Trusts

Question 1

What are the two legal interests created by a trust?

Answer 1

1. Legal title trustee

2. Equitable/beneficial title beneficiary.

Question 2

Who holds the legal interest in a trust?

Answer 2

Held by trustee.

Holds responsibility for ownership.
Receives no benefit from the legal title.
Trustee is a fiduciary, which means must: (1) use reasonable care in dealing with trust, (2) utmost degree of loyalty, (3) personally responsible if conduct falls beneath that responsibility.

Question 3

Who holds the equitable interest in a trust?

Answer 3

Beneficiary.

Receives benefits of ownership, but with little control.

This is the person the trustee owes a duty to, who enforces the trust (has standing if trustee does something wrong)

Question 4

Who is the grantor of a trust?

Answer 4

Settlor, trustor, donor.

Person who causes trust to come into existence by supplying the initial property.

Question 5

What are some terms for the trust property?

Answer 5

Principal
Trust corpus
Trust res

A trust is not a legal entity. You can’t sue it. The trustee provides the trust property.

Question 6

What is the basic timeline of a trust?

Answer 6

1. Settlor creates by transferring legal title to trustee, equitable title to the beneficiary
2. Trustee manages and invests pursuant to law & trust instruments. In most states, trust instrument can trump normal state law.
3. Trustee follows trust instrument, which clarifies payment play
4. Trustee duty is over, trust ends. Additional property, if applicable, is conveyed to beneficiary (giving beneficiary legal title)
5. Ultimate beneficiary has full title, both sides of the stick, trust is over.

Question 7

What are some purposes and uses for trusts?

Answer 7

Providing for and protecting beneficiaries.

1. Minors
2. Incompetents
3. People without management skills
4. Spendthrifts (spenders)

Flexibility of asset distribution, manipulation of dead hand.

Protection against settlor’s incompetence (they don’t have to pay attention to the details)

Professional management of property.
Probate avoidance.
Tax benefits.

Question 8

What are the possible types of trusts?

Answer 8

Express trusts (private and charitable)
Trusts created by operation of law (resulting trusts, constructive trusts)

Question 9

What are the five main elements in a valid trust?

Answer 9

To create a valid trust, there must be a settlor, who intending to create a trust for a valid trust-purpose, delivers the trust property to the trustee to hold for the benefit of one or more beneficiaries.

1. Intent
2. Identifiable corpus
3. Ascertainable beneficiaries
4. Proper purpose
5. Mechanics and formalities

If there are no trust assets when the trust instrument is executed (settlor promises to create in the future), a trust arises in the future only if, when the asset comes into existence, the settlor manifests anew an intention to create the trust OR is supported by consideration.

Question 10

What are the elements required within intent to form a valid trust?

Answer 10

1. Intent to split legal and equitable title
2. Intent to impose enforceable duties on the holder of legal title
3. Present intent required (no promises) - although a future interest can be trust property; the settlor’s intent must be that the trust take effect immediately
4. Precatory language (must impose legal obligation (legal, not moral, obligation))

No formal words are required; you don’t need to even call it a trust. If you use trust words, sufficient.

Also do not need to communicate the creation to beneficiary (though if you tell them, stronger evidence of intent).

You can’t change a completed gift into a trust.

Question 11

What are the requirements for split title?

Answer 11

The sole settlor cannot also be the sole beneficiary.

Any split of title such that the sole trustee is not the sole beneficiary is sufficient.

Ex. S settlor, T and B trustee, T and B beneficiary - fine because each can sue the other
Ex. S creates trust retaining life interest for self, power to change beneficiaries, power to revoke. Ellen benefits upon S death. That’s fine.

If title does not correctly split, merger occurs and the trust terminates (legal and equitable title)

Question 12

What types of property will meet the “identifiable corpus” requirement, for purposes of valid trust creation?

Answer 12

Property must be ascertainable with certainty.

Sufficient: any property settlor can transfer. Real/personal, tangible/intangible, vested/contingent, contract rights (e.g. life insurance, 401k). A future interest may be held in trust, so long as it is in legal existence.

Insufficient: property settlor cannot transfer, property settlor does not yet own, property of another person, expected future income not supported by valid contract, expectancy to inherit or take under a will from living person, unenforceable gratuitous promise

The trust res must be existing property that the settlor has the power to convey, including intangibles in which the settlor has an assignable interest

• the res must be identifiable, segregated (though it can be a fractional interest in a specified property)
• debtor cannot hold his own debt in trust, but debtor can declare himself trustee of particular property from which debt is to be paid and debt can be held in trust by another.

Question 13

How is the “ascertainable beneficiaries” requirement met within a private trust?

Answer 13

Capacity requirement: Any person or entity that can take and hold title may be beneficiary. Need not be competent, just alive.

Question 14

How is the “ascertainable beneficiaries” requirement met within a class gift?

Answer 14

Ex. “children”

1. Class members can be unascertainable at time of creation, so long as they are ascertainable at the time they are to benefit (“to my children, upon their death to my surviving grandchildren” is OK). (Common law: The class must be reasonably definite; UTC - may empower trustee to select from an indefinite class).
2. Trustee or third party can select within the class as to who will receive benefit
3. Membership of class must be ascertainable (yes grandkids, no to friends). Remedy if no ascertainable beneficiary: reverts to settlor if inter vivos, or if dead goes to successors in interest.

Ex of unascertainable class: to my friends, to the people nicest to me during my illness, to people the trustee selects.

Question 15

Who are the “ascertainable beneficiaries” within a charitable trust?

Answer 15

Set up for the benefit of a community in general rather than particular individuals.

The purpose of a charitable trust must be one considered to benefit the public, including relief of poverty, the advancement of religion or education, the promotion of health, and the accomplishment of a governmental purpose. A trust for the dissemination of views of a political movement qualifies as educational and thus is charitable, but a trust for the benefit of a political PARTY is not charitable.

Ex. Second Amendment rights, but NOT the Republican Party.

Question 16

Who are the “ascertainable beneficiaries” within an honorary trust?

Answer 16

Non-human, non-charitable (your cat, maintain a grandfather clock).

Majority: Trustee MAY carry out the honorary trust, but is not bound to. If does not, returns to successor in interest or settlor.

Growing minority are making honorary trust trustees requisite.

Absent specific statutes, many jdns void under RAP if its duration may be more than a human life plus 21 years. UPC expressly provides that it may not be enforced for more than 21 years.

Question 17

What purposes will NOT meet the “proper purpose” requirement of a valid trust?

Answer 17

Generally, you can trust for any purpose.

Exceptions:

1. Illegal purpose
2. Requires trustee to commit a crime or tort
3. Purpose contrary to public policy (case by case)
4. Impossible to achieve
5. Intended to defraud the settlor’s creditors

Acts contrary to public policy:

• encourage others to engage in criminal or tortious acts
• encourage immorality
• induce a person to neglect parental, familial, civic duties

If against public policy:

• settlor’s alternative desire controls
• illegal condition is a condition subsequent, condition is just invalidated and the trust is valid
• if illegal condition is CP, preferred view is to hold the interest valid unless evidence that the settlor’s wish would be to void altogether

Question 18

What are the requirements to fulfilling the “mechanics and formalities” requirement of a valid trust?

Answer 18

1. If inter vivos trust, then created while settlor alive. If testamentary trust, created within settler’s VALID will.
2. Designate trustee (with powers, duties)
3. Transfer (deliver) property to trustee (if declaration of trust, no conveyance needed so long as property is identified and declared; if conveyance in trust, must convey to a trustee through deed or title, appropriate written assignment)
4. Meet SoF (oral OK so long as proven by clear and convincing evidence; real property or will must be in writing)

Note: otherwise invalid oral trust of land may be enforced by imposing a constructive trust.

Question 19

What are the features and requirements of a pour-over trust?

Answer 19

A will containing a gift to a previously existing inter vivos trust (“I leave all my $ to my trust.”)

Property goes into trust as trust exists at date of death. Amendments made after will execution are effective to govern the poured-over property.

Modern rule: pour-over can actually be the first thing that goes into a trust, so long as the trust is identified in the will and is executed before testator death.

A pour-over gift from a will to an inter vivos trust is valid if the trust is established during the testator’s lifetime. At common law, a pour-over gift was invalid if the trust was not in existence at the will’s execution. However, under the Uniform Testamentary Additions to Trusts Act, adopted by most states, a will may devise property to a trustee of a trust to be established during the testator’s lifetime. The Act also authorizes pour-over gifts to a trust that is unfunded during the testator’s lifetime and whose sole purpose is to receive such a testamentary gift. A pour-over gift is valid even though the inter vivos trust is amendable and revocable. The gift is to the trust as it exists at the testator’s death, including amendments to the trust made after the will’s execution.

Question 20

What is a testamentary secret trust?

Answer 20

A will gift that is silent about the trust nature of transfer. Where a will makes a gift that is absolute on its face, but was in fact made in reliance on the beneficiary’s promise to hold the property in trust for another, the intended trust beneficiary may present extrinsic evidence of the promise. If the promise can be proven by clear and convincing evidence, a constructive trust will be imposed on the property in favor of the intended trust beneficiary.

A constructive trust will be imposed even iff the will beneficiary did not make the promise until AFTER the will was executed. Furthermore, it doesn’t matter whether the beneficiary actually intended to perform the promise; all that matters is that the TESTATOR RELIED.

Must prove:

1. Settlor agrees with B that B will hold property in trust
2. Testator relied on the promise

Remedy: constructive trust against will beneficiary who should be serving as trustee.

Question 21

What is a testamentary semi-secret trust?

Answer 21

A gift that is in trust, but the will does not indicate the beneficiaries or stated terms.

In this case, the trust fails and the property passes through testator’s estate to successors in interest.

Extrinsic evidence is NOT allowed.

Question 22

What is an inter vivos secret trust?

Answer 22

This is a grant of property that looks outright on its face but there is ORAL evidence that the grantee promised to use the property for another person’s benefit.

Grantee usually cannot enforce because it’s just precatory, unless alleged beneficiary can show an abuse of confidential relationship, fraud, undue influence, wrongdoing.

Question 23

What degree of transferability are trust beneficiaries presumed to have?

Answer 23

There is a presumption that interests are freely transferable.

For voluntary transfers (gifts and sales), beneficiaries may transfer their equitable interests as any other property, unless trust provides otherwise.

Question 24

Can creditors access beneficiaries’ interests?

Answer 24

Unless the trust explicitly provides otherwise, as is usually the case, beneficiary creditors may reach interests that are kept in trust.

In both of these, there is usually a spendthrift provision (see other slide) and they are limited to life.

Question 25

What is a discretionary trust, and when is it transferable?

Answer 25

In a discretionary trust, the trustee determines how much (if anything) a beneficiary will receive. Before the trustee exercises his discretion to make payments, beneficiary's interest is not assignable and can't be reached by creditors. Creditors may attach the beneficiary's interest but may not compel trustee to make a distribution. If trustee has notice of an attachment by creditors and decides to make payments to beneficiary, he must make those payments directly to the creditors unless the beneficiary's interest is protected by a spendthrift provision. Exception for maintenance of spouse/child. B is merely expecting to be beneficiary of power of appointment placed into trust. Beneficiary has no right to payment that he can enforce against the trustee; can't interfere with exercise of discretion unless abuse of power is present.

Question 26

What is a spendthrift trust (characteristics, enforcement?)

Answer 26

A spendthrift trust is one in which the beneficiary is unable to transfer her interest—either voluntarily or involuntarily. She cannot sell or give away her right to income or corpus, and her creditors cannot attach these rights. 1. Creditors cannot attack the beneficiary's trust interest until income has been paid to beneficiary (but when the trustee pays beneficiary, creditors may reach). 2. Restraint on alienation must accompany (if there is alienability but no-creditor provision, will be held invalid; alienable when interest reaches beneficiary) 3. Effect: assignments are unenforceable (though the trustee may choose to honor a purported assignment by beneficiary, but trust may recommence payments to beneficiary at any time, and beneficiary may withdraw his direction to pay assignee) Exceptions: Spendthrift clause cannot be used to shield beneficiary from: - Own creditors where beneficiary is settlor (self-settled spendthrift trust); - Judgments/orders for support/maintenance of child, spouse, ex - Claims by the government - Can reach a mandatory distribution of income/principal if the trust did not make it within a reasonable time.

Question 27

What is a self-settled spendthrift trust?

Answer 27

Basically if you are a settlor and beneficiary, and you put your own funds in a trust with a spendthrift provision with the hope that creditors will not be able to reach. It used to be that we would not allow self-settled spendthrift trusts to avoid creditors, but a growing minority of states are allowing this (since people were just taking their business out of the country)

Question 28

Who are certain creditors that a spendthrift provision may not work to protect from?

Answer 28

1. Support of beneficiary's spouse/child (alimony, CS) 2. Creditors who supplied necessaries 3. In some states, tort creditors. 4. Federal and state income taxes

Question 29

What are support provisions within a trust?

Answer 29

1. Use of trust property limited to beneficiary's support (which means the trustee can only use property for health, education, maintenance, support (HEMS) standard). 2. May or may not be discretionary. 3. Impliedly spendthrift, courts will usually block creditors from touching even if no explicit provision. 4. If instrument is silent, standard of support is the beneficiary's accustomed standard of living they were in before becoming beneficiary (trust should spell out if it was meant to enhance) 5. Case-by-case determination as to whether beneficiary's other resources are considered in setting balance for HEMS allowance (is it meant to pick up difference or fully sustain you?) Look for provision like "may/must/cannot consider other resources"

Question 30

What are the most common way in which a trust will be modified or terminated?

Answer 30

By the terms of the trust, either through express terms or upon the achievement of a condition (i.e. person's death, stated age, graduation from college, stated date)

Question 31

When may a settlor modify or revoke a trust?

Answer 31

General rule: settlor may modify or revoke at any time unless the trust expressly restricts settlor's ability, i.e. by making a trust irrevocable. A settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable. The power to revoke includes the power to amend. Thus, a trust that is silent as to revocability is both amendable and revocable.

Question 32

How can a settlor revoke an irrevocable trust?

Answer 32

Upon written consent of all living persons with a vested or contingent interest

Question 33

How may beneficiaries of a trust modify or terminate a trust? (Irrevocable or revocable)?

Answer 33

An irrevocable trust may be terminated or modified by the consent of all existing and potential beneficiaries as long as no material purpose of the trust will be frustrated. It may also be modified or terminated upon the consent of the settlor and all beneficiaries, including potential beneficiaries, EVEN if the modification conflicts with a material purpose. Requirements: 1. All beneficiaries must agree (even unascertainable or unborn ones; get around through appointment of GAL, or perhaps state will recognize virtual representation [similarly situated beneficiaries can consent for unascertainable unborn beneficiaries] - tough to do) 2. All beneficiaries must be legally competent 3. Settlor's intent cannot be frustrated by the modification or termination (settlor consent OR "Claflin Rule" - modification/termination would not interfere with the trust's material purpose ``` Examples of material purposes (where the existence of these provisions will likely prevent beneficiaries from modifying or terminating the trust): Support of beneficiary Spendthrift provision Payment at certain ages Payment at certain dates Discretionary trusts ```

Question 34

When will a trust terminate by operation of law?

Answer 34

When the property is exhausted, then it ends. Merger - legal and equitable titles come together.

Question 35

How may a court terminate a trust?

Answer 35

1. Trust purposes accomplished 2. Trust purposes have become illegal 3. Trust purposes have become impossible (change in circumstances) 4. Value of the trust is insufficient to justify cost of administration A court will generally permit termination of a trust or modification of its administrative or dispositive terms if circumstances unanticipated by the settlor threaten the purposes of the trust. Note: court can reform terms of a trust to reflect settlor intent if mistake in terms is shown by clear and convincing evidence

Question 36

What are the sources of power that a trustee may get power from?

Answer 36

1. Express grant of powers in the instrument 2. Statutory grant of powers (majority) (Uniform Trust Code lists extensive rights, ex. "all the powers given under State A's law") 3. Powers from court judgments 4. Implied powers (necessary/appropriate to carrying out trust terms, ex. power to sell in order to invest, power to hire agents, mortgage trust property, repair trust, incur reasonable expenses, lease property)

Question 37

If there are multiple trustees, when can they exercise their powers?

Answer 37

Upon majority agreement, doesn't need to be unanimous anymore.

Question 38

When may a trustee be held liable?

Answer 38

If their decision is an abuse of discretion or the trustee fails to exercise discretion. A grant of absolute discretion may not be truly absolute, since it is still subject to court review.

Question 39

What are the trustee's duties?

Answer 39

The trustee must have duties. THe settlor must impose enforceable duties on the trustee. If duties are not spelled out in trust instrument, court implies duties if there is an intention to create a trust, a res, and an identified beneficiary. 1. Administer trust according to its terms 2. Duty of loyalty and utmost good faith in all matters (requires that you invest solely in beneficiary's interest and don't consider social investment considerations like human rights abuses) 3. Avoid self-dealing (except for compensation, trustee or spouse/child/associate cannot benefti, cannot buy property for self, borrow money, claim excessive compensation. Good faith or fairness of transaction irrelevant) 4. Keep accurate records and render accountings upon demand 5. Follow the standard of care that is appropriate 6. Duty to review trust property (when assumes office, bring them into line with standard of care and review during tenure) 7. Duty of impartiality (can't be biased toward one beneficiary, need to take into account differing interests - ex. even if one is a life tenant and other is remaindermen, the trustee must balance the goals of present income and appreciation). Standards of care: OLD: duty to use the care and skill of a prudent person (insulate trust property - earmark [label] and segregate [from own property]) NEW. Investment standard of care: that of a prudent investor (majority)

Question 40

What is the "prudent investor" standard of care (under the Uniform Prudent Investor Act)

Answer 40

Certain phrases trigger: prudent person rule, prudent man rule, legal investments (as versus "statutory "legal lists"). Rule: trustee must invest in the same manner as a prudent investor Trustee must consider the factors of: trust purposes, terms, distribution requirements, other circumstances. Must follow the portfolio approach (as part of an overall investment strategy) - can't view investments individually. Usually, diversification is required (unless reasonably determines that special circumstances exempt him from diversification requirement) Comprehensive factors: economic conditions, role of each investment within portfolio, other resources of beneficiaries, need for liquidity, need for income, importance of preserving trust property, special relationship of value to trust (heirloom) Trustee's conduct viewed AT time of decision. Trustee with special skills/expertise must use those higher skills The UPIA permits a trustee to invest in any kind of property or any type of investment “consistent with the standards of this Act”; therefore, no particular type of investment is inherently imprudent. The overriding concern is the risk/return objective of the investment, rather than the classification of investments as prudent or imprudent.

Question 41

When may a trustee delegate their duties?

Answer 41

Trustee may delegate investment/management functions, but only if the trustee is prudent and with comparable skills. Must use reasonable care in selecting agent, establishing scope/terms of delegation, and periodically reviewing agent's actions. If review is proper, trustee is not personally liable for decisions/actions of agent. Note: generally, a trustee may not delegate discretionary functions (i.e. decision to make/not make distributions) - if delegated, trustee is guarantor for any losses caused

Question 42

What are the general categories of remedies available to beneficiaries?

Answer 42

1. Money damages from the trustee personally (lost profits that the trust could have earned but for breach, depreciation in value, profits earned by trustee if breach, even if trust earned money) 2. Remedies of self-dealing and specific performance (affirm transaction if trust profited, set aside the transaction if trust lost, trace profits if trustee profited) 3. Removal of trustee If a trustee commits a breach of trust, the trustee is liable to the beneficiaries, not the settlor, for the greater of: (i) the amount needed to restore the trust property and distributions to what they would have been without the breach, and (ii) the trustee’s profit from the breach. Likewise, a trustee is liable to the beneficiaries, not the settlor, for any profit arising from the administration of the trust, even if there was no breach. Ex. A trustee may not commingle trust property with his own property. If a portion of commingled assets increase in value, it is presumed that the assets belonging to the trust increased in value. Thus, the entire amount of increase will be allotted to the trust. Trustee will get his initial investment back. Note: a transaction involving self-dealing is voidable by beneficiary affected UNLESS: 1. court or the terms of the trust approved it 2. beneficiary failed to bring suit within prescribed time period 3. beneficiary gave conesnt/ratification/release 4. involves contract or claim arising before trustee became trustee

Question 43

What are the grounds on which a beneficiary may properly move to remove the trustee?

Answer 43

1. Incapacity 2. Unfit (conviction, chemical dependency) 3. Insolvency (more likely to embezzle) 4. Extreme hostility between trustee and beneficiaries if it would interfere with proper trust administration 5. Unwillingness or persistent failure to administer (refusal to post required bond, refusal to account) 7. A serious breach of trust 8. Lack of cooperation among co-trustees 9. Substantial change in circumstances Overriding factor: whether continuation in office would be detrimental to the trust. Courts consider settlor's intent

Question 44

What is a trustee's general liability for third parties (ex. agents, employees)

Answer 44

1. General rule: liable for acts of agents and employees 2. Exception: Contract provision absolving of personal liability 3. Trustee may indemnify or receive reimbursement from the trust property, if: a. Trustee not personally at fault b. Tort is normal incident of activity c. K properly entered into

Question 45

What are the requirements for a charitable trust?

Answer 45

1. No special language necessary as long as the intent is clear 2. Beneficiaries must be indefinite 3. Must be sufficiently altruistic (must benefit a large enough group). It must benefit the public.

Question 46

What does the cy pres doctrine require vis a vis charitable trusts?

Answer 46

Issue will be what to do when you can't carry out the trust as written, due to a change in circumstances that makes it impossible/impracticable and the trust is silent (when the charitable purpose is impracticable, unlawful, impossible to achieve, wasteful). Can alter the provisions upon a finding of general charitable intent. Must find charitable intent was broader than the purpose which can now be carried out. Can look to extrinsic evidence. Cy pres means "as near as possible"

Question 47

How does the Rule Against Perpetuities impact charitable trust administration?

Answer 47

It doesn't. Charitable trusts are not bound by RAP and may have an unlimited duration.

Question 48

What is a "resulting trust"?

Answer 48

It arises by implication from the settlor's conduct. Purpose is to do what the settlor would have done had he thought about it. Settlor's successors in interest may benefit.

Question 49

What is a failed express trust, and what are its repercussions?

Answer 49

Ways this can happen 1. If the settlor attempts to create an express trust but their intent fails. 2. If there is no provision for remainder (trust res is larger than necessary and the instrument doesn't provide for the disposition of excess) 3. Purchase-money resulting trust (non-donor pays for the transfer, title in the name of another i.e. seller gives to someone else) Creates an implied reversionary interest.

Question 50

What are the presumptions used in properly allocating a purchase-money resulting trust?

Answer 50

1. If payor is a close relative of grantee = gift 2. If payor is not close relative of grantee = Purchase Money Resulting Trust presumed 3. If the payor expects to be reimbursed = loan/debt. Rebutting presumptions with extrinsic evidence is permissible

Question 51

What is a constructive trust?

Answer 51

Not a trust at all. Not based on intent either. It is an equitable remedy to prevent unjust enrichment. The equity turns the holder of legal title into a trustee when he may not in good conscience retain the beneficial interest in the property. This is a remedy, so it must be specifically requested. Requirements: Must be able to identify particular property as the trust res, which was subject to the conduct triggering unjust enrichment (nexus) If granted, trustee's duty is merely to convey.

Question 52

What are appropriate grounds to impose a constructive trust?

Answer 52

Flexible remedy, no conclusive list. Ex. state without slayer statute, breach of contractual will, evil behavior with particular nexus to property, abuse of confidential relationships (can be A/C but also just friendships), promises made in contemplation of death

Question 53

What if a trust is both private and charitable (mixed)?

Answer 53

When the beneficiaries of a single trust are both charitable and noncharitable (mixed), the special rules for charitable trusts do not apply unless two trusts can be found.

Question 54

What assets can creditors reach, when a debtor is not the sole beneficiary?

Answer 54

If the debtor is neither the sole beneficiary nor the settlor of a revocable trust, a creditor reaches only the interest of the debtor, not the trust property itself. Thus, Andy’s creditors can reach only his income interest in the trust. It is even possible for the creditors to sell Andy’s beneficial interest to satisfy their claims.

Question 55

How should a trustee of a discretionary trust for B's HEMS support proceed, when trustee has been served with notice from creditors?

Answer 55

In a discretionary trust, under which the trustee is given discretion to make or withhold distributions of income and or principal, neither the beneficiary, the beneficiary’s creditors, nor the settlor can compel the trustee to make a distribution. However, once the trustee has been served with process, she cannot exercise her power in favor of the beneficiary without first satisfying the creditor’s claim.

Question 56

To whom does the trustee owe her duties in a revocable and irrevocable trust, respectively?

Answer 56

Under a revocable trust, a trustee’s duties are owed exclusively to the settlor. For an irrevocable trust, a trustees duties are owed exclusively to the trust beneficiaries.

Question 57

What effect does an exculpatory clause have on an irrevocable trust?

Answer 57

Other than including an exculpatory clause in the trust instrument, the settlor of an irrevocable trust has no ability to affect the trustee’s liability for a breach of trust. An exculpatory clause in the trust instrument relieves the trustee of liability or lowers the standard the conduct required. These clauses are valid unless they relieve a trustee of liability for breach committed in bad faith or with reckless indifference, or the clause was included because the trustee abused a confidential relationship with the settlor.

Question 58

In a revocable trust, when does the Rule Against Perpetuities begin?

Answer 58

The Rule does not apply to grants in a revocable trust until the settlor’s death. RAP is usually modified by a wait and see or 90 year approach. Ex. "Trustee to pay income to Settlor for life. Upon Settlor's death, the trust shall be paid, in equal shares, to the Settlor's surviving children for their lives [this is the measuring life]. Upon the death of the last surviving child, the trust shall be paid equally to then-surviving grandchildren." - Does NOT violate RAP.

Question 59

What is a Totten Trust?

Answer 59

A Totten trust is a deposit of money in the depositor’s own bank account in trust for another person. Majority rule: this transfer creates a valid revocable trust, even though the depositor retains complete control over the account during her lifetime and the transfer is complete only upon her death. Revocation: The trust is revoked to the extent of withdrawals made by the depositor during her lifetime. It may also be revoked by any lifetime act that manifests an intent to revoke: 1. A writing expressly revoking all in-trust-for accounts delivered to an attorney is a valid revocation, even though the revoking instrument was not delivered to the bank. 2. If the depositor’s will bequeaths all funds held in her "in trust for" accounts to someone other than the trust beneficiary, the trust is revoked and the funds pass to the will beneficiaries. 3. If the trust beneficiary predeceases the depositor, the trust automatically terminates; the funds belong to the depositor absolutely and do not pass to the beneficiary’s estate. However, if the depositor predeceases the beneficiary, the funds pass to the beneficiary pursuant to the terms of the trust.

Question 60

When will a constructive trust be imposed when someone backs out of an oral promise?

Answer 60

Generally, a person’s mere breach of a promise is not a sufficient basis for implying a constructive trust. Thus, where a grantor conveys real property to a grantee in reliance on his oral promise to hold it in trust for the grantor’s daughter and the grantee subsequently conveys the property to his son, there is no constructive trust. (To hold otherwise would frustrate the purpose of the Statute of Frauds.) However, broken promises to a decedent concerning devolution of her property on death are a major exception to the rule: a constructive trust will be imposed because the promisee is dead and unable to personally seek enforcement.

Question 61

If a will bequeaths money in trust, but there is no named beneficiary, what result?

Answer 61

This is a semi-secret trust. A resulting trust will be imposed in favor of the settlor’s heirs or residuary legatees. Because a trust, and not a gift, was clearly intended from the face of the will, the trustee cannot take the money. A semi secret trust, such as the one here, is generally unenforceable because it would violate the policy of the Statute of Wills to permit the beneficiaries to be identified through parol testimony. With no identifiable beneficiaries, the trust fails.

Question 62

Does a trustee of a constructive/resulting trust owe a duty to produce and invest the property?

Answer 62

No. They must account for the profits they have made, transfer title to the beneficiary, and preserve/protect the trust property. However, they need not make the trust productive.

Question 63

How may a trustee accept or reject their duties as trustee?

Answer 63

A designated trustee need not notify anyone of his rejection of the trusteeship. Failure to do so does not constitute acceptance of the trusteeship; if the trusteeship is not accepted within a reasonable time, it is presumed to be rejected. A person designated as trustee can accept the trusteeship by complying with the method of acceptance stated in the trust instrument or by accepting delivery of the trust property, exercising powers or performing duties as a trustee, or indicating acceptance. Accepting delivery of the deed is accepting delivery of trust property. A person acting as trustee may still act to preserve the trust property without accepting the trusteeship, provided he sends notice of rejection to the settlor or a qualified beneficiary. Note: a testamentary trust is treated as in existence as of the settlor's death, and the trustee's acceptance relates back to that date. It is possible for a trustee, by accepting, to become liable (in his fiduciary capacity) on tort claims arising to the time accepted.

Question 64

What is a Purchase Money Resulting Trust?

Answer 64

When a buyer obtains legal title from the seller in exchange for consideration supplied by another person, courts imply a purchase money resulting trust by which the buyer is treated as a trustee whose sole duty is to convey the property to the payor beneficiary. For a resulting trust to arise, the payor must supply the consideration at or before the time the buyer takes title. A resulting trust will arise if the payor gives consideration by canceling a debt owed to him by the seller. Although a gift, not a trust, is presumed when a parent supplies the consideration and title is taken in the child’s name, the normal presumption of a trust applies where the payor is the child and the buyer is the parent. A trust usually will not be implied where the arrangement under which title is taken in the buyer’s name is for an unlawful purpose, such as where the buyer cannot obtain proper financing.

Question 65

If a modification cannot be obtained by beneficiary consent, either because all beneficiaries do not or cannot consent, or because a material purpose will be frustrated, when may parties seek modification by the court?

Answer 65

If: (i) the trust could have been modified if all beneficiaries had consented, and (ii) the interests of nonconsenting beneficiaries will be protected. Because the court may modify even if it might frustrate a material purpose of the settlor, the settlor's consent, whether the settlor is dead, and lack of a spendthrift restriction will not affect the court’s ability to modify the trust if the beneficiaries are all represented.

Question 66

What is a support trust?

Answer 66

A support trust is one in which the trustee is required to pay or apply so much of the trust as is necessary for the support of the beneficiary. The trustee does not have discretion to refuse to pay bills necessary for the beneficiary's support. Beneficiary's interest is never assignable (even w/o spendthrift provision) THe words "for his support" alone do not create a support trust Creditors' right s- allowed to attach to interest but can't compel distribution; if trustee has notice of attachment, must first pay directly to creditors unless interest protected by spendthrift provision

Question 67

Can the trustee of a discretionary trust be compelled to make a distribution?

Answer 67

In a discretionary trust, the trustee is given discretion 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 her. The beneficiary cannot interfere with the exercise of the trustee's discretion unless the trustee abuses her power. What constitutes abuse depends upon the extent of the discretion conferred on the trustee. Generally, a court will not interfere unless the trustee has acted in bad faith or dishonestly.

Question 68

What is the usual inference w/r/t precatory expressions, and when is that inference overcome?

Answer 68

A settlor's expression of a hope, wish, mere suggestion that the property be used in a certain way is precatory language. The usual inference is that precatory language does not create a trust. The inference can be overcome by: - Definite and precise directions, - Directions addressed to a fiduciary (e.g. executor under a will) - Resulting "unnatural" disposition of property if no trust imposed (close relative takes nothing) - Extrinsic evidence shows that settlor previously supported the intended beneficiary

Question 69

If a trustee dies, what happens?

Answer 69

Once established, a trust will not fail because the trustee dies, refuses to accept appointment, or resigns. THe court will appoint a successor trustee unless it is clear that the settlor intended the trust to continue only so long as a particular trustee served. A successor trustee succeeds to all of the rights, powers, privileges of the original trustee and is subject to all the original trustee's duties, liabilities, responsibilities. The absence of a trustee may cause an attempted inter vivos trust to fail for lack of de.ivery.

Question 70

Who has capacity to be a trustee?

Answer 70

Anyone who has capacity to acquire and hold property for her own benefit and has capacity to administer the trust may be a trustee. Not minors or insane people, some states limit foreign corps' abilities to trustee.

Question 71

How can a trustee resign?

Answer 71

Either 1. 30 days' notice to qualified beneficiaries, settlor (if living) and co-trustees; or 2. Court approval

Question 72

Who is a qualified beneficiary?

Answer 72

Either: 1. Current beneficiary OR 2. First-line remainderman (one who would become eligible to receive distributions were the event triggering termination of a benficiary's interest or the trust itself to occur on the qualification date).

Question 73

How can a beneficiary disclaim their interest?

Answer 73

Beneficiary may disclaim interest by filing written instrument with trustee (or if trust created by will, with probate court). If valid disclaimer made, read trust as though disclaimant deceased. You don't need to expressly accept a benefit btw. Requirements for disclaimer: - Within 9 months of interest's creation OR - Within 9 months of disclaimant's 21st bday A beneficiary may be estopped from making a disclaimer if she has exercised any dominion or control over the interest or accepted any benefits under the trust. Under most state disclaimer statutes, a disclaimer relates back to the date of transfer for all purposes. Thus, a disclaimer by an insolvent beneficiary can be used to defeat creditors' claims but not a federal tax lien.

Question 74

What impact does divorce have on trust?

Answer 74

Final decree of divorce or annulment revokes all beneficial gifts and fiduciary appointments in favor of a former spouse. UPC and several states have extended the rule to all revocable dispositions. Read as though the former spouse (AND RELATIVES) deceased.

Question 75

When is parol evidence allowed?

Answer 75

Most states allowed when there is an ambiguity on the face of the writing.

Question 76

How may a trustee modify or terminate a trust?

Answer 76

1. Uneconomic trust (less than 50k + amount insufficient to justify cost of administration) with notice to beneficiaries 2. Combination and division of trusts - can do so, so long as this doesn't frustrate any purpose of the trust or impair rights of beneficiary - notice (not consent) of beneficiaries