Trusts Final

Chapter 6: Trusts: creation and characteristics

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Decedent dies with a will that purports to devise $10,000 in trust for the benefit of her dog, Fido, who survives her. Decedent’s will names a trustee of the trust and gives specific directions regarding the use of the trust property for Fido’s benefit and the trust is to continue until Fido’s death. Which of the following best describes the legal effect of these provisions in Decedent’s will?

a. The attempt to create a trust for Fido is invalid and void, as trusts can be created only for human beneficiaries and charities.

b. Although the attempt to create a trust for Fido is invlaid, the devise can be held by the named trustee as an “honorary trust” if trustee so chooses.

c. The attempt to create a trust for Fido is likely to be invalid, as it violates the rule against perpetuities.

d. The attempt to create a trust for Fido is likely to valid as a type of “purpose trust.”

The correct answer is D. Although under the traditional law of trusts purpose trusts such as trusts for animals were not permitted, all states now have statutes that permit purpose trusts for animals. These trusts are typically valid if they terminate, at the latest, on the death of the animal. A and B are not correct answers because purpose trusts for animals can be created under statutory provisions enacted in all U.S. jurisdictions. C is not the correct answer because under statutory modifications to the traditional law of trusts, trusts for animals can be created if they terminate, at the latest, on the death of the animal. Pages 422-428 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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2. On April 1, 2015, F, who owns a valuable painting entitled “Seymour Dreams,” writes an email to his son, S, that reads in its entirety: “Dear S: I hereby give you the ‘Seymour Dreams’ painting currently hanging in my study. From this date forward, I want you to own this fine work of art. Love, Dad.” F does not deliver the painting to S, who lives several hundred miles away. Although S received and read the email, neither F nor S makes any further mention of the painting. F dies intestate a few months later with the painting still hanging in his study. After F’s death, the personal representative of F’s estate claims the painting for the estate, maintaining that it was not gifted to S during F’s lifetime because the delivery requirement for making gifts was not satisfied. S argues that from the time of the April 1, 2015, email, F held the painting in trust for S. Which of the following is the most accurate legal characterization of S’s argument?

a. The argument is a valid representation of the law as applied to the facts.

b. The argument is invalid as a settlor of a trust cannot be the trustee of that trust.

c. The argument is invalid as F did not deliver the trust property to S.

d. The argument is invalid as the facts show no intent on the part of F to create a trust.

Rationale:

The correct answer is D. The intent to create a trust is an intent to transfer property to a trustee for, or hold property as a trustee for, the benefit of one or more beneficiaries. Here, F wrote that he intended to “give” S the painting, and that he wanted S to “own” the property. This is not the same as the intent to transfer the painting to a trustee for S’s benefit; it is not the intent to create a trust. A is not the correct answer because F lacked the requisite intent to create a trust. B is not the correct answer because as a general rule, a settlor of a trust may also serve as a trustee of the trust. C is not the correct answer because a settlor need not deliver trust property to the beneficiary in order to create a trust. Pages 401-416 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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3. T’s will devises his residuary estate to “the trustee of the trust created under this will.” T includes language in the will directing the creation and administration of the trust but inadvertently fails to name a trustee. Which of the following is the most accurate statement of the legal effect of the trust provisions in T’s will?

a. The trust will be created and the court will appoint a trustee.

b. The trust will not be created, because T’s will fails to name a trustee.

c. The trust will not be created, because a trust cannot be created by a will.

d. The trust will be created only if the personal representative of T’s estate agrees to serve as trustee.

Rationale:

The correct answer is A. Although a trust must have a trustee, a trust will not fail to be created solely for lack of appointment of a trustee. In such case, the court will appoint a trustee on the application of an interested party. B is not the correct answer because although a trustee is essential, the court will appoint a trustee. C is not the correct answer because testamentary trusts are valid. D is not the correct answer because the personal representative need not serve as trustee. Page 402 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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4. Testator dies leaving a will that contains the following language: “I devise the residue of my estate to my friend F, for the benefit of my surviving children. F shall use this property to pay for my children’s education, and shall distribute any remaining property in equal shares to my children at such time as my youngest living child reaches the age of twenty-five years.” The will also contains a paragraph naming F as the executor of Testator’s estate but contains no language that specifically names a trustee. Which of the following statements most accurately describes the effect of the quoted language in Testator’s will?

]a. The language creates a trust with F as trustee and Testator’s surviving children as beneficiaries.

b. The language legally devises the residue to F, but is precatory and does not create a trust; instead it imposes only a moral obligation on F to use the property for the benefit of Testator’s surviving children.

c. The language creates a trust without naming a trustee, but the court will appoint a trustee.

d. The language devises the residue to F, and neither creates a trust nor imposes a moral obligation on F to use the property for the benefit of Testator’s surviving children.

Rationale:

The correct answer is A. To create a trust, one need only the requisite intent, one or more trust beneficiaries, and trust property. The intent necessary to create a trust is the intent that the property given be held or managed for the benefit of one or more persons. Here, that intent is evident in the language that the transfer is “for the benefit of” the Testator’s children and that F “shall use” the property for their benefit in specific ways. Testator is therefore devising the property to F not for his own benefit but to hold and manage as a trustee for Testator’s children, who are the trust’s beneficiaries. B is not the correct answer because directive terms such as “shall use” and “shall distribute” reveal an intent that F’s obligation be legally binding. C is not the correct answer because the language reveals Testator’s intent that F hold the property as trustee. D is not the correct answer because the language used by Testator reveals that he intended to create a trust, and there is trust property (the residue of Testator’s estate), and trust beneficiaries (Testator’s surviving children). Pages 401-402 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

Chapter 7:Nonprobate transfers and planning for incapacity

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5. 1. Client wishes to transfer his principal residence to his girlfriend at his death outside of probate. He is not interested in obtaining advice as to the transfer of any other assets. He consults with Lawyer as to the simplest and easiest way to make this transfer. Of the following, which is the best advice given to Client by Lawyer?

a. Client should sign and record a deed for the residence under which he retains a life estate but transfers a remainder interest to his girlfriend.

b. Client should sign and record a deed under which he transfers the residence to himself and his girlfriend and joint tenants with a right of survivorship.

c. Client should sign and record a deed under which he transfers the property to himself, with a “transfer on death” to his girlfriend.

d. Client’s only good option is to transfer the residence to the trustee of a revocable trust under which the trustee is required to distribute the deed to Client’s girlfriend at Client’s death.

Rationale:

The correct answer is C. An ideal nonprobate transfer of property at death does not make a transfer of any interest in the property until the moment of death and is completely revocable up until the moment of death. A majority of jurisdictions has implemented legislation such that permits a transfer on death deed that does not transfer any interest in the property before death and is revocable by the transferor at any time before death. A is not the correct answer because such a deed gives the transferee a vested remainder interest and is not revocable. B is not the correct answer because such a deed gives the transferee an undivided one-half interest in the property and is not revocable. D is not the correct answer because a majority of jurisdictions has implemented legislation such that permits a transfer on death deed. Pages 492-493 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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6. 2. H and W are married to one another. Sometime after H and W’s marriage, H becomes a participant in an employer-sponsored retirement plan governed by federal ERISA laws. H designates his daughter, X, who is not W’s daughter, as the primary death beneficiary on his retirement account on a beneficiary designation form supplied by the plan sponsor. W consents, orally, to the designation. After H’s subsequent death, W claims a right to the plan. Which of the following is most accurate in describing W’s right to the plan benefits?

a. W is entitled to the benefits, because ERISA provides that a participant in an ERISA-governed plan cannot designate someone other than the participant’s spouse as the primary death beneficiary of the participant’s account in the plan unless the spouse consents in writing.

b. W is not entitled to the benefits, because ERISA provides that a married participant in an ERISA-governed plan can designate a child as the death beneficiary of the plan if the child is not the child of the participant’s spouse.

c. W is not entitled to the benefits, because ERISA provides that a participant in an ERISA-governed plan cannot designate someone other than the participant’s spouse as the primary death beneficiary of the participant’s account in the plan unless the spouse consents, orally or in writing.

d. W is entitled to the benefits, because ERISA provides that a participant in an ERISA-governed plan cannot designate someone other than the participant’s spouse as the primary death beneficiary of the plan unless that right is waived in a premarital agreement valid under the law of the participant’s jurisdiction of domicile.

Rationale:

A is the correct answer for the reasons stated in the answer. B is not the correct answer because a participant in an ERISA-governed plan is permitted to designate any person to be the beneficiary of the death benefit of the plan, so long as the participant’s spouse waives the right to be the death beneficiary in writing. C is not the correct answer because ERISA provides that a participant’s spouse must waive his or her right to be named as the death beneficiary of an ERISA-governed plan in writing. D is not the correct answer because under ERISA a spouse’s waiver before he or she becomes the spouse of the participant is not effective to waive the spouse’s right to be named the death beneficiary under the plan. Pages 478-492 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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7. 3. H, who is married to W, executes a declaration of revocable trust and transfers most of his assets to the trust. On the same date, H executes a will that names the trustee of H’s revocable trust as the beneficiary of H’s residuary estate. The revocable trust provides that if W survives H, then she will benefit from the trust assets after H’s death. A couple of years later, H and W divorce. Shortly thereafter, H dies unexpectedly, not having made any changes to his revocable trust instrument. Which of the following most accurately describes W’s interest in H’s revocable trust upon H’s death?

a. Despite the divorce, in all jurisdictions the provisions of the revocable trust will be respected, and W will benefit from the trust property.

b. Due to the divorce, in all jurisdictions W will be deemed to have predeceased H for purposes of determining her benefit from the revocable trust.

c. Due to the divorce, in many jurisdictions W will be deemed to have predeceased H for purposes of determining her benefit from the revocable trust.

d. Due to the divorce, W will be deemed to have predeceased H in all jurisdictions, but only for purposes of determining whether she will benefit from assets “poured over” to the revocable trust by H’s will.

Rationale:

The correct answer is C. The revocation on divorce rule provides that for purposes of interpreting a will executed before a testator’s divorce from a spouse, the spouse will be deemed to have predeceased the testator. In many but not all jurisdictions, the rule also applies to revocable trust provisions implemented before a divorce. A is not the correct answer because in many jurisdictions the revocation on divorce rule applies to revocable trusts. B is not the correct answer because the revocation on divorce rule does not apply to revocable trusts in all jurisdictions. D is not the correct answer because the revocation on divorce rule applies to the provisions of revocable trusts in many jurisdictions. Pages 459-465 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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8. 4. Having as one of her goals the avoidance of probate, O executes a declaration of trust creating a revocable trust and also executes a pour-over will and a durable power of attorney. The revocable trust benefits O during her lifetime and at O’s death the assets are to be distributed to O’s children. The durable power of attorney names O’s daughter (D) as O’s attorney-in-fact and gives D broad powers to act on behalf of O. The trust instrument names D as the successor trustee in the event of O’s incapacity (as defined in the trust instrument) or death. O begins the process of transferring her assets to the trust but only gets some of them transferred before she becomes ill and is forced to stop the process. A few months later O’s family determines that she has met the definition of incapacity contained in the trust instrument and D becomes trustee of the trust with O’s acquiescence. Which of the following is the best advice to D regarding her desire to manage O’s assets for O’s benefit while O remains incapacitated and preserve O’s goal of avoiding probate at her death?

a. f the durable power of attorney permits it then D should, as O’s attorney-in-fact, transfer O’s remaining assets to D as trustee of the revocable trust so that D as trustee can manage all of O’s assets for O’s benefit while she remains incapacitated.

b. If the trust instrument permits it then D should distribute the assets out of the trust and back into O’s name so D can manage all of the assets for O’s benefit using the durable power of attorney.

c. An attorney-in-fact under a durable power of attorney cannot transfer the assets of an incapacitated principal to a trust, so D must instead use the authority contained in the power of attorney to manage the assets outside the trust for O’s benefit while managing the assets inside the trust as trustee.

d. D should seek to have a court declare O to be without legal capacity and name D as O’s guardian.

Rationale:

The best answer is A. O’s goal of avoiding probate can be preserved if all O’s assets are transferred to her revocable trust. After the transfer D can also achieve her goal of managing O’s assets for O’s benefit as trustee of the revocable trust. B is not the best answer because if O’s assets are distributed out of the revocable trust, then O’s estate will not avoid probate as to those assets. C is not the best answer because a durable power of attorney can give the attorney-in-fact the authority to transfer the principal’s assets to a trust. D is not the correct answer because the management of O’s assets for O’s benefit can be achieved through the plan that O implemented as O intended when she signed the durable power of attorney and declaration of trust without resort to the courts. Pages 502-511 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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9. 5. Lawyer is an attorney who meets with client (Client). Client, who is elderly, tells Lawyer that she needs to “do a will.” Lawyer, who offers this service to clients, interviews Client regarding her family situation and the general nature and extent of her assets. Client tells Lawyer she is widowed and has no children but does have a niece (Niece) and nephew (Nephew) and is quite close to each of them. She also tells Lawyer that she owns only a small house, a couple of bank accounts and miscellaneous furniture, furnishings, and personal effects. Client further tells Lawyer that she wants this property to be distributed one-half to her niece and one-half to her nephew. Upon further questioning by Lawyer, Client tells Lawyer that if either of her niece or nephew predecease her, she wants the predeceased person’s share to go to person’s descendants. Lawyer, who has prepared many wills and is quite competent in her drafting abilities, prepares a will for Client that directs that her estate be distributed as Client requests. After being assured by Lawyer that the document will distribute all of Client’s property interests as she wishes, Client executes the will and dies a couple of years later, survived by her niece, but predeceased by her nephew, who leaves descendants surviving him. After Client’s death, survived by Niece but not by Nephew, her executor discovers that although Client owned her house in fee simple, Client’s bank accounts, which were far more valuable than her house, were held in pay-on-death (POD) form. Although Client had, a few years before she executed her will, named both Niece and Nephew as “primary beneficiaries” on the beneficiary designation forms for the accounts, the forms provided, in boilerplate language, that if one primary beneficiary predeceased the account owner, the other primary beneficiary would succeed to the account. Might Nephew’s children have a cause of action against Lawyer for failing to prepare an estate plan that distributed Client’s estate as she wished?

a. No, because Client told Lawyer only that she needed to “do a will,” not that she wanted help with her nonprobate assets.

b. Perhaps, if Lawyer failed to make inquiry into whether the accounts were held in POD form, and Client was unaware of the implications of the beneficiary forms in the event that a named primary beneficiary predeceased her.

c. Perhaps, but only if Lawyer reviewed the beneficiary forms and wrongly concluded that they would distribute the accounts as Client wished.

d. No, because Client’s will, which was competently drafted to carry out her dispositive intent, would override the prior beneficiary designations on the accounts.

The correct answer is B. Although Client only told Lawyer that she wanted to “do a will,” Lawyer should know that under the general rule a will does not affect nonprobate assets, something about which Client may not have been aware. For this reason, Lawyer should have inquired into whether Client’s bank accounts were held in POD form. It is not apparent from the facts whether Lawyer did this, although Lawyer “assured” Client “that the document will distribute all of Client’s property interests as she wishes.” For this reason, even though Lawyer prepared Client’s will as Client wished, a court might hold Lawyer liable to Client’s intended beneficiaries under a theory of negligence or third-party beneficiary to the contract between Lawyer and Client. A is not the correct answer because Lawyer should know that under the general rule a will does not affect nonprobate assets, something about which Client may not have been aware. C is not the correct answer because, although this answer does describe a situation under which Lawyer might be liable, it is not the only such situation. D is not the correct answer because under the general rule a will does not affect nonprobate assets. Pages 492-493 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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10. 6. M recently died, leaving a valid will, executed a few years before her death, that devised her substantial estate in equal shares to her two children, F and G. At the time that M executed her will, she also executed a durable power of attorney naming her child G as her attorney-in-fact and giving her very broad powers. A few months after signing these documents, M began to suffer cognitive impairment. Later, G, as M’s attorney-in-fact under the durable power of attorney, made several cash gifts to various persons from M’s accounts. Before M died, G, as M’s attorney-in-fact, also settled an inter vivos trust on M’s behalf and transferred several valuable assets to the trust. Did G have the authority to make the gifts and settle the trust?

a. If the durable power of attorney contained broad general powers, G may have been granted the power to make the gifts, but the creation of the trust was authorized only if the document contained a specific power to do so.

b. If the durable power of attorney contained broad general powers, G may have been granted the power to create the trust, but the making of the gifts was authorized only if the document contained a specific power to do so.

c. If the durable power of attorney did not contain specific authorization to make the gifts and create the trusts, then neither of those actions was permitted.

d. The durable power of attorney could not have authorized the power to make gifts or settle a trust.

Rationale:

The correct answer is C. While durable powers of attorney can contain broad general powers that authorize many actions, in most jurisdictions a power to make gifts or create trusts must be specifically authorized in the document. A and B are not the correct answers because both the power to make gifts and the power to create trusts must be specifically authorized in a document creating a power of attorney. D is not the correct answer because most jurisdictions permit attorneys-in-fact to make gifts and create trusts on behalf of the principal if the document specifically grants that authority. Pages 502-504, 513, 515 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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11. 7. O creates a revocable trust by executing a declaration of trust. On the same day, O also executes a “pour-over” will. The trust instrument provides that the trustee is to distribute all of the net income to O during her lifetime, together with so much of the principal as requested by O from time to time. At O’s death, any remaining trust property is to be distributed to O’s daughter, Q. A provision in the trust instrument states as follows: “The settlor reserves the right to revoke the trust at any time by a writing delivered to the trustee.” A few months after creation of the trust, O has a falling out with Q. O tears up the trust instrument and signs a new will giving all of her estate to the local animal shelter. Upon O’s death a few months later, Q brings suit against O’s estate contending that O did not properly revoke her trust and that all of the property transferred thereto must therefore be distributed to Q. No writing by O purporting to revoke the trust is ever found. Which of the following is the estate’s best legal argument against Q’s contentions?

a. Expressions of intent in a subsequently enacted will always prevail over conflicting expressions in a trust.

b. A revocable trust can always be revoked by physical act, which is expressed by destructive actions taken on the trust instrument coupled with the intent to revoke the trust.

c. A pour-over will always incorporates the revocable trust by reference so that a revocation of the will necessarily revokes the trust.

d. A revocable trust can be revoked in any manner that indicates the settlor’s intention to do so, unless the trust instrument provides that a method of revocation in the trust instrument is exclusive

Rationale:

The correct answer is D, as it states what is now the majority rule for revocable trusts. A is not the correct answer because there is no rule with regard to the superiority of expressions in a will versus a trust. B is not the correct answer because there is no general rule regarding revocation of a trust by physical act and the settlor is entitled to set out an exclusive revocation method in the trust instrument. C is not the correct answer because pour-over wills do not generally incorporate the trust instrument by reference. Pages 453-459 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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12. 8. O signs a declaration of trust creating the “O Revocable Trust,” under which O will serve as trustee. The trust instrument provides that only O will benefit from the trust during her lifetime and at O’s death any remaining trust property will be distributed in equal shares to O’s children. O retains the right to revoke and amend the trust. On the same day O signs a will whose residuary clause devises the residue of O’s estate to “the trustee of the O Revocable Trust.” O then signs and records a deed transferring her primary residence to “O, as trustee of the O Revocable Trust.” When O dies a few months later her property consists of the residence she transferred to the trust, a checking and savings account, and some miscellaneous tangible personal property. Will O’s estate avoid probate?

a. Yes, the primary residence will avoid probate because it was transferred to her revocable trust and the other assets will avoid probate because they will be transferred to the revocable trust by O’s pour-over will.

b. Although the primary residence will avoid probate, the other assets will avoid probate only if she also transferred them to the trust.

c. Although the primary residence will avoid probate, the other assets will avoid probate only if she transferred them to the trust or held them in some other nonprobate form at her death.

d. The primary residence will not avoid probate because O transferred it to herself, but the other assets will avoid probate if they were transferred to the trust.

Rationale:

The correct answer is C. By transferring the residence to “O, as trustee of the O Revocable Trust” O transferred then to the revocable trust. Assets transferred to a revocable trust avoid probate at the settlor’s death. Assets can also avoid probate at the owner’s death if they are subject to another nonprobate form of ownership. For example, a bank account with a “pay on death” beneficiary designation avoids probate. It is not clear from the facts whether the assets other than the residence were transferred to O’s trust or whether they were subject to any other form of nonprobate form of ownership at O’s death. A is not the correct answer because assets transferred by a will, even a pour-over will such as is described in the problem, do not avoid probate. B is not the best answer because assets can avoid probate not only if they are in a revocable trust, but also if they are held in some other nonprobate form of ownership. D is not the correct answer because O transferred the primary residence to herself “as trustee,” which is the proper method of transferring assets to a trust. Recommended Reading: Pages 440-448 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

Chapter 7: Nonprobate transfers and planning for incapacity

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13. 9. O signs a document that purports to create the “O Trust” and declares herself to be the trustee of the trust. The document provides that the trustee of the O Trust shall pay the income of the trust to O for her lifetime, and that, at O’s death, the trust property shall be distributed to O’s daughter, M. O then opens a bank account as “O, as trustee of the O Trust.” Which of the following best describes the legal effect of O’s actions?

a. O has not created a trust, because she failed to name a successor trustee to serve at O’s death.

b. O has not created a trust, because a trustee cannot be the sole beneficiary of a trust.

c. O has not created a trust, because the trust document has not been witnessed.

d. O has created the O Trust.

Rationale:

The correct answer is D. A trust can be created inter vivos. All that is needed is the intent to create a trust, trust property, and one or more trust beneficiaries. All of these elements are present here. B is not the correct answer because O is not the sole beneficiary of the trust; M is also a beneficiary, even though M will not obtain a possessory benefit from the trust until a future date. A is not the correct answer because there is no requirement that a successor trustee be named in the trust instrument. C is not the correct answer because there is no witness requirement for the creation of an inter vivos trust. Pages 445-447 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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14. 10. S executes a revocable trust and a “pour-over” will. S then transfers most of his property to the trust. When S dies, his probate estate consists of some tangible personal property valued at about $1,000 along with a bank account valued at about $1,000, while the trust contains much cash and valuable property. At his death, S owed a health care provider $10,000 for services rendered in connection with his last illness, which are not covered by his health insurance. Can the health care provider recover against the assets of the trust?

a. The health care provider cannot recover against the trust, because revocable trusts become irrevocable at the death of the settlor

b. The health care provider can recover against the trust only if the successor trustee agreed to be personally liable.

c. The health care provider can recover against the trust to the extent the assets of the estate are insufficient.

d. The health care provider can recover against the trust unless the trust contains a spendthrift provision.

Rationale:

C is the correct answer. A revocable trust does not provide protection from the claims of a settlor’s creditors. Although most jurisdictions require a decedent’s creditors to pursue the estate first, a settlor’s creditor can recover against the assets of a revocable trust if the assets of the estate are insufficient. A is not the correct answer because the rule that permits a settlor’s creditors to recover against the assets of a revocable trust applies despite that revocable trusts become irrevocable upon a settlor’s death. B is not the correct answer because whether the non-settlor successor trustee of a revocable trust is personally liable for the settlor’s debts is not relevant to the liability of the trust. D is not the correct answer because even if the trust contains a spendthrift provision, that fact would only be relevant for settling the debts of a trust beneficiary. Here, the debts are owed by the trust settlor, and therefore the trust assets are available to satisfy the trust settlor’s debts regardless of whether the trust is a spendthrift one. Recommended Reading: Page 461 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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15. 11. S, who is getting up in years, executes a deed of trust creating the “S Revocable Trust” under which T is the trustee. S then transfers most of his property to T as trustee of the trust, including Blackacre, a parcel of rental real estate managed by S and his oldest child A. The trust instrument provides that all of the trust’s property is held for the benefit of S during his lifetime and that at S’s death all remaining trust property is to be distributed in equal shares to S’s two children, A and B. Approximately one year after the transfer of Blackacre to the trust, S decides to sell Blackacre to his oldest child, A. A transfers cash and a promissory note directly to S, and S directs T to deed Blackacre to A, free and clear of the trust. T complies with S’s request. S’s child B, upset that S sold Blackacre to A for what she considers a bargain price, brings suit against T, as trustee of the trust, alleging breach of her fiduciary duty. If the jurisdiction follows the rules set out in the Uniform Trust Code, will B’s suit be successful?

a. Yes, if the price A paid for Blackacre was clearly below the property’s fair market value, in which case T breached his fiduciary obligation to treat the trust beneficiaries impartially.

b. Yes, unless S contributes the proceeds from the sale to trust, as Blackacre belonged to the trust, not to S.

c. No, if S still had the right to revoke the trust during the time period when the sale was made.

d. No, but B does have recourse against T for not requiring that S withdraw Blackacre from the trust before he sold it to A.

Rationale:

The correct answer is C. Although the general rule is that a trustee must treat trust beneficiaries impartially, under the Uniform Trust Code (UTC), while a trust is revocable the rights of the beneficiaries are subject to the control of the settlor and the trustee owes duties only to the settlor. A, B and D are not the correct answers because under the UTC, S as the settlor of the revocable trust, has control of all the trust property and the trustee owes no duties to any other beneficiary. Recommended Reading: Pages 440-448 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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16. 12. T dies with a will devising “all of my estate, including all of my property of every kind and character, all life insurance proceeds and the remaining benefits in any retirement account, to my niece, N.” At T’s death she owns a number of probate assets, a life insurance policy under which she is the insured, and an individual retirement account (IRA). To what property is N entitled?

a. N is entitled to the probate assets, but the facts are insufficient to determine whether she is entitled to the life insurance proceeds or IRA benefits.

b. N is entitled to the probate assets and the life insurance policy proceeds, but the facts are insufficient to determine whether she is entitled to the IRA benefits.

c. N is entitled to the probate assets and the and the IRA benefits, but the facts are insufficient to determine whether she is entitled to the life insurance policy proceeds.

d. N is entitled to the life insurance proceeds and the IRA benefits, but the facts are insufficient to determine whether she is entitled to the probate assets.

Rationale:

The correct answer is A. A will disposes of a testator’s probate estate, but under the general rule a will does cannot affect the disposition of nonprobate assets. Life insurance policy proceeds and IRA benefits are nonprobate assets that generally pass according to a beneficiary designation form prepared by the owner. There is no information in the facts here as to the existence or content of any beneficiary designations relating to T’s life insurance policy or IRA. For the same reasons B, C, and D are not the correct answers. Recommended Reading: Pages 471-492 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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17. 13. T executes a declaration of revocable trust and a “pour-over” will. T then dies. Which of the following statements most accurately describes the trust?

a. The trust is a testamentary trust.

b. The trust is an inter vivos trust.

c. The trust is a constructive trust.

d. The trust is a resulting trust.

Rationale:

The correct answer is B. A revocable trust is always created inter vivos. A is not the correct answer because a revocable trust is never created by a will and is therefore never a testamentary trust. C and D are not correct because those answers refer to equitable remedies rather than to revocable trusts. Recommended Reading: Pages 466-467 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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18. 14. T has the following property interests at his death: 1) A bank account titled jointly with rights of survivorship with Z. 2) A bank account titled in T’s sole name, with Z named as a “payable on death” (POD) beneficiary. 3) A qualified employer-sponsored retirement account with Z named as primary beneficiary. 4) A house titled in the name of T and Z, as joint tenants. And 5) Certain household furniture and furnishings.

T’s will, executed before the above property interests were established, provides that X, not Z, will receive all of T’s property. A codicil to T’s will, executed after the above property interests were established, provides only that Z is to receive T’s leather sofa. T is neither married nor in a domestic partnership. To which assets are Z and X entitled to at T’s death?

a. X will receive all the listed property interests except the leather sofa.

b. Z will receive all the listed property interests except the household furniture and furnishings and will also receive the leather sofa.

c. Z will receive only the retirement benefits, and X will receive the rest of the listed property interests.

d. T’s intestate heirs will receive all of his property.

Rationale:

The correct answer is B. Each of the named property interests except the household furniture and furnishings is held as a type of nonprobate device. Under the general rule, a will cannot affect the operation of a nonprobate device at the death of the decedent owner. Although the will states that X is to receive all of T’s property, the will may only dispose of probate property. Therefore, X will receive only the household furniture and furnishings, and, of those, will not receive the sofa that was devised by the codicil. A and C are not the correct answers because a will cannot affect the operation of a nonprobate device at the death of the decedent owner. D is not the correct answer because T dies with a will that disposes of all of his probate property, and any nonprobate property will be distributed by the nonprobate device to which it is subject. Recommended Reading: Pages 440, 493-496 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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19. 15. T has two adult children, F and G. T has a very good relationship with both of her children, but F lives near T while G lives several hundred miles away. Because T is getting on in age and needs help with her affairs, she decides to add F’s name to her checking account so that F can help her pay her bills and make sure her account is balanced on an ongoing basis. T goes to the bank with F, and a bank employee has F sign a “signature card” for the account. F then takes over the task of paying T’s bills from the account. T dies a couple of years later when the checking account balance is $20,000. T’s will divides all of her assets between F and G equally. F maintains that the account is a nonprobate asset and should be paid solely to her, while G maintains that the account is a probate asset that should be distributed in equal shares according to T’s will. If the jurisdiction follows majority rules, who will succeed to the ownership of the account?

a. The account is a nonprobate asset. If F supplies the bank with T’s death certificate, the bank must transfer the account to F’s name alone.

b. The account is a probate asset that must be distributed in accordance with T’s will.

c. Whether the account is a probate asset depends on the account paperwork. If the signature card and any other bank paperwork describe the account as having survivorship rights, then it is a nonprobate asset and must be paid to F.

d. Whether the account is a probate asset depends on whether T intended that F have survivorship rights at the time she added F’s name to the account.

Rationale:

The correct answer is D. In most jurisdictions, whether a joint bank account has survivorship rights depends on the account owner’s intention at the time she adds the second party to the account. While the account paperwork may have relevance in this inquiry, it is not necessarily dispositive. Neither A nor B is a correct answer because whether the account is a nonprobate asset depends on T’s intention at the time she added F’s name to the account. C is not the correct answer because although the account paperwork might be evidence of T’s intention at the time F’s name was added, it is not necessarily conclusive. Recommended Reading: Pages 440, 478-497, 561-562, 711-712 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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20. 16. W executes a will that gives her entire estate to her husband, H, if he survives her, and if not, then to her child, X. W also designates H as the primary death beneficiary of her employer-sponsored qualified pension plan, and X as the contingent beneficiary in case H predeceases W. Subsequently W divorces H. W fails to change her will or the beneficiary designation on her pension plan. W does not remarry and subsequently dies. Who is entitled to the death benefits from W’s pension plan?

a. X, because most states have statutes in place that revoke will provisions to an ex-spouse upon divorce

b. X, because federal law revokes provisions in nonprobate devices for an ex-spouse upon divorce

c. H, unless W’s state of domicile is one of the few that revoke provisions in nonprobate devices for an ex-spouse upon divorce

d. H, unless the pension plan documentation provides for a different disposition upon divorce

Rationale:

The correct answer is D. All employer-sponsored and “qualified” retirement plans are governed by the Employee Retirement Income Security Act (ERISA), a federal law. The U.S. Supreme Court case of Egelhoff v. Egelhoff held that ERISA preempts state laws that provide that the designation of a spouse as the beneficiary of such a plan is revoked upon divorce. ERISA provides instead that the death beneficiary of such a plan is determined according to the plan documents. So the plan documents must be consulted to determine who is entitled to the death benefits. A is not the correct answer because despite the fact that most states have these “revocation-upon-divorce” statutes, those statutes do not apply to accounts governed by ERISA. B is not the correct answer because federal law does not revoke provisions in nonprobate devices for an ex-spouse upon divorce. C is not the correct answer because a state law that revokes provisions in nonprobate devices for an ex-spouse upon divorce will not affect plans covered by ERISA. Recommended Reading: Pages 490-491, 561-562, 711-712 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

Chapter 8: Limits on freedom of disposition protection of the spouse and children

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21. 1. H and W, a married couple, enter into divorce proceedings. One month after the contentious proceedings are complete and the divorce becomes final, H executes a will acknowledging his children but devising his entire estate to his girlfriend, G. Shortly thereafter H dies in a tragic accident, survived by G and his minor children. To what portion of H’s probate estate will his minor children be entitled?

a. None; G will take H’s entire probate estate.

b. H’s minor children will take his entire probate estate in equal shares.

c. Each of H’s minor children will take an intestate share of his probate estate.

d. In about one-half of U.S. jurisdictions H’s minor children would take an intestate share; in most other jurisdictions G will take H’s entire probate estate.

Rationale:

The correct answer is A. No U.S. jurisdiction except Louisiana requires a testator to devise any part of his or her estate to the testator’s children, even if they are minors. Recommended Reading: Pages 574-585 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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21. 2. H and W, who live in a separate property jurisdiction, are married. It is a second marriage for both. Although H has a large estate and W does not, the couple does not have a premarital agreement. H visits Lawyer for estate planning and tells Lawyer that he wants all of his estate except the personal residence (valued at about ten percent of H’s estate) to go to his children from his prior marriage. He wants W to have the house if she survives H. Lawyer informs H that W will have elective share rights, and H expresses a strong desire to avoid the elective share if at all possible. If H lives in a jurisdiction that follows the rules of a majority of states, which of the following is the best advice to H regarding H’s desire to avoid having W benefit from the elective share in H’s estate?

a. H should execute a trust instrument creating a revocable trust that distributes his assets as he wishes at his death and then transfer all of his assets to the trust.

b. H should execute a will that devises the residence to W if she survives him and creates one or more testamentary irrevocable spendthrift trusts for his children.

c. H should enter into a postnuptial agreement with W wherein each of the spouses waive their rights to the elective share in each other’s estate.

d. H should transfer all of his assets except the residence into asset-specific nonprobate forms of ownership naming his children as the death beneficiaries.

Rationale:

The correct answer is C. Almost all jurisdictions will enforce a waiver of elective share rights in a postnuptial agreement entered into by spouses. A is not the correct answer because in a majority of jurisdictions the elective share can be exercised against the assets in a revocable trust. B is not the correct answer because the elective share can be exercised against probate assets regardless of whether a will creates irrevocable trusts. D is not the correct answer because many jurisdictions permit the elective share to be elected against nonprobate assets, especially in cases where courts apply an “illusory transfer” test or an “intent to defraud” test. Recommended Reading: Pages 544-553 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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23. 3. H dies in a separate property jurisdiction survived by his son, S, and his wife of forty years, W. H’s estate consists of a personal residence titled in H’s name, a checking account titled in H’s name, a large brokerage account with a transfer on death (TOD) provision designating S as the death beneficiary, and assorted items of tangible personal property. H’s will contains only the following dispositive provision: “I give all of my estate to my son, S.” If W makes the election to take the elective share in H’s estate, out of what property will her elective share be determined?

a. The personal residence, checking account, brokerage account, and tangible personal property

b. The checking account, brokerage account, and tangible personal property, but not the personal residence

c. The personal residence, checking account, and tangible personal property, but not the brokerage account

d. The personal residence, checking account, and tangible personal property, and in some jurisdictions the brokerage account

Rationale:

All separate property jurisdictions in the United States, except Georgia, permit a surviving spouse to take an elective share of the predeceased spouse’s estate. The percentage of the decedent’s assets to which the surviving spouse is entitled varies across jurisdictions, as does the identity of the types of assets out of which the share can be drawn. In all jurisdictions, the elective share is drawn from the probate assets, and some jurisdictions also draw the elective share from all or a portion of nonprobate assets. Here, all of the listed property is probate property, except for the brokerage account, which is subject to a TOD designation. The correct answer is D. W would be entitled to her elective share of the probate assets (personal residence, checking account, and tangible personal property), and in some jurisdictions the nonprobate asset (the brokerage account). A is not the correct answer because in some jurisdictions the brokerage account will also be included. B is not the correct answer because the personal residence would be included and the brokerage account might not be included. C is not the correct answer because in some states the brokerage account would be included. Recommended Reading: Pages 528-540 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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24. 4. In year 1, T executes a will devising “$1,000,000 to each of my children, X and Y” and devising the remainder of his estate to his wife, W. At the time T’s will is executed he has only two children, X and Y. In year 2, T and W have another child, Z. Later in year 2, T dies unexpectedly, not having changed his will. Which of the following most accurately describes the interest that Z has in T’s estate?

a. Z has no interest in T’s estate because on the date T’s will was executed his only children were X and Y.

b. The law prevents T from disinheriting a minor child, so Z will receive an intestate share of T’s estate.

c. Z has a right to make an election to receive an “elective share” interest in T’s estate.

d. Z is a pretermitted child and has the right to a statutory share of T’s estate.

Rationale:

The correct answer is D. Pretermitted child statutes protect a child against unintentional disinheritance. In most jurisdictions these statutes protect a child born or adopted after the execution of the testator’s will and give any such child a statutory share. Here, since Z was born after the execution of T’s will, Z will have the right to a statutory share under the jurisdiction’s pretermitted child statute. A is not the correct answer because Z was not yet born at the execution of T’s will, so it is not clear that Z was intentionally omitted. Therefore, Z will qualify as a pretermitted child under the statute of most jurisdictions. B is not the correct answer because most U.S. jurisdictions do not give a minor child a right to inheritance. C is not the correct answer because there are no elective share rights for children of testators. Recommended Reading: Pages 574-586 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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25. 5. In year one, H, who is married to W and has one child, X, executes a will containing only the following dispositive provision: “I devise my entire estate to my wife, W, if she survives me.” In year two, W gives birth to twins, Y and Z, who are also the children of H. H makes no changes to his estate plan and in year three, H dies with the year one will intact. Given the varying rules across jurisdictions, which of the following is the most accurate statement of the law applicable to these facts?

a. Regardless of which of X, Y, and Z are pretermitted children, since W survived H, she will take H’s entire probate estate.

b. Only Y and Z are pretermitted children, and each will take an intestate share.

c. All of X, Y, and Z are pretermitted children, and each will take an intestate share.

d. Y and Z are pretermitted children under any pretermitted child statute, and they may be entitled to a share of H’s estate.

Rationale:

Pretermitted heir statutes protect children and sometimes other descendants who are deemed to have been unintentionally omitted from a will. Some statutes protect all children or descendants not referenced in the will, while others only apply to those born or adopted after execution of the will. In some states and under the Uniform Probate Code, pretermitted children do not receive a share if the will devises all of the estate to the other parent of all the surviving children (and such other parent survives). D is the correct answer because afterborn children not referenced in the will are always pretermitted, and regardless of which children are pretermitted, their entitlement to a share is possible but not certain under these facts since the will devises the estate to W, and W survived. A is not the correct answer because in some jurisdictions a pretermitted child would take a share without regard to whether W survived. B is not the correct answer because in some jurisdictions all of the children would be pretermitted, and whether they would take depends on the jurisdiction. C is not the correct answer because in some jurisdictions only Y and Z would be pretermitted, and whether they would take depends on the jurisdiction. Recommended Reading: Pages 574-585 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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26. 6. In year one, T, who is very wealthy, executes a will with only the following dispositive provisions: “I give the sum of $100,000 to my boyfriend, X. I give all the rest of my estate to my daughter, Z.” No other references to X are made in the will, nor is the possibility of T getting married. In year two, T and X get married. Despite advice to the contrary from her lawyer, T does not enter into a premarital agreement with X. In year three, T dies, survived by both X and Z with the year one will intact. T’s probate estate is valued at several million dollars. To what portion of T’s probate estate are X and Z entitled in most jurisdictions?

a. Since X was mentioned in the will, the pretermitted spouse rule would not apply, and X would be entitled only to the $100,000 general devise. Z would receive the residue.

b. Although X was mentioned in the will, the possibility of marriage was not, therefore the pretermitted spouse rule would apply and X would be entitled to elect to receive an intestate share of T’s probate estate. Z would receive the residue.

c. Although X was mentioned in the will, the possibility of marriage was not, therefore the pretermitted spouse rule would apply and the will would be deemed revoked. X would therefore be entitled to receive an intestate share of T’s estate, as would Z.

d. Although X was mentioned in the will, the possibility of marriage was not, therefore the pretermitted spouse rule would apply and the will would be deemed revoked as to X’s share of the estate. X would therefore be entitled to receive an intestate share of T’s estate, and Z would receive the residue.

Rationale:

The correct answer is D. Although a premarital will was deemed revoked at common law, most states now have statutes providing that a pretermitted surviving spouse is entitled to the minimum of an intestate share. The rule exists to prevent unintentional disinheritance of a spouse and does not apply if the will contains language indicating that the testator contemplated the marriage. In some jurisdictions extrinsic evidence may be admissible with respect to this question. A is not the correct answer because merely mentioning X in the will is insufficient to prevent the pretermitted spouse statute from applying. B is not the correct answer because the pretermitted spouse rule applies automatically and does not require the surviving spouse to make an election. C is not the correct answer because under the modern rule the entire will is not deemed revoked, only the spouse’s share. Recommended Reading: Pages 574-585 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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27. 7. W and H, who lived in a separate property jurisdiction that follows all majority rules, married one another when both were in their middle sixties. Both W and H had adult children from a prior marriage, but there were no children of their marriage to one another. At the time of her marriage to H, W was quite wealthy, but H did not have much money of his own. Nonetheless, the couple did not enter into a premarital agreement waiving the elective share in one another’s estates. Shortly after the marriage, W deeded her home (in which the couple now lived together) to W and H as tenants by the entirety. After twenty years of marriage to H, W dies with a will that leaves her large probate estate to her own children, to the exclusion of H. H succeeds to the ownership of the home. H had never expressed an interest in W’s potentially substantial estate, but he is in cognitive decline and lacks legal capacity at the time of W’s death. Which of the following best describes the legal rights of H to the estate of W?

a. Since H is incompetent and has the smaller estate, his guardian must file the petition on his behalf to take the elective share.

b. Since W chose not to enter into a premarital agreement, H’s guardian has the duty to file a petition on his behalf to take the elective share if it is in H’s best interest, computed mathematically.

c. Since H is incompetent and received a substantial nonprobate asset (the home), he cannot take the elective share.

d. Since H is incompetent, whether he can take the elective share may depend at least in part on whether his guardian determines that H would have wanted to preserve his wife’s estate plan.

Rationale:

The correct answer is D. Although a married couple can waive the elective share by agreement, this couple chose not to do so. Under the majority rule, whether a surviving spouse who is incompetent can take the elective share depends on all the facts and circumstances. Whether H would have wanted to preserve W’s estate plan would be a factor in the determination. A is not the correct answer because whether an incompetent spouse can take the elective share does not depend upon who has the smaller estate. B is not the correct answer because although some states apply a mathematical test to determine if the surviving spouse would benefit, that is not the majority rule. C is not the correct answer because whether an incompetent spouse can make the election to take the elective share would not depend solely on whether he received nonprobate property. Recommended Reading: Pages 544-553 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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28. 8. W, a wealthy woman, marries H in a community property jurisdiction. Ten years after her marriage to H, W dies unexpectedly. W has no nonprobate property, and her will, which predates her marriage to H, devises her entire probate estate in equal shares to her two children. To what property is H entitled?

a. H retains his share of any community property only.

b. H retains his share of any community property and may be entitled to the share of a pretermitted spouse.

c. H retains his share of any community property and may be entitled to the greater of his elective share or the share of a pretermitted spouse.

d. H retains his share of any community property and may be entitled to the lesser of his elective share or the share of a pretermitted spouse.

Rationale:

The correct answer is B. Since the couple was in a community property jurisdiction, H retains his share of community property. Additionally, since the will predated the marriage, H would be entitled to his pretermitted share, assuming no exceptions apply, such as a premarital agreement. A is not the correct answer since H may also be entitled to his pretermitted spousal share. C and D are not correct answers because there is no elective share in community property jurisdictions. Recommended Reading: Pages 574-585 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

Chapter 10: Trusts: alienation and modification

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29. 1. In year one, S creates the “S Trust,” an irrevocable spendthrift trust for the benefit of her daughter, X, and her grandson, Y. The trust terms give the trustee, T, discretion to make distributions to or for the benefit of X as the trustee deems advisable for X’s support and education during her lifetime, taking into account X’s other resources. At the death of X, the trustee has discretion to make distributions to or for the benefit of Y as the trustee deems advisable for Y’s support and education during her lifetime, taking into consideration Y’s other resources. At Y’s death, the trust is to terminate and any remaining trust property is to be distributed to Y’s estate. For the next few years T makes a number of distributions to X from the trust. But by year ten, S has died and T has not made any distributions to or for X’s benefit in three years, because X has become a successful products liability lawyer and more than adequately provides for herself. Consequently, X approaches T with a request to begin making distributions from the trust to Y (who is now 25 years old) for Y’s support and education. T takes the position that so long as X is alive, he can only make distributions to X and then only if needed for her support and education. X and Y decide to seek legal advice on the matter. Of the following, which is the best advice to X and Y on the question of whether distributions from the S Trust could be made to Y before the death of X?

a. X should simply transfer her interest in the trust to Y, after which time T can make distributions to Y.

b. Since the trust is irrevocable and S is dead, the trust cannot be modified and its terms must be followed.

c. The trust can be modified to permit distributions to Y only if all of T, X, and Y agree to a modification of the trust terms to permit such distributions.

d. Since X no longer needs the trust for support or education, and both X and Y agree, T should seek to have the trust modified by attempting to convince a court that making distributions to Y would not be contrary to the material purpose of supporting and educating X.

Rationale:

D is the correct answer. Under the Claflin doctrine, an irrevocable trust can be modified or terminated if such is not contrary to a material purpose of the trust and all the beneficiaries consent. Here, the purpose of the trust is the support and education of X and Y. Since X no longer has needs for support or education, modification of the trust terms to permit distributions to or for Y’s benefit would not be contrary to a material purpose of the trust. A is not the correct answer because a beneficiary of a spendthrift trust cannot voluntarily transfer her interest in the trust. B is not the correct answer because irrevocable trusts can be modified without the consent of the settlor pursuant to either the equitable deviation doctrine or the Claflin doctrine. C is not the correct answer because an irrevocable trust cannot be modified by mere agreement among the trustee and the trust beneficiaries. Recommended Reading: Pages 728-734 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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30. 2. In year one, S signs a deed of trust creating the “S Trust,” an irrevocable trust for the benefit of her son, X. The trust is funded with cash and securities in the amount of two million dollars. The trust terms give the trustee (T, a corporate trust company) discretion to distribute so much of the net income and principal to or for the benefit of X as the trustee deems advisable for X’s health and support during his lifetime. At the death of X, any remaining trust property is to be distributed to X’s estate. For the next several years X benefits from the trust, as the trustee makes a number of distributions to X or for X’s benefit in accordance with the trust’s distribution standard. In year ten, X convinces S that he should have access to all the trust property, rather than just what the trustee determines is best for his health and support. S arranges a meeting with the trustee at which the trustee’s representatives tell S that, given their experiences with X’s spending habits and requests for money, it would be a bad idea to permit X to access the trust property more liberally. Disgusted with what she contends is a “greedy” trustee, S consults you for legal advice. Which of the following is the best advice to S regarding whether the S Trust can be terminated?

a. The S Trust cannot be terminated, because there are no changed circumstances not anticipated by the settlor that would defeat or substantially impair the accomplishment of the purposes of the trust.

b. The S Trust cannot be terminated unless the trustee agrees to termination.

c. The S Trust can be terminated if both S and X agree to termination.

d. The S Trust cannot be terminated, because termination would be contrary to a material purpose of the trust.

Rationale:

The correct answer is C. Under the general rule, an irrevocable trust can be modified or terminated if the settlor and all the beneficiaries agree. A is not the correct answer because while this answer correctly describes whether a trust can be terminated pursuant to the equitable deviation doctrine, the facts show that the S Trust can be terminated because the settlor and the sole beneficiary agree to termination. B is not the correct answer because the trustee’s consent is not required to terminate a trust. D is not the correct answer because although this answer correctly states an element of the Claflin doctrine, here the S Trust can be terminated because the settlor and the sole beneficiary agree on termination. Recommended Reading: Page 740 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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31. 3. O creates an irrevocable trust (the B trust) that provides for distributions of principal to beneficiary B in such amounts “as the trustee deems advisable in its discretion for the health and support of B.” Despite B’s protestations and due primarily to B’s profligacy, the trustee of the B trust has been hesitant to make distributions from the trust even though, as has become apparent, B needs funds to pay her support obligations. B files suit against the trustee for abuse of its discretion, and while the suit is pending, one of B’s credit card creditors files suit against the trustee seeking to compel a distribution for amounts clearly owed by B. If the trust is governed by the Uniform Trust Code (UTC), is the creditor’s suit likely to be successful?

a. Yes, if the trust does not contain spendthrift provisions, but only to the extent that the trustee abused its discretion in failing to make a distribution.

b. No, even if the trust does not contain spendthrift provisions, and even if the trustee abused its discretion in failing to make a distribution.

c. Yes, so long as the trust does not contain spendthrift provisions.

d. Yes, but only to the extent that the trustee failed to make a distribution in compliance with the “health and support” standard.

Rationale:

The correct answer is B. Under the UTC, a creditor of a beneficiary may not compel a distribution from a trust that is discretionary, even if the trust does not contain spendthrift provisions, and even if the trustee has abused its discretion in failing to make a distribution. For the same reason, A and C are not the correct answers. D is not the correct answer because a creditor of a beneficiary may not compel a distribution from a discretionary trust, even if the trustee failed to comply with a standard (here “health and support”). Recommended Reading: Pages 695-712 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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32. 4. O creates an irrevocable trust and names XYZ Trust Company as trustee. O’s son A is to receive all of the income for life, along with any principal the trustee deems advisable in its discretion for A’s health and support reasonable comfort. At A’s death the remaining trust property is to be divided into equal shares and one share is to be distributed to each of A’s children, or by representation to the descendants of any deceased child. Some years after O’s death A becomes increasingly unhappy with the investment decisions made by the trustee and wishes to replace XYZ Trust Company with another corporate trustee. No provisions in the trust agreement address the question of removal or replacement of a trustee. If the jurisdiction governing the trust follows traditional trust law, which of the following best describes A’s legal power to remove and replace the trustee under these circumstances?

a. Unless the trustee’s investment decisions rise to the level of a breach of trust, or the trustee otherwise breaches the trust, A has no power to remove and replace the trustee unless he has the agreement of the remainder beneficiaries.

b. Unless the trustee’s investment decisions rise to the level of a breach of trust, or the trustee otherwise breaches the trust, A has no power to remove and replace the trustee, regardless of whether the remainder beneficiaries are in agreement.

c. Regardless of whether the trustee’s investment decisions rise to the level of a breach of the trust, since A is the only beneficiary with a current possessory interest he has the unilateral power to remove and replace the trustee.

d. Regardless of whether the trustee’s investment decisions rise to the level of a breach of the trust, A can remove and replace the trustee so long as all of the beneficiaries are in agreement.

Rationale:

The correct answer is B. Under traditional trust law, a trustee can only be removed for cause, such as a serious breach of trust. Although the UTC more liberally permits removal of a trustee when all of the beneficiaries agree, the court finds that removal serves their interests and a suitable successor trustee is available, the facts here states that the jurisdiction follows traditional trust law. A, C and D are not the correct answers because under traditional trust law a trustee cannot be removed and replaced without cause such as a serious breach of trust, regardless of whether all beneficiaries agree. Recommended Reading: Pages 750-757 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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33. 5. O dies with a revocable trust that splits into two separate shares upon her death. One share is distributed to her child, A, outright and free of trust. The other share is held as the “B Trust” for O’s other child, B. The trustee is to distribute all of the net income of the B Trust to B at least annually during B’s lifetime, with the remainder to be distributed to B’s descendants at his death. A few years after the B Trust is created, B’s former spouse sues and obtains a judgment against him for child support. Can B’s former spouse attach distributions from the B Trust to B to satisfy her judgment?

a. Yes, unless the B Trust contains a spendthrift clause.

b. Yes, because the claim is in the form of a judgment for child support.

c. Yes, because the trust is a revocable trust.

d. Yes, because the trust is self-settled.

Rationale:

The correct answer is B. Most states allow judgments for child or spousal support to be enforced against a debtor’s interest in a trust, even if the trust contains a spendthrift clause. For this reason, A is not the correct answer. C is not the correct answer because although the trust was revocable by O during her lifetime, the B Trust, created after O’s death, is not revocable. D is not the correct answer because the trust is not a self-settled trust, having been created by O for B’s benefit. Recommended Reading: Pages 699-700 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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34. 6. O, who has several very young grandchildren, creates an irrevocable spendthrift trust for their higher education and funds it generously at her death. The trust terms provide that the trustee is to make distributions for a grandchild’s higher education in amounts the trustee deems advisable to pay tuition, room, and board, but in no event more than $50,000 per year for any particular grandchild. Many years after O’s death, as the grandchildren begin to reach college age, it becomes apparent that while the trust likely has enough money to pay for the education of all the grandchildren, the $50,000 annual limit is too restrictive given the substantial increase in the cost of education since O’s death. The trustee seeks your advice: Can the trust terms be modified to increase the annual limit for distributions to an amount more in line with the current costs of higher education?

a. Yes, the trustee can petition a court for modification under the equitable deviation doctrine, but only if the $50,000 annual limit was a result of O failing to anticipate that educational costs would rise so precipitously after her death.

b. Yes, the trustee can petition a court for modification under the equitable deviation doctrine, but only if all of the beneficiaries agree to the modification.

c. Yes, the trustee can petition the court for modification under the equitable deviation doctrine, but only if modification is not available under the Claflin doctrine.

d. Yes, but only under the Claflin doctrine, and only if modification is not inconsistent with a material purpose of the trust.

• the Claflin doctrine.
• Yes, but only under the Claflin doctrine, and only if modification is not inconsistent with a material purpose of the trust.

Rationale:

The correct answer is A. Modification is available under the traditional equitable deviation doctrine if, due to circumstances not anticipated by the settlor, compliance with the trust terms would defeat or substantially impair the accomplishment of the purposes of the trust. The UTC requires only that modification will further the purposes of the trust in light of the unanticipated changed circumstances. Here, the argument would be that the settlor did not anticipate that higher education costs would be so high and that this situation is either preventing the trust from covering the cost of the grandchildren’s education (traditional doctrine) or that modification will further the trust’s ability to pay for the grandchildren’s education in line with the settlor’s probable intention (UTC). B is not the correct answer because under the equitable deviation doctrine all the beneficiaries need not agree. C is not the correct answer because relief under the equitable deviation doctrine can be pursued regardless of whether the Claflin doctrine would also be available. D is not the correct answer because relief would be available under the equitable deviation doctrine as stated above. Recommended Reading: Pages 734-742 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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35. 7. O, who is very wealthy, creates an inter vivos irrevocable spendthrift trust for his 25-year old grandchild, G, and transfers $1 million to the trustee, XYZ Trust Corporation, a bank and trust company. Because O is concerned that G has not acquired the habit of thrift, O makes sure the trust terms permit distributions to be made only for G’s “support,” and only in the discretion of the trustee. The terms further provide that at G’s death any remaining trust property is to be distributed to G’s estate. Ten years later, when the trust corpus has grown to $3 million due to savvy investments by the trustee, G requests that the trust be terminated and the corpus be distributed to G. Since G has by that time abandoned his profligate spending habits, O wishes to grant G’s request. O seeks your advice: can the trust be terminated according to the terms requested by G?

a. No, irrevocable trusts cannot be terminated except according to the terms of the trust instrument.

b. No, irrevocable trusts with spendthrift provisions cannot be terminated except according to the terms of the trust instrument.

c. Yes, so long as both O and G consent.

d. Yes, but only if O, G and XYZ Trust Corporation all consent.

Rationale:

The correct answer is C. An irrevocable trust, regardless of whether it has spendthrift provisions, can be terminated if the settlor and all the beneficiaries agree. For the same reason, A and B are not the correct answers. D is not the correct answer because the trustee’s consent is not needed to terminate an irrevocable trust, so long as the settlor and all the beneficiaries agree to the termination. Recommended Reading: Pages 727-734 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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36. 8. S creates a testamentary spendthrift trust for the support of her children and the education of her grandchildren, naming T as the trustee of the trust. Because S thinks it will always be a good investment, she directs in her will that the trustee is never to sell the capital stock in XYZ, Inc. that comprises the bulk of the property she transfers to the trust. Many years after S’s death, XYZ, Inc. falls on hard times due to changing technologies, and it becomes clear that the investment in XYZ, Inc. is not a good one for the trust. Which of the following describes T’s best option for divesting the trust of the XYZ stock?

a. T should reopen S’s estate and then convince T’s executor, as well as all the trust beneficiaries (including guardians ad litem for any minor beneficiaries), that they should agree to modifying the terms of the trust to permit sale of the XYZ stock.

b. T should ask the appropriate court to allow modification of the trust terms and permit sale of the XYZ stock based on the fact that the changing technology was not foreseen by S and that retention of the XYZ stock would impair S’s purposes in establishing the trust.

c. Because the direction to retain XYZ stock is an administrative direction, T may divest the trust of the stock if T obtains the informed consent of all trust beneficiaries.

d. Since S is dead and the trust has a spendthrift provision, the trust terms must be followed and T cannot divest the trust of the XYZ stock.

Rationale:

The correct answer is B. Under the common law equitable deviation doctrine, administrative and distributive provisions of a trust can be modified if changed circumstances unanticipated by the settlor would defeat or substantially impair the accomplishment of the purposes of the trust. Here, the facts state that S thought that XYZ stock would always be a good investment, but due to changing technologies XYZ is now not a good investment for the trust. A failure to divest would impair the trust purpose of supporting S’s children and educating her grandchildren. A is not the correct answer because a testamentary trust cannot be modified by agreement of a settlor’s executor and all the trust beneficiaries. C is not the correct answer because mere beneficiary agreement is not a basis for modifying any provision in an irrevocable trust. D is not the correct answer because T has a path for modification under the equitable deviation doctrine. Recommended Reading: Pages 695-696, 734-750 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

Chapter 10: Trusts: alienation and modification

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37. 9. S creates an irrevocable trust naming T, a corporate trust company, as trustee. The trust terms require the trustee to distribute so much of the net income and principal of the trust to and between X and Y (or the survivor of them) as the trustee in its discretion deems advisable for their health and support. After the death of the last of X and Y to die, any remaining trust property is to be distributed to Z, if living, otherwise to Z’s estate. A few years after S’s death, X, Y, and Z become frustrated with T’s “exorbitant fees” and “mediocre returns” in its investment of the trust assets. X and Y also maintain that T is too “stingy” in making distributions. After consulting with a lawyer, X and Y are given to understand that T’s fees are the high upper range of what corporate trustees generally charge, T is taking a very cautious (but probably legally permissible) approach to making distributions, and that T’s returns on investment are at the low end of what would be a reasonable range for the purposes of the trust. X, Y, and Z are all in agreement that T should be removed and replaced with T2, another corporate trustee who is ready and able to take over the trustee duties, charges lower fees, and generally has a good track record of investment. Assuming that removal and replacement of the trustee is not inconsistent with a material purpose of the trust, if the jurisdiction follows the traditional or common law approach to trustee removal, which of the following best describes the beneficiaries’ prospects of forcing removal of T as trustee?

a. The beneficiaries would not likely be successful, because the facts show no breach of trust.

b. The beneficiaries would not likely be successful, because the facts do not show a persistent failure to administer the trust effectively.

c. The beneficiaries would likely be successful, because the facts show that all trust beneficiaries are in agreement that the trustee should be removed.

d. The beneficiaries would likely be successful, because the facts show that all beneficiaries are in agreement, removal best serves the interest of the beneficiaries, and T2 seems to be a suitable successor trustee.

Rationale:

A is the correct answer. Under the common law, a trustee can only be removed for cause such as a serious breach of trust. Here, the facts show no such breach and the beneficiaries do not seem to be alleging any. B is not the correct answer because the facts do not show a “persistent failure to administer the trust effectively” and in any event such is not a ground for removal under the common law unless it amounts to a serious breach of trust. C is not the correct answer because agreement by the beneficiaries is not sufficient grounds for removal under the common law. D is not the correct answer because none of the cited factors amounts to a serious breach of trust. Choice D instead represents the Uniform Trust Code approach to trustee removal. Recommended Reading: Pages 750-757 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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38. 10. S creates an irrevocable trust naming T, a corporate trust company, as trustee. The trust terms require the trustee to distribute so much of the net income and principal of the trust to and between X and Y (or the survivor of them) as the trustee in its discretion deems advisable for their health and support. After the death of the last of X and Y to die, any remaining trust property is to be distributed to Z, if living, or to Z’s estate. A few years after S’s death, X, Y, and Z become frustrated with T’s “exorbitant fees” and “mediocre returns” in its investment of the trust assets. X and Y also maintain that T is too “stingy” in making distributions. After consulting with a lawyer, X and Y are given to understand that T’s fees are the high upper range of what corporate trustees generally charge, T is taking a very cautious (but probably legally permissible) approach to making distributions, and that T’s returns on investment are at the low end of what would be a reasonable range for the purposes of the trust. X, Y, and Z are all in agreement that T should be removed and replaced with T2, another corporate trustee who is ready and able to take over the trustee duties, charges lower fees, and generally has a good track record of investment. Assuming that removal and replacement of the trustee is not inconsistent with a material purpose of the trust, if the jurisdiction follows the Uniform Trust Code’s approach to trustee removal, which of the following best describes the beneficiaries’ prospects of forcing removal of T as trustee?

a. The beneficiaries would not likely be successful, because the facts show no breach of trust.

b. The beneficiaries would not likely be successful, because the facts do not show a persistent failure to administer the trust effectively.

c. The beneficiaries would likely be successful, because the facts show that all trust beneficiaries are in agreement that the trustee should be removed.

d. The beneficiaries would likely be successful, because the facts show that all beneficiaries are in agreement, removal best serves the interest of the beneficiaries, and T2 seems to be a suitable successor trustee.

Rationale:

D is the correct answer. Under the UTC, where, as here, removal is not inconsistent with a material purpose of the trust, a trustee can be removed if requested by all the beneficiaries, it best serves the interest of the beneficiaries, and a suitable replacement trustee is available. Removal would likely serve the best interest of the beneficiaries because T’s fees are high, its approach to distributions is very conservative, and its returns on investment are low. A is not the correct answer because under the UTC a trustee can be removed for reasons other than a serious breach of trust. B is not the correct answer because under the UTC a “persistent failure to administer the trust effectively” need not be shown if other factors in the statute are satisfied. C is not the correct answer because agreement by the beneficiaries is not sufficient grounds for removal under the UTC. Recommended Reading: Pages 750-757 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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39. 11. S dies unexpectedly when his son, X, is very young. S’s will creates the “S Trust” to benefit X. The trust terms direct the trustee to distribute the income of the trust for X’s benefit in regular increments. At such time as X reaches the age of 25 years, one-half the remaining trust assets are to be distributed to X, and when X reaches the age of 30 years, all of the remaining trust assets are to be distributed to X. As it happens, when X reaches the age of 20 he develops an unanticipated health problem that requires a great deal of medical intervention. Thereafter, it becomes apparent that X will not be able to work for a living and will require substantial medical care for the remainder of his life. While X is only receiving income distributions from the trust, he qualifies for government benefits that provide supplemental payments for his medical care and basic support. But a lump sum distribution of trust principal would cause X to be ineligible for government benefits until the distributed trust assets were expended. With this in mind, T, the trustee, wishes to have the S Trust amended to provide that, for the rest of X’s lifetime, distributions of principal can only be made to X for purposes and in amounts that would not disqualify X for government benefits and to supplement rather than supplant government payments for his medical care and support benefits. Which of the following is T’s best legal argument for implementing such an amendment?

a. The Claflin doctrine

b. Reformation of the trust to correct a drafting error

c.The common law equitable deviation doctrine

d. The equitable deviation doctrine as provided in the Uniform Trust Code and the Restatement (Third) of Trusts

Rationale:

The correct answer is D. The UTC and the Restatement permit modification of dispositive trust terms if circumstances arise that were not anticipated by the settlor and modification would further the purposes of the trust. Here, S did not anticipate that his son would develop a health problem and be eligible for government benefits for basic health and support. Modification of the trust would further its purposes as it would extend the period for which X would receive benefits from the trust. Modification would therefore give effect to the settlor’s intent had the circumstances been anticipated. A is not the best answer because the Claflin doctrine does not explicitly consider unanticipated circumstances and here the settlor at the time of execution of the will wished the beneficiary to receive the assets outright at specific stated ages. B is not the correct answer because the facts reveal no drafting error. C is not the correct answer because under the common law any deviation from the original trust terms must be necessary to accomplish the trust purposes. Here, the trust purposes were to allow the beneficiary to have the trust property at certain ages to do with as he wished. Under common law equitable deviation courts will not permit deviation just because it is more advantageous to the trust beneficiaries. Recommended Reading: Pages 695-696, 734-750 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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40. 12. S, who wishes to provide a source of funds for the health and support of her descendants, creates an irrevocable trust (the “S Trust”) and funds it with a substantial amount of property to benefit her daughter X during X’s lifetime, with any remaining trust property to be distributed outright in equal shares to X’s children at X’s death. Many years after S’s death, X’s adult daughter (S’s granddaughter), Y, develops a substance abuse problem that persists over the years. While Y often and regularly asks X for money, X generally refuses to give it to her because she knows Y will spend it on the illegal and destructive drugs to which she has become addicted. On numerous occasions, X offers to pay for a substance abuse rehab program but Y refuses to be admitted to such a program. X becomes concerned that, when X dies, the substantial trust assets will be distributed to Y and create a source of funds for purchasing drugs that might exacerbate Y’s substance abuse problem and even lead to her premature death. X approaches the trustee about modifying the S Trust so that, after X’s death, the trustee would only make distributions for Y’s health needs so long as Y remains addicted to destructive drugs. Which of the following would be the best legal basis for modifying the S Trust in the manner suggested by X?

a. Modification of the trust terms under the equitable deviation doctrine

b. Modification of the trust terms under the Claflin doctrine

c. Modification of the trust terms under the cy pres doctrine

d. Reformation of the trust to correct a drafting error

Rationale:

The correct answer is A. The common law equitable deviation doctrine permits modification of trust terms if due to circumstances not anticipated by the settlor compliance with the trust terms would defeat or substantially impair the accomplishment of the purposes of the trust. Here, S likely did not anticipate that her granddaughter would become addicted to drugs. A lump sum distribution of trust assets to Y would impair, rather than provide for, the good health of Y. On the other hand, distributing trust assets only in amounts needed for Y’s health and support would promote the purposes of the trust. B is not the correct answer because the Claflin doctrine requires that all beneficiaries agree, and Y would not agree. C is not the correct answer because the cy pres doctrine is generally applied in the charitable trust area when a trust’s specific purpose becomes illegal, impossible, or impracticable. D is not the correct answer because the facts do not indicate that any drafting error occurred. Recommended Reading: Pages 695-696, 734-750 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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41. 13. The XYZ trust contains the following dispositive provisions: “To the full extent allowed by applicable law, the interest of any beneficiary in the income and principal of this trust shall be free from the control or interference of any creditor of the beneficiary or of any spouse of a married beneficiary. Such interest shall not be subject to attachment or susceptible to anticipation or alienation.” Based solely on these provisions, this trust would most accurately be described as:

a. A testamentary trust.

b. A mandatory trust.

c. A spendthrift trust.

d. A discretionary trust.

Rationale:

C is the correct answer. In order for a trust to be spendthrift, a provision in the trust instrument must prevent the trust beneficiaries from transferring their interest in the trust (voluntary alienation) and must prohibit trust beneficiaries’ creditors from reaching the trust assets (involuntary alienation). The cited language in this trust is therefore a spendthrift provision making this trust a spendthrift trust. A is not the correct answer because there is nothing in the facts that indicates whether or not this trust was created by a will, which is characteristic of a testamentary trust. B and D are not the correct answers because nothing in the facts describes the distributive provisions of the trust. Recommended Reading: Pages 703-712 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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42. 14. X is convicted of assault and battery for fighting in a local bar and sentenced to time in the state prison. Y, a bar patron who was blinded when X struck him with a beer bottle for “looking at X in a funny way,” sues X and obtains a judgment for several million dollars. As it happens, X is the beneficiary of a trust created by his mother, M, containing the following distributive provisions: “The trustee shall distribute so much of the net income and principal of this trust to X as the trustee in its sole discretion shall deem advisable for X’s health and support in reasonable comfort. At X’s death, the trustee shall distribute the remaining principal and accumulated income of the trust to those persons X appoints by will and, in the absence of appointment, to X’s estate.” The trust also contains a spendthrift provision. Can Y pursue the trust assets to satisfy his judgment?

a. Possibly not; many jurisdictions do not permit tort creditors access to the assets of a spendthrift trust, even if they are victims of an intentional tort.

b. Yes; although many jurisdictions do not permit certain tort creditors to access the assets of a spendthrift trust, all jurisdictions permit access to spendthrift trust assets by victims of intentional torts.

c. Yes; most jurisdictions allow spendthrift trusts, but all permit tort creditors to access the assets of such trusts.

d. Possibly; although some jurisdictions don’t allow tort creditors access to the assets of a spendthrift trust, the majority of jurisdictions allow such creditors access.

Rationale:

The correct answer is A. Many jurisdictions do not allow tort creditors access to the assets of a spendthrift trust, even if they are victims of an intentional tort. B is not the correct answer because many jurisdictions do not allow tort creditors access to the assets of a spendthrift trust, even if they are victims of an intentional tort. C is not the correct answer because many jurisdictions do not permit tort creditors access to the assets of intentional trusts. D is not the correct answer because a majority of jurisdictions does not allow tort creditors access to the assets of a spendthrift trust. Recommended Reading: Pages 703-712 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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43. 15. X is engaged in the risky business of selling dubious “nutrition” products over the Internet. After surfing the Internet for estate planning tips, X becomes convinced he can remove his property from the reach of judgment creditors. X transfers the bulk of his property to T, a domestic trustee, to pay so much of the income and principal to X as T determines advisable in T’s sole and absolute discretion. A clause in the trust instrument provides that X may not transfer her life interest in the trust and that it may not be reached by X’s creditors. A few years later, P brings suit against X, alleging that X sold P a defective product that caused P to suffer permanent nerve damage. P wins the lawsuit and is awarded a judgment of $10 million. Can P reach the assets in X’s trust to satisfy her judgment?

a. Yes, unless the trust is a discretionary trust and distributions are subject to T’s sole and absolute discretion

b. No, because the facts indicate that the trust is a spendthrift trust

c. Yes, because the facts indicate that the trust is neither a discretionary trust nor a spendthrift trust

d. Yes, because the facts indicate that the trust is a self-settled trust

Rationale:

D is the correct answer. In most jurisdictions, a self-settled trust cannot be spendthrift as respects the settlor/beneficiary. This trust is self-settled to the extent that X is a beneficiary because it was settled by X. A is not the correct answer because a self-settled trust does not provide protection from creditors by being discretionary. B is not the correct answer because the trust is self-settled, and the spendthrift provision is not effective as respects the settlor/beneficiary. C is not the correct answer because the trust does in fact contain both discretionary and spendthrift features but those features do not affect creditors’ rights as to the settlor/beneficiary. Recommended Reading: Pages 712-727 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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44. 16. X signs a revocable declaration of trust naming X as settlor, trustee, and sole lifetime beneficiary. X’s girlfriend, Y, is named as the remainder beneficiary of the trust; Y’s interest commences at X’s death, and after X’s death the trust becomes irrevocable. The trust instrument contains a spendthrift provision. X transfers most of his assets to the trust and dies shortly thereafter. After X’s death, X’s creditor, Sky High Credit Card Services, files a claim against X’s probate estate for $100,000 owed by X. X’s probate estate is valued at only $15,000. Can Sky High reach the assets of the trust to satisfy all or a portion of its claim?

a. Yes

b. No, because the trust is irrevocable

c. No, because the trust contains a spendthrift provision

d. Only if and to the extent that Y disclaims trust assets

Rationale:

A is the correct answer. The assets of any revocable trust are available to the trust settlor’s creditors at the settlor’s death regardless of whether the trust contains a spendthrift provision. Further, all revocable trusts become irrevocable at the trust settlor’s death and this fact does not alter the result. B is not the correct answer because the assets of any revocable trust are available to the settlor’s creditors regardless of the fact that the trust becomes irrevocable at the settlor’s death. C is not the correct answer because a spendthrift provision does not affect a settlor’s creditors’ rights to the assets of a revocable trust at the settlor’s death. D is not the correct answer because the claim is against X, and a disclaimer by Y cannot affect the interest of the trust settlor’s creditors. Recommended Reading: Pages 703-712 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition.

Chapter 12: Trusts: powers of appointment

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45. 1. O creates an irrevocable trust (the “D Trust”) for the benefit of his daughter (D) and her descendants and funds the trust very generously at his death. The trust terms require the trustee to distribute all of the net income to D at least annually during her lifetime and to distribute so much of the principal of the trust to D during her lifetime as the trustee deems advisable for D’s health and support. D is given a testamentary power to appoint the trust property “to or among any one or more of her descendants at her death in such proportions as she deems advisable.” In default of appointment, the trust property is to be distributed outright and free of trust to D’s descendants at her death, by representation. D had two children alive at O’s death and has had no further children. When D’s children, X and Y, are thirty and thirty-two respectively, she consults with you about drafting a will for her that purports to exercise her power of appointment by appointing the trust property in two shares: one equal share for her son, X, to be distributed to him outright, and one equal share to a newly created irrevocable trust for her daughter, Y (the “Y Trust”). She wants the Y trust to provide for mandatory distributions of income to Y but, because D is concerned that Y might use trust distributions unwisely, she wishes to restrict principal distributions to Y unless the trustee deems them advisable for Y’s health and support. Which of the following is the best assessment of whether D can proceed with her plan?

a. D can appoint the share to the Y trust as she describes, but only if she also appoints X’s share to a trust with the same restrictions as those contained in the Y Trust.

b. D can appoint the shares as she describes.

c. D cannot appoint either beneficiary’s share in trust because her power is a nongeneral power.

d. D can appoint the shares as she describes, but only if she deems it necessary to “further the purposes” of the D Trust.

Rationale:

The correct answer is B. D’s power of appointment is a nongeneral power because she cannot appoint the trust property to herself, her estate, or the creditors of either herself or her estate. While under the traditional common law, a donee of a nongeneral power of appointment was not permitted to appoint the power in further trust, that is no longer the case unless the language creating the power so restricts it. A is not the correct answer because there is no requirement that a power to appoint to or among more than one person must be exercised in the same manner for each object of the power. C is not the correct answer because while under the traditional common law, a donee of a nongeneral power of appointment was not permitted to appoint the power in further trust, that is no longer the case unless the language creating the power so restricts it. D is not the correct answer because there is no such requirement with respect to a power of appointment. Recommended Reading:nPages 809-810 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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46. 2. S creates the irrevocable “S Trust” and directs the trustee to distribute so much of the income and principal of the trust as the trustee deems advisable for the health and support of S’s granddaughter, X. The trust also provides that “X shall have a general testamentary power to appoint any trust property remaining at her death.” If X fails to appoint the remaining trust property, then the trustee is directed to distribute it to S’s descendants, by representation. X wishes to exercise the power of appointment by a provision in her will explicitly appointing any trust property remaining at her death to X’s estate. Which of the following best describes the law applicable to X’s attempt to exercise the power in this manner?

a. X cannot appoint the property to her estate, because the power of appointment is a general rather than comprehensive power.

b. X can appoint the property to her estate, because the power of appointment is a general power.

c. X cannot appoint the property to her estate, because the donee of a power of appointment can never appoint property to the donee’s estate.

d. X cannot appoint the property to her estate, because the power of appointment is not a nongeneral (special) power of appointment.

Rationale:

The correct answer is B. A general power of appointment is one that authorizes the donee of the power to appoint property to all or any one of herself, her creditors, her estate, or the creditors of her estate. Since X was explicitly given a general power of appointment, she had the power to appoint the property to her estate. A is not the correct answer because a general power of appointment would allow X to appoint the property to her estate and “comprehensive power” is not a legally recognized term describing a power of appointment. C is not the correct answer because a general power of appointment is a power that authorizes the donee of the power to appoint property to all or any one of herself, her creditors, her estate, or the creditors of her estate. D is not the correct answer because a nongeneral or special power of appointment can never be exercised in favor of the donee’s estate. Recommended Reading: Pages 809-810 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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47. 3. S creates the irrevocable “S Trust” and directs the trustee to distribute so much of the income and principal of the trust as the trustee deems advisable for the health and support of S’s granddaughter, X, during X’s lifetime. The trust instrument also provides that “X shall have a testamentary power to appoint any trust property remaining at her death to and among S’s descendants in such amounts as X shall determine.” The trustee is directed to distribute any remaining property X fails to appoint to S’s descendants, by representation. At X’s death, she exercises the power given to her under the S Trust by a will that appoints one-half of the remaining trust property to X’s sister, Y, and fails to appoint the rest of the trust property. X’s estate is insolvent, and several of X’s creditors wish to reach the property subject to the power of appointment. Which of the following best describes the law applicable to X’s creditors’ attempt to reach the property subject to X’s power of appointment?

a. X’s creditors can reach none of the property.

b. X’s creditors can reach all of the property.

c. X’s creditors can reach the property X appointed, but not the property she failed to appoint.

d. X’s creditors can reach the property X failed to appoint, but not the property she appointed.

Rationale:

The correct answer is A. The creditors of the donee of a nongeneral power of appointment have no access to the property subject to the power of appointment by virtue of the donee’s power. X’s power is a nongeneral power because she has no power to appoint to herself, her estate, her creditors, or the creditors of her estate. B, C, and D are not correct answers because the creditors of the donee of a nongeneral power of appointment have no access to the property subject to the power of appointment by virtue of the donee’s power. Recommended Reading: Pages 815-820 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

Chapter 13: Construction and future interests

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48. 1. H dies with a revocable trust that becomes irrevocable at his death. The trust instrument provides that the trust is to be held for the benefit of H’s spouse W for her life. At W’s death any remaining trust property is to be distributed “to [H’s] descendants, by right of representation.” W dies some years after H’s death. By what method of representation is the remaining trust property to be distributed to H’s descendants?

a. Unless otherwise provided in the trust instrument, by modern per stirpes.

b. Unless otherwise provided in the trust instrument, by English per stirpes.

c. Unless otherwise provided in the trust instrument, by per capita at each generation.

d. Unless otherwise provided in the trust instrument, by that method used in the governing jurisdiction’s intestacy statute.

Rationale:

The correct answer is D. If a settlor specifies that a distribution be by right of representation, but fails to specify which method to use, then most courts will apply that method set out in the governing jurisdiction’s intestacy statute. For this reason, A, B, and C are not the correct answers. Recommended Reading: Pages 869-873 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

Chapter 14: rule against perpetuities and trust duration

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49. 1. O, who is very wealthy, consults Lawyer about creating a trust for the benefit of her descendants. Due to O’s great wealth, she wants the trust to continue for several generations of her descendants, if possible. To O’s question about how long such a trust can last, which of the following is the most accurate answer Lawyer can give her?

a. Although O can create a trust that lasts a long time, in most jurisdictions its duration will be constrained by the common law rule against perpetuities.

b. Although O can create a trust that lasts a long time, in most jurisdictions its duration will be constrained by the “wait-and-see” rule, a statutory modification to the common law rule against perpetuities.

c. All jurisdictions now permit trusts that are designed to last for hundreds of years.

d. Most jurisdictions now permit trusts that are designed to last for hundreds of years.

Rationale:

The correct answer is D. A majority of jurisdictions now has legislation that permits trusts of a duration up to several hundred years, with some states permitting trusts of 1,000 years. A is not the correct answer because no jurisdiction currently limits its trusts to a duration defined by the traditional common law rule against perpetuities. B is not the correct answer because the duration of trusts in most jurisdictions is not constrained by the traditional wait-and-see rule, and most jurisdictions permit trusts of several hundred years or more. C is not the correct answer because not all jurisdictions permit trusts of several hundred years or more. Recommended Reading: Pages 906-916 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition

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50. 2. S creates the irrevocable “S Trust” for the benefit of his infant grandson, X. The trust instrument directs the trustee to distribute the net income of the trust to or for the benefit of X at least annually for X’s lifetime. If X dies before the date that is 25 years after the creation of the trust, then beginning with X’s death and continuing until such date the trustee is to accumulate the income of the trust and add it to principal. After the later of the date of X’s death or the end of 25 years, the trust is to terminate, and the trustee is to distribute any remaining property to S’s descendants, by representation. Does the S Trust violate the rule against perpetuities?

a. It does violate the common law rule but does not necessarily violate the Uniform Statutory Rule Against Perpetuities (USRAP).

b. It does violate the USRAP but not the common law rule.

c. It violates both the common law rule and the USRAP.

d. It violates neither the common law rule nor the USRAP.

Rationale:

The correct answer is A. The common law rule against perpetuities provides that an interest must vest, if at all, not later than 21 years after some life in being at the creation of the interest. The interests in S’s descendants will not necessarily vest within such time period because if X dies before the date that is four years after creation of the trust, it would be more than 21 years before we could identify those persons in whom the remaining trust property would vest. USRAP, on the other hand, follows a “wait and see” approach. Under USRAP the interest is valid if it either vests or terminates within 90 years after its creation. If the jurisdiction governing the S Trust follows USRAP, then we would wait until X dies to make the determination whether the USRAP rule is violated. If X dies before the date that is 90 years after the trust’s creation, then the interests in S’s descendants are valid. For these reasons, B, C, and D are not correct answers. Recommended Reading: Pages 890-893, 904-906 of Sitkoff, Wills, Trusts, and Estates, Tenth Edition