TRUSTS

What fiduciary duties does a trustee hold?

The trustee holds legal title to the trust property and has all powers over the property that a legally competent, unmarried individual has regarding their own property.

Under CA Probate Code § 15212, what happens to leftover funds in a pet trust upon termination?

Funds are distributed as directed in the trust, or if not specified, under the will's residuary clause, or to the settlor's heirs.

How does the execution requirement for a trust differ from a will?

Trusts generally do not require witnesses, and some trusts can even be created orally, whereas wills have strict execution requirements.

Define 'trust alienation'.

The legal term for transferring a beneficiary's interest in a trust to someone else, including both voluntary transfers and involuntary seizures by creditors.

What is the general rule regarding self-settled asset protection trusts (APTs)?

The law generally does not allow a settlor to establish a spendthrift trust for their own benefit.

Under the Claflin Doctrine, what two conditions allow for the modification or termination of a trust without settlor consent?

All beneficiaries must consent, and the action must not violate a material purpose of the settlor.

What is the equitable deviation doctrine?

It allows a court to permit trust modification or termination due to unanticipated circumstances that would otherwise defeat or substantially impair the accomplishment of the trust's purpose.

What is trust decanting?

The process where a trustee with discretionary power transfers assets from an old trust to a new trust with revised terms.

What is the primary limitation on a trustee's power to decant?

The trustee must have the power to distribute trust assets and must not violate their fiduciary obligations to the beneficiaries.

How does trust decanting differ from a pour-over will?

A pour-over will moves property from an estate into a trust at death, while decanting moves assets from an existing trust into a new one during its administration.

What is the 'Everyone Agrees' rule for trusts?

If the settlor is still alive, the settlor and all beneficiaries can agree to modify or terminate an irrevocable trust, even if it changes the trust's material purpose.

What is the Claflin Doctrine's limitation on trust termination?

Beneficiaries cannot modify or terminate a trust if a material purpose of the trust remains unfulfilled.

List 4 examples of 'material purposes' that prevent trust termination under the Claflin Doctrine.

Spendthrift provisions, age-based distribution requirements, discretionary trusts, and support trusts.

What is an 'uneconomic trust' under UTC § 414?

A trust whose value is so low that the costs of administration outweigh the benefits, allowing the trustee to terminate it.

How does the Restatement (3d) of Trusts differ from the Claflin rule regarding trust modification?

It allows a court to permit modification or termination even if a material purpose is unfulfilled, provided the reasons for the change outweigh the material purpose.

What is the difference between the traditional and modern rules of equitable deviation?

The traditional rule applied only to administrative terms, while the modern rule (UTC § 412) expands it to include both administrative and dispositive provisions.

What is the bifurcation of ownership in a trust?

The trustee holds legal title to the trust property, while the beneficiaries hold equitable or beneficial ownership.

What are 3 advantages of using a trust for property management?

Avoiding probate, providing professional management for vulnerable beneficiaries, and ensuring property is managed according to the settlor's intent.

What is the modern rule regarding a trustee's powers?

A trustee has powers granted in the trust, all owner-like powers, and any powers needed for proper investment, management, and distribution, subject to fiduciary duties.

What is the current rule regarding 3rd parties’ duty when dealing with a trustee?

If a third party deals with a trustee in good faith, they have no duty to inquire about the trustee's authority or duties.

What is the purpose of fiduciary governance in trusts?

It replaces limited powers with broad authority, constrained by fiduciary duties, to solve the agency problem created by separated ownership.

What are the four primary fiduciary duties of a trustee?

Loyalty, prudence, impartiality, and the duty to follow trust terms.

To whom does a trustee owe their fiduciary duties?

To the beneficiaries of the trust; they can also enforce (and in some cases, the settlor can to)

What is the resignation rule for a trustee who can no longer serve?

They must resign to avoid liability for breach of fiduciary duties and must notify co-trustees and beneficiaries.

On what two grounds can a trustee's actions be legally challenged?

Lack of power to undertake the action (authority) or failure to exercise the power consistent with fiduciary duties.

Why is a spendthrift clause often used in trust decanting?

To protect trust assets from a beneficiary's creditors if the original trust document lacked such a provision.

What is the effect of UTC § 411 on trust modification?

It allows modification or termination even without the consent of all beneficiaries, provided a court is convinced the interests of non-consenting beneficiaries are protected.

What are the three primary branches of trust practice?

Business trusts (commercial purposes), revocable trusts (will substitutes to avoid probate), and irrevocable trusts (ongoing fiduciary administration).

What is the core requirement of the Trustee's Duty of Loyalty?

A trustee must administer the trust solely in the interests of the beneficiaries. no self dealing (even if in good faith)

What is the 'No-Further-Inquiry Rule' in trust law?

If a trustee has a conflict of interest, the court will not consider the trustee's good faith or fairness of the transaction; the conflict itself makes the transaction voidable; extends to persons in close relationships with the trustee

What are the three defenses/exceptions to the 'No-Further-Inquiry Rule'?

Settlor authorization in the trust, informed consent from all beneficiaries after full disclosure, or prior court approval.

What are 2 specific exceptions to the 'No-Further-Inquiry Rule' regarding corporate trustees and structural conflicts?

Corporate trustees may deposit assets in their own institution, and structural conflicts created by the settlor (e.g., trustee also being a beneficiary) do not breach the duty of loyalty.

What are the 4 types of breach remedies available to beneficiaries?

Disgorgement of profits, appreciation damages, surcharge, and co-trustee liability.

What is the difference between traditional and modern rules regarding co-trustee action?

Traditionally, co-trustees were required to act with unanimity; under modern law (e.g., UTC § 703), they may act by majority.

What is the 'Duty to Monitor' for co-trustees?

A co-trustee must participate in trust administration and take reasonable steps to prevent a breach by another co-trustee.

What does the Duty of Prudence require of a trustee?

The trustee must use reasonable care, skill, and caution in administering trust assets as a prudent person would, including the duty to diversify.

What is the 'Duty of Inquiry' for a trustee of a discretionary support trust?

The trustee has an affirmative duty to inquire into a beneficiary's financial needs when given discretionary power for support.

What is the purpose of an exculpation clause in a trust?

To limit trustee liability for out-of-pocket damages, except in cases of willful neglect or default. only protects against liability for out-of-pocket damages; doesn’t protect from INJUNCTIVE RELIEF

Under what circumstances is an exculpation clause unenforceable?

If the breach involves bad faith, recklessness, or intentional misconduct, or if the clause was added by a drafter who is also named as the trustee.

Why are 'No-Review Clauses' considered unenforceable?

Fiduciary duties must be judicially reviewable; a trust must be subject to court oversight to be legally recognized as a trust.

What is the status of mandatory arbitration clauses in trusts?

It is a developing area; some courts strike them down for depriving beneficiaries of court access, and in CA, they are generally unenforceable against beneficiaries.

What is the 'Prudent Investor Rule' regarding trust investments?

Trustees must manage assets as a prudent investor would, focusing on the entire portfolio rather than isolated investments, and must diversify unless special circumstances justify otherwise.

What are 3 examples of circumstances that might excuse a trustee from the duty to diversify?

Holding a family vacation home, holding a closely held family business, or having written authorization from beneficiaries to hold an undiversified portfolio.

Is a trustee liable for failing to diversify assets that were already undiversified when the trust began?

No, the trustee is not liable if the trust begins with assets that the settlor did not diversify.

What factors should a trustee consider when developing an investment strategy?

Economic conditions, inflation/deflation, tax consequences, the role of the investment in the portfolio, total expected return, beneficiary resources, liquidity needs, and special asset value.

What does 'surcharge' mean in the context of trust breach?

A financial penalty imposed on a trustee for losses resulting from a breach of duty.

What are 'appreciation damages'?

Damages awarded to beneficiaries if the trust property would have increased in value had the breach not occurred.

What is the standard of review for a trustee's discretionary distributions?

They may be subject to judicial review for 'abuse of discretion,' though courts vary on the threshold for what constitutes an abuse.

What does the investment function of trusteeship involve?

Reviewing trust assets and implementing an investment program that fits the purpose of the trust and the circumstances of the beneficiaries.

What are the primary duties of a trustee regarding trust property?

Trustees have duties regarding the custody of trust property, administrative duties, the duty to perform (with limited delegation), and the duty to treat beneficiaries fairly while properly allocating income and principal.

What is a primary advantage of choosing a friend as a trustee?

A friend often knows the settlor's wishes and values, allowing for discretionary decisions that are more closely aligned with the settlor's intent.

What is a primary disadvantage of choosing a friend as a trustee?

A friend may lack the professional expertise required for managing trust assets, such as investing, administration, and tax compliance.

What are the advantages of appointing a professional trustee, such as a bank?

Professional trustees offer expertise, established administrative systems, continuity, greater accountability, and solvency, and are typically more familiar with the duty to invest as a prudent investor.

What is the modern solution for balancing the pros and cons of individual vs. professional trustees?

Splitting functions through the use of co-trustees, delegation, or directed trusts.

Under traditional law, what is the requirement for co-trustees to take action?

Co-trustees of a private trust must act as a group and reach a unanimous decision for any action to be valid.

Under the Uniform Trust Code (UTC), what is the rule for co-trustee decision-making?

If co-trustees are unable to reach a unanimous decision, they may act by a majority.

What is a directed trust?

A trust where the settlor provides that the trustee must follow the directions of a designated third party (the trust director), such as an investment or distribution advisor, rather than exercising full discretion.

Are trust directors subject to fiduciary duties?

Yes, under the majority approach, trust directors are subject to fiduciary duties to beneficiaries, generally mirroring a trustee's duties of loyalty, prudence, and impartiality.

What is the 'willful misconduct' standard regarding a trustee's liability in a directed trust?

Under the UDTA, a trustee is not liable for following a trust director's instructions unless doing so constitutes willful misconduct, defined as a clear, obvious breach that any reasonable trustee would recognize.

What is the modern rule regarding a trustee's ability to delegate tasks?

A trustee may delegate tasks when a prudent trustee would do so, provided they exercise reasonable care, skill, and caution in selecting, instructing, and monitoring the agent.

What does the custodial function of a trustee involve?

Taking title and custody of trust property and properly safeguarding it, including collecting, protecting, and insuring the assets.

What is the duty to earmark trust property?

The duty to designate property as belonging to a specific trust, ensuring it is titled in the name of the trust and kept separate from the trustee's personal assets.

What is the purpose of earmarking trust property?

It keeps trust property free from the trustee's personal creditors and ensures that gains from trust property are properly attributed to the trust.

Under what circumstance is a trustee permitted to pool trust assets?

A trustee may pool assets from different trusts for investment purposes, provided they keep adequate records indicating the respective interests of each trust.

What is the consequence of commingling trust property with personal property under the current majority view?

The trustee is liable for all losses to the trust assets, even if the losses are normal market losses associated with a particular investment.

Why must a trustee keep adequate records of administration?

To fulfill the duty to account, enable beneficiary oversight, and protect the trustee by documenting actions and the reasoning behind them.

What is the trustee's duty regarding claims involving the trust?

The trustee has a duty to defend all claims against the trust and to enforce claims of the trust against others, including the right to settle or compromise claims.

What happens if a trustee fails to bring a legitimate claim against a third party?

A beneficiary may bring a derivative claim against the trustee and the third party.

Does the duty of impartiality require a trustee to treat all beneficiaries equally?

No, it requires the trustee to give due regard to the beneficiaries' respective interests as defined by the settlor in the terms of the trust.

What is the trustee's duty regarding the allocation of principal and income?

The trustee must allocate receipts and disbursements between income and principal impartially to balance the interests of income beneficiaries and remainder beneficiaries.

What specific actions are included in the trustee's administrative function?

Recordkeeping, bringing and defending claims, accounting to beneficiaries, and making tax and other required filings.

In a testamentary trust, what is the trustee's duty regarding the executor?

The trustee must collect trust assets from the executor as promptly as circumstances permit, verify that the property is complete, and pursue the executor for any breach that reduced trust assets.

What is the traditional rule regarding trustee delegation?

The traditional rule prohibited delegation, but it is now considered impractical as trustees often lack the specialized skills required for all trust business.

What is the trustee's responsibility when delegating a task to a contractor?

The trustee remains responsible for using due care in the selection and supervision of the contractor.

What is the definition of a trust director?

A third party, such as an investment or distribution advisor, who has the authority to direct the trustee's actions regarding specific trust functions.

What are common examples of 'income' in a trust?

Rents, cash dividends on stocks, and interest on bonds or bank accounts.

What constitutes the 'principal' of a trust?

The original property placed in the trust, including appreciation in value, stock dividends, insurance proceeds on trust assets, stock splits, and proceeds from the sale of capital assets.

How does 'appreciation' differ from 'interest' in a trust?

Appreciation is the increase in the market value of an asset (remaining in principal), while interest is earnings generated by an asset (typically paid out as income).

What is the primary difference between the traditional and modern (UPIA '97) approaches to trust allocation?

The traditional approach strictly identifies specific items as income or principal, while the modern approach allows trustees to invest for 'total return' and rebalance between income and principal.

What is a 'unitrust'?

A trust that pays the income beneficiary a fixed percentage of the trust's total value annually, rather than focusing on specific income-producing assets.

What is the trustee's duty to inform under the UTC?

The trustee has an ongoing duty to respond promptly to requests for information and to affirmatively disclose material developments, especially regarding nonroutine transactions.

What is the consequence of a beneficiary failing to timely object after receiving a full disclosure from a trustee?

The beneficiary waives breach claims against the trustee and is barred from later suing based on those disclosed facts.

What information must a trustee include in an annual report to beneficiaries?

Details on assets, liabilities, receipts, disbursements, trustee compensation, and market values.

Can a settlor limit a beneficiary's access to information about trust value?

Yes, under the UTC, a settlor may limit information until the beneficiary reaches a certain age, though this is not allowed in most states.

List three examples of 'nonroutine transactions' requiring disclosure by a trustee.

Changes in trustee identity/compensation, delegation of fiduciary responsibilities, and adjustments to investment or management strategies.

Are UTC rules regarding trusts mandatory or default?

They are default rules; most can be modified by the trust terms, except for core requirements like acting in good faith.

What are three key differences between private and charitable trusts?

Charitable trusts require a charitable purpose rather than ascertainable beneficiaries, are exempt from the Rule Against Perpetuities, and have a different scheme of supervision.

What is the Rule Against Perpetuities in the context of trusts?

A legal deadline requiring that an interest must 'vest' within the life of someone alive at the creation of the gift plus 21 years.

Are trusts created for political advocacy permitted as charitable trusts?

Yes, advocacy for a specific cause (e.g., gun rights or reproductive rights) is generally permitted, whereas supporting a political party is not.

Who enforces a charitable trust?

A state attorney general or other public officer, in addition to the beneficiaries.

What is the 'cy pres' doctrine?

A doctrine allowing a court to modify a charitable trust's purpose when the original objective becomes illegal, impossible, or impracticable, redirecting funds to a similar purpose.

What does 'cy pres' mean literally?

It is a French term meaning 'as near/close as possible'.

Under the modern UTC rule, what is an additional trigger for applying cy pres?

Cy pres can be applied if the amount of money held in the trust results in waste because it exceeds what is needed for the charitable purpose.

What is the difference between cy pres and equitable deviation?

Cy pres applies only to charitable trusts, while equitable deviation applies to all trusts.

What is the purpose of the equitable deviation doctrine?

It allows a court to modify a trust's administrative (and sometimes dispositive) terms when unforeseen circumstances would otherwise frustrate the trust's purpose.

How do courts typically handle racially or otherwise discriminatory charitable trusts?

They often use cy pres or equitable deviation to remove the discriminatory restrictions and preserve the charitable gift rather than invalidating it.

What is the legal status of a discriminatory trust administered by a government entity?

It is considered unconstitutional state action.

Does a charitable trust require specific, named beneficiaries?

No, it must benefit a broad class or have a socially useful purpose; naming specific individuals would make it a private trust.

What is the primary justification for the cy pres doctrine?

It carries out the settlor's intent as much as possible and prevents the 'dead hand' from being trapped by obsolete instructions.

Can a beneficiary waive their right to receive reports from a trustee?

Yes, a beneficiary may waive the right to reports and may later withdraw that waiver for future disclosures.