Types of Trusts Flashcards
Testamentary trust
Testamentary trusts are a type of express trust which occur when the terms of the trust are contained in writing in a will or in a document incorporated by reference into a will. To be valid the will must comply with the Statute of Wills and the elements of a trust must be met.
Spendthrift Trust
A spendthrift trust expressly restricts the beneficiaries’ power to voluntarily or involuntarily transfer his equitable interest. Spendthrift provisions are often inserted into trusts to protect beneficiaries from their own imprudence.
A beneficiary’s creditors usually cannot reach the beneficiaries’ trust interest in satisfaction of their claims if the governing instrument contains a spendthrift clause prohibiting creditors to do so. Ex: “The interests of the beneficiaries are inalienable and not subject to the claims of creditors.”
SEE EXCEPTIONS.
Spendthrift Trust Exceptions
While spendthrift clauses are generally valid, most states allow certain classes of creditors to reach a beneficiary’s assets, notwithstanding the spendthrift clause. Exceptions are:
1) Children & Spouses entitled to support
2) providers of basic Necessities to the beneficiary
3) holders of federal or state Tax Liens
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Charitable Trust
For a trust to be considered charitable, it must
1) have a stated charitable purpose
2) exist for the benefit of the community at large or for a class of persons the membership in which varies. Cannot be for a specific beneficiary.
Charitable purposes include: poverty relief, advancement of education or religion, or
Resulting Trust
When a trust fails or when there is an incomplete disposition of trust property, a court may create a resulting trust requiring the holder of the property to return it to the settlor or the settlor’s estate.
When a testamentary trust fails, the residuary legatee succeeds to the property interest. The purpose of a resulting trust is to achieve the settlor’s likely intent.
Discretionary Trust
A discretionary trust is where the trustee is given complete discretion regarding whether or not to apply payments of income or principal to the beneficiary and make a distribution.
If the trustee exercises his discretion to pay, then the beneficiary’s creditors are entitled to reach the trust assets.
If the direction to pay is not exercised then the beneficiary’s interests cannot be reached by his creditors.
Mandatory Trust
The trustee must pay out income and principal to the beneficiaries according to the instructions of the trust. They have no discretion to choose whether to do so or not. When the money is paid out to the beneficiary, the creditor has a right to reach that property.
Inter vivos trust
An inter vivos trust is a trust created while the trustor is living that transfers some or all of the trustor’s property into a trust. The trustor can designate himself as the trustee or a third party.
Support Trust
Directs trustee to pay income or principal as necessary to support trust beneficiary; creditors cannot reach these assets unless providing a necessity to beneficiary.
