Trusts [Highly Tested Rules]

Question 1

What is a trust?

Answer 1

A trust is a fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard and administer the trust assets and income for the benefit of designated beneficiaries, who hold equitable title

Question 2

What is a trustee?

Answer 2

The trustee holds legal title to the trust property; as a fiduciary, a trustee (1) must deal with the property with reasonable care, (2) must maintain the utmost degree of loyalty, and (3) is personally responsible if their conduct falls beneath required standards

Question 3

What is a beneficiary?

Answer 3

The equitable or beneficial interest in the trust property is held by the beneficiary, who receives the benefits of ownership as set forth in the trust, enforces the trust, and is the person to whom the trustee owes duties

Question 4

What is a settlor?

Answer 4

The settlor is the person who causes the trust to come into existence by supplying the initial trust property

Question 5

What is an express trust?

Answer 5

Express trusts are created by the express intention of the settlor and fall into two categories distinguished primarily by the identity of their beneficiaries:
* Private trusts, which must have ascertainable private beneficiaries
* Charitable trusts, which have charitable beneficiaries consisting of an indefinite class of persons or the public in general

Question 6

What are the main elements of a valid express trust?

Answer 6

1. Intent to create a trust, manifested by a settlor with capacity
2. Identifiable trust property (““corpus”” or ““res”” ascertainable with certainty)
3. Ascertainable beneficiaries (except for a charitable trust)
4. Proper purpose
5. Trustee with duties (although a trust will not fail if a trustee resigns, etc.)
6. Compliance with any necessary formalities or mechanics

Question 7

What intent is require to create an express trust?

Answer 7

The settlor’s intention to create a trust is essential to the existence of an express trust
* The settlor must manifest, by words or conduct, an intent to split legal and equitable title to the trust property and to impose enforceable duties on the trustee
* The settlor’s intent must be that the trust take effect immediately, not at some future time
* An intention to create a trust must have been manifested by the settlor at the time they owned the property and prior to its conveyance to another

Question 8

What are precatory expressions?

Answer 8

Precatory expressions are a settlor’s expressions of hope, wish or mere suggestion that property be used in a certain way
* The usual inference is that precatory expressions do NOT create a trust because the settlor must impose a legal obligation on the transferee, not merely a moral one, but this inference can be overcome by (1) definite and precise directions, (2) directions addressed to a fiduciary, (3) a resulting “unnatural” disposition of property if no trust is imposed, or (4) extrinsic evidence showing that the settlor previously supported the intended beneficiary

Question 9

What is sufficient trust property?

Answer 9

The trust property must be an existing interest in existing property that is ascertainable and which the settlor has the power to convey (including intangibles in which the settlor has an assignable interest)

Question 10

Does trust property need to be segregated from other property?

Answer 10

Yes–the res must be identifiable and segregated, but it may consist of a fractional or undivided interest in specific property

Question 11

What does the requirement that a beneficiary be “definite” require for a private trust?

Answer 11

Beneficiaries may be “definite” even though not yet unascertained (e.g., unborn children), but they must be ascertainable by the time their interests are to come into enjoyment

Question 12

What happens when a trust fails for lack of a beneficiary?

Answer 12

A resulting trust in favor of the settlor or their successors is presumed

Question 13

What is a disclaimer?

Answer 13

A beneficiary of a trust may disclaim their interest in the trust by filing a written instrument with the trustee, or, if the trust is a testamentary trust, with the probate court
* If a valid disclaimer is made, the trust is read as though the disclaimant was deceased as of the relevant date

Question 14

When may a beneficiary be estopped from making a disclaimer?

Answer 14

A beneficiary may be estopped from making a disclaimer if they have (1) exercised any dominion or control over the interest or (2) accepted any benefits under the trust

Question 15

What is a proper trust purpose?

Answer 15

The general rule is that a settlor may create a trust for any purpose, however, a trust purpose is invalid if:
1. it is illegal;
2. its performance requires a criminal or tortious act;
3. it is otherwise contrary to public policy; or
4. it violates the Rule Against Perpetuities

Question 16

What is the Rule Against Perpetutities?

Answer 16

Under the common law Rule Against Perpetuities, a nonvested property interest is invalid unless it is certain to vest or fail no later than 21 years after the death of a person who is alive when it is created

Question 17

When will a trust fail for absence of a trustee?

Answer 17

The absence of a trustee may cause an attempted inter vivos trust to fail for lack of delivery

Question 18

When will a trust NOT fail for absence of a trustee?

Answer 18

Once established, a trust will NOT fail because the trustee dies, refuses to accept appointment or resigns
* The court will appoint a successor trustee unless it is clear that the settlor intended the trust to continue only so long as a particular trustee served

Question 19

What are the grounds for removal of a trustee?

Answer 19

A court can remove a trustee or refuse to confirm an appointment of a trustee for, among other things, (1) serious breach of trust, (2) habitual drunkenness, or (3) a conflict of interest

Question 20

When does a trust terminate due to merger of title?

Answer 20

If the sole trustee and sole beneficiary of a trust are the same individual and hold precisely the same interests, title merges and the trust terminates

Question 21

What are the ways a trust can be created?

Answer 21

A trust can be created by (1) inter vivos transfer, (2) inter vivos declaration of trust or (3) will (testamentary trust)

Question 22

What is an inter vivos trust?

Answer 22

An inter vivos trust is a trust created while the settlor is alive either by the settlor declaring themselves trustee for another or transferring property to another as trustee
* The present intent to create a trust must be manifested by conduct (delivery) or words (declaring oneself trustee)

Question 23

What are the delivery requirements for an inter vivos declaration of trust?

Answer 23

If a trust is created by a declaration of trust, (1) real property should be conveyed from the settlor as an individual to the settlor as a trustee, but (2) no conveyance of personal property is needed as long as the property is identified and segregated

Question 24

What are the delivery requirements for an inter vivos conveyance in trust?

Answer 24

If a trust is created by a conveyance in trust, (1) real property must be conveyed to the trustee by deed, and (2) personal property must be conveyed by physical delivery or an appropriate written assignment

Question 25

When is a writing required for a trust?

Answer 25

For a trust of land, a written instrument signed by the settlor is required under the Statute of Frauds

Question 26

What is a pour-over gift from a will to a trust?

Answer 26

Under the Uniform Testamentary Additions to Trusts Act, a settlor can make gifts by will to a trust—even an amendable and revocable trust—established during their lifetime, but the trust must be clearly identified from language in the will
* Property goes into the trust as it exists at the testator’s death, thus, trust amendments made after execution of the will are effective to govern the poured-over property; if the trust is revoked within the testator’s lifetime, the gift lapses (but note that a revocable trust becomes irrevocable at death)
* The pour-over property can be the initial trust funding if (1) the trust is identified in the will and (2) the trust is executed before the testator’s death

Question 27

What are the required formalities for a testamentary trust?

Answer 27

To create a testamentary trust, intent to create the trust and the essential terms of the trust must be ascertained from (1) the will itself, (2) a writing incorporated by reference into the will, or (3) the exercise of a power of appointment created by the will

Question 28

What is a secret trust?

Answer 28

A secret trust is a testamentary gift that is silent about the nature of a trust and makes what seems to be gratuitous gift, but was actually made in reliance on the beneficiary’s promise to hold the property “in trust” for another, the intended trust beneficiary

Question 29

How can a secret trust be proven?

Answer 29

The intended trust beneficiary may present extrinsic evidence of the will beneficiary’s promise to hold the property in trust
* If the intended trust beneficiary can prove the promise and the testator’s reliance by clear and convincing evidence, a constructive trust will be imposed on the property in favor of the intended trust beneficiary

Question 30

What is a semi-secret trust?

Answer 30

A semi-secret trust occurs when a gift is directed in a will to be held in trust, but the testator fails to name a beneficiary or specify the terms or purpose of the trust
* Extrinsic evidence may NOT be presented, the gift fails (lapses), and a resulting trust is imposed on the property to be held in trust for the testator’s heirs

Question 31

What is the general rule regarding voluntary transfers of a trust interest?

Answer 31

Absent restrictions by statute or by the trust instrument, a beneficiary may freely transfer their interest in the trust
* The assigned interest remains subject to all previous conditions and limitations

Question 32

What is the general rule regarding involuntary transfers of a trust interest?

Answer 32

Unless statute or the trust provides otherwise, the beneficiary’s creditors may reach the beneficiary’s interest in the trust, and the interest is subject to judicial sale
* To avoid this, a court may order the trustee to pay the beneficiary’s income to the creditors until the debt is satisfied

Question 33

What is a discretionary trust?

Answer 33

In a discretionary trust, the trustee is given discretion whether to apply or withhold payment of the trust property to the beneficiary
* Before the trustee exercises their discretion to make payments to the beneficiary, the beneficiary’s interest is not assignable and cannot be reached by their creditors; however, creditors are usually allowed to attach the beneficiary’s interest, and, if the trustee has a notice of an attachment by creditors and decides to make payments to the beneficiary, the trustee must make those payments directly to the creditors unless the beneficiary’s interest is protected by a spendthrift provision
* Beneficiaries cannot interfere with the exercise of the trustee’s discretion unless the trustee abuses their discretion, in which case a court will intervene

Question 34

What is a spendthrift trust?

Answer 34

A spendthrift trust precludes the beneficiary from voluntarily or involuntarily transferring his interest in the trust
* Thus, creditors cannot reach the beneficiary’s interest until income or principal has been paid to the beneficiary

Question 35

What classes of creditors may be allowed to reach a beneficiary’s interest notwithstanding a spendthrift restraint?

Answer 35

Many states allow dependents, the government, and persons supplying necessities to reach a beneficiary’s assets notwithstanding a spendthrift restraint
* In a few states, tort creditors can also reach a spendthrift trust’s assets on the theory that they, unlike contract creditors, have no means of protecting themselves against the beneficiary’s actions

Question 36

What is a support trust?

Answer 36

A support trust directs the trustee to pay only so much of the income or principal (or both) as is necessary for the beneficiary’s support
* The beneficiary’s interest CANNOT be assigned or reached by creditors

Question 37

What is the standard of support for a support trust?

Answer 37

If the trust instrument is silent, the standard of support is the beneficiary’s accustomed standard of living

Question 38

When can a trust be modified or revoked by the settlor?

Answer 38

Under the UTC and by statute in many states, including California, a settlor CAN revoke or amend a trust UNLESS the terms expressly state that it is irrevocable
* However, some states follow the traditional rule, which provides that a trust is IRREVOCABLE unless the settlor expressly reserves the power to revoke or modify the trust

Question 39

When can a settlor revoke an irrevocable trust?

Answer 39

Under the law of some states, the settlor may revoke an irrevocable trust upon written consent of all living persons with vested or contingent interests

Question 40

When can a trust be modified or terminated by the beneficiaries?

Answer 40

The beneficiaries of a trust can terminate the trust only if:
1. all beneficiaries agree (but the existence of unborn or unascertainable beneficiaries may make this impossible);
2. all beneficiaries are legally competent; AND
3. the settler’s intent is not frustrated, which can be shown where (i) the settlor consents or (ii) modification or termination will not impair any material trust purpose (the “Claflin Rule”)

Question 41

When does a trust terminate by operation of law?

Answer 41

A trust will terminate by operation of law if (1) the trust property has been exhausted or (2) the legal and equitable titles have merged

Question 42

When may a trust be terminated by the court?

Answer 42

A court may prematurely terminate a trust where the trust’s purpose has been completed or has become illegal or impossible

Question 43

What is the doctrine of changed circumstances (equitable deviation)?

Answer 43

Upon a change of circumstances unanticipated by the settlor, a court may authorize a deviation from the administrative terms of a trust where necessary to achieve the trust’s purpose
* Under the UTC, a court may modify an administrative or dispositive provision or terminate a trust if, because of changed circumstances, doing so will further the purposes of the trust

Question 44

What is a charitable trust?

Answer 44

A charitable trust is a trust created for charitable purposes
* A charitable trust must have a purpose considered to benefit the public, and the beneficiaries of a charitable trust must be indefinite
* Charitable trusts are NOT bound by the Rule Against Perpetuities and, thus, may be perpetual
* The Rule Against Perpetuities also does NOT apply to the shifting of the beneficial interest in a charitable trust from one charity to another, but the Rule Against Perpetuities DOES apply to shifts between private and charitable uses

Question 45

What is the doctrine of cy pres?

Answer 45

When a charitable purpose selected by the settlor of a charitable trust is accomplished or becomes impracticable, the court may select an alternative charitable purpose under the doctrine of cy pres, which means “as near as possible”
* The court must find a general charitable intent on the part of the settlor and ascertain their primary purpose
* However, if a specific charitable intent is found, the trust fails and passes as a resulting trust to the settlor’s successors in interest

Question 46

What are a trustee’s express powers?

Answer 46

A trustee has those powers expressly conferred by the trust instrument, state law, and court decree

Question 47

What are a trustee’s implied powers?

Answer 47

A trustee has all powers that are necessary or appropriate to carry out the terms of the trust if those powers are NOT expressly forbidden by the trust instrument

Question 48

What are a trustee’s duties?

Answer 48

1. Administer trust in accordance with its terms
2. Not Delegate unless it would be unreasonable to require trustee to perform (and never delegate the entire administration or discretionary functions)
3. Impartially deal with beneficiaries
4. Duty of care
5. Invest in accordance with the Uniform Prudent Investor Act (“UPIA”)
6. Diversify investments unless the purposes of the trust are better served without diversification (UPIA)
7. Account for all trust transactions to the beneficiaries or the court upon demand
8. Separate and earmark trust property
9. Duty of Loyalty
10. Investigate trust investments to ensure compliance with the UPIA
11. Defend the trust from legal attack
12. Enforce claims of the trust

“AND I DID A SLIDE”

Question 49

What does a trustee’s duty of care require?

Answer 49

The trustee must exercise that degree of care, skill, and caution that would be exercised by a reasonably prudent person in managing their own property

Question 50

What is a trustee’s duty of impartiality?

Answer 50

A trustee has a duty to administer the trust impartially based on what is fair and reasonable to all the beneficiaries
* When a trust has sucessive beneficiaries, the trustee has a duty to the income beneficiaries to ensure that the trust property produces income, and a duty to the remaindermen to ensure that the trust property will not depreciate in value

Question 51

What is a trustee’s duty to invest trust assets?

Answer 51

A trustee must exercise reasonable care to preserve the trust property and make it productive
* This includes the duty to invest trust funds (and reinvest them when required)

Question 52

What is the standard of care required under the Uniform Prudent Investor Act (“UPIA”)?

Answer 52

Under the Uniform Prudent Investor Act (“UPIA”), a trustee must invest and manage trust assets as a prudent investor would, taking into account the purposes of the trust and the beneficiaries’ differing interests

Question 53

What does the UPIA require regarding a trustee’s investment strategy?

Answer 53

Under the UPIA, investment decisions must be evaluated in the context of the entire trust portfolio and as part of an overall investment strategy that has risk and return objectives reasonably suited to the trust

Question 54

What does the UPIA require regarding diversification?

Answer 54

Under the UPIA, investments of trust assets must be diversified unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversification

Question 55

What factors must a trustee consider when making investment decisions under the UPIA?

Answer 55

The UPIA provides that, when making investment decisions, a trustee must consider:
1. general economic conditions
2. the possible effect of inflation or deflation
3. the expected tax consequences of investment decisions or strategies
4. each investment’s role in the overall trust portfolio
5. the expected total return of income and appreciation of capital
6. other resources of the beneficiaries
7. needs for liquidity, return of income, and preservation or appreciation of capital
8. an asset’s special relationship or value to the purposes of the trust or to one or more of the beneficiaries

Question 56

What does a trustee’s duty of loyalty require?

Answer 56

1. A trustee cannot buy or sell trust assets, even if the price is a fair one
2. A trustee may not sell property of one trust to another trust of which they are also trustee
3. A trustee may not borrow trust funds nor loan their personal funds to the trust (except to protect the trust), and any interest paid on such a loan must be returned to the trust
4. A trustee cannot use trust assets to secure a personal loan
5. A trustee cannot personally gain through their position as trustee beyond their trustee fee
6. A corporate trustee cannot invest in its own stock, but may retain its stock if it was part of the original trust res when the trust was created and retention of the stock is consistent with the UPIA
7. A trustee cannot enter into any transaction with the trust in which the trustee is dealing in his individual capacity

Question 57

What are beneficiaries’ remedies for a trustee’s breach of duty?

Answer 57

1. Money damages for losses resulting from the breach, any profit that would have accrued but for the breach, and any profits made by the trustee
2. Removal of the trustee

Question 58

What is a resulting trust?

Answer 58

Resulting trusts arise by implication based on the presumed intent of the settlor
* Resulting trusts are of three types: (1) purchase money resulting trusts, (2) resulting trusts arising on failure of an express trust, and (3) resulting trusts arising from an incomplete disposition of trust assets (i.e., excess corpus).

Question 59

Who is the beneficiary of a resulting trust?

Answer 59

The settlor is the beneficiary of a resulting trust – if the settlor is deceased, the settlor’s successors in interest (heirs or beneficiaries under the settlor’s will) are the beneficiaries

Question 60

What circumstances give rise to a resulting trust on failure of an express private trust?

Answer 60

A resulting trust arises when a settler has conveyed property to a trustee under an express private trust and (1) the trust is void or unenforceable or (2) the beneficiaries are dead or cannot be located

Question 61

What circumstances give rise to a resulting trust on failure of an express charitable trust?

Answer 61

A resulting trust arises on failure of a charitable trust where cy pres is inapplicable

Question 62

When does a rebuttable presumption of a purchase money resulting trust arise?

Answer 62

A purchase money resulting trust is presumed whenever a person proves, by clear and convincing evidence, that they have supplied the consideration for the acquisition of real property or personal property but, with such person’s consent, title is taken in another’s name
* The legal title holder can rebut this presumption by showing no trust was intended (e.g., the payment was a gift, loan or satisfaction of a debt)

Question 63

When is a purchase money resulting trust not presumed?

Answer 63

A purchase money resulting trust is NOT presumed when (1) the parties are closely related, (2) an unlawful purpose is involved, or (3) the transferee obtained title wrongfully

Question 64

What is a constructive trust?

Answer 64

A constructive trust is a flexible equitable remedy used to prevent unjust enrichment resulting from wrongful conduct, such as fraud, undue influence or breach of contract
* When a constructive trust is imposed on property, the title holder is deemed to hold the property as trustee, with the sole duty of conveying title to the proper beneficiary

Question 65

When may a constructive trust be imposed for breach of a promise?

Answer 65

The general rule is that a mere breach of promise will NOT give rise to a constructive trust, EXCEPT in the case of:
1. a fraudulent promise (i.e., the promisor never intended to keep the promise;
2. a breach of promise by one in a confidential relationship with the promisee;
3. a breach of promise by the decedent’s devisee or heir to hold property for the benefit of a third person (i.e., a “secret trust”);
4. a breach of promise by the decedent to devise property to someone rendering services in reliance thereon; or
5. a breach of promise to the debtor by the buyer at a foreclosure sale to hold the property for the debtor, thereby causing the debtor to forego bidding at the foreclosure sale

Question 66

What is a gift causa mortis?

Answer 66

A gift causa mortis is a gift of personal property made in contemplation of immediately approaching death
* The donor must be suffering from a condition that realistically confronts them with a fear of death (not an abstract fear)
* Gifts causa mortis are subject to the same delivery and acceptance requirements as inter vivos gifts; however, symbolic delivery (delivery of a written instrument that evidences ownership) is not sufficient in many states

Question 67

When is a gift causa mortis revoked?

Answer 67

A gift causa mortis is revocable, and is revoked by:
1. an affirmative act indicating an intent to revest ownership in the donor;
2. operation of law if the donor recovers from the condition that put the donor in fear of impending death; or
3. operation of law if the donee predeceases the donor