Term
| What are the two title interests in property? |
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Definition
Legal - Record owner of property
Equitable - Right to enjoy the property |
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Term
| True or False - A trust will not fail for want of a settlor |
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Definition
| True - Implied trusts arise by operation of law. It is created despite the lack of a settlor. |
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Term
| What are two types of implied trusts? |
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Definition
Constructive - fraud rectifying trust, imposed by a court
Resulting - Intent forcing trust, based upon the presumed intent of a transferor of property |
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Term
| What are the five common law requirements of an express trust? |
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Definition
| 1)Intent to create by a legally competent settlor 2)present declaration or act of transfer by the settlor 3)existence of a trust corpus 4)naming of a trustee 5)Identifiable beneficiaries |
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Term
| Egbert creates a trust under which he declares that any interests in real property that he receives under the will of his uncle Ned are held in trust for the benefit of Egbert's 11 yr old son, Devon. An enforceable trust has not been created because... |
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Definition
| An expectancy under a will is not a transferable property interest. - At common law the corpus of a trust must consist of a transferable property interest, and expectancy under a will does not constitute such an interest. |
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Term
| True or False. Precatory words are used by a settlor to confer legally enforceable duties upon the trustee. |
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Definition
| False. The use of precatory words, such as I desire or I request, without more, do not create legally enforceable duties in a trustee. |
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Term
| What are some non-tax reasons that a settlor may have for creating an express trust? |
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Definition
| Investment management, financial management if become incapacitated, can select fiduciary, asset protection, special needs of disabled beneficiaries, and charitable reasons |
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Term
| What is the effect of a beneficiary disclaiming his or her interest in a trust? |
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Definition
| Causes an acceleration of the remainder interest in the trust. Thus, a disclaimer is equivalent to the death of the disclaimant prior to the effective date of the governing instrument. |
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Term
| What are two components of a typical A-B estate plan? |
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Definition
| 1) A unified credit shelter trust and 2) a marital trust or bequest. Under current law (2013) $5,250,000-reduced by the amount of taxable gifts made by a decedent during his or her lifetime maybe sheltered from federal transfer tax at death under the applicable exclusion amount. Additionally, a decedent may transfer an unlimited amount of property to a surviving spouse without the imposition of federal transfer tax at the decedent's death. |
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Term
| Under a credit shelter trust, what is the difference between the one-pot and several-pot structures upon the death of the second spouse to die? |
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Definition
| Under the several pot structure property of the credit shelter trust is divided upon the death of the surviving spouse into separate trusts for each of the spouse's children; property from one child's trust ordinarily is not available to another child. Under the one-pot structure, property of the credit shelter trust is retained in a single trust until the occurrence of a particular condition, such as the youngest child reaching a stated age. The single pot approach is used when funds are inefficient to establish separate trust or the parents are concerned about the special needs, especially the medical needs, of a particular child. |
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Term
| What are the 4 categories of marital trusts? |
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Definition
| 1) Power of Appointment Trust 2) Estate Trust 3) QTIP Trust 4) QDOT (foreign spouse) |
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Term
| Under what circumstances will a power of appointment trust qualify for the marital deduction? |
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Definition
| 1)spouse entitled to all income during lifetime 2)income payable to the spouse at least annually 3)spouse given inter vivos or testamentary POA over the trust property that is exercisable by the spouse alone and in all events 4)No person other than the spouse has the power to appoint trust property to anyone other than the spouse. |
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Term
| How does an estate trust differ from a power of appointment trust? |
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Definition
| Estate Trust - the surviving spouse and his or her estate are the only trust beneficiaries. Therefore, income need not be paid to the spouse, and underproductive property may be retained in the trust without jeopardizing the marital deduction. Upon the surviving spouse's death, all of the trust property is distributed to that spouse's estate. The primary disadvantage of an estate trust is that the surviving spouse cannot appoint trust property during his or her lifetime to family members. |
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Term
| How does a QTIP Trust differ from a power of appointment trust? |
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Definition
| A QTIP trust is like a power of appointment trust without the power of appointment. Thus, the surviving spouse must be entitled to all of the income of the trust during his or her lifetime, payable at least annually. At the death of the surviving spouse, the trust property is distributed as directed by the donor spouse in the trust instrument. To qualify the trust for the marital deduction, an irrevocable QTIP election must be made on the donor spouse's estate tax return. |
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Term
| What is the difference between an annuity trust and a unitrust? |
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Definition
| An annuity trust pays a sum certain, which is determined when the trust is created, to the current beneficiaries each year. IN contrast, a unitrust pays a fixed percentage of the FMV of trust principal to the current beneficiaries each year. |
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Term
| What are the primary differences between a GRIT, GRAT and GRUT? |
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Definition
| Under a GRIT, the grantor retains the right to receive all of the income of the trust for a fixed term of years. Under current law the corpus of a GRIT is limited to a personal residence of a grantor, unless the GRIT is set up for the benefit of certain collateral relatives or other unrelated third parties. Under a GRAT, the grantor retains the right to receive fixed annuity payments for a term of years. The corpus is not limited to a particular type of asst. Under a GRUT, the grantor retains the right to receive a fixed percentage of the FMV of the trust corpus each year. The trust corpus is not limited to a particular type of asset. Administration of a GRUT may be burdensome because of the requirement that assets be valued on an annual basis to determine the amount payable to the grantor each year. |
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Term
| What characteristics do GRITs, GRATS and GRUTS have in common? |
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Definition
| They are all irrevocable trust under which a grantor retains a current interest for a fixed term of years. The trust's irrevocability enables the grantor to make a completed gift of the remainder interest at the time of trust's creation. Because the remainder interest represents a future benefit, the amount of the gift is discounted under applicable treasury department valuation tables. |
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Term
| How does a qualifying annual exclusion trust differ from a Crummey Trust? |
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Definition
| A 2503(c) Trust (qualifying annual exclusion trust) 1)Have only one current beneficiary 2)make income or principal or both available for the benefit of the minor beneficiary until the beneficiary attains age 21 3)Provide that the trust property will pass to the beneficiary upon his or her reaching age 21 4)If minor dies prior to reaching age 21, provide that trust property is payable to the beneficiary's estate or as the beneficiary may appoint under a general power of appointment. A Crummy Trust may have 1)Multiple beneficiaries 2)Gift trust beneficiaries a power to withdraw only recent contributions to the trust for a short period after such contributions are made and 3)continue to operate beyond a beneficiary's reaching age 21. Thus, a beneficiary under a Crummy trust, unlike the beneficiary of a 2503(c)cannot unilaterally require distribution of the entire trust principal upon reaching age 21. |
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Term
| Under what circumstances may a trustee delegate one of its powers? |
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Definition
| A trustee may delegate one of its powers if the authority to delegate is expressed or implied by the trust instrument or an applicable statute, or if all of the trust beneficiaries consent to the delegation of the power, or a court rules that the trustee may delegate such power. Courts often infer that certain ministerial powers, such as use of a broker to execute a securities transaction, reasonably may be delegated unless expressly forbidden by the trust instrument or applicable law. |
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Term
| State the common law rule against perpetuities |
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Definition
| No interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest. |
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Term
Which of the following receipts is considered principal under the Revised Uniform Principal and Income Act?
a. Cash dividends
b. stock dividends
c. crops received from a tenant under a crop share lease
d. Life insurance proceeds that the settlor indicates in the trust instrument should be treated as income |
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Definition
| B. Stock Dividends received from a corporation are considered principal under the Revised Act. In contrast, cash dividends are considered income under the Revised Act. |
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Term
Which of the following receipts is considered income under the Revised Act?
a. Proceeds from the sale of corporate stock.
b. Periodic interest payments accrued but not yet due or payable to a testator as of the date of the testator's death.
c. Cash dividends declared but not yet paid to a testator as of the date of the testator's death
d. Cash dividends declared but not yet paid to a trust as of the date of the trust's termination. |
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Definition
| D. Under the Revised Act, corporate distributions to a trust that are due but not paid as of the date of a trust's termination are treated as income when received and paid to the income beneficiaries of the trust. |
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Term
| Under what circumstances will a court apply the doctrine of cy pres? |
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Definition
| cy pres doctrine will be applied by a court of equity if 1)the grantor of a charitable trust had a general charitable intent 2) accomplishment of the literal terms of the trust is unlawful, impossible, impractical, or inexpedient. The cy pres doctrine may also be applied by a court to modify a restriction on the management or investment of a trust if the restriction is impracticable or wasteful, if it impairs the management or investment of the trust, or if changed circumstances indicate that a modification will further the purposes of the trust. |
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Term
| True or False. The Prudent Person Rule focuses on the process used by the trustee when selecting trust investments and upon the results obtained in exercising its investment powers. |
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Definition
| False. The Prudent Person rule focuses solely upon the process of selecting appropriate investments, not on the results obtained. Realistically, though, few beneficiaries will complain unless the results obtained do not meet their expectations. |
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Term
| What is the primary difference between the traditional Prudent Person Rule and the Prudent Investor Rule? |
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Definition
| Under the prudent person rule, an independent assessment of each asset is made with respect to risk, investment objectives, concentration, safety, yield, and the like. In contrast the prudent investor rule requires careful monitoring of each investment, plus consideration of the entire trust portfolio and the trust's overall investment strategy. |
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Term
| True or False. A trustee must reasonably diversify trust investments, regardless of the circumstances. |
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Definition
| False. Although prudence almost always dictates the diversification of trust investments, circumstances may indicate that it is prudent not to diversify. In addition, the terms of the trust may preclude the trustee from diversifying. For example, the trust instrument may provide that the trustee invest only in certain closely held stock. |
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Term
| Under OCC regulations, how often must a national bank audit its collective investment funds? |
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Definition
| Must be audited at least once during a 12 month period. |
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Term
| What is a mutual trust investment company? |
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Definition
| Roughly a dozen states have authorized the creation of mutual trust investment companies or similar entities to provde the advantages of common trust fund investment to state and national banks that are too small to operate their own funds. Participating banks may contribute capital from their trust accounts to the mutual trust investment company or similar entity, which invests the capital and operates essentially in the same manner as a common trust fund. |
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Term
| What is the Chinese wall concept? What are its typical features? |
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Definition
| A metaphor used to describe a set of policies and procedures used by an entity for the purpose of preventing material inside information regarding a particular security from being communicated between the entity's departments. Typically, the policies and procedures that make up a Chinese wall include 1)Employee training on federal and state securities laws 2) restrictions on employee trading 3) physical barriers between departments and 4) limitations on proprietary trading by the entity. |
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Term
| What is the purpose of rule 144 of the SEC? |
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Definition
| Rule 144 provides objective objective criteria for determining whether a seller of securities is not an underwriter, thereby exempting the securities from the registration requirements of the Securities Act of 1933. |
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Term
| True or False. Liability may be imposed upon a fiduciary in its representative capacity under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA)as amended only if the fiduciary is shown to have been responsible for the contamination. |
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Definition
| False. CERCLA permits recovery of the costs of cleaning up contaminated sites from the current owner of the property without regard to fault. Such liability applies to a fiduciary that owns property in a representative capacity. Liability under CERCLA is strict, joint, and several; thus, if other potentially responsible parties are insolvent, the fiduciary could bear the entire cost of remediation. |
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Term
| Upon whom may liability be imposed under CERCLA? |
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Definition
| CERCLA imposes liability upon any one or more of the following potentially responsible parties 1)the current owner or operator of the contaminated property (present owner) 2)the owner or operator of the property at anytime during which hazardous substances were disposed of (past owner) 3)any person or entity that arranged for disposal or treatment, or transport for disposal or treatment, of hazardous substances at the site 4)any person or entity that accepted such hazardous substances for transport at the site. |
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Term
| Under CERCLA, must the environmental liability of a fiduciary be based upon direct ownership or operation of contaminated property? |
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Definition
| NO. Environmental liability may arise even without direct ownership or operation. For example, if a fiduciary holds closely held business stock, the business owns or uses contaminated property, and the fiduciary possesses or exercises sufficient management authority over the business to qualify as a CERCLA operator, the fiduciary may be held liable under CERCLA in its representative capacity. |
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Term
| Is a fiduciary's liability in a representative capacity under CERCLA limited to the value of the contaminated property? |
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Definition
| No. Liability extends to all assets of the person held liable. In a suit against a fiduciary in its representative capacity, the person in question probably is the estate or other entity for which the fiduciary is responsible. For example, where an estate contains contaminated property and cash, the cash is exposed to CERCLA liability arising from the contaminated property. |
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Term
| When may a fiduciary be personally liable under CERCLA? |
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Definition
| Under 1966 legislation, called the Asset Conservation Act for short, a fiduciary's liability is limited to the assets held in a representative capacity unless the fiduciary's negligence causes or contributes to the contamination. |
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Term
| Besides the federal government, what other parties may assert claims against a fiduciary for environmental damage? |
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Definition
| 1)state or local governments seeking environmental cleanup costs under their own laws 2)Other potentially responsible parties seeking contribution toward cleanup costs assessed by federal, state or local agencies against such parties 3)heirs or beneficiaries claiming a breach of fiduciary duty for failure to make appropriate inquiries regarding the condition of the property or take appropriate remedial steps that could have prevented or mitigated damages. |
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Term
| Other than an act of God or an act of war, what is the only statutory defense available under CERCLA to an owner or operator of contaminated property? |
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Definition
| Act or omission of a third person, other than an employee or agent of the owner or operator. |
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Term
| Under CERCLA, what variations of the third party defense may be available to a fiduciary asserting the third party defense? |
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Definition
| 1)Lack of direct or indirect contractual relationship wit hthe party responsible for the contamination, while exercising due care with respect to hazardous substances and taking reasonable precautions against foreseeable acts or omissions of third persons 2)lack of knowledge of environmental hazards, despite having made all appropriate inquiries into the previous ownership and use of the property, or innocent purchaser defense. |
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Term
| What types of powers may be included in a governing instrument to enable a fiduciary to protect trust or estate assets, and the fiduciary's personal assets, from liability for environmental damage? |
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Definition
| 1)power to inspect and monitor trust property 2)power to clean up environmental problems using estate or trust funds 3)power to disclaim an interest in trust property 4)right to refuse contribution to trust property 5)power to disclaim certain management authority over trust property 6)power to segregate potentially contaminated property into a separate trust 7)warranty of the settlor that the property being transferred is not contaminated by hazardous substances 8)indemnification from the settlor in the event that environmental liability arises 9)exoneration from liability in the event that environmental damage exists or occurs |
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Term
| Will an indemnification agreement, under which the settlor agrees to hold the trustee harmless for any environmental liability assessed against the trustee protect the trustee from liability under CERCLA? |
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Definition
| No, but it will defray such liability. It may also be effective in protecting the trustee from breach of fiduciary duty claims brought by the trust beneficiaries. |
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Term
Which of the following is a valid defense to an alleged breach of the trustee's duty of loyalty in a particular transaction?
a. The transaction was fair to all parties
b. The trustee did not profit in any way from the transaction.
c. The trustee exercised good faith when executing the transaction
d. None of the above |
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Definition
| D. None of the Above. Equity deems it better to forbid all disloyalty rather than attempt to separate harmless from harmful acts. Therefore, transactions that violate the duty of loyalty are prohibited regardless of reasonableness of the price paid or obtained, fairness to all parties, or the trustee's lack of profit or good faith. The existence of one or more of these factors, however may influence a court in determining appropriate relief to be granted to the trust beneficiaries. |
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Term
| What is the trust opportunity doctrine? |
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Definition
| A trustee cannot acquire for itself property that the trustee has a duty to acquire for the trust. |
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Term
| May a national bank invest trust assets in its own stock? |
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Definition
| Under OCC, only if authorized byt the trust instrument, local law, or court order |
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Term
| Under what circumstances may the trust beneficiaries consent to a trustee's disloyal act? |
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Definition
| If at time of consent 1)no beneficiary is under legal incapacity 2)the beneficiaries know, or the trustee reasonably believes that they know, their legal rights and all material facts that the trustee knows or should know 3)the beneficiaries are not induced by undue influence or other improper means employed by the trustee 4)the transaction is fair and reasonable |
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Term
| What is the liability of the trustee in the event that a breach of trust results in a loss to the trust or a profit to the trustee? |
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Definition
| 1)restore to trust principal the value that the trust would have attained but for the breach 2)restore to the trust beneficiaries any distributions that they would have received had the trust been properly administered and 3)pay the amount necessary to prevent the trustee from benefiting personally from the breach. In addition, a court of equity may impose one or more equitable remedies, such as imposition of a constructive trust, removal of the trustee and so forth, that it deems necessary to redress the breach. |
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Term
| Under what circumstances is a corporate trustee liable for the wrongful act of its officer or employee? |
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Definition
| A wrongful act of the officer or employee of a corporate trustee, committed within the scope of employment, is a wrongful act of the corporation. Therefore, a corporate trustee is liable to the trust beneficiaries for every negligent or wrongful act of the trustee's officers and employees committed within the scope of their employment. |
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Term
John creates a trust with income during life to Sam, with the remainder to Sue. John retains the right to amend or revoke the agreement. Sue will have to disclaim her interest in the trust wihtin nine months of
a. Sam's death
b. John's death
c. The creation of the trust |
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Definition
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Term
Which of the following situations represents compliance with the Revised Uniform Principal and Income Act?
a. All proceeds from assets held by the trust are allocated one-half to principal and one-half to income.
b. A trustee makes a prudent, modern, portfolio-based investment decision, but the decision skews the return in favor of the principal beneficiaries.
c. The realized capital gain on the sale of real property is allocated to income after payment of all expenses of sale.
d. All proceeds from the sale of a work whose copyright is held by the trust are allocated to income. |
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Definition
| B. The Revised Act supports a trustee who has made a prudent, modern, portfolio-based investment decision that has the initial effect of skewing the return from all the assets under management between income and principal beneficiaries. However, the trustee may be required to use the power of adjustment to correct the imbalance between income and principal. |
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Term
| On June 11, 2010, your agent - whom you failed to supervise properly - diverted income from the trust into his personal account. You discovered the agent's action on September 3, 2010, and notified beneficiaries on October 13, 2010. Under the UTC, what is the last day on which a beneficiary file a surcharge action against you based on these circumstances? |
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Definition
| October 13, 2011 - One year after the date the beneficiary or a representative of the beneficiary was sent a report that adequately disclosed the existence of a potential claim for breach of trust and informed the beneficiary of the time allowed for commencing a proceeding. |
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Term
| Under which circumstances may an individual co-trustee completely avoid liability for delegating discretionary powers to a corporate trustee? |
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Definition
| As a general rule, discretionary duties may not be delegated. Several exceptions exist: applicable law may allow for the delegation of such duties, or the trust may specifcally permit it. Absent such authority to delegate, however, a trustee usually will be liable for any loss that results. Although there has been a trend toward allowing fiduciaries greater flexibility to draw on teh abilities and expertise of others in executing the fiduciaries duties, such reliance on others always carries with it the danger that an impermissible delegation will occur. Especially in the absence of express authority under state law or in the instrument itself, fiduciaries should monitor all proposals and activities of those on whom they rely and record their vigilance. |
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Term
| Which type of trust is imposed by a court on a holder of property to prevent unjust enrichment? |
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Definition
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Term
| What does the Environmental Protection Agency (EPA) do? |
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Definition
| Under the federal statute CERCLA, broad powers are given to EPA to identify and clean up contaminated sites and to recover the costs from private parties. |
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Term
| A charitable trust can not have a fixed term greater than how many years? |
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Definition
| 20 years. However, if it is for the life of a beneficiary, it may exceed that that. |
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Term
Except in the case of illegality of objective, when an express trust fails
a. the trustee may designate a new class of beneficiaries
b. The trustee acquires beneficial title to the property
c. A resulting trust is established for the settlor or settlor's successors in interest
d. A resulting trust is established for charities to be designated by the court |
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Definition
| C. Trust beneficiaries must be identifiable, although such identification may be either specific (the actual name of a person) or general (my children). If a trust fails for want of any beneficiaries, most courts would find that a resulting trust has been created in favor of the settlor, if living, or the settlor's estate if deceased. |
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