Trusts

Question 1

What is a trust?

Answer 1

A trust is a fiduciary relationship in which a trustee holds legal title to specific property and the designated beneficiaries hold equitable title.

Question 2

What are the trustees duties?

Answer 2

Fiduciary duties to

• Deal with the property with reasonable care
• Maintain the utmost degree of loyalty
• Be personally responsible if their conduct falls beneath the required standards

Question 3

Define settlor

Answer 3

The person who causes the trust to come into existence

Question 4

What are the purposes and uses of trusts

Answer 4

• Providing for and protecting trust beneficiaries
• Flexibility of asset distribution
• Protection against settlor’s incompetence
• Professional management of property
• Probate avoidance
• Tax benefits

Question 5

What are express trusts?

Answer 5

Trusts created by the express intention of the settlor

Question 6

What are the types of express trusts

Answer 6

Private trusts- private beneficiaries who are an ascertainable class of people

Charitable trusts- Charitable beneficiaries (indefinite class or people or general public)

Question 7

What are the types of trusts created by operation of law?

Answer 7

Resulting trusts- Arise from the presumed intention of the owner of the property

Constructive trusts- An equitable remedy used to prevent unjust enrichment

Question 8

What are the five elements of a valid trust?

Answer 8

• Intent
• Identifiable corpus (that the settlor currently owns)
• Ascertainable beneficiaries
• Proper purpose
• Mechanics and formalities

Question 9

What is required to have valid intent to create a trust?

Answer 9

• A settlor with capacity to convey
• A present intent to create a trust relationship
• A competent trustee with duties
• A definite beneficiary
• The same person cannot be the sole trustee and the sole beneficiary

Question 10

What are precatory expressions?

Answer 10

Statements by the settlor of hope, wish, or suggestion for how property be used

Ex: I hope you will use this money to pay for your college tuition

Question 11

Do precatory expressions create a trust?

Answer 11

There is an inference that they do not. The settlor must impose a legal obligation on the transferee, not merely a moral one

Question 12

Define qualified beneficiary

Answer 12

Someone who, on the date the beneficiary’s qualification is determined is

• A current beneficiary OR
• A first-line remainderman (one who would become eligible to receive distributions were the event triggering the termination of a beneficiary’s interest or of the trust itself to occur on the qualification date

Question 13

What is disclaimer and what is required to disclaim?

Answer 13

• Disclaimer is saying that you don’t want a trust
• In most states you disclaim by filing a written instrument with the trustee
• If a valid disclaimer is made, the trust is read as though the person who disclaimed was dead on the relevant date

Question 14

Are class gifts permissible?

Answer 14

Class gifts are permissible if the class is reasonably definite- the trustee can determine who belongs to the class

(Gift to “my children” ok, gift to “my friends” not)

Question 15

What purposes will make a trust invalid?

Answer 15

• Illegality
• Contrary to public policy
• Impossible to achieve
• Intended to defraud the settlor’s creditors or based on illegal consideration

Question 16

What happens if a trust has a condition attached to an interest that is against public policy?

Answer 16

• The settlor’s alternative desires control if they were expressed
• If the illegal condition is a condition subsequent, the condition is invalidated but the trust remains valid
• If the illegal condition is a condition precedent, the preferred view is to hold that the settlor’s wish would be to void the beneficiary’s interest altogether if the condition is unenforceable

Question 17

How does a person accept trusteeship?

Answer 17

• Signing the trust or a separate written acceptance
• Substantially complying with the acceptance terms in the trust instrument OR
• Accepting delivery of trust property, exercising powers or performing duties as trustee, or indicating acceptance

Question 18

What are the grounds for removing a trustee?

Answer 18

• A serious breach of trust
• Serious lack of cooperation
• Unfitness, unwillingness, or persistent failure to administer
• A substantial change in circumstances

Question 19

Is a writing required for a trust of land?

Answer 19

Yes- Statute of Frauds applies

But if no writing, an otherwise invalid oral trust of land may be enforced by imposing a constructive trust

Question 20

Can pour-over property be initial trust funding?

Answer 20

Yes, if

• The trust is identified in the will AND
• The trust is executed before the testator’s death

Question 21

Define secret trust

Answer 21

The settlor agrees with a will beneficiary that the beneficiary will hold the property in trust for someone else - and relies on the beneficiary’s promise - but the will does not state the trust nature of the gift

Question 22

What standard is required to prove the existence of a secret trust?

Answer 22

Clear and convincing evidence

Question 23

What is a semi-secret trust?

Answer 23

The will makes a gift in trust but fails to name the beneficiary. The gift fails and the named trustee holds the property in a resulting trust for the testator’s successors in interest

Question 24

Can you transfer your interest in a trust?

Answer 24

Yes, as long as there are not restrictions in statutes or in the trust instrument

Question 25

What is a discretionary trust?

Answer 25

The trustee is given discretion whether to apply or withhold payments of income or principal (or both) to the beneficiary

Question 26

What is a spendthrift trust?

Answer 26

It precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust, and the beneficiary's creditors are precluded from reaching it to satisfy their claims

Question 27

Can a settlor use a spendthrift trust to protect their own assets?

Answer 27

In most states no, but a growing number of states are allowing self-settled spendthrift trusts called domestic asset protection trusts (DAPT)

Question 28

Are support trusts assignable?

Answer 28

No

Question 29

If a support trust is silent, what standard of living should be provided for the beneficary?

Answer 29

The beneficiary's accustomed standard of living

Question 30

How can the beneficiaries revoke a trust if they have the settlor's consent?

Answer 30

ALL beneficiaries and the settlor must consent

Question 31

How can the beneficiaries revoke a trust without the settlor's consent?

Answer 31

If ALL beneficiaries consent (including future and un-ascertained beneficiaries) AND no material purpose of the trust would be frustrated

Question 32

When can the court terminate a trust?

Answer 32

* If the trust could have been terminated with the consent of all of the beneficiaries and the interests of any non-consenting beneficiaries will be adequately protected * Unanticipated circumstances threaten the purpose of the trust * Continuation of the trust on its existing terms if impracticable or wasteful * The value of the trust is insufficient to justify the cost of administration or to achieve the settlor's tax objectives

Question 33

What is the amount under which some states will deem a trust uneconomic?

Answer 33

$50k

Question 34

If co-trustees cannot reach a unanimous decision, what standard is required for action?

Answer 34

In most states, they can act by majority agreement

Question 35

What are the trustee's duties?

Answer 35

* Duty to administer trust * Duty of loyalty * Duty to report

Question 36

What does a trustee's duty to report include?

Answer 36

* Given qualified beneficiaries their name, address, and phone number * Respond to beneficiary requests for information about the trust's administration and provide a copy of the trust instrument if requested * Furnish an annual accounting of the trust

Question 37

What act governs the trustee's investment responsibilities?

Answer 37

The Uniform Prudent Investor Act

Question 38

Under UPIA, what is the standard of care the trustee must exercise in investments?

Answer 38

The trustee must exercise reasonable care, skill, and caution when investing and managing trust assets

Question 39

Are trust investments evaluated individually or overall?

Answer 39

Overall

Question 40

Are trustee's with special skills/experience held to a higher standard of care?

Answer 40

Yes

Question 41

Is socially conscious investing permissible?

Answer 41

Only if the returns are the same as investing “traditionally” (in big oil etc)

Question 42

Can the trustee delegate the investment and management functions?

Answer 42

Yes, if they act prudently in doing so and periodically review the agent's actions

Question 43

Who is the trustee liable to?

Answer 43

The beneficiary

Question 44

What is the trustee's liability for breach of trust?

Answer 44

Whichever is greater of these options * The amount necessary to restore the trust property and distributions to what they would have been absent the breach * The trustee's profits from the breach

Question 45

What are the beneficiary's options if the trustee engages in self-dealing?

Answer 45

* Affirm the transaction (if the trust profited) * Set aside the transaction (if the trust lost money) * Trace profits from the trustee (if the trustee profited)

Question 46

When are exculpatory clauses void?

Answer 46

If they * Relieve the trustee of liability for breach of trust committed in bad faith or with reckless indifference OR * Appear in the trust instrument because of the trustee's abuse of a confidential relationship with the settlor

Question 47

When can a court remove a trustee?

Answer 47

* Request of beneficiary * Request of settlor * Request of a co-trustee * Of the court's own volition

Question 48

Can you sue the trust?

Answer 48

No- it isn't a legal entity. You can sue the trustee in their fiduciary capacity though

Question 49

What are income receipts

Answer 49

* Ordinary receipts from use or investment of trust property (rents, interest) * Cash dividends * Proceeds from contract insuring trustee against loss * 10% of payment from a deferred compensation plan (pension plan) unless otherwise characterized * 10% of proceeds received from a liquidating asset (ex patents, copyrights) * 10% of proceeds received from a working interest (ex oil and gas interests)

Question 50

What are income expenses?

Answer 50

* 50% of regular compensation of the trustee and any 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 51

What are principal receipts?

Answer 51

* Extraordinary receipts (ex 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 (ex pension plan) unless otherwise characterized * 90% of proceeds received from a liquidating asset (patents, copyrights)

Question 52

What are principal expenses?

Answer 52

* 50% of all regular compensation of the trustee and any 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 53

What is distinct about a charitable trust?

Answer 53

* It must have indefinite beneficiaries * It may be perpetual- rule against perpetuities does not apply * Cy pres applies

Question 54

Cy pres

Answer 54

Means as near as possible. If a charitable trust's purpose cannot be carried out as written, the court may select an alternative under the doctrine of cy pres by ascertaining the settlor's original purpose

Question 55

What is a resulting trust?

Answer 55

A trust that arises from implication of the settlor's conduct

Question 56

When does a resulting trust arise?

Answer 56

The settlor has conveyed property to a trustee under an express trust and * The trust is void or unenforceable OR * The beneficiary is dead or cannot be located A resulting trust also arises in favor of the settlor when the trust purpose is fully satisfied and some trust property remains

Question 57

What is a constructive trust?

Answer 57

Not really a trust, but a flexible equitable remedy to prevent unjust enrichment resulting from wrongful conduct