Trusts

Question 1

Trust

Answer 1

A fiduciary relationship where one party holds legal title to property for the benefit of another who holds equitable title

Question 2

Express Trusts

Answer 2

Created intentionally.

Sub-types:

• Private – Created to benefit private, non-charitable beneficiaries
• Charitable – created for some charitable purpose or to benefit charitable beneficiaries

Question 3

Implied Trusts

Answer 3

Created by operation of law.

Sub-types:

• Constructive – imposed to deprive a wrongdoer from retaining improperly obtained property
• Resulting – imposed irrespective of wrongdoing when the circumstances require it

Question 4

Settlor

Answer 4

Creates the trust by transferring assets to a trustee with manifest intent to create a trust relationship.

Once a trust is created, Settlor no longer owns the assets; they have been transferred to the trust

Question 5

Trustee

Answer 5

• The trustee is a fiduciary of the trust and holds legal title to trust property for the benefit of the beneficiaries
  
  • A trust must have a trustee, but failure to designate one wont cause the trust to fail (the court will appoint one)
• Trustee must follow the terms of the trust with respect to the preservation, enhancement, and distribution of the trust property to the beneficiaries

Question 6

Beneficiary

Answer 6

• Beneficiaries hold equitable title
  
  • Income Beneficiary = Present interest in the trust
  • Remainder Beneficiary = Remainder interest in the trust
• Must always be a beneficiary in existence who can enforce the trust against the trustee
  
  • The sole trustee cannot be the sole beneficiary → interests merge and trust collapses
• Generally, beneficiaries can’t alter administrative provisions of a trust, and they must wait until the property is distributed to exercise control over property

Question 7

Requirements for a valid trust

Answer 7

• Settlor with requisite capacity who expresses a present intent to create a trust
• Delivery of specific trust property
  
  • Must be delivered to trustee with intent to do it right now (not in future)
  • Must be some certainty over what is the trust property
    
    • Can’t be mere expectation or unearned profits
• At least one ascertainable beneficiary,
  
  • Must be determinable when the trust is to be distributed
  • Need some objective standard (reasonable basis) to identify the beneficiaries
• Proper trust purpose
  
  • A trust can be created for any purpose except those that are illegal, fraudulent or against public policy o Trustee, and o Active duties imposed on the trustee
• Trustee
• Active duties imposed on trustee

Question 8

Requirements for delivery of specific trust property

Answer 8

• Must be delivered to trustee with intent to do it right now (not in future)
• Must be some certainty over what is the trust property
  
  • Can’t be mere expectation or unearned profits

Question 9

Ascertainable Beneficiary

Answer 9

• Must be determinable when the trust is to be distributed
• Need some objective standard (reasonable basis) to identify the beneficiaries

Question 10

Proper trust purpose

Answer 10

A trust can be created for any purpose except those that are illegal, fraudulent or against public policy

Question 11

Types of Trusts

Answer 11

• Inter Vivos Trust
• Testamentary Trust
• Totten Trust

Question 12

Inter Vivos Trust

Answer 12

• Created during Settlor’s lifetime
• Trust property must be placed into the trust

Question 13

Testamentary Trust

Answer 13

Created by Settlor’s will

“Pour over” provision = Often contained in a will, directs the transfer of Decedent’s property into a trust established by either Decedent during his lifetime or another person

Question 14

Totten Trust

Answer 14

Arrangement with a bank that allows the depositor to open a bank account in his own name, as trustee for other parties

Beneficiary’s only right is to take whatever is left in the account when the depositor dies (if the beneficiary is still alive)

Question 15

Duration of Trusts

Answer 15

• All private, non-charitable trusts must comply with RAP
• Common law RAP has been modified in majority of jurisdictions
  
  • Wait-and-See Approach: Whether a trust violates the RAP depends upon what actually happens rather than what might happen

Question 16

Source of Trustee’s Powers

Answer 16

• Trust instrument (expressly or by implication), and
• Statute or implied in law as necessary or appropriate to accomplish the trust’s purposes
  
  • Unless expressly precluded by the trust, the trustee can settle/abandon claims against the trust, borrow money, sell/lease trust assets, and incur reasonable expenses necessary to maintain trust property

Question 17

Trustee’s Duties

Answer 17

• Duty of Loyalty
• Affirmative duty to preserve and enhance trust property.
  
  • “Prudent Business Person” Rule

Question 18

Duty of Loyalty

Answer 18

Trustee owes the beneficiaries a duty of loyalty and good faith, and is prohibited from:

• Self-dealing with trust (even if done in good faith)
• Obtaining a personal benefit other than the agreed-upon compensation
• Obtaining a personal benefit for a third party with respect to dealings involving the trust estate
• Being in an apparent conflict of interest with respect to the trust and third parties

Even if trust has an exculpatory clause, the trustee still can’t breach the fair-dealing standard → any profits earned from self-dealing with the trust belong to the trust

Question 19

“Prudent Business Person” Rule

Answer 19

Trustee must use the degree of skill, care, and prudence exercised by a reasonable business person to use trust property in a productive manner

• If a trustee possesses superior business expertise or is a professional fiduciary → a higher standard is applied
  
  • The trustee will be held to the care, skill, and prudence of an individual or entity possessing those capabilities

Question 20

Distribution of receipts between trust principal and income under the Uniform Principal and Income Act

Answer 20

• Rents and cash dividends received are allocated to trust income, and then are distributed to trust’s income beneficiary
• Sales proceeds and stock dividends are allocated to principal of trust

Question 21

Liability of Trustee

Answer 21

Trustee is liable for damages caused by his breach of a duty

• If the trustee uses trust assets to buy property that increases in value → must return both trust property and increased value
• If the trustee beaches duty of care in investing → must personally repay the trust for its losses

Question 22

Can a benficiary assign their right to receive income or principal?

Answer 22

Yes. A beneficiary may assign his right to receive income or principal from a trust (unless the trust provides otherwise)

Question 23

Spendthrift Trust

Answer 23

Beneficiary’s interest is inalienable, beneficiary cannot voluntarily transfer property and a creditor cannot attack it

Exception—Cannot be used to defeat a claim of:

• Alimony or child support
• Creditors who furnish necessities to the beneficiary
• Government claims against the beneficiary

Question 24

Discretionary Trust

Answer 24

• Trustee pays as much income as he believes desirable
• Beneficiary’s creditors can get a lien on the trust but cannot get trust property until a distribution is made

Question 25

Support Trust

Answer 25

Distributions are based on the beneficiary’s needs

Question 26

Modification and Termination of Trusts by Settlor

Answer 26

* Common law → Presume trusts are irrevocable unless stated otherwise * UTC → Presume trusts are revocable unless stated otherwise * Settlor may terminate an irrevocable trust only with consent of all the beneficiaries who must be living at that time

Question 27

Modification and Termination of Trusts by Merger

Answer 27

The trust ends if the sole trustee becomes the sole beneficiary

Question 28

Modification and Termination of Trusts by Operation of Law

Answer 28

Where the trust property has been: * consumed, destroyed, or lost * the trust’s purposes have been fully accomplished; or * accomplishment of the material purposes of the trust have become illegal, impossible, or impractical

Question 29

Modification and Termination of Trusts by Beneficiaries After Settlor's Death

Answer 29

After Settlor’s death, if the material purpose of the trust has not yet been accomplished, the trust cannot be terminated before the time specified by Settlor, even if all of the beneficiaries agree

Question 30

Types of Implied Trusts

Answer 30

* Resulting Trust * Constructive Trust

Question 31

Resulting Trust

Answer 31

Arises when an express trust makes an incomplete disposition of assets or fails after property has been conveyed to the trustee * Settlor is left holding the equitable interest in a resulting trust

Question 32

Constructive Trust

Answer 32

A trust is erected on the holder of specific property to redress wrongdoing or prevent unjust enrichment

Question 33

Requirements for Charitable Trusts

Answer 33

* Must have a charitable purpose * Relief of poverty, advancement of education or religion, promotion of health, performance of governmental and municipal purposes, or other purposes beneficial to the community * Beneficiaries must be indefinite

Question 34

Distinguishing Characteristics of Charitable Trusts

Answer 34

* Cannot have ascertainable beneficiaries (unless charitable organizations) * RAP doesn’t apply * When the trust purpose has been accomplished or has become impracticable or impossible to accomplish, the trust doesn’t necessarily end → cy pres doctrine allows to continue

Question 35

Cy Pres Doctrine

Answer 35

* If exact charitable purpose cannot be carried out, court may direct the trust property be used for another charitable purpose that approximates Settlor’s intentions * Cy pres may be used if: * Settlor’s specific charitable purpose becomes impossible, impracticable, or illegal to carry out, and * Settlor had, in addition to this specific charitable purpose, a general charitable intent