Trusts

I. INTRODUCTION
Strategy to Approach Trusts Question
1. What kind of trust?
2. Is the trust valid?
3. Is the trust adinistered appropriately?
!. Is the trust accounted for appropriately?
". #as interest $een transferred?
%. &hanges' odifications or terination to trust?
(. Is there a trust $y operation of la)?
Trust*
+arties to a Trust*
1.

2.

3.

A. ,-press trusts
1.

2.

B. .peration of la)
1. /esulting trust*

2.


II. VALIDITY
A. Intent
1.


2. +recatory language*




3. &apacity* Sae as $asic testaentary capacity*





B. Identifia$le Trust &orpus0/es*



1. ,-pectancy*


,1A2+3,:
A declares hiself trustee over 4 over )hatever property A receives fro &5s estate.
2. 6uture interest*


,1A2+3,:
A dies leaving 4lack Acre to 4 for life' reainder to &. & declares 7 trustee over her interest in 4lack Acre.
C. Ascertaina$le 4eneficiaries
1.


2. &lass gift pro$le
a.

$.

c. /eason )e need ascertaina$le $eneficiaries*


D. +roper +urpose
1.

2.


3.
HYPOTHETICAL
Sa declares he is placing his $each house in 2ali$u in trust for his daughter' contingent on her divorce
fro her good8for8nothing hus$and and his faily. Is this trust valid?






HYPOTHETICAL
4en ,. 9olent )ants to place :";;';;; in a trust to pay for his t)o children to attend a specific private
college' )ith any reainder going to the college to esta$lish a erit scholarship. What type of trust is
appropriate to serve his purposes?






E. 2echanics of &reation
1. 7eclaration*
a.

$.


.ral trusts are soeties upheld $y &alifornia courts' if the trust corpus does not include real property. Where
real property is involved' the Statute of 6rauds re<uires a )riting.
2. Inter vivos transfer* need a )riting =>3,SS only personal property' no real property.
a. A trust )ill not fail for lack of a trustee unless*



$. .rdinarily' the persons selected $y the settlor as trustee and successor trustee )ill $e confired $y the court' $ut if
they refuse to serve or fail to <ualify' the court has )ide discretion in naing a trustee or successor trustee to fill a
vacancy.
3. Testaentary transfer* trust is created through a )ill.
a. A trust can $e created through a clause in a )ill.
$. +our over )ill* =nder odern la)' it is perissi$le for a )ill to pour over property of the estate into an e-isting trust
that )as not forally e-ecuted and ay $e aended or revoked after the e-ecution of the )ill.
,1A2+3,:
Settlor sets up a trust. Testator akes a )ill that gives :1;;';;; to the trust esta$lished $y settlor. The provision in
the )ill is the pour over provision.
HYPOTHETICAL
4ill deposits oney in his o)n account at a $ank along )ith a letter instructing that the oney $e held ?in
trust for@ his grandfather in case 4ill dies in the )ar. Is there a trust?
,1A2
TI+







!. 3a) of &ontracts*


III. ADMINISTRATION
A. Trustee5s po)ers
1. ,-press*


2. Iplied*


3. /esignation07elegation
a. /esignation*


A1B

A2B

A3B



$. 7elegation*
A1B

A2B


B. 3ia$ility of Trustee
1. 3ia$ility of trustee to $eneficiaries
a. Ceneral duty*




A1B +rudent investor rule*


A2B 7iversify assets
A3B

A!B ,arark assets*


A"B

A%B Accounting*




2. 3ia$ility of trustee to third persons
a. &ontract*




$. Tort*



HYPOTHETICAL
A trustee akes an iprudent investent that' surprisingly' earns a su$stantial profit. The life $eneficiary
seeks ore incoe $ecause of the increase. What relief is availa$le to the life $eneficiary?






HYPOTHETICAL
T' the trustee of a trust' co$ines :"';;; of trust funds )ith :"';;; of his o)n onies to purchase an
anti<ue car' personally taking title to this asset. The autoo$ile appreciates in value to :1"';;;. What relief
is availa$le to the $eneficiaries?






A trustee is entitled to $e copensated for his duties. A trust cannot take advantage of the fact that a trustee
possesses special skills to do ore than a trustee typically does )ithout $eing copensated for it.
IV. ACCOUNTING
A. Incoe and +rincipal
=nifor +rincipal and Incoe Act* dis$urseents coe fro principal only in specified circustances' such as to pay the
principal of a trust de$t.
1. Incoe vs. +rincipal*


2. 7ividends*


3. >on8productive asset*


!. Wasting asset*


B. ,-penses
1. Ceneral rule*


2.


V. TRANSFERS OF INTEREST
A. Transfera$ility*


B. 7iscretionary trusts*


C. Spendthrift &lause*

,1A2
TI+


1. In order for clause to $e valid*




2. The effect of the clause is*



3. Special creditors that can $reakthrough a spendthrift clause*
a.

$.

c.

HYPOTHETICAL
2ickey is the $eneficiary of a discretionary' spendthrift trust. #e has' ho)ever' disappeared' and the trustee
cannot find hi. #is e-8)ife is seeking past due child support. What result?






VI. MODIFICATION AND TERMINATION
=nder &alifornia la)' a trust is to $e treated as revoca$le unless the trust instruent specifically provides for
irrevoca$ility. This is the general rule and it preserves fle-i$ility. Any trust created $y a )ill is irrevoca$le.
A. 2odification
1.

2.



a. If any $eneficiary does not consent*




,1A2
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B. Terination
1.


2.

C. 7octrine of &y +res*




A trust instruent ay prohi$it cy pres. In that case' the instruent )ill control' >.T the default rule.
HYPOTHETICAL
,unice' a resident of a sall to)n' left her hoe to the to)n )ith instructions that the property $e used as a
hospital. The to)n council decided it did not need a hospital and asked the court to invoke cy pres to allo)
the property to $e used for a ne) to)n hall. Should cy pres $e applied?






HYPOTHETICAL
Andy creates a trust to provide for the special tuition and costs associated )ith his daughter ,lisa$eth5s
training to $ecoe a concert violinist. Shortly thereafter' they are involved in a car accident in )hich Andy is
killed and ,lisa$eth suffers serious inDury' including daage to the nerves in her fingers. As a result' any
future prospects for ,lisa$eth to $ecoe a violinist are eliinated. Will the trust terinate?






D. /ule Against +erpetuities
1. 7efinition* holds that a $eneficiary5s interest in a trust is void unless it ust vest' if at all' )ithin 21 years after the death
of an individual alive at the creation of the trust.
2. &alifornia*

,1A2
TI+


VII. TRUSTS BY OPERATION OF LAW
A. /esulting Trust
1. &ircustances giving rise to a presuption of a resulting trust are of t)o types*
a.





$.




B. &onstructive Trust*

C. +urchase 2oney /esulting Trust*

,1A2+3,:
A purchases a car fro 4' pays the purchase price' and transfers title to &. If A intended to confer a gift on &' then & takes
the car outright. If it is sho)n that A did not intend to confer a gift on &' then & )ould hold title to the car in a purchase
oney resulting trust for A.
BAR EXAM APPLICATION
Question 1
Sa e-ecuted a valid testaentary trust )ith To as trustee' and all incoe paid to Sa5s nephe)' 4ill' for life. The trust
specified that To could invade the principal for 4ill in such aounts as To deterines' and that 4ill5s interest )as
inaliena$le and not su$Dect to the clais of creditors.
4ill is delin<uent in paying child support and 3ender has o$tained a Dudgent against hi for an unpaid credit card $ill. 4ill5s
e-8)ife' Eate' and 3ender each seek to get the trust incoe to satisfy 4ill5s o$ligations. Eate and 3ender re<uest a court order
directing To to pay all future installents of trust incoe to the' rather than 4ill' until 4ill5s o$ligations to the' are satisfied.
#o) should the court rule on the re<uests ade $y 3ender and Eate?
Applicants ust consider )hen a lender ay overcoe a spendthrift provision' and ho) a spendthrift provision applies to an
o$ligation to pay child support.
Adapted From the February 2005 California Bar Exam
BAR EXAM APPLICATION
Question 2
Applicants )ere asked to analyFe issues concerning reoving a trustee and re<uiring the trustee to indenify the trust.
/ichard e-ecuted a revoca$le inter vivos trust at his )ife' Alicia5s' re<uest' naing Alicia as trustee and Alicia5s daughter &elia
as a $eneficiary. After the trust5s creation and during /ichard5s lifetie' Alicia invested half of the trust assets in a ne)ly fored
copany and lent the other half of the trust5s assets to her la) fir.
/ichard5s son fro a previous arriage' 4rian' seeks to have Alicia reoved as trustee and re<uired to indenify the trust
against any possi$le legal action $y &elia.
What grounds' if any' under &alifornia la) can 4rian assert for reoving Alicia as trustee and re<uiring her to indenify the
trust' and )hat is the likelihood 4rian )ill succeed?
Applicants ust consider the grounds for reoval of a trustee and for re<uiring a trustee to indenify the trust. Applicant
should address )hether Alicia violated her duty of care and duty of loyalty.
Adapted from the February 2002 California Bar Exam