The ABCs of: Trusts

Here is a collection of 26 important concepts, from A to Z, you need to know about Trusts for the bar exam:

A – Anti-Lapse Statutes: Anti-lapse statutes are designed to prevent gifts in a trust from failing when a named beneficiary predeceases the settlor. These statutes typically allow the gift to pass to the deceased beneficiary's descendants unless the trust instrument specifies otherwise. This rule ensures the settlor’s intent is upheld and avoids reverting the property to the residuary beneficiary or the settlor’s estate.

BONUS: A – Adopted Children: Adopted children are treated as biological children under most trust laws, meaning they can inherit under class gifts and anti-lapse statutes unless explicitly excluded by the trust terms. This rule reflects public policy favoring equality among children.

B – Beneficiaries: Beneficiaries are individuals or entities for whose benefit a trust is created. They hold equitable title to the trust property and can enforce the trustee’s fiduciary duties. Beneficiaries are classified as income beneficiaries, who receive trust income during the trust’s term, or remainder beneficiaries, who receive the trust corpus after specific conditions are met or the trust terminates.

BONUS: B – Beneficiaries’ Rights: Beneficiaries have the right to compel the trustee to act in accordance with the trust terms, to receive accountings, and to sue for breaches of fiduciary duty. These rights ensure trustees act responsibly and the trust serves its intended purpose.

C – Charitable Trusts: Charitable trusts are established for purposes benefiting the public, such as education, religion, poverty relief, or scientific research. These trusts are not required to have definite beneficiaries and are not subject to the Rule Against Perpetuities. Courts favor charitable trusts because of their public benefit and may modify them under the cy pres doctrine to ensure they achieve their general purpose.

BONUS: C – Cy Pres Doctrine: The cy pres doctrine allows a court to redirect the property of a charitable trust when its original purpose becomes illegal, impracticable, or impossible. The court modifies the trust to fulfill a purpose as close as possible to the settlor’s intent.

D – Discretionary Trusts: In discretionary trusts, the trustee has discretion over when and how much to distribute to beneficiaries. Beneficiaries cannot demand specific distributions, and creditors generally cannot access trust property unless under limited exceptions, such as child or spousal support claims.

BONUS: D – Definite-Beneficiary Rule: Private trusts must have identifiable beneficiaries to be valid, except for charitable trusts and those serving a permissible noncharitable purpose. This rule ensures accountability and enforceability.

E – Express Trusts: Express trusts are explicitly created by a settlor through a declaration of trust or transfer of property. The essential elements are (1) a settlor with capacity and intent to create the trust, (2) a trustee, (3) identifiable beneficiaries, (4) trust property, and (5) a valid trust purpose.

BONUS: E – Exception Creditors: Spendthrift provisions in a trust generally protect trust assets from creditors, but certain creditors, like those enforcing child or spousal support obligations, may access these assets despite restrictions.

F – Fiduciary Duties: Trustees owe fiduciary duties to act in the best interests of the beneficiaries. These include the duty of loyalty (avoiding conflicts of interest), the duty to administer the trust prudently, the duty to preserve and protect trust property, and the duty to account to the beneficiaries.

BONUS: F – Forfeiture Clauses: Forfeiture clauses, also known as no-contest clauses, penalize beneficiaries who challenge a trust's validity. While generally enforceable, these clauses may be invalidated if the beneficiary's challenge was made in good faith and with probable cause.

G – General Power of Appointment: A general power of appointment allows the holder to appoint trust property to anyone, including themselves, their creditors, or their estate. This power offers significant flexibility but may also expose the property to the holder’s creditors.

BONUS: G – Gift-Over Clauses: Gift-over clauses specify an alternate beneficiary if the original gift fails. These clauses ensure the property is distributed according to the settlor’s intent.

H – Honorary Trusts: Honorary trusts are established for non-human beneficiaries or purposes, such as caring for pets. While not enforceable in the same way as private trusts, many jurisdictions recognize them and limit their duration to 21 years or the life of the animal.

I – Intent to Create a Trust: The settlor must have a clear, present intent to create a trust relationship. This intent is typically expressed through words, writing, or conduct. A mere hope or desire does not suffice unless the intent to create enforceable obligations is evident.

J – Judicial Modification: Courts may modify or terminate a trust under circumstances such as unforeseen changes that defeat the trust's purpose, impracticability of administration, or when compliance with terms would violate public policy.

BONUS: J – Joint Trustees: Joint trustees must act unanimously unless the trust instrument provides otherwise. Disputes between trustees may require court intervention to ensure the trust is administered effectively.

K – Knowledge of Trustee: Trustees are expected to familiarize themselves with the trust terms and fulfill their duties accordingly. Ignorance of the trust’s provisions does not excuse breaches of fiduciary duty.

L – Lapse and Predeceased Beneficiaries: A gift in a trust lapses if the beneficiary predeceases the settlor, unless anti-lapse statutes apply or the trust terms provide otherwise. For class gifts, the share of a predeceased member often passes to the surviving class members.

M – Modification and Termination of Trusts: Trusts can be modified or terminated by beneficiaries if all consent and no material purpose remains. A settlor may revoke or amend a revocable trust unless explicitly restricted.

N – No Res, No Trust: A trust must have identifiable property (res) to be valid. Without trust property, the trust fails for lack of subject matter.

O – Oral Trusts: Oral trusts are valid if there is clear and convincing evidence of their terms, except for trusts involving real property, which must be in writing under the Statute of Frauds.

P – Powers of Appointment: A power of appointment allows an individual to direct the disposition of trust property. Special powers limit appointees to a specified group, while general powers grant broader discretion.

Q – Qualified Beneficiaries: Qualified beneficiaries, as defined by the Uniform Trust Code, are those with vested or contingent interests who may enforce the trust and receive accountings.

R – Resulting Trusts: Resulting trusts occur when an express trust fails or has excess property, and the property reverts to the settlor or their estate. This equitable remedy preserves the settlor’s intent.

S – Spendthrift Trusts: Spendthrift trusts prevent beneficiaries from voluntarily or involuntarily transferring their interests. These provisions protect trust assets from creditors, subject to exceptions such as spousal or child support claims.

T – Testamentary Trusts: Testamentary trusts are created by a will and take effect upon the settlor’s death. These trusts are commonly used for estate planning to manage property for minors or incapacitated beneficiaries.

U – Uniform Principal and Income Act: This Act governs the allocation of trust receipts and expenses between principal and income, ensuring fairness between income and remainder beneficiaries.

V – Void for Vagueness: A trust may be invalidated if its purpose or terms are too vague to enforce. Courts may apply equitable principles to clarify or reform vague provisions.

W – Waste: Trustees must avoid waste by preserving trust property and making it productive. This includes prudent investments, proper maintenance, and fulfilling the trust's terms.

X – Exculpatory Clauses: Exculpatory clauses limit trustees’ liability for breaches of duty, but they are unenforceable if they excuse bad faith or reckless conduct.

Y – Yearly Accounting: Trustees are required to provide annual accountings to beneficiaries, detailing the trust’s administration, income, expenses, and distributions.

Z – Zoning Trusts: Trusts holding real estate must comply with zoning laws and regulations. These provisions ensure property use aligns with local planning requirements.