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Bar Exam: Outline > Trusts (MEE) > Flashcards

Trusts (MEE) Flashcards

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1
Q

Principal

A

Original trust property and any increase in value

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2
Q

Income

A

Money invested by the trust

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3
Q

Income Beneficiaries

A

Receive income from the trust (ex. profits from a business held by trust or rental income from property held by trust)

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4
Q

Remainder Beneficiaries

A

Entitled to trust principal upon termination of trust

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5
Q

Trust Requirements

A
  • Grantor/settlor: Creator of trust (may also be trustee and/or beneficiary)
  • Intent to create a trust
  • Trustee: Holds legal interest or title to trust property (court will appoint trustee if settlor fails to designate one or if trustee dies, i.e., trust will not fail for lack of trustee)
  • Trust assets: Cash, securities, real estate, life insurance policies
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6
Q

Revocable vs. Irrevocable Trusts

A

Revocable Trusts: Can be terminated (or modified) by settlor at any time
Irrevocable Trusts: Usually cannot be terminated

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7
Q

Rule Against Perpetuities

A
  • Trusts are subject to the Rule Against Perpetuities, except for Charitable Trusts
  • “Wait and see” approach: Many courts have adopted this approach to wait until an interest vests to determine its validity
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8
Q

Private Express Trust: General Rule

A

Clearly states intention of settlor to transfer property to a trustee for benefit of one or more ascertainable beneficiaries

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9
Q

Express Trust: Intent

A
  • Settlor must intend to make a gift in trust. Manifestation of intent must occur prior to or simultaneously with transfer of property
  • Settlor’s intent may be manifested orally, in writing, or by conduct
  • “Trust words” may create a presumption of intent (e.g., “in trust” “for the benefit of”
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10
Q

Express Trust: Precatory Language

A
  • Language that expresses donor’s hope or wish that donee use property in certain way does not create trust
  • Must contain specific instructions to a fiduciary, and must be shown that absent imposition of trust, there would be unnatural disposition of donor’s property because of familial relations or history of support between donor and intended beneficiary
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11
Q

Express Trust: Writing Required

A

Trust must be in writing when:
(1) Statute of frauds applies (i.e., conveying real property); or
(2) A devise (i.e., trust created in a will)
* Trust must be in existence at time will was made or created simultaneously
* Trust avoids probate

Note: A minority of jurisdictions find that a trust must be in writing to be valid.

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12
Q

Express Trust: Trust Property

A
  • Trust must be funded with identifiable trust property (res), but if a trust that is invalid for lack of assets is later funded, a trust arises if settlor re-manifests intent to create a trust
  • Exception: Pour-over trust (trust terms must be in writing at time will is executed but property need not be in trust at time of will)
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13
Q

Express Trust: Valid Trust Purpose

A
  • Trust can be created for any purpose as long as it is not illegal or contrary to public policy and possible to achieve, and is for benefit of its beneficiaries
  • Terms that violate public policy will be stricken from trust but trust will not fail overall unless removal of terms is fatal.
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14
Q

Express Trust: Restraints on Marriage

A
  • Trust provisions that restrain a first marriage have generally been held to violate public policy.
  • Restraint on marriage might be upheld if trustee’s motive was merely to provide support for a beneficiary while the beneficiary is single.
  • Restriction on a surviving spouse remarrying after death of the settlor is likely to be upheld.
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15
Q

Express Trust: Ascertainable Beneficiaries

A
  • Beneficiaries must be identifiable and ascertainable, either by name or some criteria to determine who the person is
  • Exceptions: Trusts for benefit of unborn children, class gifts (class must be reasonably definite), charitable trusts
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16
Q

Express Trusts: Inter Vivos Trust

A
  • Created by declaration of trust or deed of trust while trustor is living that transfers some or all of the trustor’s property into a trust.
  • Does not need to be executed with same formalities as a will
  • Trustor can designate himself or a third party as trustee (if third party delivery must accompany declaration of trust)
  • Writing required only for real property, otherwise court will impose a constructive trust when a writing is lacking
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17
Q

Inter Vivos Trust: Pour-Over

A
  • Provision in a will that directs distribution of property to a trust, so that property passes according to terms of trust
  • Will may “pour over” assets into a trust, even if trust is not in existence when the will is executed; later amendments to trust are also valid.
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18
Q

Express Trusts: Totten Trust

A
  • Designation given to a bank account in a depositor’s name as trustee for a named beneficiary
  • Can be revoked by any lifetime act manifesting depositor’s intent to revoke, or by will
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19
Q

Express Trusts: Life-insurance Trust

A
  • Proceeds go to trust upon insured’s death
  • Trust is owner of policy and trust is irrevocable
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20
Q

Express Trusts: Living Trust

A
  • Typically, settlor names himself trustee until death;
  • Settlor can change successor trustee and beneficiaries until death
  • Trust property not protected from creditors or federal estate taxation
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21
Q

Express Trusts: Testamentary Trust

A
  • Created in writing in a will or in a document incorporated by reference into a will.
  • Will containing trust must meet attested or holographic will requirements.
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22
Q

Testamentary Trust: “Secret” Trust

A
  • Looks like a testamentary gift, but is created in reliance on named beneficiary’s promise to hold and administer property for another
  • Constructive trust is imposed on property for intended beneficiary

Note: Modern trend is to impose a constructive trust in favor of intended beneficiaries (if known)

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23
Q

Testamentary Trust: “Semi-secret” Trust

A
  • Gift is directed in a will to be held in trust, but testator fails to name a beneficiary or specify terms or purpose of the trust
  • Resulting trust is imposed on property to be held for testator’s heirs

Note: Modern trend is to impose a constructive trust in favor of intended beneficiaries (if known)

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24
Q

Express Trusts: Charitable Trusts

A
  • Must have a charitable purpose, such as: relief of poverty, advancement of education or religion, good health, government purposes, or other purposes benefiting community at large (not funding specific political party)
  • Indefinite Beneficiaries: Must benefit community at large, or a class comprising unidentifiable members, not named individual or narrow group of individuals
  • Exempt from Rule Against Perpetuities
  • If charitable trust fails, court may create an honorary trust
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25
Q

Charitable Trusts: Cy Pres Doctrine

A
  • Court may modify a charitable trust to seek an alternative charitable purpose if original one becomes illegal, impracticable, or impossible to perform
  • Court will analyze whether there is a general charitable intent (court may substitute a similar charity) or if there is a specific charitable intent (court may not modify trust)
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26
Q

Remedial Trusts

A
  • Equitable remedy not subject to trust requirements
  • Not driven by intent
  • Two types: Resulting Trust and Constructive Trust
27
Q

Remedial Trust: Resulting Trust

A

If trust fails in some way or when there is an incomplete disposition of trust property,court may create a resulting trust requiring holder of the property to return it to settlor or to the settlor’s estate.

28
Q

Resulting Trust: Purchase-Money Trust

A
  • Person One buys property, but title is taken in Person Two’s name
  • If Person Two is not object of Person One’s bounty(i.e., not a close friend or relative), court will create a purchase-money resulting trust
29
Q

Remedial Trust: Constructive Trust

A
  • Imposed when court concludes person holding title to property would profit by a wrong or be unjustly enriched
  • Wrongful conduct is required (e.g., fraud, duress, undue influence, breach of a duty, detrimental reliance of a third party)
30
Q

Beneficiary/Creditor Rights: Alienation

A
  • Beneficiary’s equitable interest in trust property is freely alienable unless a statute or trust instrument limits right
  • Beneficiary’s creditors may reach trust principal or income only when those amounts become payable to beneficiary or are subject to their demand.
31
Q

Beneficiary/Creditor Rights: Support Trust

A
  • Directs trustee to pay income or principal as necessary to support trust beneficiary and maintain lifestyle
  • Creditors cannot reach these assets unless providing a necessity to beneficiary (trustee can pay directly), but can reach when trustee makes a support payment
32
Q

Beneficiary/Creditor Rights: Discretionary Trust

A
  • Trustee is given complete discretion regarding whether or not to apply payments of income or principal to beneficiary
  • Creditors cannot reach trust property, because the beneficiary cannot demand payment, but can reach when trustee makes a support payment
  • Beneficiary lacks standing to challenge actions or inactions of trustee unless there is a clear abuse of discretion.
33
Q

Beneficiary/Creditor Rights: Mandatory Trust

A

Trustee has no discretion to ask for payment because trust document explains in detail how and when trust property is to be distributed

34
Q

Beneficiary/Creditor Rights: Spendthrift Trust

A

Trust expressly restricts beneficiary’s power to alienate her interest. Therefore, creditors cannot reach trust property until trustee makes a payment, except:
* Spousal or child support;
* Basic necessities providers; and
* Holders of federal or state tax liens

35
Q

Trust Modifications and Termination: Presumption of Revocability

A
  • Traditional rule: Trust is presumed to be irrevocable unless it expressly states otherwise.
  • Majority (UTC): Trust is presumed revocable unless it expressly states otherwise.
36
Q

Trust Modifications and Termination: Trustee’s Lack of Knowledge of Revocation

A

Trustee who does not know that a trust has been revoked or amended is not liable for distributions or other actions

37
Q

Trust Modification and Termination: Automatic Termination

A

Trust terminates if it is revoked or expires pursuant to its terms, no material purpose remains, or purpose has become unlawful, contrary to public policy, or impossible

38
Q

Termination of Trust by Beneficiaries: Effect on Trustee’s Liability

A
  • If trust is terminated, title merges and vests in beneficiaires.
  • If trustee distributes trust principal pursuant to beneficiaries’ directions, trustee would not be violating any fudiciary duty and beneficiaries would be entitled to distribute proceeds as they saw fit
  • Equity would prevent consenting beneficiaries from pursuing action against trustee for breach
39
Q

Trust Modification and Termination: By Agreement

A
  • By all beneficaries: Trust can be terminated/modified by consent of all beneficiaries if continuance is not necessary to achieve any material purpose or modification is not inconsistent with material purpose. However, trustee can lock premature trust termination if trust is shown to have an unfulfilled material purpose.
  • By beneficiaries and settlor: If all beneficiaries and settlor agree, irrevocable trust may be modified/terminated even if inconsistent with material purpose
40
Q

Trust Modification and Termination: Judicial Modification, Reformation, Termination

A

Court may modify or terminate trust without seeking beneficiary consent:
* (i) due to unanticipated circumstances or an inability to manage trust effectively,
* (ii) if the trust is uneconomic; or
* (iii) to correct mistakes or achieve the settlor’s tax objectives

41
Q

Principal and Income Allocations: General Rule

A

Life beneficiaries entitled to trust income and remainderman entitled to trust principal (ex. stock distribution or dividend)

42
Q

Principle and Income Allocations: Modern Approach

A
  • Allocation must be balanced so as to treat present and future trust beneficiaries fairly unless otherwise authorized
  • UPAIA: Trustee can re-categorize and reallocate as necessary to fulfill trust purpose
  • Trustee should focus on **total return **of portfolio
  • Factors that trustee must balance: (i) intent of settlor and trust language; (ii) nature, duration, and purpose of trust, (iii) identities and circumstances of beneficiaries, (iv) anticipated effects of economic conditions, (v) anticipated tax consequences
43
Q

Principle and Income Allocations: Allocation of Reciepts

A
  • Generally amount received in exchange for trust property is allocated to principal
  • Amount received for use of trust property is income
44
Q

Principle and Income Allocations: Allocation of Expenses

A
  • One-half of trustee’s compensation and one-half of accounting and other costs is charged to income
  • Remaining one-half of those expenses is charged to principal
  • But, for extraordinary expenses, those should be charged to trust principal
45
Q

Trust Administration and Trustee’s Duties: Trustee’s Powers

A

Trustee has powers granted expressly in the trust, and powers necessary to act as a reasonably prudent person in managing the trust, including implied power to contract, sell, lease, or transfer the trust property.

46
Q

Trustee’s Duties: Duty of Loyalty and Good Faith

A

Duty to administer trust in good faith (subjective standard) and to act reasonably (objective standard) when investing property and otherwise managing the trust solely in the best interests of the beneficiaries

47
Q

Trustee’s Duty of Loyalty and Good Faith: Self-Dealing

A
  • When trustee personally engages in a transaction involving trust property, a conflict of interest arises between trustee’s duties and her own personal interest
  • Irrebuttable presumption that trustee breached duty of loyalty when self- dealing
  • Exception: Even when self-dealing is authorized, transaction must still be reasonable and fair to avoid liability for breach
  • Remedies: Beneficiaries can set aside transaction or ratify transaction and recover profits from transaction.
48
Q

Trustee’s Duty of Loyalty and Good Faith: Conflicts of Interest

A

If a conflict of interest does not constitute self-dealing, there is a presumption of a breach of the duty of loyalty that can be rebutted by showing that the terms of the transaction were “reasonable and in good faith”

49
Q

Trustee’s Duties: Duty of Care

A

Trustee must take the care that a person of ordinary prudence would practice in the care of his own estate, treating the trust property as if it were its own

Note: A trustee with special skills is held to a higher standard

50
Q

Trustee’s Duty of Care: Delegation

A

Trustee may delegate responsibilities if it would be unreasonable for settlor to expect trustee to undertake such functions (e.g., investment decisions), but trustee then has duty to oversee decision-making process

51
Q

Trustee’s Duty of Care: Prudent Investor Rule

A
  • Trustee msut act as a prudent investor would act when investing his own property
  • Trustee must exercise reasonable care, caution, and skill when investing and managing trust assets
  • Factors include: (i) trust’s distribution requirements, (ii) general econmic conditions, (iii) investment in relation to trust’s overall investment portfolio, (iv) trust’s need for liquidity, income regularity, and preservation or appreciation of capital
52
Q

Trustee’s Duty of Care: Duty to Diversify

A

Trustee must adequately diversify the trust investments in order to spread the risk of loss under a total performance portfolio approach, but not if administrative costs would outweigh the benefits

53
Q

Trustee’s Duty of Care: Duty to Make Property Productive

A

Trustee must pursue all possible claims, derive maximum amount of income from investments, sell assets when appropriate, secure insurance, pay expenses, and act within a reasonable period of time in all matters

54
Q

Trustee’s Duty of Care: Duty to be Impartial

A

Trustee must balance interests of present and future beneficiaries and treat them equally unless the trust provides otherwise

55
Q

Trustee’s Duty of Care: Duty to Disclose

A

Disclose complete and accurate information about nature and extent of trust property, including allowing access to trust records and accounts

56
Q

Trustee’s Duty of Care: Duty to Account

A

Trustee must periodically account for actions taken on behalf of trust

57
Q

Trustee’s Duty of Care: Powers of Appointment

A
  • General: Trustee can give property to anyone
  • Special: Trustee must give the property to a specific person (e.g., to grandkids).
  • If person exceeds bounds of power of appointment or does not exercise it at all, property they were supposed to give to someone will either go back to the estate or be distributed in a different way
58
Q

Trustee’s Liabilities: Liability for Others’ Acts

A
  • Co-trustee: Co-trustees are jointly liable
  • Predecessor: Trustee is liable for predecessor’s breach if he failed to address it or was negligent in delivering property
  • Agents: Liable for agent’s breach if trustee directs or conceals agent’s act or fails to exercise reasonable supervision over agent
  • Third parties: Trustee is personally liable on contracts entered into and for tortious acts committed while acting as a trustee but can seek indemnity from trust if acting within scope of trustee’s duties
59
Q

Resignation of Trustee

A

Trustee can resign by providing 30 days’ notice to qualified beneficiaries, living settlor, and co-trustees, or by court approval

60
Q

Removal of Trustee

A

Trustee can be removed by court due to trustee being incapable of performing or materially breaching duty, conflict of interest, conflict between trustee and a beneficiary, poor trust performance

61
Q

Vested Remainder

A
  • Holder of interest is ascertainable and no express condition precedent required before interest becomes possessory
  • If income beneficiary disclaims interest, trust assets will be immediately distributed to remainder beneficiary if they have a vested future remainder
62
Q

Class Gifts to Children

A
  • Gift to group of individuals with automatic right of survivorship is a class gift
  • Class remains open and may admit new members until (i) at least one class member is entitled to possession of gift, or (ii) preceding interest terminates (ex. holder of present life estate dies)
63
Q

Class Gift: Lapse

A
  • In most states, anti-lapse statutes do not apply to trusts
  • Common law: Gift is expressly limited to transferor’s surviving children, so surviving issue of a deceased child do not take
  • UPC: If class gift is limited in favor of class of children, only children alive at time of distribution are entitled to possession of property. If child who survives settlor but predeceases time of distribution has surviving issue, issue would have right to parent’s share of gift.

Bar Exam: Outline (16 decks)

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