Trusts Final Exam Quiz
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What role does the settlor retain after transferring equitable title to beneficiaries, in a self-declaration trust?

  • All equitable title
  • Ownership of trust property
  • Legal Title (Fiduciary duties) (correct)
  • Both Legal and equitable Title
  • What must a testamentary trust include to take effect upon the settlor's death?

  • A valid will (correct)
  • A binding contract
  • A valid deed
  • A certificate of deposit
  • Which of the following is true regarding consideration in the context of a trust?

  • Consideration is always required for a valid trust.
  • Consideration is needed for a valid gift in trust.
  • Consideration is not required for a valid trust. (correct)
  • Consideration must be material property only.
  • What happens to the testamentary trust if a will fails?

    <p>The trust becomes ineffective.</p> Signup and view all the answers

    What is true about promises made to create a future trust?

    <p>They require consideration to be enforceable.</p> Signup and view all the answers

    Which of the following would likely be considered trust property?

    <p>A certificate of deposit from a bank</p> Signup and view all the answers

    Why would a promise to give money not qualify as trust property?

    <p>It's considered a gratuitous promise.</p> Signup and view all the answers

    What is necessary for a promise to be considered enforceable as trust property?

    <p>It must be supported by consideration.</p> Signup and view all the answers

    What does the Substitute Fiduciary Act allow a corporation to do without court permission?

    <p>Become the trustee of trusts previously held by a target corporation.</p> Signup and view all the answers

    Which statement best describes the role of a beneficiary according to the provided content?

    <p>A beneficiary holds equitable title and can enforce fiduciary duties against the trustee.</p> Signup and view all the answers

    What is a requirement for beneficiaries under a trust as mentioned in the content?

    <p>Beneficiaries must be clearly ascertainable from the trust instrument.</p> Signup and view all the answers

    In the context of honorary trusts, which of the following statements is true?

    <p>Honorary trusts cannot be enforced by a human or charity, leading to reversion of property.</p> Signup and view all the answers

    Which of the following entities has the capacity to hold property as mentioned in the content?

    <p>Legal entities such as corporations, partnerships, and governmental units.</p> Signup and view all the answers

    What happens if a settlor fails to adequately describe beneficiaries in a trust?

    <p>The trust will fail due to lack of certainty.</p> Signup and view all the answers

    Which of the following statements about pets being designated in trusts is accurate?

    <p>Minnesota is the only state that does not provide for trusts for pets.</p> Signup and view all the answers

    What is one advantage of an inter vivos trust over a testamentary trust?

    <p>It does not need to be probated.</p> Signup and view all the answers

    What could be a disadvantage of an inter vivos trust?

    <p>It incurs immediate expenses.</p> Signup and view all the answers

    Which characteristic indicates a funded trust?

    <p>It must have property to pay premiums.</p> Signup and view all the answers

    What does a revocable trust allow the settlor to do?

    <p>Change the beneficiaries at will.</p> Signup and view all the answers

    What happens if a testamentary trust's will is deemed invalid?

    <p>The trust cannot be established.</p> Signup and view all the answers

    What is the main risk associated with an unfunded trust?

    <p>Insurance premiums may go unpaid.</p> Signup and view all the answers

    Which factor must be considered when selecting a trustee?

    <p>The trustee's willingness to accept the role.</p> Signup and view all the answers

    What benefit does an irrevocable life insurance trust (ILIT) provide regarding taxes?

    <p>It keeps life insurance proceeds out of the taxable estate.</p> Signup and view all the answers

    What is a trustee's primary duty regarding trust property?

    <p>To manage the trust with a high standard of care.</p> Signup and view all the answers

    What can result from a trustee's failure to comply with trust administration duties?

    <p>Liability or penalties for the trustee.</p> Signup and view all the answers

    Under what circumstances can a trustee face personal liability?

    <p>When acting with a state of mind worse than negligence.</p> Signup and view all the answers

    What must a trustee do if the validity of the trust is challenged?

    <p>Defend the trust unless advised otherwise by a competent attorney.</p> Signup and view all the answers

    Which of the following is NOT a responsibility of the trustee regarding trust property?

    <p>Taking personal ownership of the trust property.</p> Signup and view all the answers

    What does the prudent investor rule emphasize for a trustee?

    <p>Balancing risk and return in trust investments.</p> Signup and view all the answers

    What does the trustee’s duty to appeal a legal challenge to the trust depend on?

    <p>The existence of reasonable grounds for appeal.</p> Signup and view all the answers

    What type of powers may a court grant to a trustee that exceed those provided by the settlor or statute?

    <p>Judicial powers</p> Signup and view all the answers

    Under the modern rule, when is delegation of powers permissible for a trustee?

    <p>When reasonably necessary in the administration of the trust</p> Signup and view all the answers

    What was deemed a discretionary act preventing a trustee from delegating it under the traditional rule?

    <p>Decision to invest trust funds</p> Signup and view all the answers

    What must a trustee do before delegating investment decisions to an investment agent according to the 1999 Rule?

    <p>Notify the beneficiaries at least 30 days prior</p> Signup and view all the answers

    What is the main function of powers granted by equity according to the content?

    <p>To carry out the purpose of the trust</p> Signup and view all the answers

    What is true regarding the delegation of mere ministerial duties according to the common law?

    <p>May be delegated but with restrictions</p> Signup and view all the answers

    Which of the following best describes the implied powers granted under the law?

    <p>Powers necessary to fulfill the trust's purpose</p> Signup and view all the answers

    What does the 2004 rule state regarding the delegation of investment or management decisions?

    <p>Delegation is allowed if prudent trustees would do the same</p> Signup and view all the answers

    What happens if a court finds that a trust violates the Rule Against Perpetuities (RAP)?

    <p>The remaining trust property is distributed to the designated beneficiary.</p> Signup and view all the answers

    Which of the following is NOT a valid reason for a trust to be declared invalid based on public policy?

    <p>The trust benefits a minority group previously subjected to discrimination.</p> Signup and view all the answers

    What is a key characteristic of an inter vivos trust?

    <p>It is synonymous with an inter vivos gift.</p> Signup and view all the answers

    What constitutes prohibited trustee conduct under the outlined regulations?

    <p>Committing a tortious act.</p> Signup and view all the answers

    What standard do courts generally apply to determine public policy regarding trusts?

    <p>Examining the long-term effects and intentions for society.</p> Signup and view all the answers

    Which of the following actions might allow a creditor to set aside a trust transfer under the Uniform Fraudulent Transfer Act?

    <p>The settlor transfers property that restricts creditor access.</p> Signup and view all the answers

    In which scenario would a trust likely violate public policy according to the content?

    <p>Restricting a beneficiary from remarrying.</p> Signup and view all the answers

    What is the predominant view regarding the enforcement of discriminatory terms in a trust?

    <p>Discriminatory restrictions can be valid if they serve the public interest.</p> Signup and view all the answers

    Study Notes

    Introduction to Trusts

    • A trust is created when a property owner divides ownership into legal and equitable interests.
    • The settlor (trustor/grantor) creates the trust, transferring legal title to a trustee for the benefit of a beneficiary.
    • This is often used when a gift is being made to a worthy recipient, but the owner wants to control the distribution.
    • Trusts help manage assets for minors, incompetents, spendthrifts, or to avoid probate.

    Texas Trust Legislation

    • Texas Trust Code governs trusts created after January 1, 1984, and transactions relating to older trusts.
    • Prior to 1943, trust law relied on case law.

    Purposes and Uses of Trusts

    • Protect beneficiaries (minors, incompetents, spendthrifts).
    • Flexible asset distribution.
    • Protection against incapacity of settlor.
    • Professional management of assets.
    • Avoidance of probate.
    • Tax benefits (lower tax brackets for beneficiaries).

    Elements of a Valid Trust

    • Trust intent (settlor's desire to create a trust).
    • Settlor with capacity (must be legally able to create a trust).
    • Compliance with the statute of frauds requirement (some trusts need to be in writing to be enforceable).
    • Legal purpose (cannot violate public policy).
    • Transfer of property (transfer of title).
    • Trustee holding legal title.
    • Beneficiary holding equitable title.
    • Compliance with RAP (Rule Against Perpetuities).

    Trust Creation

    • Trust intent is the crucial element in trust creation. Courts will not create a trust if no intent is shown.
    • Specific trust language is not required to establish trust intent, but general language may be sufficient.
    • Trust must be for a specific purpose or intent.
    • A trust is created only if the settlor manifests intention to create a trust.

    Combination of Parties

    • Settlor, Trustee, and Beneficiary can combine in many ways.
    • Sole trustee cannot be the sole beneficiary.
    • Split of legal and equitable title is a key characteristic of trust.

    Trust Creation (continued)

    • The trust does not have to specify the current or future beneficiary.
    • The trustee does not have to inform the beneficiary that they are a beneficiary of the trust.
    • The settlor and trustee do not have to explain the purpose of the trust to the beneficiary.
    • The trustee is required to act prudently in the reasonable care, skill, and caution.
    • Trusts are not enforceable if trustee does not accept the fiduciary duties.

    Trust Creation During Settlor's Lifetime

    • Inter vivos trusts are created while the settlor is alive.
    • Self-declaration of trust (settlor is the trustee and transfers equitable title to beneficiary).
    • Transfer-in-trust (settlor transfers legal title to a trustee).

    Trust Creation Upon Settlor's Death

    • Testamentary trusts are created in a will
    • The beneficiary does not have to be aware of the trust and be able to recognize valid conditions/directions

    Statute of Frauds

    • Trusts of real property must usually be evidenced by a written instrument.
    • Trusts of personal property may not require a writing.
    • Oral trusts of real property are unenforceable in Texas.

    Rule Against Perpetuities

    • Future interests must vest within 21 years after the death of a person alive when the interest was created.
    • This rule applies generally to trusts other than charitable trusts.

    During Settlor's Lifetime (continued)

    • Inter vivos trusts are generally used for estate planning purposes.
    • Beneficiaries during the life of the settlor can be identified or unidentified.
    • The trust property can be transferred

    Trusts During Settlor's Lifetime (continued)

    • Inter vivos trust property is not part of the probate process upon the settlor's death.
    • Some inter vivos trusts allow the settlor the right to revoke or amend during his lifetime until the settlor's death
    • Can be created for many purposes, but some are not allowed (tax evasion)
    • There are tax benefits for certain conditions of inter vivos trust

    Trust Administration - Overview

    • Trustees are legally required to accept the office and undertake the duties associated with it.
    • Trust administration relies on the trust document and the Trust Code of Texas.
    • Statutory trustee powers can be modified.

    Trust Administration - Additional Points

    • Trustees should have a basic degree of skill and prudence.
    • Trustee's duty is to serve the beneficiaries
    • Trustees must act in a prudent fashion when handling a trust or risk personal liability.

    Trustee's Responsibilities and Duties

    • Duties of Loyalty, Prudence, and Confidentiality
    • Duties to Inform Beneficiaries
    • Accountings (reporting)
    • Handling Tort issues
    • Handling Contract issues

    Trustee Compensation

    • Trustees may receive reasonable fees.
    • Many factors go into what a reasonable fee is.

    Court Alterations

    • Deviation from trust provisions is possible if the settlor had an “equitable argument” that would have considered the same circumstances.

    Party Alterations by Settlor

    • Settlor can revoke, modify, or amend a trust, unless trust is specifically written as irrevocable
    • Revocation is often a valid action.
    • Settlors and beneficiaries can work together to change terms of irrevocable trusts

    Party Alterations by Trustee

    • Trustee can modify or amend a trust with court approval of beneficiaries
    • If no court approval, then a trustee is not permitted
    • Trustee's powers are delegated.

    Trust Termination

    • Trust will end when trust document terminates it
    • Trust will end when all applicable terms are completed
    • Trust will terminate via explicit written directions
    • Trust will end if settlors and all parties agree in writing
    • Trust can be terminated by the court if there's a worthy reason

    Trust Enforcement

    • How to ensure the trust is run correctly and by who.
    • How to approach the courts
    • How those courts will evaluate evidence and actions for breach of trust.

    Remedies

    • Trustee has legal responsibility.
    • Personal recovery for beneficiaries
    • Trust property recovery.
    • Parties are personally liable

    Other Trust Issues

    • Trusts of real property, personal property, life insurance, and bank accounts.
    • Resulting Trusts - when trust fails
    • Constructive Trusts - when improper conduct leads to trust creation.

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