Wills and Trusts

Question 1

Wills - What is nonprobate property?

Answer 1

Nonprobate property does not pass through probate and is not governed by the testator’s will or by intestacy. They are removed from the decedent’s estate before distributing property under a will or via intestacy

Question 2

Wills - What are inter vivos gifts?

Answer 2

Inter vivos outright gifts are property that has already been given away and do not pass under the decedent’s will or by intestacy.

Question 3

Wills - What are inter vivos living trusts?

Answer 3

Inter vivos living trusts are property that has already been transferred into a trust and do not pass under the decedent’s estate.

Question 4

Wills - What is a totten trust?

Answer 4

A Totten Trust is a deposit of money in a bank account in “trust” for another person, but they are not true trusts because the depositor retains complete control of the account and the transfer is only completed upon the depositor’s death.

Question 5

Wills - What is a joint or survivor account?

Answer 5

A joint or survivor account is a bank account deposit in the name of two or more persons “with right of survivorship” that gives the survivor the absolute right to all of the money.

However, under the UPC, creditors can reach the money in a joint account (to the extent the decedent deposited money) if the other estate assets are insufficient to satisfy their claims.

Question 6

Wills - What is intestacy?

Answer 6

Property may pass by intestacy when a decedent dies without a will or their will is denied probate, or their will does not dispose of all the decedent’s property.

Question 7

Wills - Can a surviving spouse take from property passing by intestacy?

Answer 7

Under common law, the surviving spouse was not an heir (widow received dower, widower received curtesy).

Under modern law, the surviving spouse is an heir (no more dower or curtesy) and their share depends on various factors.

Question 8

Wills - How much does a surviving spouse take from property passing by intestacy?

Answer 8

If the decedent leaves descendants, then the surviving spouse takes either (1) one-third or one-half of the estate; or (2) a specific dollar amount plus one-third or one-half of the estate. However, under the UPC, if the descendants are all from the surviving spouse and the surviving spouse has no other surviving descendant, then the surviving spouse takes the entire estate.

If the decedent leaves no descendants, then the surviving spouse takes the entire estate. However, under the UPC, the surviving spouse only takes the entire estate when there are no surviving descendants or parents.

Question 9

Wills - How much do surviving children take from property passing by intestacy?

Answer 9

The portion of the estate that does not pass to the surviving spouse, or the entire estate if there is no surviving spouse, passes to the decedent’s children and descendants of deceased children.

If all the decedent’s children survive the decedent, then each child receives an equal share. A descendant from a younger generation cannot take if the older generation is still alive.

If at least one of the decedent’s children predeceases the decedent, then the distribution will be classic per stirpes, per capita with representation, or per capita at each generational level.

Question 10

Wills - What is classic per stripes?

Answer 10

If at least one of the decedent’s children predeceases the decedent, then the distribution will be classic per stirpes, per capita with representation, or per capita at each generational level.

Classic per stirpes is the minority view and it creates one share for each child and each deceased child that has at least one surviving descendant.

Question 11

Wills - What is per capita with representation?

Answer 11

If at least one of the decedent’s children predeceases the decedent, then the distribution will be classic per stirpes, per capita with representation, or per capita at each generational level.

Per capita with representation is the majority view and it creates equal shares at the first generational level at which there are living takers, and the share of each deceased person at that level passes to their issue by right of representation.

Question 12

Wills - What is per capita at each generational level?

Answer 12

If at least one of the decedent’s children predeceases the decedent, then the distribution will be classic per stirpes, per capita with representation, or per capita at each generational level.

Per capita at each generational level is the modern trend and it creates equal shares at the first generational level at which there are living takers, and the shares of deceased persons are combined and then divided equally at the next generational level with living takers.

Question 13

Wills - What are the rights of adopted children for property passing by intestacy?

Answer 13

Adopted children are treated the same as biological children of the adopting parents, and there is generally no inheritance in either direction between the adopted children and their biological parents (unless the biological parent marries an adopting parent, or the child is adopted by a close relative)

Question 14

Wills - What are the rights of stepchildren and foster children for property passing by intestacy?

Answer 14

Stepchildren and foster children generally have no inheritance rights unless adopted by the stepparent or foster parent. However, adoption by estoppel allows a child to inherit from or through a stepparent or foster parent when legal custody of a child is gained under an (unfulfilled) agreement to adopt them.

Question 15

Wills - What are the rights of nonmarital children for property passing by intestacy?

Answer 15

Nonmarital children always inherit from their mothers. However, they will only inherit from their fathers if (1) the father married the mother after the child’s birth; (2) the man was adjudicated to be the father in a paternity suit; or (3) after his death and during probate proceedings, the man is proved by clear and convincing evidence to be the father.

Question 16

Wills - What are the rights of posthumous children for property passing by intestacy?

Answer 16

Posthumous children can inherit from their deceased parent if they were in gestation at the time of death, or if they are born within a statutorily stated period of time.

Question 17

Wills - What is the hierarchy for who gets to take property passing by intestacy?

Answer 17

: If the decedent is not survived by a spouse or descendants, then the estate is distributed to (1) ancestors, (2) brothers and sisters and their descendants, (3) one-half to paternal grandparents and one-half to maternal grandparents, (4) one-half to nearest kin on paternal side and one-half to nearest kin on maternal side, then, if all else fails, (5) to the state.

Under the UPC, if one parent and at least one sibling survive, the entire estate is given to the surviving parent. Some states give one-half to the surviving parent and one-half to the sibling or siblings.

Question 18

Wills - What is an advancement?

Answer 18

An advancement is 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.

Under common law, a substantial lifetime gift to one of the decedent’s children was presumed to be an advancement.

However, under modern law, a substantial lifetime gift to one of the decedent’s heirs is not an advancement unless shown to be intended as such. Under the UPC, intent is shown by (1) writing by the donor, or (2) writing by the heir

Question 19

Wills - What happens when there is an advancement?

Answer 19

If there is an advancement, the gift’s value when given is added back into the estate for purposes of calculating shares and then subtracted from the recipient’s share. The heir does not need to return the amount of an advancement in excess of the value of their intestate share.

If the advancee predeceases intestate, then the advancement is not binding on the advancee’s successors unless the required writing states that it is.

Question 20

Wills - What happens if the beneficiary or heir predeceases the decedent?

Answer 20

A person cannot take as an heir or will beneficiary unless they survive the decedent.

Under the USDA, the disposition of property depends on the order of death. If there is no sufficient evidence of order of death, then the property of each decedent is disposed of as if they had survived the other. If the person survived by even minutes, then the USDA does not apply.

Under the RUSDA or 120 hour rule, the person must survive the decedent by 120 hours to take any distribution of the decedent’s property (and to avoid the USDA result).

Question 21

Wills - What is a disclaimer, and what happens when a heir or beneficiary disclaims?

Answer 21

An heir, will beneficiary, life insurance beneficiary, surviving joint tenant, etc., cannot be forced to accept an inheritance or gift under a will. They can disclaim their interest because it is burdensome, taxed, or to avoid creditors. The disclaimer must be written, signed by the disclaimant, notarized, and filed with the appropriate court within 9 months of the death.

A guardian or personal representative can disclaim on behalf of an infant, incompetent, or decedent can disclaim if the court finds that it is in the best interests of those interested in the estate of the beneficiary and it is not detrimental to the best interests of the beneficiary.

An interest cannot be disclaimed if the heir or beneficiary has accepted the property or any of its benefits

Question 22

Wills - What is the slayer statute?

Answer 22

Any person who feloniously and intentionally brings the death of a decedent forfeits any interest in the decedent’s estate. The property will pass as though the killer predeceased the victim.

A conviction of a murder in any degree is conclusive for the purpose of this type of statute, but courts are divided on lesser degrees of killing.

In the absence of a murder conviction, the court must generally find that the killing was unlawful or intentional by a preponderence of the evidence before applying the statute

Question 23

Wills - What is a will?

Answer 23

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

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

Question 24

Wills - How is a valid will created?

Answer 24

A valid will must be formally executed as per the state’s statutes, usually consisting of a writing, signed by the testator, and two witnesses who sign in the testator’s presence.

Many states also recognize holographic wills, which require all or most of the will to be handwritten by the testator.

Under common law, exact compliance is required for a valid will. Under the UPC, the court may excuse minor errors using a substantial compliance test.

Question 25

Wills - What is an attestation clause?

Answer 25

An attestation clause recites the elements of due execution and is prima facie evidence of those elements. It is not required for a valid will.

Question 26

Wills - What is a self-proving affidavit?

Answer 26

A self-proving affidavit recites that all elements of due execution were performed and is sworn to by the testator and witnesses before a notary. It functions like a deposition.

Question 27

Wills - How can you determine a testator’s intent?

Answer 27

Generally, the will is interpreted based on the testator’s intent.

If there is no clear intent, then (1) the presence of a will implies construction that avoids intestacy; (2) the last or latest contradictory provision will prevail; (3) the will is construed as a whole; (4) words are given their ordinary meaning unless the testator clearly intended otherwise; (5) technical words are given technical meaning unless the testator clearly intended otherwise; and (6) all words will be given effect.

Question 28

Wills - What is a codicil?

Answer 28

A codicil is a later instrument that modifies a previously executed will.

Question 29

Wills - What is a codicil’s effect on a valid and invalid will?

Answer 29

A will is considered executed (republished) on the date of the last validly executed codicil. However, in order to republish a will, the original will must have been validly executed.

If the original will was not valid, then the second document will likely be considered a partial will rather than a codicil, or it may be considered as impliedly incorporating a defective will by reference (thus validating the will).

Question 30

Wills - How can a testator incorporate a document into their will or codicil?

Answer 30

A document that is not present when a will is executed may be incorporated into the will by reference so that it is considered part of the will if (1) the document exists at the time the will was executed; (2) the language of the will sufficiently describes the writing; and (3) the will must manifest intention to incorporate the document.

Question 31

Wills - How can a testator revoke their will?

Answer 31

A testator can revoke their will at any time prior to death by (1) physically revoking their will by physically destroying their will with intent to revoke (can also be partial); or (2) written instrument that is executed with the same formalities as a will that revokes or is inconsistent with the old will (though only the inconsistent portions will revoke the old will).

Question 32

Wills - How can a testator revive their revoked will?

Answer 32

Revoked wills can be revived if the testator revoked their second will and if (1) under UPC, the testator clearly intended to revive the first will; (2) it is automatically revived; or (3) if it is re-executed or republished by a validly executed codicil.

Question 33

Wills - What is the effect of a marriage or divorce on an executed will?

Answer 33

Marriage following an executed will generally have no effect on the earlier will, but under UPC, the new spouse can take an intestate share as an ommitted spouse unless the will provides for the new spouse, the omission was intentional, or the will was made in contemplation of the marriage.

Divorce or annulment following an executed will revokes all gifts in favor of the former spouse. Under UPC, the revocation extends to the former spouse’s relatives.

Question 34

Wills - What is an appointment?

Answer 34

A will can appoint someone (donee) to distribute the testator’s property.

A general power of appointment allows the doneee to distribute in favor of anyone, including themselves, their estate, their creditors, or the estate’s creditors.

A special power of appointment only allows the donee to distribute to a limited class of appointees, not including themselves, their estate, their creditors, or the estate’s creditors.

Generally, creditors cannot reach appointive property if the donee has not exercised their appointment powers. However, creditors can reach appointive property once the donee has exercised their powers.

Question 35

Wills - What is a testamentary gift?

Answer 35

A gift of real property is a devise given to a devisee, whereas a gift of personal property is a bequest or legacy given to a legatee.

Question 36

Wills - What is a general legacy?

Answer 36

A general legacy is a gift of a general economic benefit paid out of the estate’s general assets.

Question 37

Wills - What is a demonstrative legacy?

Answer 37

A demonstrative legacy is a gift of a general amount paid out of a particular source or fund, but if the designated fund is insufficient, then the balance can be paid from other estate assets.

Question 38

Wills - What is a residuary gift?

Answer 38

A residuary gift is the remaining balance of the state after paying all debts and distributing gifts.

Question 39

Wills - What is ademption by extinction?

Answer 39

Generally, when specifically bequeathed property is not owned by the testator at death, the bequest is adeemed (it fails).

Under the identity theory applied in most states, the ademption doctrine is an objective test that does not take into account the testator’s probable intent. If the property is not in the estate at the testator’s death, then it is adeemed, and the reason it is not in the estate is immaterial. If the property is only partially in the estate at the testator’s death, then it is partially adeemed and the beneficiary takes the remaining portion.

Question 40

Wills - What are the exceptions for ademption by extinction?

Answer 40

Exceptions for ademption by extinction may apply if (1) the testator replaced the property with another similar item; (2) the testator sold the gifted item and the purchaser still owes money to the testator; (3) a condemnation award or insurance proceeds are paid after the testator’s death; or (4) the testator became incompetent and the bequeathed property was sold by a guardian or conservator – the proceeds will be bequeathed to the extent it was not spent on the testator’s care.

Question 41

Wills - What is ademption by satisfaction?

Answer 41

Generally, when bequeathed property was given inter vivos to the beneficiary after the will is executed, the bequest is adeemed (satisfied). The testator must intend the transfer to have this effect, and there must be writing that notes the bequest is satisfied. This only really applies to general gifts because it is pretty clear when a specific gift has been given.

Question 42

Wills - How is increased value in property distributed?

Answer 42

Generally, changes in value for specific gifts are irrelevant. Before the testator’s death, changes in value for income in property go to the general estate, but improvements go to the specific devisee. After the testator’s death, changes in value go to the beneficiary.

Under common law, a specific bequest of stock includes any additional shares produced by a stock split but does not include shares produced by a stock dividend. Under UPC, stock dividends and increases in securities caused by mergers or reorganizations are included. Newly purchased securities are not included.

Under UPC, liens on specifically devised property are not exonerated (paid off with estate funds) unless the will directs it. So, the beneficiary takes the property subject to the debt.

Question 43

Wills - What is abatement?

Answer 43

Abatement is when testamentary gifts are reduced because estate assets are not sufficient to pay all claims against the estate nor satisfy all bequests and devises. Usually, testamentary gifts are abated in this order: (1) property passing by intestate; (2) residuary estate; (3) general legacies; (4) demonstrative legacies; then (5) specific bequests and devises.

Question 44

Wills - What are lapsed gifts?

Answer 44

Lapsed gifts are when the beneficiary predeceases the testator. The lapsed gift will be distributed according to: (1) the will’s express terms; (2) rule of law (anti-lapse statutes); (3) residuary clause (common law says no to surviving residuary beneficiaries to divide deceased beneficiary’s share, modern law says that is fine); then (4) intestacy.

Question 45

Wills - What is a pretermitted child and do they get anything?

(This is just a review card)

Answer 45

Pretermitted child statutes protect children from being accidentally omitted. Most states provide a forced share for a child who was born or adopted after the will was executed. The share is generally an intestate share of the decedent’s estate, but if there are other children at the time the will was executed, then the portion of the estate that the pretermitted child is entitled to is limited to the provisions made to the other children (the children’s bequests are reduced, but other bequests are not).

Many states withhold a pretermitted child’s forced share if (1) the testator had other children and devised substantially all of their estate to the other parent of the omitted child; (2) the omission appears to be intentional; or (3) the testator provided for the omitted child by an inter vivos transfer outside the will.

Under UPC, if a testator fails to provide in their will for a living child solely because the testator mistakenly believed the child to be dead, the child shares in the estate as though they were an omitted afterborn or after-adopted child

Question 46

Wills - When can a will be contested?

Answer 46

Wills can be contested by interested parties with standing based on defective execution, revocation, lack of testamentary capacity or intent (including insane delusion), undue influence or duress, fraud, or mistake.

Defective execution requires one or more of the requirements for execution to be missing.

Valid revocation requires the will to have been validly revoked by operation of law, subsequent instrument, or physical act.

Lack of legal or testamentary capacity requires the testator to be under 18 years old, or lack mental capacity at the time of execution.

Undue influence requires influence exerted on the testator that overpowered the mind and free will of the testator which resulted in a testamentary disposition that would not have been executed but for the influence.

Fraud requires either a misrepresentation regarding the nature of the instrument or a misrepresentation that induces the making of the will or gift.

Mistake requires either the testator to be mistaken as to the nature of the instrument, or the mistake appears on the face of the will.

Question 47

Wills - What is a no-contest clause and is it effective?

Answer 47

Under majority rule, a no-contest clause may be valid and enforced unless the beneficiary had probable cause for bringing the contest.

Under minority rule, a no-contest clause is given full effect regardless of the beneficiary’s intent.

Question 48

Trusts - What is a trust?

Answer 48

A trust is a fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer trust assets and income for the benefit of designated beneficiaries, who hold equitable title.

Question 49

Trusts - How is a valid trust created?

Answer 49

A valid private trust is created when there is (1) a settlor with capacity; (2) present intent to create a trust; (3) trustee; (4) definite beneficiar(ies); (5) trust property; and (6) a valid trust purpose.

Intent does not need to be communicated to the beneficiaries as delivery is sufficient.

The same person cannot be the sole trustee and sole beneficiary otherwise the title will merge.

Question 50

Trusts - How can you determine a settlor’s present intent?

Answer 50

Present intent to create a trust must be manifested by words, writing, or conduct. The settlor’s intent must be that the trust take effect immediately, and future expressions of how the property should be used do not create a trust

Question 51

Trusts - What happens when there is no property at the time the trust is created?

Answer 51

There must be property in the trust for the trustee to manage. If there are no trust assets when the trust instrument is created (when the settlor promises gratuitously to create a trust in the future), then a trust will arise in the future only if the settlor manifests anew intention to create the trust when the assets come into existence. However, this manifestation is not required if the promise is supported by valid consideration.

Question 52

Trusts - What is an inter vivos trust?

Answer 52

Inter vivos trusts are created while the settlor is alive either by the settlor declaring themselves the trustee for another, or by the transfer of property to another as trustee. There must be present intent manifested by conduct or words. If a present trust is not established because there is no trust res, the trust arises when the settlor subsequently acquires the res and remanifests trust intent.

Question 53

Trusts - When are pour-over gifts valid?

Answer 53

Under traditional view, a valid pour-over gift from a will to a revocable trust requires the trust to exist or be executed at the time of the will’s execution.

Under modern view, a will may devise property to a trustee of a trust established or to be established during the testator’s lifetime (trust may be executed after the will is executed but before the testator’s death).

Pour-over gifts are valid even if the trust is unfunded during the testator’s lifetime, even if the trust is amended prior to the testator’s death.

Question 54

Trusts - What is a testamentary trust?

Answer 54

Testamentary trusts are created in the settlor’s valid will, a writing incorporated into the will, or from the exercise of a power of appointment created by the will.

A secret trust is an absolute gift in a will made in reliance on the beneficiary’s promise to hold the property in trust for another. Extrinsic evidence to prove this is allowed, and a constructive trust will be imposed in favor of the intended beneficiary.

A semi-secret trust is a gift in a will to a person “in trust,” but it does not name the trust beneficiary. Extrinsic evidence is not allowed, and the “trustee” holds on to the resulting trust for testator’s legatees or heirs.

Question 55

Trusts - Can a beneficiary transfer their interest in a general trust?

Answer 55

Generally, a beneficiary can transfer their interest in the trust and a creditor’s may reach the beneficiary’s interest in the trust.

Question 56

Trusts - What is a discretionary trust?

Answer 56

A discretionary trust is one in which the trustee is given discretion on whether to apply or withhold payment of trust property to the beneficiary.

This discretion actually limits the rights of the beneficiary to the amounts the trustee decides to give them. The beneficiary also cannot interfere with the exercise of the trustee’s decision unless the trustee abuses their power. What constitutes abuse depends on the extent of discretion given to the trustee.

Generally, a court will not interfere unless the trustee has acted in bad faith or dishonestly.

Question 57

Trusts - Can a creditor reach into a discretionary trust?

Answer 57

Creditors cannot reach into a discretionary trust because the beneficiary has no interest for the creditors to reach. Creditors cannot compel the trustee to make a distribution.

However, if the trustee has notice of the creditors and decides to make payments to the beneficiary, then the trustee must make those payments directly to the creditors unless the beneficiary’s interest is protected by a spendthrift provision.

Question 58

Trusts - What is a spendthrift trust?

Answer 58

A spendthrift trust is one in which the beneficiary is unable (voluntarily or involuntarily) to transfer their interest in the trust. They cannot sell or give away their rights to future income or capital.

Question 59

Trusts - Can a creditor reach into a spendthrift trust?

Answer 59

Creditors generally are unable to collect or attach such rights.

However, there is an exception when the settlor is a beneficiary of the trust and attempt to protect their own retained interests from their creditors by the inclusion of a spendthrift provision. In this event, the settlor-beneficiary’s creditors can reach their right to the income just as if the spendthrift restriction did not exist.

Question 60

Trusts - What is a support trust?

Answer 60

A support trust is one in which the trustee is required to pay or apply as much of the trust is necessary for the support of the beneficiary. The trustee does not have discretion to refuse to pay expenses necessary for the beneficiary’s support. The beneficiary is unable to transfer their interest in the trust.

Question 61

Trusts - How can a trust be terminated?

Answer 61

A trust can be terminated by (1) the terms of the trust; (2) the settlor unless the terms expressly state it is irrevocable; (3) all beneficiaries’ consent with settlor’s consent; (4) all beneficiaries’ consent as long as the modification does not interfere with a material purpose of the trust; (5) operation of law when the property has been exhausted or legal/equitable titles have merged; (6) the court if unanticipated circumstances threaten the trust’s purpose, continuing the trust on its terms is impracticable or wasteful, or the value of the trust is insufficient to justify the cost of administration; and (7) the trustee if the trust property is less than $50,000 and the amount is insufficient to justify the cost of administration, or the trustee combines several trusts into one or splits one trust into several.

Question 62

Trusts - What are the basics of trust administration?

Answer 62

The trustee must be authorized to perform the act by the trust, state law, or implication, and the trustee must have done the act with appropriate care, skill, and caution. Failure to act appropriately means the court can (1) enforce specific performance; (2) enjoin the trustee from committing a breach; (3) compel the trustee to pay money or restore property; or (4) suspend or remove the trustee.

Question 63

Trusts - When is a trustee not liable for a breach?

Answer 63

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

Question 64

Trusts - When is a trustee liable to third parties?

Answer 64

Trustees are liable to third parties if they failed to reveal the fiduciary relationship, or when the trustee is personally at fault for a tort.

Question 65

Trusts - When is a third party liable to the trust?

Answer 65

Third parties are liable to the trust if they are not a bona fide purchaser and can be directly sued by trustees (beneficiaries can only bring a suit in equity to compel the trustee to sue the third party, unless the trustee also breached, left, or failed to sue).

Question 66

Trusts - What duties does a trustee owe beneficiaries?

Answer 66

Trustees owe duties to administer the trust, loyalty, report, separate and earmark property, and preserve and make trust property productive.

Question 67

Trusts - What is the duty to administer the trust?

Answer 67

The duty to administer the trust requires the trustee to act prudently, in good faith, and impartially. Failure to do so means the trustee may be ordered to comply with their duties, enjoined from committing a breach, compelled to pay money or restore property, or suspended.

Question 68

Trusts - What is the duty of loyalty?

Answer 68

The duty of loyalty requires trustee to act in good faith and in the trust’s best interests and to avoid conflicts of interests (no self-dealing). Failure to do so means the beneficiary may be able to void the transaction.

Question 69

Trusts - What is the duty to report?

Answer 69

The duty to report requires trustee to respond to beneficiaries’ requests and provide accounting. Failure to do so means the trustee will be ordered to comply with their duties.

Question 70

Trusts - What is the duty to separate and earmark property?

Answer 70

The duty to separate and earmark property requires trust assets to be kept physically separate from trustee’s personal assets and assets of other trusts (no commingling). Failure to do so means the trustee is liable for any resulting losses or profits.

Question 71

Trusts - What is the duty to preserve and make trust property productive?

Answer 71

The duty to preserve and make trust property productive requires the trustee to use reasonable care to invest the property (prudent investor rule), collect claims due, lease or manage land, record documents, pay taxes, and secure insurance. Failure to do so means the trustee is liable for losses resulting from breach and for any profit that would have accrued to the trust but for the breach, plus interest.

Question 72

Trusts - How are investments governed under UPIA?

Answer 72

Investments are governed under UPIA, which requires the trustee to exercise reasonable care, skill, and caution in investing and managing trust assets. Generally, investment decisions are evaluated in the context of the entire trust portfolio and as part of an overall investment strategy that has risks and return objectives reasonably suited to the trust.

Any kind of property or any type of investment is permitted provided the trustee acts prudently.

A trustee must diversify the investments of the trust unless they reasonably determine the purposes of the trust are better served without diversification.

Question 73

Trusts - What is adjustment power?

Answer 73

Under UPAIA, the trustee has an adjustment power to reallocate investment portfolio return (it authorizes the trustee to characterize capital gains, stock dividends, etc. as income if the trustee deems it appropriate to carry out the trust purposes) which can be done after considering various factors, like trust’s nature, settlor’s intent, beneficiaries’ identity, needs for liquidity, etc. The traditional trust accounting rules must be followed for distributing interest and dividend income.

Question 74

Trusts - What do income receipts generally include?

Answer 74

Generally, income receipts include ordinary receipts from use or investment of trust property (rent, interest); cash dividends; proceeds from contract insuring trustee against loss; 10% of payment from a deferred compensation plan (pension plan); 10% of proceeds received from a liquidating asset (patents, copyrights); 10% of proceeds received from a working interest (oil, gas, minerals).

Question 75

Trusts - What do income expenses generally include?

Answer 75

Generally, income expenses include 50% of regular compensation of the trustee or person providing investment services; 50% of all expenses for accountings, judicial proceedings, and other matters affecting income and remainder interests; ordinary expenses; insurance premiums covering loss of a principal asset.

Question 76

Trusts - What do principal receipts generally include?

Answer 76

Generally, principal receipts include extraordinary receipts (proceeds from sale of trust assets); stock dividends; proceeds from life insurance policy naming trust or trustee as beneficiary; 90% of payment from a deferred compensation plan; 90% of proceeds received from a liquidating asset; 90% of proceeds received from a working interest.

Question 77

Trusts - What do principal expenses generally include?

Answer 77

Generally, principal expenses include 50% of regular compensation of the trustee or person providing investment services; 50% of all expenses for accountings, judicial proceedings, and other matters affecting income and remainder interests; expenses of a proceeding that concerns a principal interest; payments on the principal of a trust debt; estate taxes; disbursements related to environmental matters.

Question 78

Trusts - What are charitable trusts?

Answer 78

Charitable trusts are the same as private trusts, except they have indefinite beneficiaries, may be perpetual, and cy pres (if primary purpose is not possible, then trust can act as near as possible to the trust’s primary purpose). There must be general charitable intent, though this is presumed under UTC. RAP does not apply to charitable trusts, unless it converts to a private trust

Question 79

Trusts - What are honorary trusts?

Answer 79

Honorary trusts are not for charitable purposes and have no private beneficiaries. They are commonly established for pets or burial places. Under UTC, the trust is enforceable by someone named in the trust instrument or appointed by the court. The trust property may be applied only to carry out the terms of the trust. Excess property is distributed to the settlor or their successors, unless otherwise provided. RAP may apply.

Question 80

Trusts - What are resulting trusts?

Answer 80

A resulting trust is an equitable reversion that arises by operation of law whenever a person has created an express intentional trust, but the express trust fails or does not completely dispose of the trust property. When the trust fails or does not completely dispose of the trust property, the undisposed property goes back to the settlor in a resulting trust.

A resulting trust will not be implied where: (1) the trust instrument specifically or implicitly provides for disposition of trust property when the trust has failed or been completed; (2) the settlor was given consideration for their original transfer in trust; (3) the settlor created the trust for an illegal purpose; or (4) cy pres is applicable in cases of charitable trusts.

Question 81

Trusts - What are constructive trusts?

Answer 81

Constructive trusts are used to prevent unjust enrichment and arise when there is no express declaration of trust, or when no trust was even intended. This must be requested as a remedy in a court action, and the plaintiff must be able to identify the particular property as the trust property. A constructive trust can arise from theft or conversion, fraud or duress, homicide, breach of fiduciary duty, or breach of promise.