trusts

Question 1

What in the fuck even is a trust, anyway?

Does RAP apply?

Answer 1

a MANAGEMENT DEVICE that features a BIFURCATED TRANSFER:

the TRUSTEE (manager of the trust) holds LEGAL title, while the BENEFICIARY holds EQUITABLE title.

the beneficiary has the power to ENFORCE THE TRUST INSTRUMENT, i.e., they can sue to challenge the trustee’s decisions, because it’s her property.

RAP APPLIES

Question 2

What is the difference between the principal of a trust and income of a trust?

Answer 2

principal: original trust property and any increase in value
income: money invested by the trust

Question 3

When can a revocable trust be revoked? An irrevocable trust?

When is a trust revocable v. irrevocable?

Answer 3

revocable trust can be revoked at any time DURING SETTLOR’S (creator’s) LIFE!

irrevocable trust can NEVER be revoked!

IS IT IRREVOCABLE?

• -majority rule: PRESUMED IRREVOCABLE unless trust documents say otherwise
• -Uniform Trust Code (UTC) reverses: PRESUMED REVOCABLE unless docs say otherwise

Question 4

What is the difference between a mandatory trust, a discretionary trust, and a remedial trust?

Answer 4

MANDATORY: trustee MUST MAKE DISTRIBUTIONS from trust

DISCRETIONARY: trustee MAY MAKE DISTRIBUTIONS at her discretion

REMEDIAL: a remedy created by law, trustee’s only power is to TRANSFER THE PROPERTY

Question 5

What are the two types of express trust?

Answer 5

Private express trusts and charitable trusts (a.k.a public express trusts)

Question 6

What is required to create a private express trust?

Answer 6

1) INTENT
2) TRUST RES (the property)
3) TRUST PURPOSE
4) BENEFICIARIES

Question 7

What is required to satisfy the intent element of a private express trust?

are oral trusts valid?

what’s the effect of “precatory language” (hope/wish)?

What’s the difference between a trust and a gift?

Answer 7

TRUST WORDS: “in trust,” “for the benefit of”

ORAL TRUSTS:

• -minority view: must be in writing
• -majority: trust can be oral EXCEPT, must be written if:
  a) SOF (conveying real property)
  b) a devise (trust created by a will)

PRECATORY LANGUAGE:

• -expressing donor’s hope or wish that the property is used in certain ways, that doesn’t create a trust
• -same goes for ambiguous language

TRUST V. GIFT:
–trust has a bifurcated transfer, that’s the key! three people/parties

Question 8

What does it mean that property (res) is a required element of a trust?

Answer 8

NO TRUST without some property in it

otherwise it would be an EMPTY trust

only exception: POUR-OVER TRUST
–will pours property into the trust

Question 9

What is required of element #3, a trust purpose?

Answer 9

VERY BROAD: trust is valid if:

NOT ILLEGAL, and

NOT CONTRARY TO PUBLIC POLICY

Question 10

What is required of element #4, beneficiaries?

Answer 10

must be an ASCERTAINABLE beneficiary
–either specific person or some CRITERION to determine person

EXCEPTIONS:

1) unborn children
- -it’s okay to write “and to X’s kids” even though they don’t exist

2) class gifts (class must be definite though)
3) charitable trusts

Question 11

What is required of a charitable trust?

Does the rule against perpetuities apply?

Answer 11

CHARITABLE PURPOSE: anything “benefiting the community at large or a particular segment of the community”
–modern trend is to find one, super broad

RAP doesn’t apply

Question 12

What is the cy pres doctrine in regard to trusts?

Answer 12

court can MODIFY a trust if its charitable purpose is NO LONGER POSSIBLE

need a GENERAL CHARITABLE PURPOSE that is as close to original as possible

RST and UTC PRESUME a general charitable purpose

if there isn’t one, it goes back to settlor via RESULTING TRUST

Question 13

How does one create an express trust?

Answer 13

INTER VIVOS TRANSFER:

• -declaration of trust: settlor is the trustee
• -deed of trust: settlor conveys property to trustee

TESTAMENTARY TRANSFER:
–created according to terms of will

Question 14

What is a remedial trust?

What are the two types?

Answer 14

Generally:

• -not driven by intent, but rather an equitable remedy
• -passive in nature, trustee’s only duty is to convey the property back to the settlor

two types:

1) RESULTING trust
2) CONSTRUCTIVE trust

Question 15

What is a resulting trust?

Where does the property go?

What is a purchase-money resulting trust?

How can a resulting trust be avoided?

Answer 15

used when trust FAILS

property RETURNS TO SETTLOR/his estate

purchase-money resulting trust:

• -A buys property but title is taken in B’s names
• -rule: if B is not the NATURAL OBJECT (i.e., not a CLOSE FRIEND OR RELATIVE), court will create a purchase-money resulting trust

to AVOID resulting trust:
–create a GIFT OVER CLAUSE: if trust fails (like it was supposed to go to kids that were never born), remaining property should go to XYZ

Question 16

What is a constructive trust?

Answer 16

remedy used to prevent unjust enrichment if a THIRD PARTY takes advantage of settlor

need WRONGFUL CONDUCT, DIRECTED TOWARD settlor that CAUSES him to create trust

look for:

• -fraud
• -duress
• -breach of duty
• -undue influence
• -slayer rule etc

Question 17

What rules govern the alienability (transferability) of a trust?

Answer 17

1) beneficiary’s equitable interest is FREELY ALIENABLE
- -exception: trust or statute limits that right
- -creditors can generally reach the beneficiary’s interest

2) creditor CANNOT reach trust principal or income UNTIL such amounts BECOME PAYABLE to beneficiary OR until beneficiary can DEMAND IT.

Question 18

What’s the point of an asset protection trust?

What are the three kinds of asset protection trusts?

Answer 18

point: SHIELD BENEFICIARIES FROM CREDITORS

1) support trust: beneficiary CANNOT DEMAND payment
- -creditors can only reach the money when trustee makes a SUPPORT PAYMENT

2) discretionary trust: beneficiary CANNOT DEMAND payment
- -only when payment is made can creditors reach

3) SPENDTHRIFT TRUST: EXPRESSLY RESTRICTS beneficiary’s power to alienate her interest
- -creditors cannot reach property until trustee makes a payment
- -exceptions: these creditors CAN reach the trust property:
a) spousal/child support
b) those providing basic necessities to beneficiary,
c) holders of tax liens

Question 19

What are the three ways to terminate a trust?

What ability does a settlor have to terminate a trust?

Answer 19

1) EXPIRATION: an express trust can expire at the end of a STATED TERM (e.g., when my son turns 25)
2) MATERIAL PURPOSE SATISFIED: if the trust has been satisfied, it AUTOMATICALLY terminates (e.g., purpose is to pay for medical school)

3) UNFULFILLED MATERIAL PURPOSE DOCTRINE (Claflin)
- -if (a) settlor is dead, (b) beneficiary wants to terminate trust prematurely, and (c) trustee opposes termination:
- -trustee CAN BLOCK TERMINATION is trust is STILL SERVING SOME MATERIAL PURPOSE

Settlor’s power:

1) can unilaterally terminate IF HE EXPRESSLY RESERVED THAT RIGHT
2) if did not expressly reserve, settlor can still terminate if ALL BENEFICIARIES CONSENT.

Question 20

How can a trust be modified?

Answer 20

IF SETTLOR IS STILL ALIVE:

1) he can UNILATERALLY modify if he EXPRESSLY RESERVED that right
2) if he did not reserve it, ALL BENEFICIARIES MUST CONSENT and the change MUST NOT INTERFERE with PRIMARY PURPOSE of trust

IF DEAD SETTLOR:

1) all beneficiaries can agree to a modification CONSISTENT WITH PURPOSE; or
2) an unforeseen event that has FRUSTRATED the purpose of the trust can result in modification

NB: trustee CANNOT modify or terminate unilaterally

Question 21

How can I remove a shitty trustee that I fucking hate?

Can a trustee resign?

Answer 21

Generally, when he has breached a FIDUCIARY DUTY or GROSSLY MISMANAGED the property.

• incapable of performing duties
• material breach of duty
• conflict of interest
• serious conflict between trustee and beneficiary
• persistently bad trust performance because of trustee’s actions

trustee can resign with WRITTEN NOTICE, IF SETTLOR IS ALIVE, to beneficiaries and co-trustees

Question 22

How should a trustee balance the interests of multiple beneficiaries when they have different interests?

Answer 22

OLD RULE:

• life beneficiary got the INCOME
• holder of remainder interest got the PRINCIPAL

MODERN RULE: flexible

• governed by Uniform Principal and Income Act (UPAIA)
• focus on TOTAL RETURN of trust portfolio
• allocations must be reasonable
• factors trustee should consider:
  a) intent of settlor/language of docs
  b) nature, duration, and purpose of trust
  c) identities and circumstances of beneficiaries
  d) anticipated effect of economic conditions
  e) anticipated tax consequences

Question 23

How do I know what a trustee’s powers are?

Answer 23

FIRST, look to DOC

if silent:

modern trend: give trustee all powers NECESSARY to act as a REASONABLY PRUDENT person (sale, leasing, taxes, sever, consolidation, etc)

Question 24

What are the duties of a trustee?

What standard are these measured on?

What’s the rule on self-dealing?

Conflicts of interest?

Trustee’s special skills?

Delegation?

Investments?

Answer 24

DUTY OF LOYALTY

• OBJECTIVE standard: did trustee act reasonably?
• self-dealing: automatic breach of duty, NO FURTHER INQUIRY
• if self-dealing is allowed under terms, must be REASONABLE
• Conflicts of interest may breach duty, assessed under REASONABLE and GOOD FAITH test

DUTY OF CARE

• SUBJECTIVE standard: did he act in good faith?
• must take care that person of ORDINARY PRUDENCE would practice in care of his own estate
• special skills lead to heightened standard
• delegation: old rule says no, new rule PERMITS it
• investments: old rule said only xyz investments but new rule says be a PRUDENT INVESTOR (=DIVERSIFY)

Question 25

What are the three questions you should be asking yourself regarding future interests?

Answer 25

1) who is entitled to possession now? 2) who has the future interest? 3) when, if ever, will that future interest vest?