Types of Trusts

Question 1

Are trusts revocable?

Answer 1

All trusts are presumed irrevocable unless the trust explicitly authorizes revocation.

Question 2

Can a person be both settlor and sole beneficiary of a revocable lifetime trust?

Answer 2

No, need at least 1 beneficiary who is not the settlor.

Question 3

What roles can settlor play in a revocable lifetime trust?

Answer 3

Settlor can be trustee, an income beneficiary (as long as there is at least one other beneficiary), settlor can retain the power to terminate or amend the trust.

Question 4

Why make a revocable lifetime (inter vivos) trust?

Answer 4

1) Helps manage assets efficiently, especially if trustee is a professional trustee.
2) Helps plan for possible incapacity by avoiding a guardianship proceeding
3) Avoid probate (No part of the principal of a trust goes through the settlor’s estate in probate).

Question 5

What are the downsides of a revocable lifetime trust?

Answer 5

Doesn’t avoid taxes, and if settlor keeps power to revoke the full trusts assets are included in gross estate for estate tax purposes.

Question 6

What is a pour-over gift?

Key requirement?

Answer 6

A pour-over gift is a gift made in a will to an existing revocable trust.

It is valid.

Key Requirement is:

1. The trust must be in existence OR executed concurrently with the will.

Question 7

May the trust designated for the pour-over gift be unfunded?

Answer 7

Yes, the trust to which the pour-over gift may be unfunded.

Question 8

What is a benefit of a pour-over gift?

Answer 8

It’s easier to modify than a will.

Question 9

Can a settlor create a pour-over gift into a trust created by someone else?

Answer 9

Yes, no prob.

Question 10

What are the two ways to have life insurance proceeds be paid into a trust?

Answer 10

1) Insured can create a revocable trust [lifetime] and name the trustee of the trust as policy beneficiary.
2) Create a testamentary trust and have the life insurance policy contract name “the trustee named in my will” as the life insurance beneficiary.

Question 11

What is a Totten Trust?

How is it created?

2 Key characteristics?

Answer 11

A Totten Trust is a bank account in the depositor’s name “as trustee for” a named beneficiary.

Poor man’s trust.

Key:

1) Depositor makes deposits and withdrawals as he wishes throughout his lifetime.
2) Beneficiary has no beneficial interest during depositor’s lifetime, but gets whatever is in the account when the depositor dies. **

Question 12

What must be said to create a Totten Trust?

Answer 12

Either in trust for, as trustee for, or ITF.

Question 13

What are the 4 ways to revoke a Totten Trust account?

Answer 13

a) Withdraw all the money in the account
2) Express Termination during the lifetime of the depositor by making a writing naming the beneficiary and financial institution and having the revocation notarized and delivered to the bank.
3) Revocation in a will; this must comply with the same requirements for revocation during lifetime. (I.e., will must name beneficiary, financial institution, etc.)
4) Death of the beneficiary also results in having a Totten Trust revoked and the money in the account goes free and clear to the *depositor*.

(The dead beneficiary’s heirs get NOTHING. It’s like the trust never happened.)

Question 14

What happens when the beneficiary of a Totten Trust dies before the depositor?

Answer 14

The depositor takes the money free and clear! Nothing for the heirs of the beneficiary!

Question 15

How can a depositor change the beneficiary of a Totten Trust?

Answer 15

Same as a revocation:

A notarized statement to the financial institution, naming the financial institution, old beneficiary, and new one.

Question 16

When can creditors reach a Totten Trust?

Answer 16

ANYTIME. Creditors can reach the Totten Trust account balance EITHER before OR after the depositor’s death, since it is a form of revocable trust.

!

Question 17

Distinguish Totten Trusts from Joint Bank Accounts

Are Joint Bank Accounts Trusts?

Answer 17

JBAs are not trusts.

They are made “John and Jane with the right of survivorship”

Question 18

After one of the parties in a joint bank account dies, can anyone block the money from going to the survivor of the JBA?

Answer 18

Generally not. ONLY if

1) Clear and convincing evidence shows that a survivorship was not intended when the account was established, AND
2) that the account was created only as a matter of convenience to the depositor.

Then the survivorship language can be set aside.

This is a hard requirement to satisfy!

Question 19

Who owns a joint bank account?

Answer 19

Each JBA account holder owns 1/2 of the account.

Question 20

What happens if joint bank account holder cashes the whole account out prior to the other JBA owner’s death?

Answer 20

He severs and destroys the JBA, and owes the excess removed over his 1/2 share to the other party/executor if other party has since died.

Question 21

Why make a gift to a minor under the Uniform Transfers to Minors UTMA act?

Answer 21

1) It avoids a guardianship proceeding
2) It avoids a trust (and thus the court supervision of a trust)
2) It qualifies for the $14,000 per donee annual exclusion from federal and state gift tax.

Question 22

How do you make a gift under the Uniform Transfers to Minors Act?

Answer 22

1) Make gift to a custodian (not a trustee)
2) That specifies that it is made under the UTMA

UTMA gifts can be made in a will so long as the same required statutory language is used.

Question 23

What are the duties of a UTMA custodian?

Answer 23

1) Hold, manage and invest the property under a prudent person standard
2) Pay over to the minor or for the minor’s needs what part of the property that the custodian deems advisible
3) Pay what is left of the property to the minor when the minor turns 21 (for a post Jan 1 1997 gift), 17 for pre Jan 1 1997)

(Note the custodian doesn’t actually hold legal title like a trustee does)

Question 24

What are the tax consequences of a donor naming himself as the UTMA custodian?

Answer 24

Entire amount of gift is includable in custodian’s gross estate for tax purposes.

Question 25

What type of beneficiaries may a charitable trust have?

What purposes must they be for.

Answer 25

Charitable trusts must have indefinite beneficiaries, and they must be a reasonably large group

Examples:

1. All my children - too small
2. All my descendants - too small
3. All orphans in Syracuse - good group
4. All orphans attending Syracuse University - unclear
5. All orphans living next door to me - too small

BUT, a trust for masses for relatives is ok.

Charitable trust must be for a charitable purpose: Health, education, and religion are most common

Question 26

Are charitable trusts subject to the RAP?

Answer 26

No, charitable trusts are not subject to the RPA and may be perpetual

Question 27

What happens if the purpose of a charitable trust can no longer be accomplished?

Answer 27

The court may use Cy Pres to change the trust and make it as near as possible to what the settlor intended.

Question 28

Who represents beneficiaries of charitable trusts?

Answer 28

Attorney General and donor both have standing to sue.

AG is a necessary party to any suit on construction or enforcement of a charitable trust.

Question 29

What are non-trusts? (3)

Exceptions?

Where do the assets in non-trusts go?

Answer 29

Non-trusts are not trusts. Anything in one falls into the residuary estate.

1) Honorary Trusts [exceptions are pets, cemetaries]
2) Constructive Trusts
3) Resulting Trust

Question 30

What is an honorary trust?

Answer 30

A NON-TRUST.

1) Honorary Trusts [when no human is beneficiary of a private trust] Exceptions: Pet Trusts (can last no longer than pet’s lifetime), Cemetary Trust (for maintenance and care of cemetaries and burial plots are considered charitable, so no RAP problem either)

Question 31

What is a constructive trust?

Answer 31

A NON-TRUST

Constructive Trusts:

A flexible equitable remedy designed to disgorge unjust enrichment that results from wrongful conduct. [The trustee’s only duty is to convey the property to the person who, in equity, should have the property].

—- Example can be if beneficiary was forceful is disallowing a modification to will, trustee will hold a constructive trust upon getting the property and has to give it to the testator’s truly intended beneficiary.

Also, if a spouse wrongly kills other spouse.

Question 32

What is a resulting trust?

Purchase Money Resulting Trust?

Answer 32

A NON-TRUST, it is an equitable remedy.

Purchase Money Resulting Trusts are NOT recognized in NY, but are recognized in most states [say this on bar].

1) PMRT only arises when a purchaser buys property and has title put in someone else’s name (who is not a relative) and
2) Purchaser claims no gift was intended and asks title holder for title to the property and the holder refuses.

Most states compel the title holder to give back the proeprty.

Example: Mary secretly puts down payment on beach house and puts title in friend’s name. After divorce asks friend for title back. In NY can’t get it back.

BUT, in NY if there is clear and convincing evidence that the grantee had expressly or impliedly promised to reconvey the land to the purchaser, then a constructive trust can be imposed to benefit the purchaser.

Question 33

What is a spendthrift clause?

Answer 33

A spendthrift clause prohibits the voluntary or involuntary transfer of the trust beneficiary’s interest.

It keeps creditors at bay and prohibits assignment/alienation of the interest.

I.e. Ben cannot sell or transfer his trust interest, and thus creditors cannot get it [subject to exceptions].

Question 34

What is the general rule on statutory spendthrift clauses?

What is the NY rule?

Answer 34

General Rule: Not automatic?

NY: Trust automatically includes statutory spendthrift protection for all income interests from the trust [not principal], unless it is express rejected.

To get spendthrift protection on principal, it must be expressly stated in the trust.

Question 35

What does this language create?

“No beneficiary of this trust shall have the power to assign his or her interest, nor shall such interest be reachable by the beneficiary’s creditors by attachment, garnishment, or other legal process.”

Answer 35

Spendthrift Clause

Question 36

What are the 5 major exceptions to spendthrift clauses?

Answer 36

1. Creditors who furnish necessities [food, clothing, medicine, or shelter]
2. Child support and alimony
3. Federal tax liens
4. Excess beyond income that is needed for support and education [last resort remedy, based on lifestyle]
5. The 10% levy provided by CPLR 5205(e)*

*This is for all judgment creditors, all the creditors share in the 10% of the income, don’t each get 10%.

The 10% exception is often on the exam!

Question 37

Does spendthrift protection apply to an interest retained by the settlor?

If it is statutory?

If it is express?

If trust is revocable?

Answer 37

NO!! Doesn’t matter if statutory or express.

If someone makes a trust that pays out to themself, a creditor can always reach that interest.

[or if he retains the principal, creditor can reach that too, no spendthrift protection]

If trust is revocable, the creditors can reach everything [the interest and the principal], no matter who retains the interest.

(Settlors cannot hide from the creditors in trust, but they can create a trust to hide other beneficiaries from creditors of beneficiaries]