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280 Cards in this Set
- Front
- Back
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What is a settlor?
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A settlor is the the creator of a trust
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In creating a trust, what is the 'delivery requirement'?
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For an inter vivos trust naming a third party as trustee, delivery of the corpus is necessary to create the trust. (I.e., if you die before you deliver, no trust.)
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Can you have a trust if the property named by the trust is not specific or certain?
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No. The subject matter of the trust property must be certain and ascertainable.
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What are the competency requirements of a settlor? Of a trustee?
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They must have the ability to enters contracts regarding the property (over 18, etc)
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What is a 'testamentary trustee'?
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A trustee named in a will
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Is a bond required to become a trustee?
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No, unless the trust says otherwise.
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For a noncharitable trust to be valid, what must be true of the beneficiaries?
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They much be definite and ascertainable
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For a noncharitable trust to be valid, must it pass the Rule Against Perpetuities?
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Yes, the interests of the beneficiaries must vest (if ever) within the Rule Against Perpetuities.
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For a charitable trust to be valid, must the beneficiaries be definite and ascertainable?
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No, in fact, they must NOT be definite and ascertainable
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For a charitable trust to be valid, must the interest vest within the Rule Against Perpetuities?
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No. The RAP only applies to noncharitable trusts
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In Va, when can oral trusts be valid?
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If proven by clear and convicting evidence.
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In the creation of a trust, what does it mean to 'distinguish mandatory language from precatory language'?
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i. To create a valid trust, the settlor must intend to do so using mandatory language, as opposed to intending to create a gift or lien
ii. Precatory language: language giving non-binding suggestions rather than an enforceable duty (e.g., 'It is my wish that the money go to Sue to pay her son's school expenses') |
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Will the following language be valid for creating a trust?
“It is my wish and desire that Sue use a portion of the money I have given her to pay her son’s educational expenses.” |
No, this is mere precatory language
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Will the following language be valid for creating a trust?
“This money is for the use and benefit of Gary.” |
Yes, this is mandatory (not precatory) language. Note that the word 'trust' isn't needed to create a trust.
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In Va, to create a trust, must you use the word 'trust' in the declaration?
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No. You just need to give clear intent to create a trust.
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If a trust is created with unlawful conditions, how is the trust treated?
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The conditions are unenforceable, and the property is distributed as though the conditions were met.
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What is the language of the Rule Against Perpetuities? How does it work?
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'No future interest is good unless it must vest, if it does vest, within 21 years after some life in being at the creation of the interest.'
--Meaning: When the last life in being dies, the clock starts. If it is possible for the interest still not vest for 21 years, then the rule is violated, and the entire interest is invalidated. |
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For the purposes of the Rule Against Perpetuities, who is a 'life in being'?
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Life in being: Anyone alive when a future interest is created (i.e., at the testator’s death) whether or not the person has an interest in the estate
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What is the Uniform Statutory Rule Against Perpetuities? Has Va adopted it?
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Va has adopted USRAP, which says:
a. If the interest is valid under the RAP, then it is valid. b. Otherwise, the court will “wait and see” for 90 years from the creation of the interest. If during that time, the interest actually vests, then it’s ok. If it not, the interest is voided. |
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Timing: How long is the 'wait and see period' under USRAP?
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90 years
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In a trust for personal property, can the trust instrument declare that the rule against perpetuities does not apply?
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Yes. This is a special exception or personal property trusts
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<u>Model Answer for a RAP Question:</u>
Since the settlor/testator did not specify that the Rule Against Perpetuities shall not apply to any personal property in the trust (which is permitted under Va law), the Rule does apply. Under the CL Rule, the remainder is void because it might vest remotely. For example, [tell a story where the Rule is violated]. Since this story is theoretically possible, the remainder would vest beyond the life in beings plus 21 years. However, Va has created the Uniform Statutory Rule Against Perpetuities. Under this rule, an interest is valid if it actually vests or terminates within 90 years of the interest’s creation. The court would ‘wait and see’ for 90 years, and in all likelihood, the interest would vest within that period. If it did, it would thus be valid under the Uniform Rule. [NO BACK TO THIS CARD] |
[Just review the front.]
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By default, is an inter vivos trust revocable by the settlor?
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Yes.
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When can a conservator/guardian/agent revoke a revocable intervivos trust?
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They can revoke or amend a revocable trust only if either (1) expressly authorized by the trust OR (2) authorized by the ct for good cause shown
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What is the primary benefit of using a pour-over device?
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To avoid probate (i.e., taxes, expenses, time, etc)
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What is a 'pour-over trust'?
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An inter vivos trust that receives property (usually the residual estate) from a will upon the testator’s death
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What is a 'pour-over will'?
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A will giving money over to an existing trust
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What is a self-declaration of trust?
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Typically: Settlor retains income for life and the power to revoke, and upon incapacitation or death, a new trustee steps in. This can be useful to avoid costly administrative proceedings on incapacitation.
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Timing: How long does a party have to contest a revocable trust?
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Within the earlier of
a. Two years after the settlor’s death, OR b. Six months after the trustee sent the person a copy of the instrument |
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Why might a settlor, in creating a trust, have an incentive to sent a copy of the trust instrument to those affected by the trust?
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That notification triggers the limitations period (contest must come within 6 months of notification), and the settlor will probably be live to explain things if it is contested.
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If a trustee knows of a pending judicial proceeding contesting the validity of the trust, can he still distribute trust assets?
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NO
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If a potential trust contestant notifies the trustee of a possible (but not-yet-pending) proceeding, is that enough to bar the trustee from distributing trust assets?
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The trustee is only barred if the proceeding in fact commences within 60 days of notification
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Will a beneficiary be liable for returning any distribution received that is later found invalid?
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Yes
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What makes a power of attorney 'durable'?
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It is “durable” if it contains language suggesting that the power is not affected if the principal becomes disabled or incapacitated.
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What does it mean for a trust to have a 'charitable purpose'?
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The trust must be for the relief of property, advancement of education or religion, promotion of health, governmental or municipal purpose, or other purposes beneficial to the community.
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What is the doctrine of 'cy pres,' and how does it relate to trusts and testamentary bequests?
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When the purpose can no longer be accomplished, it may be reformed in a judicial proceeding under the doctrine of cy pres (“as near as possible”)
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Hypo:
If you bequeath money to PETA in a will or trust, but PETA stops existing before you die, can the court find a suitable alternative organization? What is this called? |
Yes, under the doctrine of cy pres (“as near as possible”)
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Can a person set up a trust for pets who are not alive at the time the trust is made?
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Maybe. All that matters is that the pets must be alive during the <i>settlor’s lifetime</i>.
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If a trust is created for a pet, when does the trust terminate?
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On the pet's death
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If money is placed into trust for a pet, what is the money used for? What happens to leftover money?
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1) Money is used to care for the pets
2) Remainder goes back into estate (into intestacy) |
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Does the Rule Against Perpetuities apply to trusts for pets?
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Yes. All individuals named in the instrument can be used as “measuring lives”
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Can money be put in trust for care of cemetery plot or other cemetery structure? Does the RAP apply?
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Yes, such a trust is possible. No, the RAP doesn't apply to cemetery trusts.
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What is a constructive trust? Must they meet the requirements of an ordinary trust?
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a. These are NOT actually trusts but rather equitable devices meant to remedy a bad act (fraud, murder, willful breach of fid duty, etc).
b. These arise automatically and do not have to meet the requirements for a trust. |
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What circumstances will give rise to a constructive trust?
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If there is wrongful conduct and unjust enrichment that cannot be corrected without an equitable remedy, then the money can be placed into constructive trust.
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Hypo:
If an heir wrongly interferes with the ability of the testator to finalize a will that would have cut the heir out of the estate, what happens to the money directed to this evil heir? |
The money that would have gone to the heir can be placed into a constructive trust for the testator’s intended recipient.
(Since the will wasn’t finalized, and the slayer statute doesn’t apply, we can’t redirect the property under wills law, so we need an equitable remedy.) |
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What is a 'resulting trust'? Must they meet the requirements of an ordinary trust?
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i. A trust whose purpose can no longer be furthered will “result back” to the settlor or her estate
ii. These exist under operation of law, so they’re not really trusts and need not meet those requirements. |
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When land is purchased in the name of one person, and the purchase money is paid by another, is the presumption that the property is intended to be a gift? Can the payer demand title?
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The presumption is that the purchaser intended for a Purchase Money Resulting Trust (PMRT), such that he can demand the title back.
--The titleholder is thought of as a trustee, and the purchaser is the beneficiary. |
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How can the presumption of a resulting trust be rebutted?
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This presumption may be rebutted by clear and convincing evidence that the purchase was intended as a gift.
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What is a 'spendthrift trust'?
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A spendthrift trust is a trust (with all general requirements met) where the settlor adds a clause that restricts the ability of creditors to reach the estate. These are fully enforceable.
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What kind of trust contains a statement like the following?
<i>“No interest of any beneficiary shall be assignable by the beneficiary or subject to the claims of the beneficiary’s creditors by garnishment, attachment, or other legal process.”</i> |
A spendthrift trust
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In a spendthrift trust, can a creditor reach money once the money is distributed to the beneficiary?
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Yes, but creditors have to sue each time the beneficiary gets money out (they can’t use the more efficient remedy of garnishment).
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If a debtor is getting money from a spendthrift trust, can the creditor garnish the distributions?
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No: creditors have to sue each time the beneficiary gets money out (they can’t use the more efficient remedy of garnishment).
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In a spendthirft trust, can creditors reach the corpus of the trust in satisfaction of a debt by the beneficiary?
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Generally no. They can only get a beneficiary's money after it is distributed.
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Can a <b>settlor's</b> creditors reach the corpus of a spendthrift trust?
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The settlor’s creditors CAN reach the corpus IF the settlor himself could.
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If a trustee of a spendthrift trust is supposed to give a beneficiary a set amount each month, and the trustee doesn’t, can the beneficiary's creditors sue to have the money distributed so they can get at it?
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Yes
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In a spendthirft trust, can creditors reach the corpus of the trust in satisfaction of a debt for child support?
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Yes (this is an exception to the general rule that creditors cannot reach the corpus of a spendthrift trust)
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In a spendthrift trust, can creditors reach the corpus of the trust in satisfaction of a debt for legal fees associated with the protection of a beneficiary's interest?
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Yes (this is an exception to the general rule that creditors cannot reach the corpus of a spendthrift trust)
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In a spendthrift trust, can creditors reach the corpus of the trust in satisfaction of a debt for government claims, like taxes?
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Yes (this is an exception to the general rule that creditors cannot reach the corpus of a spendthrift trust)
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In a spendthrift trust, can creditors reach the corpus of the trust in satisfaction of a debt for public assistance reimbursements (e.g., emergency room bills)
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Yes (this is an exception to the general rule that creditors cannot reach the corpus of a spendthrift trust)
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In a spendthrift trust, can creditors reach the corpus of the trust in satisfaction of a debt for student loans?
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No
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Which of the following are NOT duties of a trustee?
a. Duty to act prudently b. Duty of impartiality (toward beneficiaries) c. Duty to protect trust property (insurance, etc) d. Duty to collect trust property and enforce/defend claims e. Duty to segregate trust property (from trustee’s property) f. Duty to keep adequate records g. Duty to keep beneficiaries reasonably informed h. Duty to furnish trust instrument (a copy of it) upon request of a beneficiary |
These are all duties of a trustee.
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Does a trustee have a duty to furnish annual reports to any beneficiaries who request it?
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Yes
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For irrevocable trusts created since July 1, 2006, what must a trustee do within 60 days of appointment?
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Trustee must notify beneficiaries of: the trust’s existence, who the settlor is, their right to request a copy of the instrument, their right to an annual report, and the trustee’s contact information.
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Can a trustee perform an action on the trust that benefits himself? What if it merely benefits someone close to the trustee?
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No and no. This is self-dealing, which violates the fiduciary obligation to the trust’s beneficiaries.
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Can the trustee get consent to perform an action that would otherwise constitute self-dealing?
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Yes, such an action is okay if the beneficiaries consent after a full disclosure
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What is the statute of limitations for challenging a trustees action as violating the duty not to self-deal?
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Depends on whether the trustee discloses the potential breach:
1) If trustee gives beneficiary an accounting that discloses the potential breach of trust and informs the beneficiary of the timing for taking an action --> S/L is one year. 2) Otherwise, the S/L is five year after the earliest of (a) trustee’s removal or death, (b) termination of the beneficiary’s trust interest, or (c) termination of the trust. |
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Can the settlor himself waive the self-dealing rules or make his own?
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Yes (though there are some rules he cannot waive)
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Can a settlor, in setting up a trust, modify the usual limitation that the trust cannot have an illegal purpose?
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No
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Can a settlor, in setting up a trust, eliminate the duty of a trustee to act in good faith?
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No
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Can a settlor, in setting up a trust, exculpate a trustee from bad faith or reckless conduct?
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No
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Can a settlor, in setting up a trust, limit the statute of limitations for challenges to the trust?
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No
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Can a settlor, in setting up a trust, limit a court’s jurisdiction over the trust?
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No
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Can a trustee who has trust over a property for 20 years agree to lease the the land for 30 years?
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YES: a trustee can do anything with the property that an owner could in fee simple.
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What Act states that a trustee’s investments are viewed in light of the portfolio as a whole?
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The Uniform Prudent Investor Act
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If a trustee is given the power to make investment decisions, what standard governs the wisdom of his decisions?
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Under the Uniform Prudent Investor Act, a trustee’s investments are viewed in light of the portfolio as a whole.
1) The portfolio must be diversified (i.e., a speculative risk is okay if it is balanced by a strong investment) 2) Factors to consider: general economic conditions, tax consequences, liquidity needs, etc. |
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By default, can a trustee delegate trust powers and duties? What about the investment power?
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Yes and yes. The trustee has broad powers of delegation.
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When is a trustee liable for the actions taken by an agent to whom he delegated trust tasks?
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Trustee is NOT liable for any actions taken by the agent if the trustee exercised reasonable care in selecting the agent, establishing terms for the delegations, and periodically reviewing the agent.
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When can a trustee be personally liable on a contract entered into on behalf of the trust?
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A trustee is not personally liable UNLESS the trustee’s fiduciary capacity is not disclosed in the contract.
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If there are multiple trustees on a trust, how many must agree on an action for it to have effect?
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Majority rules
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If a trust has multiple trustees, and one of the trustees feels the majority's chosen course of action is wrong, how can he insulate himself from liability?
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A trustee will not be liable for the wrongful actions of the co-trustees only if he expressly dissents in writing
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By default, is a trust created during the settlor's lifetime revocable or nonrevocable?
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Revocable
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In an irrevocable trust, if the settlor is still alive, whose consent is necessary to modify the trust?
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If the settlor AND all beneficiaries consent, a court can order a modification
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In an irrevocable trust, if the settlor is still alive, can the court modify the material purpose of the trust if the settlor and all beneficiaries agree?
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Yes, but only because all agree and the settlor is still alive.
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After a settlor has died, can a court order modification of a trust if all the beneficiaries agree? Can this change modify a material purpose of the trust?
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If all beneficiaries consent, the court can order a minor modification of the trust. But since the settlor is dead, the modification CANNOT change a material purpose of the trust.
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Under what circumstances can a court order modification of a trust even though the beneficiaries do NOT all consent to a change?
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Only if the court is satisfied that: (a) if all the beneficiaries had consented, the trust could have been modified/terminated (i.e., not a material change), and (b) the interests of the nonconsenting beneficiaries will be adequately protected.
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Can a court modify a trust based on circumstances not anticipated by the settlor?
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Yes, if modification will further the trust’s purpose.
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Can a court modify a trust to achieve settlor’s tax objectives?
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Yes
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Can a court terminate a trust if no trust purpose remains to be achieved? What is the trust's purpose becomes impossible to achieve?
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The court can terminate the trust in both of these scenarios
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Under what circumstances can a trustee terminate a trust without court approval?
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If the value of the trust is less than $100k, the trustee may terminate without court approval if the trustee concludes that the trust’s value is insufficient to justify administration costs.
--Note: Trustee must first give notice to all beneficiaries |
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Under what circumstances can a trustee, without court approval, merge or divide trusts?
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If the result does not materially adversely affect achievement of the trust purpose, and even then, only after giving notice to all beneficiaries.
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Hypo:
If a trust holds a home for the settlor's wife to live in, but neighborhood becomes severely devalued, can the trustee ask the court to reform the to allow the house to be sold and another bought elsewhere? What must be shown to accomplish this change? |
Yes. The court may reform the terms of the trust, if it is proven by clear and convincing evidence that the trust terms were affected by mistake of law of fact
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Can a court reform the terms of the trust if the trust terms were affected by mistake of law of fact, even if the terms are themselves unambiguous?
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Yes, if it is proven by clear and convincing evidence that terms were affected by mistake of law of fact
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A trust's central feature is that is bifurcated, which means...
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it separates legal and equiitable interest, so that a trustee has legal authority to manage the trustees equitable interests
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The "principal" is the original trust property plus....
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any increased value
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In Illinois, a trust is presumed to be (revocable / irrevocable).
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irrevocable -- burden is on the creator to explicitly say that it is revocable
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What is a mandatory trust?
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The trustee has no discretion, but must distribute the trust acc to a specified payout scheme
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What is a discretionary trust?
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trustee has some discretion in distributions (may be complete or limited discretion as specified)
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What is a remedial trust
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It's not really a trust, but an equitable remedy. Passive -- the only obligation is to convey the value to the beneficiary
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What is a passive trust?
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one that only involves conveyance of the value to the beneficiary
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Trusts (are/are not) generally subject to the Rule against Perpetuities (RAP). Illinois trusts (are/are not/are sometimes) subject to RAP.
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are, are sometimes.
(They are subject to it because they involve future interests, but in Illinois, a settlor can opt out of RAP, making the trust a perpetual trust) |
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A "settlor" is ...
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the creator of a trust
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In Illinois, a trust must be closed by ___ years after the creator's death
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NEVER -- Illinois allows perpetual trusts if the settlor opts out of RAP
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In Illinois, who can be a trustee?
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an individual, a bank, a trust company
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a trust (will/ will not) fail for lack of a trustee
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will not
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If a named trustee refuses to serve, a new trustee can be chosen by ___
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the court, or by a majority of the income beneficiaries
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Who has the right to enforce a trust instrument?
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the beneficiary has the right to supervise and enforce the trustee in his duties
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T/F a trustee can also be a beneficiary of a trust
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True, but only where she is not the sole beneficiary
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T/F: Pets can be the beneficiaries of trusts
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True in Illinois. False in most states.
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When is a trust revocation valid?
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If it is consistent with the method of revocation required by the creating instrument; but absent such language, any action manifesting the settlor’s intent to revoke is OK
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Four necessary elements for express trusts:
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(1) intent; (2) trust res; (3) trust purpose; (4) beneficiaries
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T/F Use of the words “for the benefit of" will create a presumption in favor of there being intent to create a trust.
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True
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(Illinois / most states / both Illinois and most states ) permit oral trusts
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Both
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When must a trust be created in writing?
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(1) when subject to the statute of Frauds (e.g. transfer of real estate); or (2) if it is created by a will (by devise) (pour-over will)
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T/F A pour-over trust can be created by a will provision
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true.
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T/F A pour-over trust is generally off-limits to creditors
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True
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What is the primary purpose of a pour-over trust?
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To avoid probate.
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Precatory language that simply expresses a donor's hopes or wishes for funds (does / does not) create a trust
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does not
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T/F Use of the words “which I wish will be used to..." will create a presumption in favor of there being intent to create a trust.
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False -- this is precatory language, not strong enough to create a presumption
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T/F: to create a valid pour-over trust, a testator must put some token value into the trust at the time of its creation
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False -- a trust must have some property, but a future interest is enough
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An empty trust (is /is not) a valid trust
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is not (generally; exception is pour-over)
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Funded trust requirement
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a trust must have some piece of property -- a penny is sufficient -- to be valid
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T/F: A future interest is adequate to meet the funded trust requirement
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true
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T/F Can you fund a trust contigent on the beneficiary getting a divorce?
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No -- against public policy
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The beneficiary of a trust must be ascertainable, which means __ . What are the exceptions to this requirement?
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indentifiable by name or class membership. Exceptions are unborn children and charitable purposes (ok to make a trust "to relieve poverty")
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T/F: advancement of religion is a valid purpose for a charitable trust
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True
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Charitable trusts (are / are not) exempt from RAP
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are
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T/F: a trust designed to benefit the sufferers from an extremely rare disease is considered charitable
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True -- OK as long as it benefits a segment (even if very small) of the community
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Cy Pres doctrine:
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Under the cy pres doctrine, a court can modify a trust if the trust’s charitable purpose is no longer possible.
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A settler created a trust and directed the remainder interest to go to a charity to end homelessness. Thirty years later, the identified charity has closed its doors. Should the remainder interest will revert to the settlor’s estate or should the probate court use its cy pres power to substitute a different charity.?
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It should substitute under cy pres because the settlor expressed a general charitable purpose.
(this was an actual 2011 question summarized in Themis notes-- apparently the power to transfer is pretty broad, and preference is to prevent reversion by finding an alternative (purpose or org)) |
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What is a "resulting trust"
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A trust created when a charitable purpose trust loses its purpose and the court determines no alternative purpose is close enough -- this money will re-enter the estate
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A private express trust
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is one going to individuals/a group rather than one for a charitable purpose
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T/F a charitable trust can fund a political party
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False
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what are the two types of remedial trusts?
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resulting trust and constructive trust
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Is there a way to avoid a resulting trust?
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A gift-over clause: a contingency clause
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The only possible problem with gift over clauses in IL is the__
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rule against perpetuities. But you can opt out, so...
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If a third party takes advantage of the settlor, a _____ can be imposed by the court, requiring the wrongdoer to convey the property. These avoid unjust ___
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constructive trust, enrichment
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3 basic types of trust distributions
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mandatory, discretionary, support
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define alienable
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transferable
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the level of support (support trust) will depend on the ___
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beneficiary, e.g. expected standard of living
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creditors can reach trust payments if they are ___ by the beneficiary
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alienable
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Creditors can reach a beneficiary's equitable interest in a trust only ___
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when payments are made, and if the instrument or statutes don't prevent alienation
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For pay outs under a trust to be made inalienable....
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the trust instrument must specify, or there must be a relevant statute
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The ability of creditors to attach is directly related to a beneficiary's
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ability to transfer (alienability)
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If a trust is discretionary, creditors can't reach the funds until___
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the trustee chooses to make a payout
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Creditors (can / cannot) reach funds put in trust through a pour-over will
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cannot
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A pourover trust helps protect the ___'s funds from creditors
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testator's
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Support trusts are (discretionary /mandatory by order of the court)
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discretionary
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Because a support trust is discretionary, creditors (can/ can't) reach until there is a ___
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can't, support payment
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Define a spendthrift trust
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expressly restricts trustee's ability to alienate
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Purpose of a spendthrift trust is __
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to protect beneficiary from own spending habits
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When can creditors reach funds in a spendthrift trust?
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when the trustee makes a payment
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What is the difference between discretionary and spendthrift trusts?
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alienability
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In Illinois, creditor exceptions to spendthrift clause are...
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spouses and children entitled to support payments, still have to get payments; those providing basic necessities to the beneficiary (nurse, etc if disabled) ; holders of Fed or state tax liens; self-settled trusts can't have a spenthrift provision
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Claflin doctrine
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"unfulfilled material purpose" (refer to doctrine by both names) When a beneficiary wants to terminate a trust prematurely, but trustee objects and settlor is gone or deceased-- the trustee can block the termination if the trustee is still
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unfulfilled material purpose doctrine
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aka Claflin doctrine; When a beneficiary wants to terminate a trust prematurely, but trustee objects and settlor is gone or deceased-- the trustee can block the termination if the trust is still serving some material purpose
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Types of cases intrinsically determined as having an unfullfilled material purpose under the Claflin doctrine are:
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discretionary trusts; support trusts; age-dependent/ delayed enjoyment trusts (e.g. gets money until (or after) she reaches the age of 20"); spendthrift trusts
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3 ways a trust can terminate:
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expiration; fulfilled material purpose (Claflin inquiry); settlor termination
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A settlor can terminate or modify a trust unilaterally if....
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he expressly reserved the right to terminate (doesn't have to specify right to modify) in trust documents
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If a settlor did not expressly reserve the right to terminate a trust, he must ___ to terminate.
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get the permission of all beneficiaries
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If the settlor is dead, a trust can be modified by __ if ____and ___
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the court, if an unforeseen event frustrates the purpose of the trust, and all beficiaries agree to modify
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T/F a court is likely to find a change in the tax code to be an unforeseen event that frustates a trust's purpose where beneficiaries seek to modify a trust
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True
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T/F a court may find that a neighborhood becoming blighted where trust real estate is located may constitute an "unforeseen event" that allows modification
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likely, since desire to provide a place to live to the daughter is frustrated if she doesn't feel safe there (2011 exam)
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A trustee (does / does not) have the right to unilaterally modify or terminate a trust
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does not
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Generally, when may a trustee be removed?
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when she's breached fiduciary duty or grossly mismanaged trust funds
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In Illinois, a trustee may be removed when it is ___ to ensure the future safety of the trust property. The inquiry is (generally the same for all trusts / highly case specific)
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clearly necessary, highly case specific
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T/F a factor Illinois will consider in trustee removal is whether the trustee has married a beneficiary
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true -- conflict of interest
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T/F a factor Illinois will consider in removing a trustee is whether the trust balance took a nosedive based on a poor investment in a mutual fund
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False-- but persistent poor performance of trust funds may support replacement
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T/F a factor Illinois will consider in removing a trustee is the fact that the trustee and beneficiary refuse to speak to each other due to disagreements
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True -- a serious conflict between the trustee and a beneficiary may support replacement of the trustee
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A trustee can resign if ___
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he gives written notice to: the settlor, if allive; any co-trustees; and the current beneficiar(ies).
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T/F A trustee who expressly retains power to unilaterally revoke a trust can also unilaterally modify it.
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True
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What is the Rule Against Perpetuities
|
Future interests may fail if they do not vest or fail by the end of a life in being, plus 21 years
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Some jurisdictions take a "wait and see" approach to RAP, refraining from....
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invalidating future interests until it is clear they will not vest within the perpetuities period.
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What is an honorary trust?
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One with no private beneficiaries, such as a trust to care for a pet. The trustee is on her honor to administer, as there are no beneficiaries capable of enforcing the terms. Failure to administer such a trust may result in a resulting trust which will go back into the estate
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There can be a problem with an honorary trust in applying the ___, sometimes circumvented by using the trustee's life as the life in being.
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RAP
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Cy pres cannot be invoked simply because an alternative scheme would be ____
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more desirable, effective, or a more efficient use of the property
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T/F Cy pres can be invoked even if the settlor's intent is unknown.
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True, under the Uniform Trust Code and RST 3rd of Trusts
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Who has standing to enforce a charitable trust?
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Atty general of the state of creation; members of the community more affected than general community; settlor under UTC, even if she hasn't expressly retained an interest
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purchase-money resulting trust
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"...a resulting trust will be declared in favor of the one paying the purchase price of property transferred to another unless it is shown that the one paying the price did not so intend.” Weisberg v. Koprowski, 17 N.J. 362, 371 (1955) Also, may be est in a
domestic partnership, where the domestic property is purchased by both partners, but the title is only in the name of one partner and the title-holder dies intestate. |
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Generally, life beneficiaries are entitled to trust __ and remaindermen are entitled to trust __.
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income, principal
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All assets received by a trustee must be allocated to either __ or ___ so as to treat present and future beneficaries fairly, unless ___
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income, principal, a different treatment is authorized by the trust instrument
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|
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Traditional approach to determining trust income vs. trust principal:
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money generated by trust property was income; money generated by conveyance of trust property was principal
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|
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Modern approach under Uniform Principal and Income Act (UPAIA), adopted by most states including Illinois, to determining classifications of trust income v. principal:
|
focus is on total return to the portfolio, and the trustee can re-characterize items and reallocate as long as actions are reasonable and in keeping with trust instrument.
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T/F: Illinois follows the traditional approach to allocation of trust income vs. trust principal
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False
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What does the Uniform Principal and Income Act do?
|
gives the trustee flexibility in allocating trust funds as principal or income, and is focused more on total return to the portfolio than property classifications
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Unitrust
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where the lifetime beneficiaries are entitled to a fixed annual share of the value of the trust principal. Distinction betw principal/income irrelevant.
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unproductive income rule
|
Possible red herring. Under the traditional approach, if a trust asset produced little or no income upon the asset’s sale, an income beneficiary was entitled to some portion of the sale proceeds under the theory that such portion represented delayed income thereon. under the modern approach, this rule is now seldom applied.
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Distribution of stock -- income or principal?
|
Under UPAIA § 6(a), a distribution of stock, whether classified as a dividend or as a split, is treated as a distribution of principal. Revised Uniform Principal and Income Act -- same, but RUPIA gives some power to allocate the stock dividend between income and the principal when the distributing corporation had made no distributions to shareholders except in the form of dividends paid in stock.
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Generally, except where IPAIA approach is justified, allocation rules follow ___
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traditional accounting rules
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Cash money receipts from an entity are classified as (income/principal) unless __ or ___.
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income, it is a captial gain for fed income tax purposes, or is received following a partial or complete liquidation of the entity
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non-cash property from an entity are characterized as (income / principal)
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principal
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Proceeds from life insurance policies or other contracts in which the trust or trustee is named as a beneficiary are allocated to (principal / income) unless ...
|
principal,the contract insures the trustee against loss, in which case the proceeds are allocated to
income |
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Receipts from a deferred compensation plan (e.g., a pension plan) are considered as income or principal depending on...
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how they are characterized by the payor. If the payor does not characterize the payment as income or principal, then 10% of the payment is income and the rest is principal.
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If the payor of receipts from a deferred compensation plan (e.g. pension plan) does not characterize receipts as income or principal, then __ is income and the rest is principal
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10%
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A liquidating asset is one ....
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whose value diminishes over time because the asset is only expected to produce receipts over a limited period (e.g., patents or copyrights).
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Proceeds from liquidating assets are allocated as __ income and __ principal
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10%, 90%
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Oil, gas, water and mineral rights payments are characterized as __ income and __ principal
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10%, 90%
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From what funds is the trustee, custodians, or advisors paid?
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1/2 from principal, 1/2 from income
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From what funds are court and accounting costs paid?
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1/2 principal, 1/2 income
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From what funds are ordinary expenses paid?
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income
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From what funds are insurance premiums that cover the loss of a trust asset paid?
|
income
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From what funds are debt on principal paid?
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principal
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From what funds are estate taxes paid?
|
principal
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What is a reversion?
|
future interest, where the grantor has the right to possess the property after a finite estate ends.
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T/F: A future interest is a presently existing interest
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True
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T/F: A possibility of reverter is a reversional interest in the grantor
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True
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T/F: A right of entry is a reversional interest in the grantor
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True
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A ___ is a future interest where the grantor takes it back as a transferee (it reverts) before/until a condition is met, at which point it goes to someone else
|
springing executory interest
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A ___ is an executory interest that divests a grantee and transfers to someone else based on some condition.
|
shifting executory interest
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Define springing executory interest
|
a trust reverts to the grantor until a condition is met, whereupon it "springs" to the new beneficiary
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Define shifting executory interest
|
a trust's beneficiary fulfills some specified condition which assigns that interest to another (e.g. I give to Anne for life, but if she marries a sailor, then to her sister Katrina)
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T/F A remainder is vested when the holder of the interest is ascertainable and there is no condition subsequent
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False -- there is not condition precedent (no condition on which the vesting depends)
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|
define vest
|
immediate fixed (absolute) right of present or future enjoyment -- person has legal entitlement and standing to seek relief
|
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define vested remainder
|
future interest held by a remainderman, which, upon the happening of a certain event, will become the person's. E.g. if A gives to B for life then C --> C has a vested remainder in the property.
|
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A reversion is __
|
a future interest held by the grantor following a life estate (E.g. "I establish a trust for the use of A during her life" After A's life, the interest reverts to me.
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A remainder is ….
|
a future interest capable of becoming possessory at the natural termination of the prior estate (e.g. a vested remainder when O gives to A for life, then to B)
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O gives to A for life then B. This is a ___
|
vested remainder.
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O gives to A for life then to A's children. This is ____
|
vested as a class gift/ vested subject to partial divestment / vested subject to open.
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If an interest is vested as a class gift it may be __ as to some members but __ as to others.
|
vested, open
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For an interested vested as a class gift, when a new member enters the class, she __ the previously existing class members
|
partially divests
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A contingent remainder exists where ___
|
the taker is either unascertained (O to A for life, then to her children, as yet unborn) or subject to a condition precedent (O to A for life, then to her child B after she reaches 21).
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|
There are two kinds of executory interests:
|
springing and shifting
|
|
|
The two kinds of future interests available to beneficiaries:
|
remainder and executory interests
|
|
|
What is the difference between remainder, reversion, and executory interest?
|
remainder -- granting a party what's left after another's life estate (e.g. B's interest if O gives to A for life, then B); reversion -- when the grantor makes a life or other time- limited conveyance, or attaches a condition, and doesn't specify a remainderman for the end of life/if the condition fails (e.g. O gives R for life (no remainderman) ; or O gives R a car conditioned on her taking it to an annual car show; once she fails to do so, O can (but doesn't have to ) retake the car; executory interest -- like remainder, but where there are conditions attached to the remainderman's possession.
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|
For class gift purposes, when is a person considered to be capable of having no more children
|
When she is dead.
|
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|
The trustee needs to __ information about trust property to the beneficiaries so that ___
|
disclose, they can enforce their rights
|
|
|
How does the beneficiary learn about the trust details?
|
The trustee is under an obligation to disclose and report
|
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T/F: a trustee who adheres to limitations set out in the trust instrument and follows a set of court investment guidelines can't be liable for breach of duty.
|
False.
|
|
|
T/F Self-dealing is potentially ok if the transaction was fair and to the trust benefit.
|
False
|
|
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T/F An apparent conflict of interest always constitutes a breach of trustee duty and loyalty
|
False
|
|
|
Illinois follows the prudent investor rule which means
|
the trustee has discretion to manage trust properties as would a prudent investor for his own property
|
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Generally, trustees can delegate trust responsibilities unless ___. In Illinois, there is a (more / less) stringent rule. Trustees can delegate ...
|
the function is key/critical to the trust, more, only as to management and investment strategies but must oversee the decision-making processes
|
|
|
Third party trust liability: if trust property is improperly transferred to a third party who is not a bona fide purchaser.... If the third party is a knowing participant...
|
the trustee or the beneficiary can have the transaction set aside, third party liable for any losses suffered as a result
|
|
|
In what case is a beneficiary able to sue a third party?
|
3 ways: 1) If a trustee is a participant in a breach which results in a transfer of property to a third party,2) if the trustee fails to pursue a cause of action or 3) there is no successor trustee
|
|
|
If the trustee is an alcoholic, and the settlor knew this when she appointed him, will the court remove him?
|
habitual drunkenness is one of the grounds a court can use to remove a trustee, but if the settlor knew of the grounds when she appointed him, the trustee may be allowed to continue
|
|
|
If the trustee engages in a breach of contract, and is sued, is he entitled to indemnification?
|
Yes, if he acted within the scope of his duties.
|
|
|
A trustee (is / is not) personally liable on contracts entered into on the trust's behalf
|
Is, unless trust instrument or contract says otherwise.
|
|
|
T/F: a trustee is generally vicariously liable for an agent's actions
|
False -- but general negligence/intentional liability may attach
|
|
|
T/F: a successor trustee is never liable for his predecessor's breach
|
False -- liable if he knew and failed to address, or was negligent
|
|
|
T/F If losses are incurred as the result of a breach, a trustee is allowed to offset the loss with gains from any other breach.
|
False
|
|
|
If beneficiaries joined a breach, or consented to it, the beneficiaries (can / may not) pursue an action against the trustee.
|
may not
|
|
|
T/F IF a beneficiary failed to object to a breach, the beneficiary is not barred from action against the trustee.
|
True
|
|
|
Larry was taking money out of a trust , trading in illegal stolen art with it in his own name, and then returning the principal with a healthy return to the trust. Larry told Oleander, the beneficiary, of his actions in the hopes that she would be complicit and he could increase his investments. She was noncommital, but didn't condemn his actions. Is she barred from action against Larry?
|
Probably not -- failure to object does not rise to the level of consent.
|
|
|
In Illinois, to the degree trust powers are not specified in trust documents...
|
the trustee has all powers necessary to act as a RPP in managing the trust
|
|
|
Two rhetorical aspects of a trusties duties:
|
loyalty and care
|
|
|
T/P A trustee is held to the standard of ordinary prudence in managing the trust, even if he has special relevant skills or expertise
|
False -- held to a higher standard
|
|
|
The trustee is liable to all beneficiaries; if beneficiary interest are in conflict, she must...
|
balance these interests
|
|
|
Under the modern approach, trustee is able to recharacterize assets or reallocate investments; what standard in making these decision?
|
RPP
|
|
|
Define "power of appointment"
|
enables the holder to direct the trustee to distribute some/all of the trust without regard to the trust provisions. Usu given to a beneficiary (by the donor?).
|
|
|
Duty to segregate
|
Trustee must keep personal and trust assets separate (may be a modern trend to allow some commingling, but accounting is going to remain an absolute duty)
|
|
|
exception to duty to segregate
|
when the trustee invests in bearer bonds
|
|
|
In Illinois, under the duty to segregate, the trustee is only liable when ...
|
breach of duty to segregate results in damages to trust property
|
|
|
T/F in a testamentary trust, the executor must monitor the trustees actions
|
False -- the trustee must monitor the executor to protect the trust's interests
|
|
|
Constructive fraud
|
When an accounting includes false factual statements that could have been discovered with investigation
|
|
|
Who can waive the trustees reporting obligaitons?
|
Generally nobody. However, under the UTC -- not accepted in Illnois -- settlor can, or beneficiaries can waive the RECEIPT of reports
|
|
|
What is the UTC
|
The Uniform Trust Code is a model drafted by the National Conference of Commissioners on Uniform State Laws as a recommended statute for states to enact - ideally, with few changes - in order to promote uniformity among state trust laws. To date, it has been enacted in whole or in part by 15 states, but NOT in Illinois. However, it represents a trend in trust thinking that may be persuasive.
|
|
|
Unless __ a trustee must notify beneficiaries of a sale that ___
|
severely detrimental to beneficiaries, represents a significant portion of trust assets
|
|
|
If the trust document says to retain certain assets, a trustee (must / must not / may, at his discrection, ) sell that property if retaining the property will be inconsistent with the modern portfolio approach
|
must
|
|
|
After a delay in disposing of under- or over-performing property, the trustee must _____ beneficiaries who were adversely affected
|
reallocate sales proceeds if necessary to compensate
|
|
|
Jerry is managing dead a trust for Kevin, with Leticia as a remainderman. The principal has been growing at an amazing 10% / year, but Kevin's monthly income payments have been decreasing steadily over time. These facts suggest that Jerry may be _____
|
impartial, favoring Leticia's interests over Kevin's
|
|
|
Exculpatory clauses
|
expressly allow all investments by trustees
|
|
|
Do exculpatory clauses always protect a trustees bad investment decisions?
|
No -- will not protect a trustee who acts in bad faith or recklessly, but do give more latitude for minor lapses in judgment
|
|
|
If a trustee commingles trust funds and personal funds under the modern trend, what happens if commingled property is lost or destroyed?
|
The presumption is that the destroyed property was the trustees and that any remaining property belongs to the trust.
|
|
|
If one part of commingled assets increases in value, and another part decreases, (the gain and loss are averaged/ the trust gets the gain and the trustee the loss / if there is an overall loss trustee must compensate)
|
the trust gets the gain, the trustee the loss
|
|
|
Uniform Prudent Investor Act (UPIA) The Illinois “Prudent Investor Rule”
|
The rule generally follows the UPIA (adopted by the RST (Third) of Trusts and the Trustee Act of 2000), requiring the trustee to act as a prudent investor would when investing his own property, but puts less emphasis on the level of risk for each investment, looking more at the big picture
|
|
|
Illinois (does / does not) adhere to a statutory list of acceptable investments.
|
does not
|
|
|
Trustee's responsibility in the face of a legal challenge to a trust
|
Unless a challenge is well founded, the trustee must defend the trust against legal attacks.
|
|
|
Exception to self-dealing
|
authorized by settlor, by court order, by all beneficiaries -- but still must be reasonable and fair; statutory exceptions for banks who want to invest trusts in bank-created funds (Illinois has one)
|
|
|
To determine whether a breach has occured, deteriminations of whether the trustee acted reasonably is a(n) (objective/ subjective) standard
|
objective
|
|
|
To determine whether a breach has occured, deteriminations of whether the trustee acted in good faith is a(n) (objective/ subjective) standard
|
subjective
|
|
|
T/F: if the trustee acted in good faith, that is sufficient to show that there was no breach of fiduciary duty.
|
False -- the actions must also have been reasonable.
|
|
|
Can a trustee ever modify the provisions of a trust?
|
Yes, if the settlor included the power to modify
|
|
|
Before trustee duties are imposed, a trustee must __
|
accept the trusteeship
|
|
|
Unless the trust agmt says otherwise, if there are two trustees, the majority rule is that they must act with ___. If there are more than two, then the rule is ___
|
unanimity, that a majority is needed
|
|
|
a trustee's duties cannot be unilaterally enlarged by the settlor, unless the trust includes an ___. Even so, the additions may be __ my the trustee
|
additions clause, rejected
|
|
|
Rule in Shelley's case
|
common law rule prevented remainders by merging present and future interests; abolished in IL and most jurisdictions, so taht parties take present and future interests acc to language in the deed
|
|
|
adopted children
|
general modern trend is that adopted children are children absent a contrary intent. The date of adoption may matter in discussion of when a class closes.
|
|
|
If a grantor specifies " I leave a gift to my nieces and nephews if I die without issue" but fails to make a gift to a son he ends up having, what will happen to the contigent gift?
|
some courts may imply/infer that the gift goes to the son; others will revert the gift to the estate
|
|
|
Acceleration into possession
|
A doctrine which "accelerates" a vested remainder into posession of the remainderman as soon as the preceding estate ends for any reason, including disclaimer
|
|
|
A contingent remainder does not vest until ___
|
all conditions precedent have been satisfied.
|
|
|
If a remainder is after a life estate, does a disclaimer by the life recipient allow the remainderman's interest to vest immediately? Is a life estate followed by remainderman a contingent remainder?
|
I don't know. research if time.
|
