Duty of Care

HIGH

Answer 28

Duty of Prudent Administration: Trustee must administer trust as prudent person would. Trustee must exercise reasonable care, skill and caution.

Duty to Take Control and Protect Trust Property: Failure to purchase fire/casualty insurance for trust property is a beach of this duty, when insurance is customarily obtained by a prudent person.

Failure to Test Market: Failing to test market for potential buyers before selling trust property could result in a breach of trustee’s duty of care.

Prudent Investor Rule: Trustee must exercise the degree of care, skill and prudence of a reasonable investor investing his own property (includes diversifying trust assets, avoiding risky investments and the duty to monitor investments to keep trust assets productive). Court considers:
* distribution requirements of trust
* general economic conditions
* role the investment plays in relationship to the trust’s overall investment portfolio AND
* the trust’s need for liquidity, regularity of income and preservation or appreciation of capital

Question 29

Trustee Duty of Loyalty - Self Dealing

HIGH

Answer 29

No Self-Dealing: Trustee must administer the trust solelly in the interst of the beneficiares and cannot engage in self-dealing. A self-dealing transaction for the trustee’s own benefit or that is affected by a conflict between the trustee’s fiduciary and personal interests is voidable by an impacted beneficiary or a beneficiary can seek a damages award for the self -dealing.

Question 30

Trustee Duty of Loyalty - Self Dealing Exceptions

HIGH

Answer 30

Trustee Self-Dealing Exceptions:
* if the transaction was authorized by the terms of the trust
* if the transaction was approved by the court
* the beneficiary did not commence a judicial proceedin within the required time
* the beneficiary consented to the conduct, ratified the transacion or released the trustee of liablity OR
* the transaction occurred before the person became trustee.

Question 31

Trustee Duty of Loyalty - Conflicts of Interest

MED

Answer 31

A transaction will be presumed to be affected by a conflict of interest if it is entered into by the trustee with:
* the trustee’s spouse
* trustee’s descedants, siblings, parents or their spouses
* an agent or attorney of the trustee
* a corporation or other person or enterprise in which the trustee has an interest that might affect the trustee’s best judgment

For transactions involvig trust propery entered into with persons who hae close business or personal ties with the trustee, this presumption may be rebutted if the trustee shows that the transaction was not affected by any conflict.

Question 32

Trustee Duty of Loyalty - No Further Inquiry Rule

MED

Answer 32

No Further Inquiry Rule: A transaction involving trust property entered into by thetrustee for the trustee’s own benefit is automatically presumed to be a conflict of interest and is voidable without further inquiry into fairness of the transaction.

It is immaterial whether trustee acts in good faith or pays a fair consideration.

Question 33

Trustee Duty of Loyalty - Duty to Act Impartially

MED

Answer 33

If trust has two or more beneficiaries, trustee must act impartially in investing, managing and distributing the trust property.

Trustee cannot be influenced by personal favoritismm or animosity toward individual beneficiaries.

Question 34

Delegation of Trustee Duties

LOW

Answer 34

A trustee may delegate duties and powers that a prudent trustee of comparable skills could properly delegate under the circumstances.

Trustee must exercise reasonable care, skil land caution in:
* selecting an agent
* establishing the scope and terms of the delegation AND
* periodicially reviewing the agents actions in order to monitor the agent’s performance and compliance with the terms of the delegation.

Trustee is not liable for actions of an agent if trusteem meets above requirements.

Question 35

Trustee in Accordance w/ Settlor Wishes

MED

Answer 35

Revocable: A trustee owes duities only to the settlor (during settlor’s lifetime). A trustee is not liable for breach of the trust if trustee acted in accordance with settlor’s wishes.

Irrevocable: Trustee owes duties to settlor and the beneficiaries and cannot be relieved from liability for acting in accordance wiuth the settlor’s wishes.

Question 36

Principal and Income Allocations

HIGH

Answer 36

Trust receipts and disbursements are allocated according to state law either to income or principal.

Must be allocated to Income:
* receipt of rental payments form real or personal property
* money received from an entity and
* ordinary expenses and repairs

Must be allocated to principal:
* proceeds from the sale of a principal asset
* all other property received and
* extrodinary expenses and repairs

Question 37

Substitute Gift
(Future Intrests)

MED

Answer 37

A substitute gift is created in the deceased beneficiary’s surviving descendants if:
* the beneficiary of a future interest does not survive the distribution date AND
* a state’s anti-lapse law applies to trusts. (most do not)

Question 38

Vested Remainder Interest

MED

Answer 38

A vested remainder is an interest where there are no contingencies or conditions on survivorship.

Vested remainders are devisable and will pass to that person’s heirs if they die before the interest becomes possessory.

Under the common law, vested remainders pass to a deceased remainder person’s heirs, unless there is a survival condition in the trust. If the remiander person has no heris, the interst passes to the remainder person’s estate.

Question 39

Condition on Survivorship
(Vested Interests)

MED

Answer 39

Under the common law, a condition of survivorship on future interests in a trust is not implied.

UPC: condition of survivorship is implied.

Question 40

Accelteration of Future Interests

MED

Answer 40

A person’s future remainder interest may be accelerated (allowing person to take possession immediately) if the present holder:
* loses legal right to property OR
* disclaims their present interst in the property

If an income beneficiary disclaims their interest, the remainder beneficiaries are immediately entitled to the trust principal UNLESS
* a distribution would harm one of the beneficiaries or potential beneficiaries (causing a class to close earlier) OR
* the trust terms limit acceleration of a remainder interest.

Question 41

Power of Appointment

HIGH

Answer 41

When a settlor gives another person the power to decide where and to whom the testator’s property will go, that person has power of appointment.

General Appointment: When testator does not leave any conditions or restrictions as to appointment of the property. Can appoint property to themself.

Testamentary appointment: Can only be exercised by settlor’s will and according to settlor’s conditions.

Settlor’s power is exercised in an instrument if:
* the instrument is valid under state law
* the terms indicate the holder’s intent to exercise hte power and are consistent with the conditions imposed by testator AND
* appointment is permissible

Appointment is permissible if it’s to a person or group authorized by the donor.

Question 42

Special Power of Appointment

HIGH

Answer 42

A special power of appointment is one in which the donee may only appoint property to a limited class of persons authorized by the settlor.

The settlor must indicate certain indivudals or definite groups.

Donee may make an appointment in any form and can create more limited interests.

Appointments made to those not authorized by the settlor are ineffective.

The holder of a special power of appointment cannot appoint property to himself.

Question 43

Ineffective Appointments

HIGH

Answer 43

Apponitments made to those not authorized by the settlor are ineffective.

An ineffective appointment will not affect a valid one.

If the donee of a general power of appontment, makes an ineffective appontment, the property apsses to the taker-in-default designated by the settlor. If settlor did ot provide for a taker-in-default, the property passes to thedonee or the donee’s estate.

If the the donee has specific powers of appontment, then the property passes to permissile living appointees if:
* the permissible appointees are a defined and limited class AND
* donor has not manifested a contrary intent.

If ther are no permissible living appointees, then the property passes under a reversionary interst t othe settlor or the settlor’s successors in interest.

Question 44

Rule Against Perpetuities

HIGH

Answer 44

For an interest to be valid under the common law Rule against Perpetuities (RAP), it must vest within a life in being at the time of the grant plust 21 years.

A class gift becomes vested under RAP when
* the class closes AND
* all conditions for every member of the class are satisfied

Some states have a “wait and see” approach to see if interest will not vest on time.

Question 45

Class Gifts

HIGH

Answer 45

A class gift is a gift to a group of persons described colletively.

Common Law: Words of a settlor were given their legal meaning, but modern courts likelly to consider settlor’s intent.

Class gifts generally close at the death of the testator/ settlor.

Rule of Conveinence: class is closed when any member of he class is entitled to possession of the gift.

Whether givt to a predeceased member of the class will go their estate or be divided among the other class members depends on whether a group of persons is named (ex my children) vs individual members of the class are named.