Vested & Contingent Interests Flashcards
What is the primary difference between a vested interest and a contingent interest?
A) A vested interest requires a condition to be met before the beneficiary becomes entitled.
B) A contingent interest is an immediate right to trust property.
C) A vested interest gives the beneficiary a current right to property, whereas a contingent interest depends on a future uncertain event.
D) A contingent interest automatically passes to the beneficiary’s estate if they die before it vests.
C): A vested interest gives the beneficiary a current right to property, whereas a contingent interest depends on a future uncertain event.
Explanation: A vested interest exists immediately, either in possession or in interest. A contingent interest only becomes effective if a specified condition occurs.
Which of the following statements is TRUE regarding a vested interest in possession?
A) The beneficiary has a current right to enjoy the trust property.
B) The beneficiary’s entitlement is conditional on surviving another person.
C) The beneficiary will only receive the trust property upon meeting a specified condition.
D) The beneficiary cannot transfer their interest to another party.
A): The beneficiary has a current right to enjoy the trust property.
Explanation: A vested interest in possession means the beneficiary has an immediate right to the use and benefit of the property.
Sarah creates a trust stating: “To my son Jack for life, then to my daughter Emily.” What type of interest does Emily have?
A) Vested in possession
B) Vested in interest
C) Contingent
D) No interest until Jack dies
(B): Vested in interest
Explanation: Emily has a vested interest in interest because she has an absolute right to the property, but her enjoyment is postponed until Jack’s death.
A contingent interest is an interest that:
A) Will always pass to the beneficiary’s estate if they die before the condition is met.
B) Exists immediately but is subject to future conditions.
C) Cannot become vested.
D) Requires no conditions to be met before the beneficiary takes ownership.
(B): Exists immediately but is subject to future conditions.
Explanation: A contingent interest exists but is not guaranteed to vest unless a condition occurs.
A trust states: “To Lisa for life, then to Mark if he survives Lisa, but if not, to Emma.” What type of interest does Mark have?
A) Vested in interest
B) Contingent
C) Vested in possession
D) Fixed
(B): Contingent
Explanation: Mark’s interest depends on him surviving Lisa. If he does not, Emma takes the remainder interest.
Which of the following phrases indicates a contingent interest?
A) “To A for life, then to B.”
B) “To A for life, then to B if B reaches 25.”
C) “To A for life, then to B in equal shares with C.”
D) “To A for life, then to B immediately.”
(B): “To A for life, then to B if B reaches 25.”
Explanation: The phrase “if B reaches 25” introduces a condition, making B’s interest contingent.
Which of the following statements best describes a vested remainder interest?
A) The beneficiary is currently entitled to possession of the trust property.
B) The beneficiary has a present right to a future interest in the trust property.
C) The trustee has discretion over whether to distribute the property.
D) The interest automatically fails if the beneficiary dies before the trust ends.
(B): The beneficiary has a present right to a future interest in the trust property.
Explanation: A vested remainder means the beneficiary will receive the trust property in the future, regardless of survival.
A trust states: “To Tom for life, then to his son David if David has married by the time Tom dies.” What kind of interest does David have?
A) Vested in possession
B) Vested in interest
C) Contingent
D) Fixed
(C): Contingent
Explanation: David’s interest depends on whether he has married before Tom’s death. If he has not, he does not inherit.
Which of the following best describes the effect of a gift-over provision in a trust?
A) It removes all conditions attached to an interest.
B) It ensures the property will pass to an alternative beneficiary if the primary contingent interest fails.
C) It converts a contingent interest into a vested one.
D) It automatically revokes the trust.
(B): It ensures the property will pass to an alternative beneficiary if the primary contingent interest fails.
Explanation: A gift-over clause provides a fallback plan if the first intended beneficiary does not meet the condition.
Which of the following is NOT a characteristic of a vested interest?
A) It may be transferred or inherited.
B) It depends on a condition precedent.
C) It provides an immediate or future right to the trust property.
D) It can be either in possession or in interest.
(B): It depends on a condition precedent.
Explanation: Vested interests do not require conditions to be met; they exist immediately.
A trust states: “To Anne for life, then to Brian if he survives Anne, but if not, to Catherine.” What happens if Brian predeceases Anne?
A) Brian’s heirs inherit his interest.
B) The property passes to Catherine.
C) The property returns to the settlor.
D) The trust becomes void.
(B): The property passes to Catherine.
Explanation: The gift-over clause ensures that if Brian does not survive Anne, the property goes to Catherine.
A trust states: “To A for life, remainder to B if B completes a law degree.” What happens if B dies before A and has not completed the degree?
A) B’s heirs inherit the remainder interest.
B) The property reverts to the settlor’s estate.
C) A keeps the property absolutely.
D) The property is held on a discretionary trust.
(B): The property reverts to the settlor’s estate.
Explanation: Since B’s interest was contingent on completing a law degree, and this was not met, it fails, and the property reverts.
Michael creates a trust stating: “To my daughter Jane if she graduates from university before turning 30.” Jane is currently 25 and still in school. What happens if Jane dies at 27, without having graduated?
A) Her heirs inherit her interest in the trust.
B) The trust property is held on resulting trust for the settlor’s estate.
C) The trustee has discretion to distribute the property to another beneficiary.
D) The property is automatically transferred to another beneficiary.
(B): The trust property is held on resulting trust for the settlor’s estate.
Explanation: Jane’s interest was contingent on her graduating before 30. Since she died before fulfilling this condition, her interest never vests, and the property reverts to the settlor’s estate.
Which type of interest is more predictable for estate planning purposes?
A) Vested interest
B) Contingent interest
C) Neither, as both are equally uncertain
D) Powers of appointment
(A): Vested interest
Explanation: Vested interests are guaranteed to belong to the beneficiary, whether immediately or in the future. This certainty makes them more reliable for estate planning.
How can trustees determine whether an interest is contingent or vested?
A) By examining whether the beneficiary is currently entitled to possession.
B) By checking if there is a condition that must be fulfilled before the beneficiary is entitled.
C) By determining if the interest is transferable.
D) By confirming whether the settlor has retained any control over the trust property.
(B): By checking if there is a condition that must be fulfilled before the beneficiary is entitled.
Explanation: A contingent interest requires a future condition to be met before it vests. If no such condition exists, the interest is vested.
