Wills and Trusts

Question 1

Apply intestacy rules when…

Answer 1

1. No will;
2. Will fails (denied probate);
3. Will does not dispose of all probate property (i.e., undisposed-of property is subject
   to intestacy rules); or
4. Will specifies intestate distribution

Question 2

Intestate: surviving spouse’s share, if descendants also survive…

Answer 2

In most states, the spouse takes one-third or one-half of the estate

UPC– surviving spouse takes the entire estate if the decedent is survived by descendants, all of whom are descendants of the surviving spouse, and the surviving spouse has no other surviving descendant.

UPC—surviving spouse takes entire estate if all surviving descendants are surviving
spouse’s descendants

Question 3

Intestate: surviving spouse’s share, if no descendants survive…

Answer 3

Generally, the surviving spouse takes the entire estate

Question 4

Intestate: Who’s next, if no descendants survive…

Answer 4

a. To parents
b. If no parents, to descendants of parents
c. If no descendants of parents, to grandparents or their descendants
d. If no grandparents or their descendants, divided into maternal and paternal
shares and pass to nearest kin (watch for laughing heir statute)
e. If no relative capable of taking, the estate passes to the state (escheat)

Question 5

Per stirpes

Answer 5

a. Minority view, oldest
b. Divide at the first generation
c. Create one share for each surviving child and one share for each predeceased child who left living descendants
d. Give each surviving child one share

Question 6

Per capita with representation

Answer 6

a. Majority rule
b. Divide at the first generation with surviving members
c. Each living person at that level takes a share
d. Share of deceased person at that level passes to issue

Question 7

Per capita at each generation level

Answer 7

a. Used by growing number of states and UPC
b. Divide estate into shares at first generation with survivors
c. Pool shares of lower generation so each person of lower generation gets an equal share

Question 8

Stepchildren and foster children

Answer 8

no inheritance rights unless adopted, but may be
exception for adoption by estoppel

Question 9

Posthumous children

Answer 9

child in gestation at decedent’s death inherits as if born in
decedent’s lifetime

Question 10

Nonmarital children can adopt from father if

Answer 10

a. Father and mother married after child’s birth,
b. The man is adjudicated the father in a paternity suit, or
c. After the man’s death, he is proved to be the father of the child

Question 11

Disinheritance clause

Answer 11

1. Majority—ineffective if partial intestacy
2. Minority and UPC—given full effect; heir treated as though he had disclaimed his
   intestate share

Question 12

Disclaiming an interest

Answer 12

o Most states: must be written, signed by disclaimant, acknowledged before a notary, and filed with the appropriate court within nine months of death
o To be effective for federal tax purposes, the disclaimer must be in writing, irrevocable, and filed within nine months of the decedent’s death or the beneficiary’s 21st birthday.
o Treat the disclaimant as having died first
o An interest cannot be disclaimed if the heir or beneficiary has accepted the property or any of its benefits.

Question 13

Slayer statute

Answer 13

In most states, person who intentionally brings about death of decedent forfeits any interest in decedent’s estate
o Passes as though killer predeceased victim
o POE standard to determine killing was intentional

Question 14

Advancements

Answer 14

A lifetime gift to an heir with the intent that the gift be applied against any share the heir inherits from the donor’s estate

o Most states: a lifetime gift is presumptively NOT an advancement unless intent is shown
o UPC states: an advancement only if: 1) declared as such in a contemporaneous writing by the donor, or (2) acknowledged as such in a writing by the heir (which need not be contemporaneous)

Question 15

Will

Answer 15

an instrument executed with certain formalities that usually directs the disposition of a person’s property at death, although an instrument that merely appoints a personal representative or revokes an earlier will can be a will

A will is revocable during the testator’s lifetime and operative at their death.

Question 16

Compliance with will

Answer 16

• Most states require exact compliance
• UPC and some states allow substantial compliance, excuse minor errors
• UPC: courts can ignore harmless errors (not complying with all of will requirements) if proponent can establish by POE that T intended the document to be their will

Question 17

Applicable law (wills)

Answer 17

o Real property: validity and effect of a will re: real property is determined by the law of the state where the property is located
o Personal property: validity and effect of a will re: personal property is determined by the law of T’s domicile at time of death

Question 18

Simultaneous death

Answer 18

1. Under the Uniform Simultaneous Death Act (“USDA”), property of each person passes as though he survived the other person
2. Applies to probate and nonprobate transfers (e.g., wills, trusts, insurance)
3. About half of the states have adopted 120-hour rule—must survive by 120 hours to take as a beneficiary, heir, etc., and avoid application of USDA
4. Governing instrument can make different provision

Question 19

Requirements of all wills

Answer 19

1. Legal capacity: Testator age 18 and of sound mind
2. Testamentary capacity: Testator must have capacity to understand nature of their act, extent of their property, the persons who are recipients
3. Testamentary intent—present intent to make a will
4. Writing
5. Signature of testator

Question 20

Requirements of formal attested wills

Answer 20

1. Legal capacity: Testator age 18 and of sound mind
2. Testamentary capacity: Testator must have capacity to understand nature of their act, extent of their property, the persons who are recipients
3. Testamentary intent—present intent to make a will
4. Writing
5. Signature of testator
6. Two attesting witnesses (or signed by a notary under UPC)
   a. Testator must acknowledge will or signature in witnesses’ presence
   b. Witnesses must sign in testator’s presence
   c. If witness is also a beneficiary, will is valid but gift to interested witness is purged unless: (1) Witness is supernumerary, (2) Witness would take without the will (takes lesser gift), (3) UPC provision (minority view) allows interested witness to keep gift

Question 21

The signature requirement

Answer 21

o Some states also require: T must sign at the end of the will, T must publish the will, Ws must sign in each other’s presence
o Under UPC, a will is valid if either (1) attested by 2 competent ws, OR (2) signed by notary

Question 22

Self-proving affidavit

Answer 22

recites all the elements of execution and is sworn to by T and Ws before a notary
 Makes probate faster and cheaper (bc no need to testify in court later)
 Signatures on affidavit = signatures on will in most states

Question 23

Attestation clause

Answer 23

recites elements of execution and is prima facie evidence of elements (not required by is helpful)

Question 24

Holographic wills

Answer 24

One that is entirely in T’s handwriting and no Ws
o Recognized by UPC and most states
o UPC and most states that accept h wills: will accept h will as long as the portion not in T’s handwriting is not material
o Must be signed by T somewhere on will (nickname, first name okay)
o Most states that recognize holographic wills give effect to handwritten changes made by the testator after the will is completed

Question 25

Oral wills

Answer 25

o Most states and UPC do not recognize
o The small number of states that allow oral wills do so only for the disposition of personal property and only if made in very particular circumstances.
o Two or more witnesses to the spoken words are often needed.

Question 26

Attorney’s liability for negligence

Answer 26

In most states, an attorney’s duty runs not only to the client but also to the intended beneficiaries of the attorney’s services, and they can sue the attorney for negligence or as a third-party beneficiary of the attorney-client contract.

Question 27

Types of testamentary gifts

Answer 27

o Devise: gift of real property (devisee)
o Bequest: gift of personal property
o Legacy: gift of personal property (usually money)
o Specific devise or legacy: gift of a particular item of property distinc from all other objects in T’s estate (“I leave my computer model ### with serial number ### to Z”)
o Specific bequest: not distinguishable from the rest of T’s estate until T dies (“I leave my computer to X”)
o General legacy: gift of personal property (usually money) payable out of general assets of estate without requiring particular source of payment (“I leave $1k to Y”)
o Demonstrative legacy: a gift of general amount to be paid from a particular source or fund. If the designated fund is unavailable, usually will be paid from other assets of the estate.) (“I leave C $10k from my bank account at blahblah”)
o Residuary estate: the balance of T’s property after paying (1) debts, expenses, and taxes and (2) specific, general, and demonstrative gifts. (sometimes the will is one big residual clause)

Question 28

Incorporation by reference

Answer 28

The document must be:
a. In existence at the time the will was executed,
b. Sufficiently described in the will, and
c. The will must show intent to incorporate
2. Signed list of tangible personal property is valid even if made or altered after will’s
execution

Question 29

Ademption

Answer 29

1. Gift fails
2. Applies ONLY to specific devises and bequests
3. Ademption may be partial
4. Testator’s intent is irrelevant

Ademption by satisfaction: beneficiary receives gifted property before T’s death
* Inter vivos transfer after execution of will
* Most states require a writing (possible exception for specifically described property)

Question 30

Accretions

Answer 30

-Increases to property after execution of will
-Income goes to general estate, but improvements
to real property go to devisee
-Increases after testator’s death pass to specific beneficiary
-Specific bequests include stock splits and stock dividends

Question 31

Exoneration of liens

Answer 31

UPC and most states provide that liens on specifically devised property are NOT exonerated/paid off with estate funds unless the will so directs. (so beneficiary takes property subject to the debt)

Question 32

Abatement

Answer 32

The process of reducing testamentary gifts in cases where the estate assets are not sufficient to pay all claims against the estate and satisfy all bequests and devises.

If the testator does not set out an order of abatement in the will, testamentary gifts will usually abate in the following order:
* Property passing by intestacy
* Residuary estate
* General legacies
* Demonstrative legacies
* Specific bequests and devises

Question 33

Lapsed gifts

Answer 33

• A gift lapses if the beneficiary predeceases the testator or if the beneficiary is treated as not surviving the testator because, for example, the beneficiary disclaimed or did not survive long enough
• Who receives a lapsed gift is controlled by: express terms of will, rule of law, residuary clause, intestacy

Question 34

Anti-Lapse statutes

Answer 34

prevent lapse by substituting descendants of predeceased beneficiary for predeceased beneficiary

Relationship needed between T and predeceased beneficiary varies by state

Question 35

Lapse in residuary gift

Answer 35

If a will devises the residuary estate to two or more beneficiaries and one of them predeceases the testator (and the anti-lapse statute does not apply), most states allow the surviving residuary beneficiaries to divide the share in proportion to their interests in the residue.

Question 36

Class gifts

Answer 36

If a will makes a gift to a class, only the class members who
survive the testator take a share of the gift, unless the will provides otherwise or the anti-lapse statute’s requirements
are met

Question 37

Ambiguity in will interpretation

Answer 37

• Patent/obvious: Fails to convey sensible meaning. The traditional view is that extrinsic evidence is not admissible to correct a patent ambiguity, but the modern view is that extrinsic evidence is admissible. However, extrinsic evidence cannot be used to fill in blank spaces or supply omitted gifts.
• Latent: the language is clear on its face but cannot be carried out without clarification. Extrinsic evidence will be considered to resolve the ambiguity.
• No apparent ambiguity (mistake): clear on its face and can be carried out as written, but a beneficiary or interested party thinks T made a mistake.
   Plain meaning rule: cannot bring in extrinsic evidence to disturb plain meaning.
   Modern rule: can bring in extrinsic evidence

Question 38

Codicil

Answer 38

• Republication by codicil: the will and codicil are treated as 1 document speaking from date of last codicil.
• Proof of codicil acts as proof of the will.

Question 39

Integration

Answer 39

The person probating the will must be able to show that the pages present at the time of execution are those present at the time of probate (e.g. same font styles, initials at bottom of each page, fasten pages together)

Question 40

Combination wills

Answer 40

• Joint wills: single instrument executed by two or more testators (never do this in practice!)
• Reciprocal or mutual wills: separate wills executed by one or more Ts that contain substantially similar provisions (“sweetheart wills”)

Question 41

Contractual wills

Answer 41

Executed (or not revoked) as the consideration for a contract (k law governs these)
o Need a writing
o No presumption of k
o Can be revoked by agreement of parties while both are alive
o Breach: If the testator dies in breach, the usual remedy is for the court to grant a constructive trust for the benefit of the promisee.
o Breach of k not to revoke: no remedy unless 1st party dies in reliance on k; constructive trust

Question 42

Reach of creditors

Answer 42

o Creditors generally cannot reach appointive property until the power is actually exercised

Question 43

Revocation by operation of law

Answer 43

-By operation of law
(a) marriage: most states, marriage following execution of will has no effect on earlier will
(b) divorce: In most states, divorce or annulment following execution of a will revokes all gifts and fiduciary appointments in favor of the former spouse.
-divorce has no effect on other gifts in majority of states
-but in UPC and some states, divorce also revokes gifts to ex-spouse’s relatives

Question 44

Conditional wills

Answer 44

A conditional will is one that provides that it is to be operative only if a certain event occurs or does not occur. Wills are construed as general, not conditional, if possible. Parol evidence is not admissible to show that a will absolute on its face was intended to be conditional.

Question 45

Pour-over gift to inter-vivos trust

Answer 45

1. Valid even if trust amended after will execution
2. Under Uniform Testamentary Additions to Trusts Act, trust need not be in existence at will execution

Question 46

Power of appointment

Answer 46

-General vs. special power—general power can be exercised in favor of donee; special power cannot
-Appointive property not subject to elective share or creditors
-Residuary clause does not, by itself, exercise testamentary power; must mention power
-Blanket exercise of power permissible (“including all property over which I have a power of appointment”)
-Contract to exercise testamentary power is invalid
-Creditors generally cannot reach appointive property until the power is actually exercised

Question 47

Revival of revoked will

Answer 47

-In a majority of states, destruction of revoking instrument presumptively revives revoked will unless testator did not so intend. Will always revived if:
a. Reexecuted with formalities, or
b. Republished by codicil
-No revival in some states
-UPC: look at T’s intent (if a will that wholly revoked a previous will is thereafter revoked, the previous will remains unrevoked unless evident from circumstances or T’s statements that T intended to revive old will)

Question 48

Lost or destroyed wills

Answer 48

If a will is lost or destroyed (and the presumption that the testator revoked it is overcome), it may be admitted to probate if the following can be proven: (1) valid execution; (2) the cause of nonproduction (that is, proof that the will was not revoked); and (3) the contents of the will.

Question 49

Presumptions as to revocation

Answer 49

If a will last seen in the testator’s possession or under their control cannot be found after their death or is found in a mutilated condition, a rebuttable presumption arises that the testator revoked it. However, if the will was last seen in the possession of a third person or if a person adversely affected by its contents had access to the will, no presumption of revocation arises. Note that extrinsic evidence is admissible to overcome the presumption of revocation.

Question 50

Presumption as to no revocation

Answer 50

If a will is found in a “normal location” and there are no suspicious circumstances, there is a presumption that the testator did not revoke it.

Question 51

Conditional revocation

Answer 51

-Express: T may state in revoking instrument that revocation is effective upon happening of named event
-Implied: Doctrine of Dependent Relative Revocation: applies when a testator revokes their will under the mistaken belief that another disposition of their property would be effective, and but for this mistaken belief, the testator would not have revoked the will. If the other disposition fails, the revocation also fails and the will remains in force.
* The more similar the provisions of the two wills, the more likely the court will apply DRR

Question 52

Who can contest a will

Answer 52

interested parties (heirs, beneficiaries of prior wills) (creditors, executors are NOT interested parties)

contestant has the burden

Question 53

Grounds for contest of will

Answer 53

(1) defective execution,
(2) revocation,
(3) lack of testamentary capacity,
(4) lack of testamentary intent,
(5) undue influence or duress,
(6) fraud
(7) mistake

Question 54

No contest clauses

Answer 54

Provides that a beneficiary forfeits their interest in the estate if they contest the will and lose.

Majority of states + UPC: no forfeiture if probable cause for contesting will; no-contest clause will be upheld unless the contestant had probable cause for bringing the contest
Minority: no exception for probable cause to contest, will uphold no-contest clause

Question 55

Duress or undue influence

Answer 55

 The influence existed and was exerted;
 The effect of the influence was to overpower the mind and free will of the testator; AND
 The resulting testamentary disposition would not have been executed but for the influence
 Evidence: court will look at these factors: opportunity or access; confidential or fiduciary relationship bw parties; ability of T to resist; b’s involvement with the drafting or execution of will
 Duress is a form of undue influence but connotes violent conduct such as the threat of physical harm.

Question 56

Fraud

Answer 56

 A successful contest on grounds of fraud requires that the testator have been willfully deceived as to: (1) the character or content of the instrument, (2) extrinsic facts that would induce the will or a particular disposition, or (3) facts material to a disposition.
 If a testator is fraudulently prevented from making a will, some courts will impose a constructive trust against the intestate beneficiaries in favor of those who would have taken had the will been made.
 Elements:
* False representation made to the testator
* Knowledge of falsity by person making the statement
* The testator reasonably believed the statement
* The statement caused the testator to execute a will or make a particular disposition that the testator
 fraud in the factum: In the case of fraud in the execution, there is a misrepresentation as to the identity or contents of the instrument—that is, the testator did not know the document was a will or what it contained. There was a lack of testamentary intent.
 Fraud in the inducement: In the case of fraud in the inducement, the testator knows they are executing a will and what it contains, but the testator is deceived as to some extrinsic fact and makes the will or a gift based on that fact. The will or the particular gifts affected by the fraud must be set aside.

Question 57

Mistake

Answer 57

 Mistake in the factum: the testator is in error regarding the identity or contents of the instrument and thus lacks testamentary intent. Extrinsic evidence is admissible to show that a testator did not know that the instrument they were signing was a will. If the testator mistakenly signs the wrong will (for example, a husband and wife sign each other’s will), some courts will deny relief, but the better view is that the court will grant relief where the nature of the mistake is obvious.
 Mistake in inducement: no relief
* Where the testator is mistaken as to some extrinsic fact and makes their will based on that erroneous fact. If the mistake involves the reasons a testator made their will a particular way and the mistake was not fraudulently induced, the court will not normally grant relief.

Question 58

Probate

Answer 58

the proceeding in which an instrument is judicially determined to be the will of decedent or in which decedent’s heirs are determined

Question 59

Personal representative

Answer 59

appointed to carry out the estate administration
o Any person who has capacity to k may serve as a personal representative
o Named executor will serve unless disqualified
o If no executor named, or if estate is intestate, administrator will be appointed,
o Personal representative may be required to file a bond
o The primary functions of the personal representative are to: (1) give notice to devisees, heirs, and claimants against the estate; (2) discover and collect the decedent’s probate assets and file an inventory; (3) manage the assets of the estate during administration; (4) pay expenses of administration, claims against the estate, and taxes; and (5) distribute property
o Entitled to compensation for their services
o If named in the will, personal representative is called executor. If not named, they are an administrator.

Question 60

o Claims generally paid in the following order:

Answer 60

(1) administration expenses,
(2) funeral expenses and expenses of the last illness,
(3) family allowance,
(4) debts given preference under federal law,
(5) secured claims
(6) judgments entered against the decedent during his lifetime, and
(7) all other claims.

Question 61

Probate jurisdiction

Answer 61

• Primary probate jurisdiction = decedent’s domicile at time of death
• Ancillary probate jurisdiction = wherever decedent’s assets are located

Question 62

Living will

Answer 62

states an individual’s desires regarding: (1) whether to administer, withhold, or withdraw life-sustaining procedures; (2) whether to provide, withhold, or withdraw artificial nutrition or hydration; and (3) whether to provide treatment to alleviate pain.

Question 63

A durable healthcare power (also called a medical power of attorney)

Answer 63

appoints an agent to make healthcare decisions on behalf of the principal and does not become effective until the principal becomes incapacitated.

Question 64

Creation of advance healthcare directive

Answer 64

(1) writing, (2) signed by declarant or principal or another at person’s direction, and (3) witnessed by 2 adults

• Capacity is presumed, burden on challenger

Question 65

Revocation by physical act

Answer 65

-By physical act
(a) Intent to revoke + physical act (concurrent!)
(b) Proxy revocation: someone else can destroy, but at T’s request, and in T’s presence
(c) Partial revocation by physical act: most states allow if there is sufficient evidence that T made the changes. Extrinsic evidence allowed to determine whether intended revocation was total or partial.
-By written instrument:
(a) Revoking instrument must be executed with same formalities as will
(b) Inconsistent provisions in later instrument revoke prior ones by implication

Question 66

Revocation by written instrument

Answer 66

-By written instrument:
(a) Revoking instrument must be executed with same formalities as will
(b) Inconsistent provisions in later instrument revoke prior ones by implication

Question 67

Methods of will revocation

Answer 67

by operation of law (marriage or divorce)
by written instrument (express, same formalities as will)
by physical act (concurrent act + intent to revoke)

Question 68

Protection of the family

Answer 68

-Elective share statutes
-Homestead
-Family allowance
-Exempt personal property
-Pretermitted child statutes

Question 69

Elective share statutes

Answer 69

CL marital property states have elective share statutes that give spouse an election to take a statutory share of decedent’s estate in lieu of taking under the decedent’s will
 1/3 of net probate estate is typical, some states base the amount on length of marriage

Community property states: no elective share because spouse is protected by owning half of community property
 Deceased spouse can give away only separate property and their half of community property

Question 70

Pretermitted child statutes

Answer 70

(accidentally omitted children)

Most states provide a forced share for a child who was born or adopted after the will was executed. Only a few states provide a forced share for a child born or adopted before the will execution.
-Amount varies a lot
-Many states withhold a pretermitted child’s forced share in the following circumstances:
* the testator had other children at the time the will was executed and devised substantially all of their estate to the other parent of the omitted child
* it appears from the will that the omission was intentional
* the T provided for omitted child outside of will

Question 71

Homestead

Answer 71

Most states have statutes that protect the family residence or farm from creditors’ claims by exempting a certain amount of land. These statutes often provide that the decedent’s spouse or dependent children are entitled to occupy the homestead for as long as they choose despite the disposition of the residence in the decedent’s will.

Question 72

Family allowance

Answer 72

The purpose of the family allowance is to provide support during probate administration, and usually takes precedence over all claims other than funeral and administration expenses. It is in addition to the amount passing by will, intestacy, or elective share.

Question 73

Exempt personal property

Answer 73

A surviving spouse (or if none, minor children) is usually entitled to petition to set aside certain items of tangible personal property (for example, household furnishings, personal effects, farm equipment, and, sometimes, automobiles) as exempt from claims against the estate except for perfected security interests on the items themselves. These items are in addition to the amounts passing by will, intestacy, or elective share.

Question 74

Trust created by

Answer 74

(1) settlor transfers legal title to trustee and equitable title to beneficiary
(2) trustee will invest and manage it according to state law and the settlor’s instructions in the trust instrument
(3) trustee will make payments to the beneficiary according to settlor’s instructions

Question 75

Types of trusts

Answer 75

(1) express trusts: private or charitable, made by express intention of settlor
(2) created by operation of law: either resulting trusts (from presumed intention of owner of property) or constructive trusts (an equitable remedy used to prevent unjust enrichment)

Question 76

Requirements of private trust

Answer 76

A. Settlor with Capacity and Present Intent to Create a Trust
B. Competent Trustee with Duties
C. Trust Property (Res)
D. Beneficiaries
E. Valid Trust Purpose
F. Formalities

Question 77

Requirements of private trust: settlor with capacity and present intent

Answer 77

1. Must intend trust to take effect immediately
2. Must express intent by words or conduct while settlor owns the property
3. Precatory expressions (hope, wish, suggestion) result in inference that no trust was intended, but inference may be overcome by other evidence
4. No formal words required
5. No consideration required (Consideration would be required for a promise to create trust in the future.)

Question 78

Requirements of private trust: trustee

Answer 78

1. Failure to name trustee (or failure of trustee to accept or qualify) does not defeat a testamentary trust; court will appoint trustee
2. Inter vivos trust will fail without trustee because there can be no valid delivery and transfer of trust property
3. Trustee must have duties
4. Settlor may declare himself trustee
5. the same person cannot be sole trustee and sole beneficiary

Question 79

Requirements of private trust: trust property

Answer 79

a. The property must be described with certainty
b. Sufficient: existing interest, future interest, future profits from existing contract
c. Insufficient: no right to transfer, future interest not yet in legal existence, unenforceable gratuitous promise
d. Must be segregated from other property, but may be a fractional or undivided interest in specific property
e. Debtor cannot hold their own debt in trust

Question 80

Requirements of private trust: beneficiaries

Answer 80

a. Once you accept any benefits of the trust, cannot disclaim
b. Disclaimer: by filing written instrument with trustee, can be made within 9 months of interest’s creation, or 9 months after beneficiary turns 21.
c. Qualified beneficiary is: (1) a current beneficiary, or (2) a first-line remainderman (that is, one who would become eligible to receive distributions were the event triggering the termination of a beneficiary’s interest or of the trust itself to occur on the qualification date).
d. Capacity: anyone cable of taking and holding title to property, need not be competent
e. The trust must operate directly to benefit the person (not everyone who benefits is a beneficiary)
f. Notice to beneficiary not essential, but lack of notice may indicate that no trust was intended

Question 81

Requirements of private trust: valid trust purpose

Answer 81

a. Improper purpose: Illegal, contrary to public policy, impossible to achieve, intended to defraud the settlor’s creditors or based on illegal consideration
i. Court can either get rid of the condition or void the gift entirely

Question 82

Requirements of private trust: formalities

Answer 82

1. Inter vivos trust—created during settlor’s life
   a. Declaration of trust by property owner that he holds in
   trust, or
   b. Transfer of property by the settlor to the trustee
   c. No writing required unless trust of land
2. Testamentary trust—created by settlor’s will
   a. Essential terms must be ascertained from will,
   incorporated document, facts of independent
   significance, or exercise of power of appointment
   b. Secret trust (absolute gift but trust intended)—
   constructive trust imposed
   c. Semi-secret trust (gift in trust without beneficiary)—
   resulting trust for testator’s heirs

Question 83

How to accept trustee appointment

Answer 83

b. A person accepts a trusteeship by: (1) signing the trust or a separate written acceptance; (2) substantially complying with the acceptance terms in the trust instrument; or (3) accepting delivery of trust property, exercising powers or performing duties as trustee, or indicating acceptance

Question 84

Removal of trustee

Answer 84

Court can remove for (1) a serious breach of trust; (2) serious lack of cooperation among co-trustees; (3) unfitness, unwillingness, or persistent failure to administer; or (4) a substantial change in circumstances.

Basically, if continuation would be detrimental to the trust

Question 85

Transfer of beneficiary’s interest

Answer 85

General rule: Freely transferable interests presumed (gifts, sales; creditors can involuntarily reach)

BUT it’s extremely rare! Because of spendthrift provisions and bc beneficiary’s interests are almost always limited to their lives (life estates) and cannot be transferred by will or intestacy

Question 86

Charitable trusts

Answer 86

1. Purpose must benefit the public (e.g., poverty relief, education, health)
2. Must have indefinite beneficiaries
3. May be perpetual—Rule Against Perpetuities (“RAP”) does not apply
4. Enforceable by settlor, a qualified beneficiary, or attorney general
5. Cy pres—if settlor’s intended purpose is impracticable, unlawful, or wasteful, court substitutes new charitable purpose

Question 87

Honorary trusts

Answer 87

1. Not for charitable purpose, but no private beneficiaries who can enforce trust (e.g.,
   trusts for pets, graves)
2. Enforceable by someone named in the trust or appointed by court
   a. Under UTC, enforceable for 21 years or for life of the animal
3. If property is more than is needed, excess is distributed to settlor or his successors
   unless trust provides otherwise

Question 88

Discretionary trusts

Answer 88

Common
Trustee Has Discretion to Pay or Withhold Income or
Principal
1. Before trustee makes discretionary payment, interest cannot be reached by creditors
2. After trustee elects to make payments, must pay creditors directly if he has notice—unless there is a spendthrift restriction

Question 89

Spendthrift provisions

Answer 89

o Virtually every trust will contain these
(1) beneficiary cannot transfer interest (but once trustee pays b, b may transfer the property received)
(2) creditors cannot attach b’s interest (unless b is actually paid the $)
o A restriction permitting the beneficiary to voluntarily alienate their interest, but purporting to deny creditors the right to reach the beneficiary’s interest, is probably invalid.
o Assignments unenforceable: A beneficiary’s assignees cannot force the trustee to pay them directly.
o In most states, a settlor cannot use a spendthrift trust to protect their own property from their own creditors. However, a growing number of states allow self-settled spendthrift trusts, that is, the “domestic asset protection trust” or “DAPT.”

Question 90

Support trusts

Answer 90

-Support Trust Cannot Be Assigned or Reached Even Without Spendthrift Clause (impliedly spendthrift)
-Directs the trustee to pay only so much of the income or principal (or both) as is necessary for the beneficiary’s support.
-Standard of support and other resources: If the instrument is silent, the standard of support is the beneficiary’s accustomed standard of living

Question 91

Modification and termination by settlor

Answer 91

1. UTC: trusts presumed revocable and amendable unless terms expressly state otherwise
   Traditional rule: must reserve right to revoke or modify
2. Power to revoke includes power to modify

Question 92

Modification and termination by beneficiaries

Answer 92

1. May terminate or modify if:
   a. Settlor and all beneficiaries consent, even if it conflicts with a material purpose; or
   b. All beneficiaries consent, and no material purpose would be frustrated
2. Watch for remote unborn beneficiaries—representative can be appointed to represent interests of minor, unborn, or unascertained beneficiaries
3. In most states spendthrift trust cannot be terminated without settlor’s consent

Question 93

Modification and termination by court

Answer 93

1. May modify if trust could have been modified if all beneficiaries had consented and interests of nonconsenting beneficiaries will be protected
2. May terminate or modify if circumstances unanticipated by settlor threaten trust purpose
3. May modify if continuation of trust is impracticable or wasteful
4. May modify or terminate if value is insufficient to justify administration cost or achieve tax objective
5. May reform to reflect settlor’s intent if clear and convincing evidence shows settlor’s intent and trust were affected by a mistake

Question 94

Modification and termination by trustee

Answer 94

May terminate if trust property is less than $50,000 and is insufficient to justify administration cost

Question 95

Termination and modification by operation of law

Answer 95

where the property has been exhausted or if the legal and equitable titles have merged

Question 96

Powers of trustee

Answer 96

Expressly conferred by trust, powers granted by state law, implied powers that are appropriate to carry out the trust (repair, hire agents, lease, sell, mortgage)
* Joint powers/co-trustees: need majority decision
* Mandatory powers (court will order trustee to perform) and discretionary powers (court will intervene if abuse of discretion or no discretion)

Question 97

Duties of trustee

Answer 97

• Duty to administer trust in good faith and prudent manner
• Duty of loyalty
• Duty to report:
• Duty to separate trust property and keep records – no comingling
• Duty to enforce claims and defend trust from attack
• Duty to preserve trust and make it productive

Question 98

Trustee’s duty of loyalty

Answer 98

o Cannot borrow trust funds
o Cannot personally gain through their position
o Cannot use trust assests to secure personal loan
o Cannot buy or sell trust assets even if the price is fair – no self-dealing

Remedies for self-dealing: affirm the transaction if trust profited, set aside if trust lost money, trace the profits if the trustee profited

Question 99

When is trustee not liable for breach?

Answer 99

A trustee is not liable to a beneficiary for a breach of trust if: (1) the trustee acted in reasonable reliance on the terms of the trust; or (2) the beneficiary consented to the conduct, released the trustee from liability, or ratified the transaction, so long as the beneficiary was not improperly induced.

Question 100

Trustee’s delegation of duties

Answer 100

 Trustee must act prudently in: selecting agent, establishing scope and terms of delegation, and periodically reviewing agent’s decisions
 If the delegation is proper, trustee is not liable to b for deicsions or actions of the agent

Question 101

Trustees and investments

Answer 101

• Prudent investor standard: trustee must invest in same manner as prudent investor unless the trust instrument specifies otherwise
  o Portfolio approach: view the investments together (ok to have some riskier with some safer) – overall investment strategy
  o A trustee must exercise reasonable care, skill, and caution when investing and managing trust assets
  o Any type of investment permitted
  o Factors considered in making investment decisions: general economic conditions, possible effects of inflation/deflation, other resources of beneficiaries, needs for liquidity or regularity of income for b, expected tax consequences, role that each investment plays within the overall portfolio
  o A trustee must diversify the investments of the trust unless they reasonably determine that the purposes of the trust are better served without diversification

Question 102

Trustee’s investment skills

Answer 102

o Trustee with lower skills: trustee cannot excuse a breach by proving the trustee possesses and exercises in the trust’s private affairs subnormal business judgment
o But trustees with special skills or experience have a duty to use those skills or expertise – professional trustee may be held to higher standard

Question 103

Exculpatory clauses in trust

Answer 103

void if they: (1) relieve the trustee of liability for breach of trust committed in bad faith or with reckless indifference; or (2) appear in the trust instrument because of the trustee’s abuse of a confidential relationship with the settlor (unless the trustee can show that the clause is fair and was adequately communicated to the settlor).

Question 104

Trustee’s liability to 3rd parties

Answer 104

• The general rule is that a trustee may sued on the contract in the trustee’s fiduciary capacity.
• A third party may sue the trustee personally only if the trustee, in entering into the contract, failed to reveal the fiduciary relationship either by indicating their role as trustee in their signature or by refer¬ring to the trust.
• If the contract was properly entered into for the trust and the trustee was not in breach, the trustee is entitled to indemnification or reimbursement from trust property.
• third party injured in tort can sue the trust estate by proceeding against the trustee in their fiduciary capacity. The third party may also sue the trustee personally if the trustee is personally at fault, but not by reason of respondeat superior.

Question 105

Constructive trusts

Answer 105

-A remedy to prevent unjust enrichment
-They arise either where there is no valid express declaration of trust or, frequently, when no trust was even intended
-Must be requested, and P must show CCE that the ground exists and that the property was involved in the improper conduct
-Grounds:
1. Theft or conversion
2. Fraud, duress, undue influence, mistake, or interference with contract relations
3. Breach of fiduciary duty (e.g., attorney/client, director/corporation, trustee/beneficiary)
4. Breach of fraudulent promise, promise by one in confidential relationship, promise
concerning will or inheritance, promise to forgo foreclosure bid

Question 106

Resulting trusts

Answer 106

Involve reversionary interests and are based on the presumed intent of the settlor.
o Arise by implication from settlor’s conduct
o Beneficiaries: settlor or settlor’s successors in interest if settlor has died
o Purpose: to carry out settlor’s intent
o 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 (that is, excess corpus).

Question 107

Purchase money resulting trusts (PMRT)

Answer 107

Supplier of purchase money gives money to seller who gives title to property to third party (person taking title did not supply consideration; sole duty is to convey title to one furnishing consideration)
* E.g. settlor/beneficiary – trustee, donor-donee, creditor-debtor
* Form of consideration immaterial
* Consideration must be paid at or before the time Y takes title
* Burden of proof is on the one claiming to be a b, by CCE

Question 108

Resulting trust: by failure to express trust

Answer 108

resulting trust arises with settlor as beneficiary

A resulting trust arises where a settlor has conveyed property to a trustee under an express trust and (1) the trust is void or unenforceable, or (2) the beneficiary is dead or cannot be located.

Question 109

Resulting trust: by implication from excess corpus

Answer 109

If trust property remains after purpose fulfilled, resulting trust for settlor arises

Court will find a resulting trust in favor of settlor or his successors in interest

Question 110

Revocable trusts

Answer 110

1. Interest passes during life but becomes possessory at death
2. Pour-over from will to revocable trust
   a. Trust may be established before, after, or concurrently with will
   b. Trust may be amendable and revocable
   c. Gift is valid even if trust unfunded during settlor’s lifetime

Question 111

Uniform Principal and Income Act (“UPAIA”)

Answer 111

Enacted by most states
o Describes how the principal and income should be allocated
o Settlor can alter rules
o Trustee has adjustment power: certain circumstances can deviate from normal allocation rules (when effectuates settlor’s intent and purposes of the trust)

Question 112

Trustee’s adjustment power under UPAIA

Answer 112

 Before using this power, trustee has to consider many factors, including nature and duration of trust, settlor’s intent, needs for liquidity, circumstances of bs, tax consequences, actual and anticipated effect of economic conditions, etc
 Adjustment not permitted if result would be adverse tax consequences
 Not permitted if expressly prohibited

Question 113

Basic rules of UPAIA

Answer 113

1. Trustee must administer trust impartially; must be fair to all beneficiaries
2. Interest and dividend income to income beneficiary (If such distribution does not effectuate trust purpose and is unfair, trustee may adjust between principal and income)
3. Allocation of receipts (see slide)
4. Expenses of trust (see slide)

Question 114

Allocation of receipts under UPAIA

Answer 114

a. Income—rental income, interest on bond or CD, money received from entity, liquidating assets and mineral rights—10% rule

b. Principal—proceeds of sale of asset, eminent domain awards, capital gains, property other than money received from entity, insurance proceeds where trust is beneficiary, liquidating assets and mineral rights—90%

Question 115

Expenses rules under UPAIA

Answer 115

a. Income—one-half trustee and consultant compensation; one-half accounting and legal expenses; ordinary expenses (interest payments on debt, ordinary repairs, taxes, insurance premiums)

b. Principal—one-half trustee and consultant compensation; one-half accounting and legal expenses; principal payments on debt; environmental costs