TRUSTS & FUTURE INTERESTS LAW Flashcards
Class Gifts
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Rule Statement:
For purposes of the rule against perpetuities, a class gift vests when (1) the class closes, and (2) all conditions for every member of the class are satisfied.
To help memorize this important point, consider the following techniques:
Mnemonic: “CCCS” (Class Closes, Conditions Satisfied)
Visualization: Picture a classroom (representing the class) with a closing door, and students (class members) receiving checkmarks (satisfied conditions) above their heads.
Rhyme: “When the class door shuts tight, and all members’ stars shine bright, that’s when the gift takes flight.”
Key points to remember:
Two requirements for a class gift to vest
Class closing is essential
All conditions must be satisfied for every member
Common ways this might be tested:
Fact patterns involving gifts to groups of people (e.g., “to my grandchildren”)
Questions about when a class gift violates the rule against perpetuities
Scenarios testing the timing of class closing and condition satisfaction
Common mistakes to avoid:
Assuming a class gift vests as soon as one member satisfies the conditions
Forgetting that all members must satisfy the conditions
Overlooking the importance of class closing
To reinforce your memory:
Create a checklist for determining when a class gift vests
Practice explaining the concept using different examples of class gifts
Review sample problems involving class gifts and the rule against perpetuities
This rule is crucial for understanding how class gifts interact with the rule against perpetuities. The rule against perpetuities requires interests to vest or fail within 21 years after the death of a life in being at the creation of the interest.
Remember that class closing is a separate concept from condition satisfaction. A class typically closes when it’s no longer possible for new members to join the class. This often happens when the first member of the class becomes entitled to possession or enjoyment of their share.
The requirement that all conditions be satisfied for every member can make class gifts particularly susceptible to violating the rule against perpetuities, especially if the class can remain open for a long time or if there are complex conditions attached to membership.
Understanding this concept is essential for drafting valid class gifts in wills and trusts, analyzing existing instruments for potential rule against perpetuities violations, and advising clients on estate planning strategies involving gifts to groups of beneficiaries.
Consider how this rule might apply in different scenarios, such as:
“To my grandchildren when they reach 21”
“To my children who graduate from college”
“To my descendants living 30 years after my death”
Each of these class gifts would need to be analyzed for both class closing and condition satisfaction to determine when (and if) they vest within the perpetuities period.
Trust Formation Elements
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Rule Statement:
Formation of a valid express trust requires (1) a named trustee, (2) a trust settlor with capacity to form the trust, (3) the intent to create a trust, (4) a definitive beneficiary, (5) a valid purpose, (6) that it be funded with property, and (7) compliance with applicable state formalities.
A person cannot be the sole beneficiary and the sole trustee of a trust.
To help memorize this important point, consider the following techniques:
Mnemonic: “SCIPVFC” (Settlor, Capacity, Intent, Purpose, Valid beneficiary, Funded, Compliant)
Visualization: Picture a tree (trust) with roots (settlor), trunk (trustee), branches (purpose), leaves (beneficiaries), fruit (property), and a gardener tending it (intent and compliance).
Rhyme: “Settlor’s will and capacity, trustee named with veracity, beneficiary clear as day, purpose valid, come what may, property funded, rules obeyed, thus a trust is rightly made.”
Key points to remember:
Seven essential elements for a valid express trust
The importance of separating the roles of trustee and beneficiary
The need for property to fund the trust
Compliance with state-specific requirements
Common ways this might be tested:
Fact patterns asking you to identify missing elements in a trust formation
Questions about the validity of trusts with unusual structures
Scenarios testing the limits of settlor capacity or intent
Common mistakes to avoid:
Forgetting the need for a named trustee
Overlooking the requirement for a definitive beneficiary
Assuming a trust is valid without being funded with property
To reinforce your memory:
Create a checklist of the seven elements for trust formation
Practice explaining each element and why it’s necessary
Review sample trust documents and identify how each element is satisfied
This rule is crucial for understanding the basic structure and requirements of express trusts. Each element serves a specific purpose in ensuring the trust is valid and enforceable.
Remember that while the settlor, trustee, and beneficiary are often different people, there can be some overlap. For example, a settlor can also be a trustee or a beneficiary, but one person cannot be the sole trustee and sole beneficiary as this would merge the legal and equitable titles.
The requirement for a valid purpose ensures that trusts are not used for illegal or against public policy purposes. The need for funding (also known as “res” or “corpus”) distinguishes a trust from a mere promise.
Understanding these elements is essential for drafting valid trusts, analyzing existing trusts for potential issues, and advising clients on trust creation and administration. It’s also important to note that while these are the general requirements, specific jurisdictions may have additional or slightly different requirements.
Consider how each element might be challenged in a trust dispute:
Was the settlor of sound mind when creating the trust?
Is the beneficiary designation clear enough?
Did the settlor truly intend to create a trust or was it meant to be a gift?
Was the trust properly funded?
Each of these questions relates to one of the essential elements of trust formation.
Cy Pres Doctrine
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Rule Statement:
If the purpose of a charitable devise or bequest to a trust or trust is frustrated, and if the testator had a general charitable intent in making the devise or bequest, then a court may modify the charitable devise to be as near as possible in line with the settlor’s intent.
To help memorize this important point, consider the following techniques:
Mnemonic: “FIGS” (Frustrated purpose, Intent was general, Gift is modified, Similar to original)
Visualization: Picture a charitable gift as a river flowing towards a specific destination (original purpose). When it hits a dam (frustration), the court acts as a canal builder, redirecting the water to a nearby similar location (modified purpose).
Rhyme: “When charity’s path is blocked from view, and general good the giver knew, the court can guide with gentle hand, to purposes nearby planned.”
Key points to remember:
Applies to charitable devises or bequests
The original purpose must be frustrated
Testator must have had a general charitable intent
Court has power to modify the devise
Modification should be as close as possible to original intent
Common ways this might be tested:
Fact patterns involving outdated or impossible charitable purposes
Questions about the limits of court intervention in charitable gifts
Scenarios testing the difference between specific and general charitable intent
Common mistakes to avoid:
Assuming cy pres applies to all frustrated bequests, not just charitable ones
Forgetting the requirement of general charitable intent
Thinking the court can repurpose the gift for any charitable purpose
To reinforce your memory:
Create a flowchart of the cy pres doctrine application process
Practice explaining the doctrine using historical examples (e.g., gifts to abolish slavery)
Review case law applying cy pres and analyze the courts’ reasoning
This doctrine is crucial for understanding how the law deals with charitable gifts that become impossible or impracticable to carry out as originally intended. It balances respect for donor intent with the public interest in preserving charitable gifts.
Remember that “cy pres” comes from French, meaning “as near as possible.” This reflects the core principle of the doctrine: to keep the gift as close to the original purpose as circumstances allow.
The requirement of general charitable intent is key. If the testator had a very specific intent (e.g., “to build a hospital on this exact spot and nowhere else”), cy pres might not apply if that specific purpose becomes impossible.
Understanding this doctrine is essential for:
Drafting flexible charitable gifts in wills and trusts
Advising charitable organizations on how to handle outdated restricted gifts
Representing parties in litigation over the use of charitable funds
Consider how cy pres might apply in various scenarios:
A gift to a charity that no longer exists
A bequest to cure a disease that has been eradicated
A trust to maintain a specific building that has been destroyed
In each case, the court would need to determine if there was a general charitable intent and how to modify the gift to best align with that intent.
Rights of Creditors
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Rule Statement:
A judgment creditor of a beneficiary of a trust can attach its judgment to distributions from the trust unless the trust has a valid spendthrift provision.
To help memorize this important point, consider the following techniques:
Mnemonic: “JADED-S” (Judgment Attaches to Distributions Except with Spendthrift provision)
Visualization: Picture a creditor trying to grab money falling from a trust (distributions), but being blocked by a shield (spendthrift provision) protecting the beneficiary.
Rhyme: “Creditor’s claim can grab the flow, of trust funds as they go. But if spendthrift clause is in the mix, the creditor’s grasp no longer sticks.”
Key points to remember:
Judgment creditors can generally reach trust distributions
The attachment is to distributions, not the trust itself
A valid spendthrift provision can prevent this attachment
This rule applies to judgment creditors, not all creditors
Common ways this might be tested:
Fact patterns involving beneficiaries with debts and trusts with various provisions
Questions about the effectiveness of spendthrift provisions
Scenarios testing the limits of creditor rights against trust beneficiaries
Common mistakes to avoid:
Assuming creditors can reach the trust assets directly
Forgetting that only a valid spendthrift provision offers protection
Thinking all types of creditors are treated the same way
To reinforce your memory:
Create a diagram showing the flow of distributions from a trust to a beneficiary, with and without a spendthrift provision
Practice explaining the concept using different scenarios (e.g., beneficiary with credit card debt, tax liens, etc.)
Review sample trust documents and identify how spendthrift provisions are worded
This rule is crucial for understanding the balance between protecting trust beneficiaries and the rights of creditors. It reflects a policy decision that trust beneficiaries should not be completely insulated from their legitimate debts, but also recognizes the right of trust settlors to provide some protection through spendthrift provisions.
Remember that a spendthrift provision typically prohibits the beneficiary from voluntarily or involuntarily transferring their interest in the trust. This not only protects against creditors but also prevents the beneficiary from selling or assigning their interest.
It’s important to note that even with a spendthrift provision, certain types of creditors (often called “exception creditors”) may still be able to reach trust distributions. These often include:
Child support and alimony creditors
Necessary services creditors
Government creditors (e.g., for taxes)
Understanding this rule is essential for:
Drafting effective trusts that protect beneficiaries
Advising beneficiaries on their rights and vulnerabilities
Representing creditors seeking to collect from trust beneficiaries
Consider how this rule might apply in various scenarios:
A discretionary trust without a spendthrift provision
A support trust with a spendthrift provision
A spendthrift trust where the beneficiary is also the settlor (self-settled trust)
Each of these situations might be treated differently under the law, affecting the rights of creditors to reach trust distributions.
Judgment Creditors of Spendthrift Trusts
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Rule Statement:
A judgment creditor of a beneficiary of a spendthrift trust can attach its judgment to trust property only after distribution to the beneficiary.
Key points to remember:
Protection ends upon distribution
Timing is crucial - “after distribution” is the key phrase
Applies to judgment creditors specifically
The beneficiary is the recipient of the distribution
This rule highlights the limited nature of spendthrift trust protection. While the trust property is shielded within the trust, once distributed, it becomes vulnerable to creditors.
Consider practical implications:
Beneficiaries might prefer smaller, frequent distributions over large lump sums
Trustees may need to be cautious about timing of distributions
Creditors might monitor for distributions to act quickly
Understanding this rule is crucial for trust administration, beneficiary advising, and creditor strategies. It balances respecting the settlor’s wishes with preventing complete debtor insulation.
Compelling Distributions
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Rule Statement:
A creditor of a beneficiary of a trust can compel distributions only to the extent that the beneficiary can under the terms of the trust.
A creditor of a beneficiary of a discretionary trust cannot compel distributions.
Key points to remember:
Creditor rights mirror beneficiary rights
Trust terms determine the extent of compellable distributions
Discretionary trusts offer stronger protection against creditors
This rule highlights the principle that creditors “stand in the shoes” of the beneficiary. Their rights are limited by the trust’s terms.
Practical implications:
Mandatory distribution trusts are more vulnerable to creditors
Discretionary trusts provide greater asset protection
The specific language of trust provisions is crucial
Understanding these rules is essential for:
Trust drafting strategies
Advising beneficiaries on potential creditor risks
Creditor collection strategies against trust beneficiaries
Consider how this applies in different scenarios:
A trust requiring annual distributions
A trust allowing distributions for health, education, maintenance, and support
A purely discretionary trust
Each type of trust offers different levels of protection and creditor access.
Remember, while discretionary trusts offer strong protection, they’re not absolute shields. Courts may still intervene in cases of trustee abuse of discretion or bad faith.
Court Ordered Distributions
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Rule Statement:
A court may order distribution from a discretionary trust to satisfy a judgment against the beneficiary for unpaid child or spousal support and order that the distribution be made to the child, spouse, or former spouse.
Key points to remember:
Exception to the general rule for discretionary trusts
Applies specifically to child and spousal support judgments
Court can order distribution directly to the support recipient
This rule represents an important exception to the protection typically offered by discretionary trusts. It reflects a strong public policy favoring the enforcement of family support obligations.
Practical implications:
Discretionary trusts are not absolute shields against all creditors
Family support obligations receive special treatment
Courts have power to override trustee discretion in these cases
Understanding this rule is crucial for:
Trust drafting and planning, especially in family situations
Advising beneficiaries with support obligations
Representing parties in support enforcement actions
Consider how this might apply in various scenarios:
A beneficiary with unpaid child support and other debts
A trust that explicitly excludes distributions for support obligations
A case where the trustee refuses to make distributions for support
This exception balances the intent of trust settlors with the societal interest in ensuring financial support for children and spouses. It’s part of a broader trend in trust law that recognizes certain “exception creditors” who may have greater rights than general creditors.
Remember, while this rule allows courts to order distributions, it doesn’t automatically mean they will do so in every case. Courts typically consider factors such as:
The beneficiary’s other resources
The trust’s purpose and the settlor’s intent
The needs of the support recipient
This rule underscores the importance of considering potential family obligations when creating or administering trusts, and the limits of asset protection strategies in the face of strong public policy concerns.
Trustee Duty of Care: Investments and Prudent Investor Rule
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Rule Statement:
A trustee must exercise the degree of care, skill, and prudence of a reasonable investor investing his own property.
Mnemonic: “CRISP” (Care, Reasonable Investor, Skill, Prudence)
Memorization techniques:
Visualization: Picture a well-dressed investor (trustee) carefully examining a portfolio through a magnifying glass (care), using advanced tools (skill), and thoughtfully considering each move (prudence).
Acronym expansion: TRUST
T - Thoughtful consideration (prudence)
R - Reasonable investor standard
U - Utilize skills effectively
S - Safeguard with care
T - Treat as own property
Rhyme: “With care and skill and prudence too, invest as if the trust were you.”
Common ways this rule is tested:
Fact patterns involving trustees making various investment decisions
Questions about whether specific actions meet the standard of care
Scenarios comparing trustee behavior to that of a reasonable investor
Cases involving losses due to market downturns or risky investments
Common ways students are tricked:
Confusing the “reasonable investor” standard with a higher “expert investor” standard
Assuming that any investment loss automatically means a breach of duty
Forgetting that the standard is based on process, not results
Overlooking the “as if investing his own property” aspect of the rule
Failing to consider the specific circumstances of the trust and its beneficiaries
Key points to emphasize:
The standard is that of a reasonable investor, not an expert
It’s a combination of care, skill, and prudence
The trustee should approach trust investments as if they were their own
The rule focuses on the trustee’s decision-making process, not just the outcome
This standard is part of the broader Prudent Investor Rule
Remember, this rule is about the trustee’s approach to investing, not guaranteeing specific results. A trustee can make decisions that result in losses without necessarily breaching their duty, as long as they followed a prudent process.
Pour-Over Provision in a Will
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Rule Statement:
A pour-over provision in a will gifts property to a previously established trust but does not create a trust.
A pour-over provision will fail if it gifts to an inter vivos trust that was terminated or revoked prior to the testator’s death.
Mnemonic: “PEGT” (Pour-over Exists, Gifts to Trust)
Memorization techniques:
Visualization: Picture a will (a document) pouring property into a pre-existing bucket (trust), but not creating the bucket itself. Then imagine the bucket disappearing (terminated trust) before the pouring can occur.
Acronym expansion: POUR
P - Previously established trust
O - Only gifts, doesn’t create
U - Underlying trust must exist
R - Revocation or termination invalidates
Rhyme: “Pour-over gives but doesn’t make, to dead trusts it cannot take.”
Common ways this rule is tested:
Fact patterns involving wills with pour-over provisions and various trust scenarios
Questions about the validity of pour-over provisions in different circumstances
Scenarios testing the relationship between will execution, trust creation, and testator’s death
Cases involving amended or revoked trusts and their impact on pour-over provisions
Common ways students are tricked:
Assuming a pour-over provision creates a new trust
Forgetting to check if the referenced trust was still valid at the time of the testator’s death
Confusing inter vivos trusts with testamentary trusts in pour-over scenarios
Overlooking the timing of trust termination or revocation in relation to the testator’s death
Misunderstanding the relationship between the will and the trust in a pour-over arrangement
Key points to emphasize:
Pour-over provisions gift to existing trusts, they don’t create new ones
The referenced trust must exist and be valid at the time of the testator’s death
Termination or revocation of the trust before the testator’s death invalidates the pour-over
Pour-over provisions typically work with inter vivos (living) trusts
The pour-over occurs at the time of the testator’s death, not at will execution
Remember, the pour-over provision is a tool to coordinate estate planning between wills and trusts. It allows for flexibility in managing assets during life while ensuring they are ultimately distributed according to the trust’s terms. The key is that the trust must be a valid, existing entity at the time the pour-over is meant to occur (at death).
Discretionary Trusts
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Rule Statement:
A discretionary trust is one in which the trustee has absolute power and discretion to determine when, how much, and in what manner the trust property is distributed to beneficiaries. The trustee of a discretionary trust must exercise his or her discretion in good faith.
Mnemonic: “WHEAT-GF” (When, How much, and in what mAnner Trustee distributes - Good Faith)
Memorization techniques:
Visualization: Picture a trustee at a control panel with dials for “when,” “how much,” and “manner,” adjusting them freely but with a “good faith” gauge always visible.
Acronym expansion: DISCRETE
D - Discretion is absolute
I - In trustee’s hands
S - Selecting when to distribute
C - Choosing amount to give
R - Regulating manner of distribution
E - Exercised in
T - Trust and
E - Ethical good faith
Rhyme: “When, how much, and manner too, trustee decides what’s best to do. Though power’s great, it’s understood, decisions must be made for good.”
Common ways this rule is tested:
Fact patterns involving trustees making various distribution decisions
Questions about the limits of trustee discretion in different scenarios
Scenarios comparing discretionary trusts to other types of trusts
Cases involving beneficiary challenges to trustee decisions
Common ways students are tricked:
Confusing discretionary trusts with mandatory distribution trusts
Assuming “absolute discretion” means the trustee can act arbitrarily or in bad faith
Forgetting that even in discretionary trusts, trustees have a duty of good faith
Overlooking the three key aspects of discretion: when, how much, and in what manner
Misunderstanding the balance between trustee power and fiduciary responsibility
Key points to emphasize:
Trustee has wide latitude in decision-making
Discretion covers timing, amount, and manner of distributions
Despite broad powers, trustee must act in good faith
Beneficiaries generally can’t compel distributions
The trust document defines the scope of discretion
Remember, while discretionary trusts give trustees significant power, this power is not unlimited. The requirement to exercise discretion in good faith is a crucial check on trustee authority. This balance protects the interests of beneficiaries while still allowing flexibility in trust administration.
Spendthrift Trusts
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Rule Statement:
A spendthrift provision in a trust prohibits the transfer or sale of a beneficiary’s interest in that trust.
A spendthrift provision is valid only if it prohibits both voluntary transfers and involuntary transfers.
Mnemonic: “SPIN-VI” (SPendthrift provision Inhibits - Voluntary and Involuntary transfers)
Memorization techniques:
Visualization: Picture a beneficiary’s interest as a locked box (spendthrift trust), with two keys labeled “voluntary” and “involuntary” both being broken, preventing any form of transfer.
Acronym expansion: SPEND
S - Stops
P - Prevented from transferring
E - Every type of transfer
N - No voluntary sales
D - Denies involuntary seizures
Rhyme: “Spendthrift clause, a double shield, voluntary and forced transfers both must yield.”
Common ways this rule is tested:
Fact patterns involving beneficiaries attempting to sell or assign their interest
Questions about creditors trying to reach trust assets
Scenarios comparing trusts with and without spendthrift provisions
Cases involving partial spendthrift provisions (e.g., only prohibiting voluntary transfers)
Common ways students are tricked:
Assuming a spendthrift provision that only prohibits one type of transfer (voluntary or involuntary) is valid
Confusing spendthrift trusts with discretionary trusts
Thinking spendthrift provisions prevent all creditor claims (forgetting about exception creditors)
Overlooking the distinction between prohibiting transfer of interest and prohibiting distribution of trust property
Misunderstanding the scope of protection (e.g., thinking it protects assets after distribution)
Key points to emphasize:
Spendthrift provisions must prohibit both voluntary and involuntary transfers
They protect the beneficiary’s interest, not the distributed trust property
The provision prevents beneficiaries from selling or assigning their interest
It also protects against most creditor claims on the interest
To be effective, the provision must be clearly stated in the trust document
Remember, spendthrift provisions are a powerful tool for protecting beneficiaries’ interests, but they have limits. They don’t protect against all creditors (e.g., child support claims), and they don’t protect funds once distributed. The key is that they must prevent both types of transfers - those initiated by the beneficiary (voluntary) and those forced by outside parties like creditors (involuntary).
Creditors’ Access to Spendthrift Trusts
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Rule Statement:
Creditors generally cannot attach a beneficiary’s interests in a spendthrift trust or distributions from a spendthrift trust.
Generally, creditors can collect from a beneficiary of a spendthrift trust only after a distribution from the trust is made to the beneficiary.
Creditors can reach a beneficiary’s interest in a spendthrift trust only if:
it is a judgment creditor who provided services for the protection of a beneficiary’s interest in the trust;
in some states, the creditor furnished necessities;
orders for child support or alimony;
state or federal government claims; or
the trust is a self-settled trust.
Mnemonic: “SCANS” (Spendthrift Creditor Attachment Needs Special circumstances)
Memorization techniques:
Visualization: Picture a fortress (spendthrift trust) with creditors outside. They can only catch beneficiaries after they exit (distribution). Five secret passages (exceptions) allow some creditors inside.
Acronym expansion: CREDIT
C - Can’t attach until distribution
R - Reach limited by spendthrift provision
E - Exceptions exist
D - Distribution triggers vulnerability
I - Interest protected inside trust
T - Trust type matters (self-settled not protected)
Rhyme: “Spendthrift keeps creditors at bay, till distribution day. But five exceptions make their way: services, needs, family pay, government’s say, and self-settled sway.”
Common ways this rule is tested:
Fact patterns involving various types of creditors trying to reach trust assets
Questions about timing of creditor claims relative to trust distributions
Scenarios testing knowledge of the specific exceptions to spendthrift protection
Cases involving self-settled trusts vs. trusts created by third parties
Common ways students are tricked:
Forgetting that protection ends once distribution is made
Assuming all types of creditors are treated equally
Overlooking the distinction between attaching interests and reaching distributions
Misunderstanding the scope of the exceptions, especially regarding necessities
Confusing rules for spendthrift trusts with those for discretionary trusts
Key points to emphasize:
General rule: creditors can’t reach assets inside a spendthrift trust
Distributions become vulnerable once made to beneficiary
Five main categories of exceptions to spendthrift protection
Self-settled trusts typically don’t receive spendthrift protection
State laws may vary, especially regarding the “necessities” exception
Remember, spendthrift provisions offer strong but not absolute protection. The exceptions reflect public policy considerations, balancing the settlor’s wishes against societal interests (e.g., supporting children, compensating those who protected the trust, government claims). The key is understanding both the general rule of protection and the specific circumstances under which that protection can be pierced.
Trustee Duty to Administer the Trust
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Rule Statement:
A trustee must administer the trust in good faith and in accordance with the terms and purpose of the trust even where the trust grants broad discretion to the trustee.
The trustee must administer the trust until the trust terminates.
Mnemonic: “FAITH-TPT” (Faith, Accordance, In Terms, Purpose, Trust - Till Properly Terminated)
Memorization techniques:
Visualization: Picture a trustee holding a compass labeled “Good Faith” while following a map (trust document) with “Terms” and “Purpose” clearly marked, continuing until reaching a finish line (termination).
Acronym expansion: TRUSTEE
T - Terms of trust followed
R - Responsibility continues
U - Until termination
S - Serve in good faith
T - Trust purpose respected
E - Even with broad discretion
E - Execute duties faithfully
Rhyme: “In faith and accord, terms and purpose restored, broad powers bestowed, but still to trust bowed. From start to the end, this duty won’t bend.”
Common ways this rule is tested:
Fact patterns involving trustees making decisions that might conflict with trust terms or purpose
Questions about the limits of trustee discretion in various scenarios
Scenarios testing the duration of trustee responsibilities
Cases involving potential breaches of fiduciary duty
Common ways students are tricked:
Assuming broad discretion allows trustees to ignore trust terms or purpose
Forgetting that the duty to administer continues until trust termination
Confusing good faith administration with always agreeing to beneficiary requests
Overlooking the importance of trust purpose in guiding trustee actions
Misunderstanding the balance between trustee discretion and adherence to trust terms
Key points to emphasize:
Good faith is always required, regardless of discretion granted
Trust terms and purpose are paramount guides for administration
Broad discretion doesn’t override the need to follow trust terms and purpose
The duty to administer continues until the trust officially terminates
Trustees must balance their discretion with the settlor’s intentions
Remember, this rule underscores the fundamental nature of the trustee’s role: to faithfully carry out the settlor’s intentions as expressed in the trust document. Even when given wide latitude in decision-making, trustees are always bound by the trust’s terms and purpose, and must act in good faith. This duty is ongoing, lasting from the moment they accept the role until the trust’s termination, ensuring consistent and proper management of the trust throughout its existence.
Trust Duty of Loyalty: Self-Dealing
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Rule Statement:
A trustee must administer the trust solely in the interests of the beneficiary.
A trustee may not engage in self-dealing except when:
the self-dealing is authorized by the terms of the trust;
the court approves the self-dealing;
the beneficiary failed to commence a judicial proceeding within the statutory period;
the beneficiary consents to the self-dealing, ratifies, or releases the trustee from liability; or
the transaction happened before the person became trustee.
Mnemonic: “CREST” (Court, Release, Explicit authorization, Statutory period, Transaction pre-trusteeship)
Memorization techniques:
Visualization: Picture a trustee standing on a high CREST (representing the exceptions), looking down at a “No Self-Dealing” sign below.
Acronym expansion: LOYAL
L - Look out for beneficiary’s interests only
O - Obtain authorization for exceptions
Y - Yield to court approval when needed
A - Acquire beneficiary consent or ratification
L - Limit actions to trust terms and timeline
Rhyme: “For beneficiary’s sole gain, unless exceptions explain: Trust terms allow, court says ‘wow,’ time’s up now, beneficiary’s bow, or pre-trustee vow.”
Common ways this rule is tested:
Fact patterns involving trustees engaging in various transactions with trust property
Questions about specific exceptions to the self-dealing prohibition
Scenarios testing the timing of transactions relative to trustee appointment
Cases involving beneficiary consent, ratification, or release
Common ways students are tricked:
Forgetting that the general rule prohibits self-dealing
Assuming all transactions benefiting the trustee are automatically prohibited
Overlooking the importance of timing (pre-trusteeship transactions)
Confusing court approval with other forms of authorization
Misunderstanding the scope of beneficiary consent or ratification
Key points to emphasize:
The default rule is strict prohibition of self-dealing
Exceptions are specific and limited
Trust terms can explicitly allow certain self-dealing
Court approval can override the general prohibition
Beneficiary actions (consent, ratification, release) can permit self-dealing
Timing matters - pre-trusteeship transactions are treated differently
Remember, the duty of loyalty and prohibition on self-dealing are fundamental to the trustee’s role. The exceptions balance this strict rule with practical considerations, allowing flexibility in certain circumstances. However, these exceptions are narrow and specific. The key is to start with the assumption that self-dealing is prohibited, and then carefully consider if any of the exceptions apply. This approach helps maintain the integrity of the trust relationship while allowing for situations where self-dealing might be appropriate or unavoidable.
Common Law Rule Against Perpetuities and Modern Modifications
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Rule Statement:
A gift must vest, if at all, within 21 years of a life in being at the time of the grant.
Under modern modifications of the rule against perpetuities, a gift is valid if it actually vests within 21 years following the death of some life in being at the time the interest was created.
Some states have by statute provided that courts will reduce any age contingency that violates the rule against perpetuities to 21 years.
Mnemonic: “LIVE 21” (Life In being, Vest, 21 years)
Memorization techniques:
Visualization: Picture a newborn baby (life in being) holding a gift box with a 21-year timer on it. The box opens (vests) before the timer runs out.
Acronym expansion: PERPETUITY
P - Period of 21 years
E - Evaluated from creation
R - Related to life in being
P - Possibility of vesting matters
E - Extremes considered in common law
T - Time of creation is key
U - Under modern rules, actual vesting counts
I - Interest must vest within the period
T - Twenty-one years after life in being dies
Y - Years reduced if age contingency violates
Rhyme: “Life in being plus twenty-one, for vesting time that’s how it’s done. Modern view: actual vest, twenty-one years is still the test. Age too high? Courts will comply, to twenty-one they’ll modify.”
Common ways this rule is tested:
Fact patterns involving complex family situations and conditional gifts
Questions comparing common law and modern approaches
Scenarios testing understanding of “life in being” concept
Cases involving age contingencies that exceed 21 years
Common ways students are tricked:
Confusing “must vest” with “must take effect in possession”
Forgetting that the period is measured from the time of creation, not death of the life in being
Assuming all jurisdictions apply the same version of the rule
Overlooking the difference between possibility of vesting (common law) and actual vesting (modern)
Misunderstanding how age contingency reduction works
Key points to emphasize:
The rule is about vesting, not taking possession
“Life in being” must be alive at the time of creation
Common law focuses on possibilities, modern approach on actualities
21 years is a key number, both for the rule and age contingencies
The rule aims to limit control from the grave and promote alienability of property
Remember, the Rule Against Perpetuities is notoriously complex. The common law version considers all possibilities, no matter how remote, while modern modifications tend to be more practical. The age contingency reduction is a specific statutory remedy to save interests that would otherwise fail. Always consider which version of the rule applies in the given jurisdiction, as this can significantly affect the outcome.
