Trusts

Question 1

Cy Pres Doctrine

Answer 1

Applies when a specific charitable purpose indicated by the settlor is no longer possible or practical, and the settlor manifested a general charitable intent (under UTC, general charitable intent presumed)

The court can direct the trust property to be applied to another charitable purpose as close as possible to the original one

Question 2

Creditors’ Rights in Discretionary Trust

Answer 2

In the absence of statutory prohibition or spendthrift clause, beneficiary’s interest can be reached to satisfy claims of creditors.

But before trustee exercises discretion to make payments to beneficiary, beneficiary has no interest for creditors to reach.

Creditors usually allowed to attach the beneficiary’s interest but may not compel distribution (except for spousal/child support)

Question 3

What happens when a trust or portion of a trust fails for lack of a beneficiary (or sufficiently definite beneficiary)?

Answer 3

resulting trust in favor of the settlor or settlor’s successors in interest

Question 4

Elements of a valid trust

Answer 4

(i) settlor with capacity to convey
(ii) a present intent to create a trust relationship
(iii) a competent trustee with duties
(iv) a definite beneficiary
(v) the same person is not the sole trustee and sole beneficiary

Question 5

What is the requisite intent to create a trust?

Answer 5

intent to split the legal and equitable title and to impose enforceable duties on the holder of the legal title (manifested at time settlor owned the property)

must intend trust to take effect immediately – promise to create trust in future is not enforceable unless binding contract

Question 6

Requirements for definite beneficiaries

Answer 6

Must be ascertainable when they are to benefit, but don’t need to be ascertainable when trust created

May be a class, as long as class is sufficiently definite. Settlor can give trustee discretion to select class members as long as the class is reasonably definite. If too broad, trust (or portion) is invalid

Question 7

What is a valid trust purpose?

Answer 7

Generally any purpose as long as it’s not:

• illegal
• contrary to public policy
• impossible to achieve
• intended to defraud the settlor’s creditors or based on illegal consideration

Question 8

definition of Rule Against Perpetuities

Answer 8

a nonvested property interest is invalid unless it is certain to vest or fail no later than 21 years after the death of a person who is alive when it is created

Question 9

Grounds for removal of a trustee

Answer 9

1. serious breach of trust
2. serious lack of cooperation among co-trustees
3. unfitness, unwillingness, or persistent failure to administer
4. a substantial change in circumstances

Question 10

mechanics and formalities for inter vivos trust

Answer 10

1. declaration of trust (settlor is trustee) OR
2. (i) transfer or conveyance in trust and (ii) delivery of property to trustee

writing only required for land (unless part performance), but oral trusts established only by C+CE

Question 11

Definition of support trust

Answer 11

A support trust is one that directs the trustee to pay only so much of the income or principal as is necessary for the beneficiary’s support

notes:

• may be mandatory or discretionary
• beneficiary’s interest not assignable

Question 12

secret v. semi-secret testamentary trust

Answer 12

secret trust: absolute gift in will made in reliance on beneficiary’s promise to hold the property in trust for another, must prove promise by C+CE and constructive trust will be imposed

semi-secret trust: gift in will to a person “in trust,” but does not name trust beneficiary, gift fails and trustee holds property in resulting trust for testator’s successors in interest

Question 13

Beneficiary’s right to payment in discretionary trust

Answer 13

no enforceable right to payment; beneficiary can’t interfere with exercise of trustee’s discretion unless trustee abuses their power

Question 14

definition of spendthrift trust

Answer 14

A trust that precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust

notes:

• most states still don’t allow self-settled spendthrift trusts
• can’t protect from orders for child/spousal support

Question 15

When can/will a trust be terminated or modified?

Answer 15

1. will terminate automatically upon expiration of term specified in instrument
2. by settlor unless terms expressly states irrevocable
3. upon consent of settlor and all beneficiaries even if conflicting with material purpose
4. upon consent of all beneficiaries if no frustration of material purpose (spendthrift is material purpose)
5. by operation of law (i.e. property exhausted or titles merged)
6. by the court (if trust could’ve been modified if all Bs consented and nonconsenting Bs’ interest is protected)
7. by trustee (i.e.,if uneconomic - less than 50k and insufficient to justify cost of admin.)

note:

• for consent of beneficiaries, look to see if all beneficiaries are in being and able to consent
• most states don’t allow guardian to consent to termination on behalf of unborn beneficiary

Question 16

sources of trustee’s power

Answer 16

• powers expressly conferred upon them by terms of the trust (controlling)
• powers granted by state law
• implied powers that are appropriate to achieve the proper investment, management, and distribution of the trust property

Question 17

discretionary powers and their limits

Answer 17

• powers that the trustee may or may not perform, as the trustee determines in their judgment to be the most appropriate
• must exercise in good faith
• will be liable for abuse of discretion or complete failure to exercise
• grant of absolute or uncontrolled discretion is still reviewable, but a court is unlikely to intervene

Question 18

duties of the trustee

Answer 18

• duty to administer trust - in good faith and in a prudent manner in accordance with terms and purpose of the trust and the interests of beneficiaries
• duty of loyalty - can’t enter into any transaction in which trustee is dealing with trust in individual capacity (good faith and actual benefit to the trust are irrelevant)
• duty to report - respond to requests for information and send annual accountings
• duty to separate trust property and keep records
• duty to enforce claims and defend trust from attack
• duty to preserve trust property and make it productive

Question 19

When is a self-dealing transaction not voidable by the beneficiaries?

Answer 19

(1) a court or the the terms of the trust approved it; (2) the beneficiary failed to bring suit within the prescribed time period; (3) the beneficiary gave their consent, ratification, or release; or (4) in involves a contract or claim arising before the trustee became trustee

Question 20

What is the typical standard of care for the trustee’s investments?

Answer 20

the prudent investor rule: a trustee must exercise reasonable care, skill, and caution when investing and managing trust assets

• prudence is evaluated in the context of the entire trust portfolio and investment strategy
• any kind of property or investment permitted
• must diversify unless reasonably determines purposes of the trust better served without diversification
• trustee with special skills or expertise has a duty to use them
• lower skills will not excuse breach
• must be impartial towards beneficiaries in investing and managing assets

Question 21

factors considered in making investment decisions

Answer 21

• general economic conditions
• possible effect of inflation or deflation
• expected tax consequences of investment decisions or strategies
• role that each investment plays within overall portfolio
• expected total return from income and expected appreciation of capital
• other resources of the beneficiaries
• needs for liquidity, regularity of income, and preservation or appreciation of capital
• asset’s special relationship or value to the purposes of the trust or to the beneficiaries

Question 22

When is the delegation of investment and management functions proper, and what is the effect of proper delegation?

Answer 22

A trustee may delegate investment and management functions if a prudent trustee of comparable skills could properly delegate under the circumstances. The trustee must act prudently in:

• selecting an agent
• establishing the scope and terms of the delegation; and
• periodically reviewing the agent’s actions

If delegation is proper, the trustee is not liable to the beneficiaries for the decisions or actions of the agent

Question 23

What are the possible remedies for breach of trust?

Answer 23

(1) enforce specific performance of the trustee’s duties; (2) enjoin the trustee from committing a breach of trust; (3) compel the trustee to pay money or restore property; or (4) suspend or remove the trustee

Question 24

What damages does the trustee owe to the beneficiaries for a breach?

Answer 24

(1) the amount necessary to restore the trust property and distributions to what they would have been absent the breach, or (2) the trustee’s profit from the breach

Question 25

What are the remedies for self-dealing?

Answer 25

(1) affirm the transaction if the trust profited; (2) set aside the transaction if the trust lost money; or (3) trace profits from the trustee if the trustee profited

Question 26

When is the trustee not liable for breach?

Answer 26

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

Question 27

When are exculpatory clauses void?

Answer 27

Exculpatory clauses are **void** if they: (1) relieve the trustee of liability for breach of trust committed in **bad faith** or with **reckless indifference**; or (2) appear in the trust instrument because of the trustee’s **abuse of a confidential relationship** with the settlor (unless the trustee can show that the clause is fair and was adequately communicated to the settlor)

Question 28

When is a trustee not liable for the acts of co-trustees?

Answer 28

Generally, a trustee will not be liable for the acts of co-trustees if the trustee did not join in the action **and** exercised reasonable care in preventing the breach of trust or compelling the co-trustee to redress the breach.

Question 29

When may a court remove a trustee?

Answer 29

When the trustee's continuation in office would be detrimental to the trust (e.g., incapacity, unfitness, commission of serious breach of trust, serious conflict of interest, insolvency, etc.)

Question 30

When may a third party sue a trustee personally?

Answer 30

A third party may sue the trustee **personally** only if the trustee, in entering into the contract, failed to reveal the fiduciary relationship either by indicating their role as trustee in their signature or by referring to the trust. \*still entitled to indemnification or reimbursement from trust property if contract properly entered into for trust and trustee not in breach

Question 31

What is the effect of an improper transfer of trust property to a third party?

Answer 31

* If not BFP, beneficiary or successor trustee can set aside transactions * if BFP, cuts off the beneficiaries' equitable interests * knowing participant in breach of trust is liable for the resulting loss to the trust estate

Question 32

When is a direct suit by beneficiaries permitted against third parties?

Answer 32

Direct actions by beneficiaries against third parties are permitted where the trustee: (1) participated in the breach, (2) has left the jurisdiction and no successor trustee is appointed, or (3) fails to sue a third person liable in tort or contract.

Question 33

What is the trustee's adjustment power?

Answer 33

The adjustment power is the trustee's power to reallocate investment portfolio return if appropriate or necessary to carry out the trust purposes. The trustee must follow traditional trust accounting rules in distributing interest and dividend income, etc. But if by distributing income the trustee is unable to comply with the requirement that all beneficiaries be treated fairly, trustee may adjust between principal and income to the extent necessary

Question 34

What factors must the trustee consider in deciding whether and to what extent to to exercise the adjustment power?

Answer 34

(1) the nature, purpose, and expected duration of the trust; (2) the intent of the settlor; (3) the identity and circumstances of the beneficiaries; (4) the needs for liquidity, regularity of income, and preservation and appreciation of capital; (5) the nature of the trust's assets; (6) the net amount allocated to income under the other sections of the Act and the increase or decrease in the value of the principal assets; (7) whether and to what extent the trust gives or denies the trustee the power to invade principal or accumulate income; (8) the actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation; and (9) the anticipated tax consequences of an adjustment

Question 35

Allocating receipts under the UPAIA

Answer 35

income * ordinary receipts from use or investment of trust property (e.g., rents, interest) * cash dividends * proceeds from contract insuring trustee against loss * 10% of payment from a deferred compensation plan (e.g., pension plan), unless otherwise characterized * 10% of proceeds received from a liquidating asset (e.g., patents, copyright) * 10% of proceeds received from a working interest (e.g., oil and gas interests) principal * extraordinary receipts (e.g., proceeds from sale of trust assets) * stock dividends * proceeds from life insurance policy naming trust or trustee as beneficiary * 90% of payment from deferred compensation plan * 90% of proceeds received from a liquidating asset * 90% of proceeds received from a working interest

Question 36

Allocating expenses under the UPAIA

Answer 36

Income * 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 Principal * 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 * 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 37

In what ways do the rules for charitable trusts differ from private trusts?

Answer 37

must have indefinite beneficiaries, may be perpetual, and cy pres applies

Question 38

Who can bring a suit to enforce a charitable trust?

Answer 38

the settlor, a qualified beneficiary, or the state's attorney general

Question 39

Honorary trusts (purpose trusts)

Answer 39

An honorary or purpose trust is a trust that is not for a charitable purpose and has no private beneficiaries. * commonly established for the benefit of pets or for the maintenance of burial places * under common law, no beneficiary to enforce, so trustee is on their honor to carry out terms * under UTC, trust enforceable by someone named in trust instrument or appointed by court

Question 40

What is a resulting trust?

Answer 40

A resulting trust involves a reversionary interest and is based on the presumed intent of the settlor. It arises by implication from the settlor's conduct

Question 41

What are the three types of resulting trust?

Answer 41

(1) purchase money resulting trusts; (2) resulting trusts arising on failure of an express trust; and (3) resulting trusts arising from an incomplete disposition of trust assets

Question 42

Who are the beneficiaries of resulting trust?

Answer 42

the settlor and their successors in interest

Question 43

What gives rise to a resulting trust on failure of express trust?

Answer 43

where a settlor has conveyed property to a trustee under an express trust and (1) the trust is void or unenforceable or (2) the beneficiary is dead or cannot be located

Question 44

Purchase Money Resulting Trusts

Answer 44

A purchase money resulting trust is **presumed** whenever X (the “beneficiary”) furnishes the consideration (usually money, but any other valuable consideration suffices) for the acquisition of real or personal property but, with X’s consent, title is taken in the name of Y (the “trustee”). * Y can rebut by showing that no trust was intended (e.g., payment was a gift or loan or satisfaction of a debt) * gift presumed when close personal relationship

Question 45

Constructive trusts

Answer 45

A constructive trust is not really a trust but rather is a **flexible equitable remedy** to prevent **unjust enrichment** resulting from **wrongful conduct**, such as fraud, undue influence, or breach of a fiduciary duty. * turns holder of legal title into trustee * only duty is to convey the property to the person who would have owned it but for the wrongful conduct * must be requested as a remedy, facts proven by C+CE

Question 46

When does a breach of promise lead to a constructive trust?

Answer 46

* fraudulent promise * breach of promise by one in confidential relationship * breach of promise by the decedent to devise property to one rendering services in reliance thereon (unless damages adequate) * breach of promise to the debtor by the buyer at a foreclosure sale to hold the property for the debtor, causing the debtor to forego bidding (unless damages adequate)