Trusts/Guardianships

Question 1

spendthrift clause

Answer 1

Protects the trust corpus from the claims of the beneficiary’s creditors. Prevents the voluntary/involuntary transfer of trust corpus.

settlor cannot create spendthrift trust for own benefit and creditors can reach the interests retained by the settlor

Valid and enforceable to extent of beneficiary’s interest in the trust. Spendthrift provisions do not apply to child support, federal taxes, or necessities of life

Once a disbursement is made to a beneficiary, the disbursement is available to satisfy debts

Question 2

irrevocable trusts

Answer 2

not available to satisfy the debts of the settlor, absent fraud. The trustee has a fiduciary duty to refuse suits

HOWEVER, if settlor retains an interest in the trust, his creditors may reach trust income in satisfaction of their claims to the maximum extent that the trustee could make distributions to a settlor

all trusts are revocable by the settlor unless expressly made irrevocable

Question 3

Declining Trustee Duties

Answer 3

individual can decline to be appointed as trustee and the court will replace him, but taking actions of a trustee will result in individual incurring fiduciary duties.

Question 4

Trustee Duty

Answer 4

trustee has the duty of reasonable care and skill but not expected to be infallible, not strict liability.

Duty to make property productive, but when making investments must follow prudent-investor rule, using reasonable skill, care and caution

duty of loyalty and good faith, avoid position where personal interests are contrary to trust and no self-dealing

Question 5

Suits against trust

Answer 5

against the trust estate UNLESS court finds the suit would not have occurred but for the trustee’s failure to properly discharge his duties. In that case, judgment is entered against trustee personally.

Question 6

Trustee as income beneficiary

Answer 6

Trustee should resign or beneficiaries can seek removal and request of accounting. If trustee makes an investment decision resulting in receiving a higher income, likely conflict of interest

Question 7

insurance proceeds from destruction of trust asset

Answer 7

not income but rather replaces loss of trust corpus

Question 8

Rule against perpetuities

Answer 8

trust creating successive life interests, so that remainder interest could vest at a time greater than lives in being plus 21 years is invalid.

Does not apply to charitable trusts

Question 9

Cy pres

Answer 9

court has power to reform trust to affect a settlor’s intent (charitable trusts)

Court has power to reform trust if all beneficiaries agree and the trust intent would not be significantly altered (non-charitable trusts)

Can work to limit the trust language to not violate RAP

Question 10

Allocation of trust property

Answer 10

interest received on obligation = income

rental income = income

net proceeds from sale of assets outside ordinary course (selling business) = principal

net proceeds of livestock sale = Trustee can choose between income and principal

proceeds from insurance policy that protects trust from loss of asset = principal

Question 11

Sale/purchase of stock

Answer 11

Trustee’s investment decisions are governed by Uniform Prudent Investor Act, which looks at total return and not just ordinary income. Investment conduct is measured at the time the decision is made

Question 12

lack of trustee

Answer 12

no trust ever fails for lack of a trustee. If the name trustee is unable to serve (or refuses to) courts will appoint a suitable person/company as successor trustee to carry out the settlor’s intent

Question 13

Judicial termination of trust

Answer 13

(1) the trust’s purpose has been fulfilled or has become illegal/impossible to fulfill;
(2) circumstances not known or anticipated by settlor and termination will further the purpose of the trust

Question 14

Charitable trust

Answer 14

must benefit the public at large (regardless of settlor’s motives).

RAP does not apply

Texas AG has the authority to represent the public in all matters regarding the trust and has the statutory authority to intervene in any judicial proceeding

Question 15

change of beneficiary (charitable trust)

Answer 15

Trustee may name a new beneficiary after giving adequate notice to the AG, but only when the replacement charitable beneficiary has the same or similar purpose as the failed beneficiary

Question 16

Best Interest of Ward

Answer 16

primary factor in determining who should be appointed guardian. Court must inquire into the qualifications, abilities, and capabilities of the person seeking appointment, and must give due consideration to any preferences indicated by the ward

Question 17

guardianship for incapacitated person

Answer 17

application cannot be granted unless the applicant presents a letter or certificate from a physician based on an examination within 120 days before the filing of the application

must describe the nature, degree, and severity of the incapacity, including the ward’s ability to handle financial matters, make personal decisions, and to consent to medical, dental, psychological, or psychiatric treatment

Question 18

Guardian of Adult person

Answer 18

court will appoint if there is clear and convincing evidence that he is incapacitated

Question 19

Guardian of estate (adult)

Answer 19

will be appointed if it is shown the adult person is substantially unable to mange his financial affairs

Question 20

Trust Accounting

Answer 20

trustee must maintain records of all transactions relating to the trust and must, on demand by a beneficiary, provide a written statement reporting all transactions since the last accounting OR no later than 15 months after trust creation

Trustee must be given reasonable time to prepare the accounting, and is not obligated to provide more than one in any 12 month period

Question 21

Trustee Compensation

Answer 21

Code gives no guidance, but a fee of 1% of the value of the trust corpus is often seen as reasonable

Question 22

Trustee reimbursement

Answer 22

trustee is entitled to reimbursement for all expenses reasonably incurred in the administration of the trust

Question 23

Trustee liability

Answer 23

Settlor can exculpate a trustee from liability for ordinary negligence, but not for liability for breach of trust committed in bad faith, intentionally, or with reckless indifference to the interest of the beneficiary

Question 24

Uniform Prudent Investor Act (UPIA)

Answer 24

Trustee has duty to invest as a prudent investor would, taking into account the purposes, terms, and distribution requirements of the trust. Trustee must exercise reasonable care, skill, and caution.

This does not prohibit a speculative investment, but trustee must show the investment will effectuate the settlor’s intent as to the purpose of the particular trust

Question 25

Self-Dealing

Answer 25

Code explicitly prohibits self-dealing transactions unless settlor has waived this rule.

Occurs when a personal interest may affect trustee’s judgment as to whether the asset should be sold at all

Trustee cannot profit from serving as trustee, other than reasonable compensation and reimbursement

improperly borrowing money is a misapplication of trust funds that would warrant a removal without notice or a hearing

Question 26

Remedies to Trustee’s breach

Answer 26

beneficiary has option to: (1) ratify the transaction and waive the breach of trust; or (2) bring a surcharge action to recover the amount subtracted from the trust due to the breach

Court can reduce or deny compensation, compel reimbursement, remove trustee if numerous breaches occur, and order trustee to pay court/attorney’s fees

Question 27

Appointment of Guardian for child

Answer 27

appointments made based on best interest of child. A child 12 years and older can choose his guardian in a writing filed by the court (subject to court’s approval and best interest of child).

Last surviving parent may designate a guardian in a written, signed declaration. Appointment of this designee takes preference over other persons qualified, unless appointment is not in child’s best interest.