trusts

Question 1

who can be a beneficiary

Answer 1

• unincorporated association couldn’t be at common law, but now can be
• any natural or artificial person capable of taking and holding title to property
• trust can name an unborn beneficiary; unascertained beneficiaries have to be determined from the will
• RAP problems!!!

Question 2

settlor

Answer 2

the individual who creates the trust

Question 3

discretionary trust

Answer 3

the trustee is given discretion as to when to pay a beneficiary, whether to pay a beneficiary and how much to pay him. Also discretion on WHO to pay if multiple beneficiaries.

“trustee shall have sole and absolute discretion in determining when to pay beneficiary & how much”

Question 4

resulting trust- definition and when applies

Answer 4

implied in fact and based upon presumed intent of the parties. if decreed, the resulting trustee will transfer the property to:

a) the settlor if he is alive or
b) the settlor’s estate if he’s dead (residuary devisees if any, or if none intestate heirs)

• private express trust ends by its own terms
• charitable trust ends or fails, and cy pres can’t be used b/c settlor didn’t have general charitable intent
• excess trust property in a private express trust- purpose satisfied but left over money/assets (support x while x is a minor and money left)
• beneficiary dead, unidentifiable, or not locatable
• semi secret trusts- will says to x to hold in trust with no named bene
• purchase money resulting trusts

Question 5

purchase money resulting trust

Answer 5

Sale of property where Y obtains legal title from the seller, but Y did not supply the consideration, another person- X- did. Once X proves he supplied the money, a presumption arises (2 different presumptions possible depending on relationship between X and Y)
*must be consideration given to buy the property

X and Y close relatives- rebuttable presumption of gift.
X and Y not close relatives- rebuttable presumption that Y is acting as a trustee (that X would have wanted to retain a benefit and not to make a gift). Y’s only duty is to convey title to X
i) can rebut by proving X made a loan to Y
a) if title in Y’s name, then NO resulting trust
b) BUT if X loaned money to Y, and title is in X’s name, then the resulting trust is in favor of Y as beneficiary

Question 6

constructive trust- requirements and examples

Answer 6

constructive trust is a remedy to prevent unjust enrichment.
Must be requested as a remedy and must point to specific trust property harmed or wrongfully handled. Some states require clear and convincing evidence.

Examples of when available

• when trustee of private or charitable trust engages in self dealing and profits
• fraud in the inducement of a will
• breach of fiduciary duty
• invalid oral trust of land that doesn’t satisfy SOF exceptions
• secret trust
• beneficiary of a will commits homicide of testator
• joint tenant kills another joint tenant
• theft of trust property when it is no longer in possession of thief and thief used it to buy something else

Question 7

oral real estate trust (imposed because of fraud in inducing conveyance)

Answer 7

• from the four corners of the deed, the person seems to own the real estate
  1) fraud in the inducement- A conveyed real estate to B because he promised to hold it in trust for someone else, but actually did not intend to do so
  2) fiduciary relationship between A and B, and A transfers to B because B makes a promise
  i) family relationship
  ii) attorney-client
  iii) business partners
  3) detrimental reliance by B

Question 8

trustee duties to beneficiaries

Answer 8

1) duty to administer trust in good faith, PRUDENTLY, and follow its instructions
2) duty of loyalty- may not self deal and must act impartially if more than one beneficiary
3) duty to separate and earmark trust property- no commingling with own or other clients’ assets
4) duty to perform personally
5) duty to defend trust from attack and enforce trust claims
6) duty to preserve trust property and make it productive
7) duty to account at least annually and respond to requests for info about the trust

DEAL APP
DEFEND, EARMARK, ADMINISTER, LOYALTY, ACCOUNT, PERSONALLY, PRODUCTIVITY

Question 9

trustee duty of care

Answer 9

care, skill*, and caution a reasonably prudent person would use in investing and managing his own property
*takes special skills of trustee into account to raise the standard but lower skill level is not an excuse

NOTE: Investment decisions are evaluated pursuant to uniform prudent investor act

Question 10

implied powers

Answer 10

power to carry out the trust purpose

Question 11

if trustee commingles trust property and own assets or assets of other trusts

Answer 11

breach of duty to separate and earmark
if some of the property is lost, it is presumed that the property lost belonged to trustee personally and any gains go to the trust

Question 12

Beneficiary remedy for trustee breach of duty of loyalty by self dealing

Answer 12

trace the profits from the transaction,

Set aside the transaction, or

affirm the transaction if it’s beneficial

surcharge if a loss to trust- trustee must make good the loss

Question 13

example of properly earmarked property

Answer 13

John Smith, as trustee of ABC trust

ie either in trustee’s name noting trustee capacity, or trust

Question 14

duty to perform personally

Answer 14

must personally perform functions that a reasonably prudent person wouldn’t delegate. DISCRETIONARY FUNCTIONS CANNOT BE DELEGATED (like who to pay and when).

INVESTMENT DUTIES
common law- no delegation of investment decision
today- may delegate if a prudent trustee could properly delegate under the circumstances

trustee cannot delegate decisionmaking to another trustee
-must act by majority decision (today); at common law it was unanimity

Question 15

duty to defend trust

Answer 15

must defend trust from legal attack, unless upon examination trustee discovers challenge is well founded

Question 16

duty to account

Answer 16

keep and render accounts periodically (at least annually) and respond to requests for info about the trust administration

proxy for duty of loyalty- lets B’s monitor

Question 17

duty to make productive / power to invest- state statutes

Answer 17

most states have adopted uniform principal investor act

some states still follow statutory legal list of approved investments (unsecured loans, land, and common and preferred stock are not allowed; mutual funds are)

Question 18

uniform principal investor act evaluation of trustee decisions

Answer 18

• must act exclusively for beneficiary. must act impartially if more than one
• any type of investment ok if trustee is prudent
  -expected to consider anticipated income, tax consequences, and effect of general economic conditions and inflation
  -should consider value of an asset to a particular beneficiary or purpose
• prudence of investments evaluated in light of whole portfolio and wisdom at time of decision

Question 19

adjustment power- UPIA

Answer 19

if the trustee feels that by distributing the trust income to the beneficiary, he/she is not complying with the duty to treat all beneficiaries fairly, may adjust between principal and income if necessary

Factors:
Nature, purpose, duration of trust
Intent of settlor
Need for liquidity and regular income
Need to preserve capital
General economic conditions and impact of inflation on income
Trustees power to invade principal under the trust
Tax consequences

Question 20

factors to consider in whether to use adjustment power

Answer 20

1. nature, purpose, expected life of the trust
2. intent of settlor
3. identity and circumstances of beneficiaries
4. need for liquidity, regularity of income, preservation and appreciation of capital
5. nature of trust assets
6. whether trust gives trustee power to invade principal

Question 21

trustee liability to third parties

Answer 21

general rule: can only be sued as trustee and not personally.

A. tort: only sue trustee personally if at fault (ex: sue the trustee personally if he was negligent in managing land held in the trust)

B. contract: party to contract must sue in trustee capacity if he knows that the trustee is making the contract in his capacity as trustee. can sue trustee personally if trustee did not reveal he was a trustee for a trust.
Trustee can be indemnified from trust property if properly entered into and the trustee is not in breach

Question 22

when can the trust be modified?

Answer 22

A. By settlor

1. when he personally reserves the power to modify
2. when settlor has reserved the power to revoke (by implication has power to modify)

B. By court

1. charitable trusts and cy pres
2. deviation
   a) unforeseen circumstances by settlor
   b) necessity to preserve the trust
3. trust becomes illegal

Question 23

when can the trust be revoked?

Answer 23

A. Some states: settlor must reserve the power

B. UTC: trust is revocable unless made irrevocable.

Question 24

how do you terminate an irrevocable trust?

Answer 24

1. Settlor and all beneficiaries agree
2. Beneficiaries agree and no material purpose will be frustrated
3. Statute of uses- passive trustee duties
4. Termination of trust by its own terms

Question 25

Holder of legal title to trust property

Answer 25

The trustee. Holds for the benefit of beneficiaries.

Question 26

Holder of equitable title to trust property

Answer 26

Beneficiary

Question 27

Requirements for valid trust

Answer 27

*Legal capacity *Testamentary capacity (for testamentary trust) *Intent - present intent to immediately create trust relationship and split legal and equitable title *Property- ascertainable and settlor has right to convey it *Valid purpose *Proper formalities Writing if required by statute of frauds

Question 28

Presumption regarding language like i desire the property to be used for / with the hope that

Answer 28

Presumed not to intend to create a trust. Rebuttable by evidence of Directions to a fiduciary Clear and definite directions Settlor providing previous support to the beneficiary If no trust is imposed a close relative will take nothing

Question 29

Proper trustee

Answer 29

Sole trustee cannot be the same as the sole beneficiary, or two trustees cannot be the only two beneficiaries The settlor can be a trustee during their life as long as they designate a successor

Question 30

Beneficiaries requirements

Answer 30

Must be ascertainable at the time they are to benefit (ex: to my children is ok but to my friends is not) and able to hold title Must be ascertainable or first line remainderman

Question 31

Anti lapse statute application to trusts

Answer 31

Most states only apply to wills The utc states apply them to future interests created in trusts if an alternate taker is not specified, even if the provision requires the beneficiary to survive

Question 32

Effect of divorce on provisions of trust

Answer 32

Appointing an ex spouse as a beneficiary or trustee will be revoked under the utc and laws of many states Some states even invalidate gifts to ex spouse relatives (step children, siblings and parents of spouse)

Question 33

Trust purposes

Answer 33

Cannot be Illegal (can’t encourage people to commit crimes) Against public policy (to A so long as she is not married could be against public policy of promoting marriage or it could be consistent with appropriate policy of providing support for someone who is unmarried) To defraud creditors Impossible to achieve Generally if it’s illegal the court will treat it as valid and eliminate the problematic condition unless there’s evidence the settlor would not have wanted the gift to still be valid

Question 34

Trustee death or resignation - impact on trust validity

Answer 34

Does not invalidate the trust. The court can appoint one unless there is evidence that the settlor only wanted the trust to exist while a specific person was trustee

Question 35

Lack of duties of trustee

Answer 35

Court will imply duties as long as other formalities are satisfied (intent, trustee, beneficiary, trust property)

Question 36

Ways to transfer property to trustee

Answer 36

Declaration of trust - declaration itself is enough to convey personal property. Must prove oral by clear and convincing evidence. Real property should be transferred from settlor as an individual to settlor as trustee Conveyance in trust- a deed transferring from settlor to trustee, or personal property by physical delivery or written assignment Gift in a will - pours property over from the will to a trust that is identified clearly in the will, even if the trust is revocable or has not been signed when the will is signed, as long as the trust is executed before the settlor dies Testamentary trusts- where the trust intent, trust property, trustee, and beneficiaries are all identified in the will or a document incorporated into the will by reference

Question 37

Class of beneficiaries

Answer 37

Trustee must be able to identify. At common law this means it has to be reasonably definite. The utc allows trustee to select members of indefinite class

Question 38

Inter vivos trust

Answer 38

Settlor during their life conveys property to themselves or someone else as trustee for benefit of another person or declares that they are trustee for another person

Question 39

Statute of frauds and trusts

Answer 39

Writing required for trusts of land Part performance exception applies

Question 40

Secret trust

Answer 40

Transfer in a will of property to a beneficiary without mentioning in the will that it is to be held in trust. Gift must have been made in reliance on promise to hold in trust. Extrinsic evidence is allowed and must prove by clear and convincing evidence that this was the intent. Court will impose constructive trust

Question 41

Semi secret trust

Answer 41

To A to be held in trust Fails and results in resulting trust

Question 42

Beneficiaries attempts to transfer or creditors attach the beneficial interest- valid normally?

Answer 42

Creditors can reach the interest Beneficiaries can transfer the interest

Question 43

If there is a discretionary trust can a creditor of the beneficiary reach the interest?

Answer 43

A creditor can attach the interest with notice to the trustee Creditor cannot force trustee to make payment to beneficiary because the trustee has discretion on when and how to make distributions, so until they do the beneficiary has no concrete right and just has an expectancy The only exception is a trustee can be forced to make a payment to satisfy child and spousal support judgments

Question 44

Spendthrift trust - assignability and creditors

Answer 44

The beneficiary is prohibited from assigning and the creditors are not able to reach the interest until beneficiary is paid Still will not work to prevent child support and spousal support and other government creditors from reaching the interest A trustee can but is not required to honor claims from assignees and creditors

Question 45

Can settlor be beneficiary of a spendthrift trust?

Answer 45

Some states will allow settlor to be beneficiary but most won’t

Question 46

Support trust

Answer 46

A trust directing the trustee to pay beneficiaries only so much of the income as is necessary for support Standard of support is lifestyle the beneficiary is accustomed to

Question 47

Support trust- can assignees and creditors force trustee to pay them ?

Answer 47

No the beneficial interest is not assignable until payment is made

Question 48

Revocability of and ability to modify trusts

Answer 48

Some states treat them as revocable and able to be modified unless it says irrevocable Other states treat them as irrevocable unless it says revocable and in this case will allow revocation or modification with all beneficiaries consent

Question 49

Modification of trusts by settlor

Answer 49

Settlor can modify without beneficiary consent if irrevocable

Question 50

Termination of a trust

Answer 50

All beneficiaries must consent and has to be revocable, no material purpose can be frustrated Court can also order same way as modification Trustee must distribute as agreed by beneficiaries In some states- trust property less than 50k and cost of admin too high

Question 51

Material purposes of trust so that it can’t be modified

Answer 51

Support trust Spendthrift provision Payment at certain ages or on certain events Discretionary trust

Question 52

If there is a mistake in the trust can a court modify to fix it?

Answer 52

In some states yes but must be shown by clear and convincing evidence

Question 53

Powers of trustee

Answer 53

Powers granted by the trust instrument Powers a competent person would have over their property (sell, invest, lease etc) Powers under utc -collect and hold trust assets -operate a business -invest assets -pay taxes -buy, sell, lease, encumber assets (and get loans) -make distribution -bring and defend lawsuits Other powers necessary to carry out trust powers granted by trust or law

Question 54

Co trustees

Answer 54

Act by majority decision unless one is ill or unable to serve- then the others may act If one does not cooperate the others can seek court order to remove

Question 55

Court review of trustee exercise of discretionary power

Answer 55

Even if the trust says he has absolute discretion the court will review the way it’s exercised or decisions not to act for abuse of discretion

Question 56

Social investing

Answer 56

If this is the only basis for the decision (ex: environmentally friendly corporate policy or black or woman owned company) it will not be prudent. Have to consider income generating potential and risk level

Question 57

Reasons to remove trustee

Answer 57

Court can order on its own or the beneficiaries, settlor, or another trustee can seek an order Lack of capacity Serious breach of duty Persistent failure to administer trust per its terms Addiction making them unfit Conviction if a crime Refusal to account Lack of cooperation among trustees

Question 58

Tort claims against the trust

Answer 58

Brought against the trustee in their fiduciary capacity. And individually if they are personally at fault

Question 59

If a trustee improperly transfers property to a third party what are the beficiaries rights?

Answer 59

They can sue the third person If the third person is a bfp they cannot be forced to convey it back If the third person did not pay for it and did not know it was trust property, they must either restore it or pay money or property of equal value to the trust

Question 60

If a third party damages trust property what are the beneficiaries able to do?

Answer 60

Sue the trustee to force them to sue third party for damage (ex: tenant in lease damages property) Can sue directly if the trustee leaves the jurisdiction without appointing a successor or the trustee participated in a breach of trust

Question 61

Manner of distributions

Answer 61

Generally income beneficiary must receive income and principal beneficiary must receive principal Uniform prudent investor act gives the trustee an adjustment power to pay income to a principal beneficiary if it would be unfair to that beneficiary not to do so and it wouldn’t carry out the intent of the settlor

Question 62

Is real property rent allocated to income or principal ?

Answer 62

Income

Question 63

Unique types of income and how allocated among principal and income

Answer 63

Proceeds from sale of an asset- principal Rents and interest- income Minerals and oil leases - 10% income 90% profit Royalties and other liquidating assets- 10% income and 90% principal Pensions and deferred compensation- 10% income and 90% principal Stock dividends- principal Cash dividends- income Life Insurance policy proceeds- principal Other insurance policy proceeds- income

Question 64

Expenses allocation

Answer 64

Ordinary repairs of property - income Capital major repairs like roofs - principal Income tax- income Capital gains tax- principal Cost of accountings, lawsuits regarding income assets, trustee compensation are split equally Cost of proceeding involving a principal asset are allocated to principal Payment of principal on trust debt allocated to principal

Question 65

Charitable trust

Answer 65

Trust that has indefinite beneficiaries and can be perpetual Must have a charitable purpose like relief of poverty, religion, or promoting education, parks and museums Beneficiary can be a specific charitable entity or a small class of people just cannot be only family

Question 66

What can a court do when a charity doesn’t exist or a purpose becomes illegal or is impractical ?

Answer 66

1 Apply Cy pres if there is general charitable intent or it’s a utc jurisdiction Court will reform the trust to come as close as possible to achieving settlor intent To apply the doctrine the settlor must have a general charitable intent and must not have expressed an intent only to give to a particular charity Under the UTC the general charitable intent is conclusively presumed 2 impose a resulting trust if cy pres inapplicable

Question 67

Honorary trust

Answer 67

A trust that does not have a human, identifiable beneficiary or charitable purpose Care of pets (last only as long as animal lives) or maintenance of a grave People with rights to enforce it may be specified in a utc jurisdiction At common law there is no way to enforce it UTC allows it to last for 21 years, some states apply general RAP rules

Question 68

When x provides the consideration to acquire property and title is taken in Y’s name how does the law treat this?

Answer 68

Presumes this is a purchase money resulting trust if X proved by clear and convincing evidence that x paid the consideration before or when Y took title. If only part of consideration was supplied they only get a pro data interest in the property. Y can rebut this by producing evidence that the intent was this was a gift, a loan that Y would repay, or repayment of a loan that Y made to X If x and y are close relatives the presumption is a gift, which is rebuttable

Question 69

Resulting trust situations- when it’s inapplicable

Answer 69

Trust created for illegal purpose The trust has an alternative way of disposing of property when a gift fails or the trust is invalid When cy pres applies When the settlor is also the beneficiary of a purchase money resulting trust bc they provided consideration for purchase of the property When settlor otherwise got consideration for trust transfer

Question 70

Trustee of resulting trust or constructive trust responsibilities

Answer 70

Convey legal title to the beneficiary Account for profits received during the resulting or constructive trust

Question 71

When a trustee is not liable for breach of duty

Answer 71

Reasonably relied on trust terms in taking action Beneficiaries consented to the conduct or released him from liability

Question 72

Beneficiary refusing to accept a gift

Answer 72

Not required to accept the gift, they can disclaim within 9 months of the creation of their interest (date of death for revocable and date of creation of trust for irrevocable) Disclaiming beneficiary will be treated as predeceasing the settlor

Question 73

beneficiary remedy for breach of duties other than loyalty

Answer 73

specific performance of duties injunction to stop trustee from breaching duties damages that are the greater of: a) amount necessary to restore the trust property and distributions to what they would have been without the breach; b) profits earned by the trustee from the breach

Question 74

examples of breach of duty of loyalty by self dealing

Answer 74

*buying or selling trust assets *selling property to another trust or company they are affiliated with *borrowing trust money *securing a personal loan with trust property *corporate trustee investing its own stock- can only keep any of its own stock in the portfolio at the time the trust was created if it is prudent to do so *indirect self dealing like transaction between trustee on behalf of the trust and trustee's relative, spouse, attorney, or corporation

Question 75

limits on trustee discretionary powers

Answer 75

must exercise them or choose not to in good faith can be reviewed for abuse of discretion by a court- found to abuse if act in bad faith or dishonestly

Question 76

duty to administer the trust

Answer 76

duty to carry out the mandatory provisions, and carry out all terms of the trust in good faith, impartially, and prudently

Question 77

Are clauses relieving a trustee of liability valid?

Answer 77

exculpatory clauses are ok but cannot relieve trustee of reckless behavior or bad faith behavior and cannot have been inserted by a trustee who abused a confidential relationship with the settlor

Question 78

Delegating trust management

Answer 78

- may delegate investment functions but must be prudent in: i) choosing the agent ii) establishing scope and terms of delegation iii) periodically reviewing agent's actions

Question 79

Does a trustee breach any duties by not having a diverse portfolio?

Answer 79

- trustee must diversify UNLESS trust says not to or there is a reasonable justification not to based on trust purposes

Question 80

Modification of trusts by beneficiaries

Answer 80

Material purpose frustrated- need settlor and all beneficiaries to consent Material purpose not frustrated- all beneficiaries must consent Trustee must distribute as agreed

Question 81

Modification of trust with court order

Answer 81

If not all beneficiaries consent or material purpose frustrated Under utc with a court order determining A) modification would have been possible with consent of all beneficiaries and the beneficiary who didn’t consent would be adequately protected B) unanticipated circumstances have arisen and threatened trust purposes C) impracticable or wasteful to continue with existing trust terms D) not enough money in trust to pay costs of administration

Question 82

who does a trustee owe fiduciaries to?

Answer 82

if the trust is revocable, they only owe duties to the settlor if the trust is irrevocable the duties are owed to all beneficiaries

Question 83

What is the remedy if the trustee does not perform personally?

Answer 83

If the delegation should not have been made at all, the trustee is liable for all losses resulting from the improper delegation

Question 84

if a class gift future interest (for example, one following a life estate) has a survival condition can the holder of the interest pass it to their heirs?

Answer 84

normally future interests are devisable and thus if the person in the class dies they can pass their interest to their heirs if there is a survival condition, however, the interest is not devisable or descendable

Question 85

is the trustee liable for losses when he has properly delegated investment functions?

Answer 85

No, he will be protected as long as delegation was proper (prudent in selection, setting terms and scope of delegation, and reviewing periodically)

Question 86

is a trustee liable for the acts of a co-trustee?

Answer 86

no, if he did not participate AND exercised reasonable care in preventing a breach of trust or compelling the co-trustee to redress a breach of trust

Question 87

remedies for breach of trust (i.e. breach of trust duties)

Answer 87

* Suspend or remove trustee * Obtain injunction to force to perform trust duties or to prevent from committing a breach of trust * Compel trustee to pay money (greater of the profits resulting from the breach or the amount necessary to restore trust property and distributions to pre breach levels) * Compel trustee to restore property

Question 88

can a trustee's inability to self deal be waived?

Answer 88

yes if the settlor expressly allows self dealing in the trust instrument, as long as trustee does not act in bad faith

Question 89

when does a revocable trust become irrevocable?

Answer 89

at the settlor's death, unless amended to become irrevocable during life

Question 90

can a trust be reformed if there is a mistake?

Answer 90

only in some states. in those states, the mistake must be shown by clear and convincing evidence.