How to Ace FYLSE/Trusts Outline

Creation of Trust

A valid trust requires a trustee, a settlor, an ascertainable beneficiary, trust res (property), trust purpose and intent to create the trust. A valid trust may be created by one of the following methods:

1. A declaration by a property owner that he holds the property as trustee.
2. A transfer of property during the owner’s lifetime to another as trustee.
3. transfer of property by means of a will taking effect upon the owner’s death (testamentary)
4. An exercise of power of appointment to another person as trustee
5. An enforceable promise to create a trust

Validity of Trust

Ted executed a will. With the exception of the signature of a witness at the bottom, the will was entirely in Ted’s own handwriting and signed by Ted. The will provided that half of Ted’s estate was to be held in trust by Trustee, Inc. for ten years with the income to be paid annually “to my brothers,” with the principal at the end of ten years to go “to my child, Deb.” The other half of the estate was to go to Deb outright.

—J01#6

Troy, a wealthy man, planned to endow a public library in his home city. To carry out his plan Troy executed the following documents:

1. A declaration stating his intention to create the "Troy Library" for the use of the inhabitants of the city, designating three persons as the first "Troy Library Board of Governors (Board)" and providing for the selection of successor members of Board in the event of death or resignation of a member or members;

2. A deed conveying a block of land Troy owned near the city center to Board "in perpetuity" for the purpose stated in his declaration;

3. A check payable to Board in the sum of $100,000 as an initial contribution for the library; and

4. A document containing an itemized list of certain of Troy's stocks and bonds having a market value of two million dollars and a statement that those stocks and bonds were to be delivered to Board in specified installments over a two-year period.

—J81Q4

When Bonnie was born in 1968, her Uncle Albert gave to Bonnie’s parents, Max and Carol, a $1,000 U.S. Savings Bond and 100 shares of Delta Company, a small California corporation. He told them that he wanted to encourage Bonnie to get a good education and asked that it be used for this purpose. Albert endorsed both the bond and the stock “to Max and/or Carol, for Bonnie.” Max and Carol thanked him for the generous gift and subsequently put the bond and the stock in a safe deposit box. Albert died in 1971.

—F90Q4

In 1996, Hal, married to Wanda, created a trust that he funded with $200,000 of his separate property. Trustee, Inc., named as trustee, was directed to pay the income to Hal for life and the remainder to Wanda.

—J00Q3

Richard, a resident of California, created a revocable, inter vivos trust in 1998 at the urging of his wife, Alicia, who was also his attorney. Alicia drafted the trust instrument. Richard conveyed all of his separate property to the trust. The trust instrument named Alicia as trustee with full authority to manage the trust and invest its assets. Richard conveyed all of his separate property to the trust. The trust instrument named Alicia as trustee with full authority to manage the trust and invest its assets. By the terms of the trust, Richard was to receive all of the income during his life.

—F02Q4

Ted executed a will which provided that half of Ted’s estate was to be held in trust by Trustee, Inc. for ten years with the income to be paid annually “to my brothers,” with the principal at the end of ten years to go “to my child, Deb.” The other half of the estate was to go to Deb outright.

—J01Q6

In 2001, Wilma, an elderly widow with full mental capacity, put $1,000,000 into a trust (Trust). The Trust instrument named Wilma’s church (Church) as the beneficiary. Although the Trust instrument did not name a trustee, its terms recited that the trustee has broad powers of administration for the benefit of the beneficiary.

—F08Q4

In 2003, Sam executed a valid testamentary trust, naming Tom as trustee. The terms of the trust state:

(a) All net income is to be paid to Bill, Sam’s nephew, for life;
(b) Tom may invade principal for Bill in such amounts as Tom, in his sole and absolute discretion, determines;
(c) The trust terminates on Bill’s death and any remaining principal is to be distributed to Alma Mater University;
(d) The interests of the beneficiaries are inalienable and not subject to the claims of creditors.

—F05Q6

Pop's wife died in 1980. In 1985, Pop properly executed a will which did not name a trustee, but provided that $100,000 was to be held in trust for ten years following Pop's death, with all income to be accumulated in the trust. At the end of the ten year period, all money in the trust was to be distributed in equal shares to persons who had both (1) been employed by Pop at the time of his death and (2) survived to the end of the ten-year period. All the rest of Pop's property, including his house, was to be distributed at the time of his death in equal shares to Pop's two children, Sam and Dona.

—J92Q4

Richard, a resident of California, created a revocable, inter vivos trust in 1998 at the urging of his wife, Alicia, who was also his attorney. Alicia drafted the trust instrument.

Richard conveyed all of his separate property to the trust. The trust instrument named Alicia as trustee with full authority to manage the trust and invest its assets. By the terms of the trust, Richard was to receive all of the income during his life. Upon his death, his child by a former marriage, Brian, and Alicia’s daughter by a former marriage, Celia, would receive for their lives whatever amounts the trustee in her discretion thought appropriate, whether from income or principal. Whatever remained of the principal on the death of the last income beneficiary was to be divided equally among the then-living heirs of Brian and Celia. Celia was included as a trust beneficiary only after Alicia convinced Richard that this was necessary to avoid a possible legal action by Celia, although Alicia knew there was no legal basis for any claim by Celia.

—F02Q4

Ted executed a will which provided that half of Ted’s estate was to be held in trust by Trustee, Inc. for ten years with the income to be paid annually “to my brothers,” with the principal at the end of ten years to go “to my child, Deb.” The other half of the estate was to go to Deb outright.J01Q6

In 2001, Wilma, an elderly widow with full mental capacity, put $1,000,000 into a trust (Trust). The Trust instrument named Wilma’s church (Church) as the beneficiary. Although the Trust instrument did not name a trustee, its terms recited that the trustee has broad powers of administration for the benefit of the beneficiary.

—F08Q4

Trustee

A trustee is a fiduciary relationship with respect to property where a settlor transfers property to a trustee who holds the property for the benefit of named beneficiaries, for a valid trust purpose.

In 2001, Wilma, an elderly widow with full mental capacity, put $1,000,000 into a trust (Trust). The Trust instrument named Wilma’s church (Church) as the beneficiary. Although the Trust instrument did not name a trustee, its terms recited that the trustee has broad powers of administration for the benefit of the beneficiary.

—F08Q4

The will did not name a trustee.

—04Q

Discretionary Trust Provision

Trustee has all express powers as set out in the trust and all implied powers required to exercise the express powers. As a fiduciary, Trustee has an obligation to exercise his discretion in good faith.

(trust provision) (b)Tom (the trustee) may invade principal for Bill (the beneficiary) in such amounts as Tom, in his sole and absolute discretion, determines; (...)

Bill (the beneficiary) wants Tom (the trustee) to invade the trust principal so Bill can promote a newly-formed rock band, but Tom has refused. Bill now requests a court order directing Tom to invade the trust principal.

—F05Q6

Purpose

The trust must have a valid purpose not contrary to public policy or illegal.

Intent

The settlor must manifest an intention to create a trust.

Beneficiary

The trustee must be able to identify the recipients of the trust. Under common law, beneficiaries of a trust is prohibited from drafting the trust unless they are related and live in the same house.

Validity of Trust

A testamentary disposition is void if it was the result of duress, menace, fraud, or undue influence.

Types of Trust

Charitable Trust

A charitable trust is a trust for a public charitable purpose, such as health care, education, or religion. A charitable trust may be of perpetual duration and need not identify ascertainable beneficiaries.

Cy Pres Doctrine

A court acting in equity may modify the provisions of a charitable trust where necessary, so that rather than its purpose being frustrated by circumstances the settlor did not anticipate, the settlor's overall purpose may be carried out as nearly as possible. Cy press requires general charitable intent.

In 2003, Tom, a patient at Happy Home, a charitable convalescent hospital that specializes in caring for the disabled elderly, asked Lilly, his personal attendant, to help him execute his typewritten will.

The 2003 will by Tom stated “I give $100,000 to my niece, Nan. And, because Happy Home does such important work for the aged who are disabled, I give the residue of my estate in trust to Happy Home for the continued care of the disabled elderly. Lilly to act as Trustee.” (...)Happy Home went out of business. Sunnyside, also a charitable convalescent hospital, provides care for disabled persons of all ages. Sunnyside has petitioned the court to substitute Sunnyside as the beneficiary of Tom’s estate.

—J06Q6

Hank executed a will that established a trust and left “five percent of my estate to Trustee, to be paid in approximately equal installments over the ten years following my death to the person who went skiing with me most often during the 12 months preceding my death.”

In 2001, Hank completely gave up skiing because of a serious injury to his leg and took up fishing instead. He went on numerous fishing trips over the next two years with a fellow avid fisherman, Fred.

Fred claims that the court should apply the doctrine of cy pres to make him the beneficiary of the trust.

—J04Q3

In 2011, Tess, age 85, executed a valid will, leaving all her property in trust for her grandchildren, Greg and Susie. Income from the trust was to be distributed to the grandchild or grandchildren then living each year. At the death of the last grandchild, any remaining assets were to go to Zoo for the care of its elephants. (...)In 2015, Tess died. That same year, Zoo’s only remaining elephant died. Zoo has petitioned the court to modify the trust to provide for the care of its animals generally.

—F15Q6

General Charitable Intent

Troy, a wealthy man, planned to endow a public library in his home city. To carry out his plan Troy executed the following documents:

1. A declaration stating his intention to create the "Troy Library" for the use of the inhabitants of the city, designating three persons as the first "Troy Library Board of Governors (Board)" and providing for the selection of successor members of Board in the event of death or resignation of a member or members; <omitted> The funds now in possession of Board are not sufficient to construct a building for and to maintain a library. If the specified stocks and bonds are transferred to Board, a library building can be constructed and the library can be maintained.

If Board fails to receive funds sufficient for the library, it proposes to use the block of land as a public park to be named "Troy Memorial Park." The funds now in Board's possession are sufficient to maintain the land as a public park.

—J81Q4

Doctrine of Equitable Deviation

A court acting in equity may order a deviation in an administrative term of a trust.

Pour Over Trust

A pour-over trust is one that is structured to receive and dispose of assets at the settlor’s death. A pour-over trust is often established through the settlor’s will.

Spendthrift Trust

A spendthrift clause is designed to protect the beneficiary from their spendthrift ways by prohibiting both voluntary and involuntary alienation of the beneficiary’s right to future payments.

The terms of the trust state:

(d) The interests of the beneficiaries are inalienable and not subject to the claims of creditors.

—F05Q6

Exceptions

Necessaries

However, the courts recognize exceptions to the protection provided by spendthrift provisions including where a creditor has provided necessaries to the beneficiary. Necessaries include items such as food, clothing, shelter and medical care.

In 2005, Lender obtained a judgment against Bill (the beneficiary of a spendthrift trust) for an unpaid credit card bill that includes charges for tuition, groceries, and stereo equipment. Lender now requests a court order directing Tom to pay all future installments of trust income to it rather than Bill until the judgment is satisfied.

—F05Q6

Surplus

The concept of surplus allows a creditor to attach to future payments to the beneficiary despite a spendthrift caluse where the income to be paid exceeds the beneficiaries' station in life, thus resulting in a surplus.

Preferred creditors

A court will disregard a spendthrift clause and allow a preferred creditor to attach to the beneficiary’s future income payments from the trust. Preferred creditors include government debt and outstanding child and spousal support and alimony payments.

(Trust provision) The interests of the beneficiaries are inalienable and not subject to the claims of creditors. (...)

Bill (the beneficiary of a spendthrift trust) is delinquent in making child support payments to Kate, his former spouse, for their child. Kate now requests a court order directing Tom to pay all future installments of trust income to her rather than Bill until the arrearages are eliminated.

—F05Q6

Resulting Trust

A resulting trust is an implied-in-fact trust based upon the presumed intent of the parties and will transfer the property back to the settlor or his estate.

In 1996, Hal, married to Wanda, created a trust that he funded with $200,000 of his separate property. Trustee, Inc., named as trustee, was directed to pay the income to Hal for life and the remainder to Wanda.

—J00Q3

Powers of Trustee

Under the common law, a trustee was entitled to buy or sell trust assets, but was not entitled to borrow for the trust or loan funds from the trust. However, under the modern trend, the trustee is entitled to loan or borrow funds for the benefit of the trust under certain circumstances.

Trust Administration

Duty not to encumber from or borrow from trust

Carol redeemed the bond and put it in her personal checking account with her husband.

Carol (trustee) retained control over the bond and shares of stock. (Trust res) The bond matured in 1975 and Carol redeemed it for the face amount and placed this money in a joint, non-interest bearing checking account, which she owned with her new husband, Daniel.

—F90Q4

Duty to exercise care, skill and prudence in managing trust

A trustee must exercise the same skill and prudence a reasonably prudent person would in managing his own property, and has a duty to sell unproductive property.

Tom is trustee of a trust created by Abe in 1996. The corpus consists of stocks and bonds worth $150,000, an apartment house appraised at $650,000 in a neighborhood which is becoming increasingly industrial, and a vacant lot.

—F92Q1

Carol (trustee) retained control over the bond and shares of stock. (trust res) The bond matured in 1975 and Carol redeemed it for the face amount and placed this money in a joint, non-interest bearing checking account, which she owned with her new husband, Daniel.<omitted>

The 100 shares of Delta stock (trust res) increased in value and, in 1976, Carol exchanged the shares for shares of ABC Corp., worth $5,000 at the time of the exchange. The value of the ABC Corp. shares steadily declined and is now approximately $250.

—F90Q4

Richard, a resident of California, created a revocable, inter vivos trust in 1998 at the urging of his wife, Alicia, who was also his attorney. Alicia drafted the trust instrument.

After creation of the trust, and while Richard was still alive, Alicia invested one-half of the trust assets in a newly-formed genetic engineering company, Genco. She lent the other one-half of the trust’s assets at the prevailing market rate of interest to the law firm of which she was a partner.

—F02Q4

Trustee invested all assets of the trust in commercial real estate, which yielded very high income, but suffered rapidly decreasing market value.

—F10Q3

Duty to avoid self-dealing

As a trustee, he owed a duty of loyalty to the beneficiaries and cannot act to benefit his personal interest at the expense of the beneficiaries.

In another 2001 transaction, Tom sold for $25,000 stocks that had been purchased for $25,000, and lent the proceeds to PQ Corp. at 1%, below the prevailing interest rate. The loan is secured by a first mortgage on unimproved realty worth $30,000. For several years, Tom has performed substantial services for PQ Corp. as a consulting engineer. He owns 100 shares of its common stock. There are 1,000,000 PQ shares outstanding.

— F92Q1

Duty to diversify trust assets

Richard, a resident of California, created a revocable, inter vivos trust in 1998 at the urging of his wife, Alicia, who was also his attorney. Alicia drafted the trust instrument.

After creation of the trust, and while Richard was still alive, Alicia invested one-half of the trust assets in a newly-formed genetic engineering company, Genco. She lent the other one-half of the trust’s assets at the prevailing market rate of interest to the law firm of which she was a partner.

—F02Q4

Tom is trustee of a trust created by Abe in 1996. The corpus consists of stocks and bonds worth $150,000, an apartment house appraised at $650,000 in a neighborhood which is becoming increasingly industrial, and a vacant lot. Yearly net income from the stocks and bonds is $12,000, and from the apartment house is $36,000. Tom has held the lot for five years, not wanting to sell it at a sacrifice because the uncertainty of zoning and the location of a proposed highway. The trust instrument directs Tom to pay the income from the trust to Abe for life and, at Abe’s death, to divide the corpus between Abe’s children, Ben and Cathy.

At the end of 2001, Tom sold the vacant lot for $50,000, the fair market value. He also sold some stocks for $35,000, realizing a $10,000 gain. Tom used this money along with $25,000 of accumulated rental income to build an addition to the apartment house.

—F92Q1

Trustee invested all assets of the trust in commercial real estate, which yielded very high income, but suffered rapidly decreasing market value.

—F10Q3

Duty to Avoid Speculation

Richard, a resident of California, created a revocable, inter vivos trust in 1998 at the urging of his wife, Alicia, who was also his attorney. Alicia drafted the trust instrument.

After creation of the trust, and while Richard was still alive, Alicia invested one-half of the trust assets in a newly-formed genetic engineering company, Genco. She lent the other one-half of the trust’s assets at the prevailing market rate of interest to the law firm of which she was a partner.

—F02Q4

Duty to earmark assets

Carol (trustee) retained control over the bond and shares of stock. (Trust res) The bond matured in 1975 and Carol redeemed it for the face amount and placed this money in a joint, non-interest bearing checking account, which she owned with her new husband, Daniel.

—F90Q4

Duty of Loyalty to Residuary Beneficiaries

Trustee invested all assets of the trust in commercial real estate, which yielded very high income, but suffered rapidly decreasing market value.

—F10Q3

Revocation of Trust

Majority rule: A settlor can modify or revoke the trust only if the power is expressly reserved in the trust Minority rule, including California: Trusts are revocable unless stated otherwise.

(After creating a trust) In 2007, Wilma named Sis as trustee of the Trust, which was when Sis found out for the first time about the $1,000,000 in the Trust. Without telling Wilma, Sis wrote across the Trust instrument, “This Trust is revoked,” signing her name as trustee.

—F08Q4

Termination of Trust

A court will not order a termination of a trust even with the consent of all beneficiaries where such termination would be in violation of the trust purposes and would be contrary to the testator’s intent.

Bill (Beneficiary) and Alma Mater wish to terminate the trust in order to divide the trust principal, but Tom (Trustee) has refused. Both Bill and Alma Mater now request a court order terminating the trust.

—F08Q4

Remedies

Richard, a resident of California, created a revocable, inter vivos trust in 1998. Richard died in 2000, survived by Alicia, Brian and Celia. Brian, upset with the way Alicia has handled the trust assets, seeks to have the trust declared invalid or, in the alternative, to have Alicia removed as trustee and require her to indemnify the trust for any losses.

—F02Q4

Rule Against Perpetuity

Under the Rule Against Perpetuities a gift will fail if it need not vest within the time of a life in being plus 21 years. The charity-to-charity exception does not apply because the grandchildren are not a charity.