CHAPTER 13: CLASSIFICATION OF TRUSTS, THE LIVING TRUST, AND OTHER SPECIAL TRUSTS

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1 CHAPTER 13: CLASSIFICATION OF TRUSTS, THE LIVING TRUST, AND OTHER SPECIAL TRUSTS MATCHING a. active trust b. inter vivos trust c. purchase-money resulting trust d. failed trust e. excessive endowment trust f. spendthrift trust g. sprinkling trust h. Totten trust i. declaration of trust j. irrevocable living trust 1. A trust that provides a fund for the maintenance of a beneficiary while safeguarding the fund against the beneficiary s extravagance or inexperience in spending money 2. A trust made when a settlor retains title to property and simply declares himself/herself trustee of the property for the benefit of another person 3. An express trust that can be either private or charitable 4. A trust that is declared void for reasons other than that it has an illegal objective 5. A trust that is established when the value of property exceeds the amount needed for the purpose of a private express trust 6. A savings account in which money is deposited in the depositor s name as trustee for another person named as beneficiary and is payable upon the death of the depositor 7. A trust made between living persons 8. A trust that may not be amended, revoked, or canceled after its creation 9. A trust for which the trustee has the authority and discretion to accumulate or distribute trust income or principal, or both, among the trust beneficiaries in varying amounts 10. A resulting trust in which property is purchased and paid for by one person, at whose direction the seller transfers possession and title to another person ANS: I ANS: E 6. ANS: H 7. ANS: B 8. ANS: J 9. ANS: G 10. TRUE/FALSE 1. All trusts must be either express or implied. Correct. Express trusts are declared in explicit terms. Incorrect. Implied trusts are based on the assumed intent of the person holding legal title to property. 2. Charitable trusts, as public trusts, must benefit the general public.

2 Correct. Trusts that limit funds to named individuals must be private. Incorrect. A charitable trust can benefit a reasonably large indefinite class of persons within the public. 3. The law will permit a public trust to end if the beneficiary no longer exists. Correct. An equity court will name a charity whose purpose is as near as possible to the designated charity as the new beneficiary. Incorrect. The courts will apply the doctrine of cy-pres. 4. If a settlor wishes to see how well a trust operates while he/she is alive, a testamentary trust should be established. Correct. A testamentary trust is a gift made after the death of the settlor under the terms of a will. Incorrect. An inter vivos trust is a gift made while the settlor is living. 5. The Rule Against Perpetuities places a time limit on how long a private noncharitable trust may exist. Correct. The Rule Against Perpetuities holds that a valid trust must take effect at some time in the future. Incorrect. Perpetuity means ongoing indefinitely or, essentially, forever. 6. Courts frequently use resulting trusts to settle legal disputes. Correct. An excessive endowment trust returns the amount not needed to the settlor or to his/her successors. Incorrect. A purchase-money resulting trust can give a payor equitable title to property. 7. The money in a Totten trust is a probate asset. Correct. The money in a Totten trust is a nonprobate asset. Incorrect. The money in a Totten trust is not part of the depositor s estate. 8. A trust that provides income payments to a person whose spouse has died only until the person remarries opposes public policy. Correct. Courts generally uphold trusts that require the beneficiary to lose an interest in a trust if he/she remarries. Incorrect. Such a trust restrains remarriage, not marriage. 9. On the death of the settlor, a revocable living trust becomes irrevocable. Correct. Many people now use a revocable living trust in place of a will. Incorrect. A revocable living trust is revocable only by the settlor.

3 10. A living trust can decrease income taxes. Correct. A living trust can decrease federal estate taxes but not income taxes. Incorrect. A living trust can decrease federal estate tax in appropriate trusts. MULTIPLE CHOICE 1. Which is NOT a subcategory of express trusts? a. Inter vivos or testamentary trusts b. Private or public trusts c. Active or passive trusts d. Implied or nonimplied trusts Implied or nonimplied trusts Correct. An implied trust is not created by the settlor s express terms. Inter vivos or testamentary trusts Incorrect. An inter vivos trust is established and administered by the settlor s express terms. Private or public trusts Incorrect. Public trusts are created under a settlor s express terms. Active or passive trusts Incorrect. Active and passive trusts are categorized based on whether or not the trustee has active duties to perform. 2. Which is NOT an essential element of an express trust? a. A charitable purpose must be expressly designated. b. The settlor must transfer sufficiently identified property to the trust. c. The settlor must intend to create a private trust. d. A beneficiary of the trust must be named. A charitable purpose must be expressly designated. Correct. This is an essential element of a public trust. The settlor must transfer sufficiently identified property to the trust. Incorrect. The property should be identified clearly so that it may be transferred. The settlor must intend to create a private trust. Incorrect. Without clear intent, the trust will not be valid. A beneficiary of the trust must be named. Incorrect. A trust requires a beneficiary. 3. Which is NOT a requirement for an express public trust to be valid? a. The settlor must intend to create a public trust. b. It must benefit the general public or an indefinite class of persons. c. It must limit the distribution of its fund to named individuals. d. A charitable purpose must be expressly designated. e. A trustee must be named to administer the trust. It must limit the distribution of its fund to named individuals. Correct. These limitations would make the trust a private trust. The settlor must intend to create a public trust. Incorrect. Intent is required for the trust to be valid. It must benefit the general public or an indefinite class of persons. Incorrect. An indefinite class of persons must be a reasonably large group of people within the general public. A charitable purpose must be expressly designated. Incorrect. The purpose that benefits the general public or an indefinite class of persons must be designated. A trustee must be named to administer the trust. Incorrect. All trusts require a trustee. 4. Which is NOT a type of resulting trust? a. Failed trust b. Purchase-money resulting trust

4 c. Implied trust d. Excessive endowment trust Implied trust Correct. A resulting trust is an implied trust, but implied trusts are not necessarily resulting trusts. Failed trust Incorrect. A failed trust is a trust declared void for reasons other than having an illegal objective. Purchase-money resulting trust Incorrect. A purchase-money resulting trust is, by definition, a resulting trust. Excessive endowment trust Incorrect. An excessive endowment trust is created when the property value exceeds the amount needed for the trust s purpose. 5. Which of the following is a type of implied trust? a. Testamentary trust b. Private trust c. Active trust d. Constructive trust Constructive trust Correct. A constructive trust is imposed by the court to accomplish justice and prevent unjust enrichment. Private trust Testamentary trust Incorrect. A testamentary trust is an express active trust. Incorrect. A private trust is created expressly for the benefit of one or more named beneficiaries. Active trust Incorrect. An active trust expressly grants the trustee power to act as the manager of the trust. 6. Which trust is in the form of a savings account? a. Totten trust b. Sprinkling trust c. Spendthrift trust d. Constructive trust Totten trust Correct. A Totten trust account will pass to the beneficiary when the depositor dies. Sprinkling trust Incorrect. A sprinkling trust gives a trustee the authority to accumulate or distribute trust income and/or principal among the trust beneficiaries in varying amounts. Spendthrift trust Incorrect. A spendthrift trust allows the beneficiary only a limited amount of funds at any one time. Constructive trust Incorrect. A constructive trust is used to recover property from someone who has improperly obtained rights to it. 7. Which of the following is NOT a feature of a revocable living trust? a. On the death of the settlor, the living trust becomes irrevocable. b. It can be used as a device for saving estate taxes c. It allows the settlor to manage and retain full control over the assets of the trust. d. It allows the settlor to name himself/herself as trustee. ANS: B It can be used as a device for saving estate taxes. Correct. Only an irrevocable trust offers this additional tax benefit. On the death of the settlor, the living trust becomes irrevocable. Incorrect. When the settlor dies, the trust property is distributed according to the terms of the trust. It allows the settlor to manage and retain full control over the assets of the trust. Incorrect. It also allows the settlor to receive the income from the trust during his/her lifetime. It allows the settlor to name himself /herself as trustee. Incorrect. If the settlor is married, the settlor and the settlor s spouse can act as co-trustees. 8. Which of the following is generally a pre-death task in the administration of a trust?

5 a. Filing the annual individual income tax returns b. Opening a checking account for the trust c. Preparing a schedule of property held outside the trust d. Requesting discharge as trustee Filing the annual individual income tax returns Correct. Form 1040 must be filed annually with the settlor s Social Security number. Opening a checking account for the trust Incorrect. A checking account is set up after the death of the settlor to deposit and disburse funds. Preparing a schedule of property held outside the trust Incorrect. This is done after the death of the testator. Requesting discharge as trustee Incorrect. This is the last task of the trustee and is performed after the settlor has died. 9. Which is NOT an advantage of using a revocable living trust as a substitute for a will? a. The need for court-appointed guardians for minors is eliminated. b. Publicity is avoided. c. The settlor maintains ownership of assets. d. A living trust is not under the control or supervision of the probate court. The settlor maintains ownership of assets. Correct. The trust not the settlor owns all the assets except for life insurance and retirement benefits. The need for court-appointed guardians for minors is eliminated. Incorrect. A living trust can provide for specific individuals. Publicity is avoided. Incorrect. A will is a public document and can be examined by anyone. A living trust is not under the control or supervision of the probate court. Incorrect. Wills not living trusts must go through probate. 10. Which function CANNOT be performed by a pour-over will? a. It can allow the testator to name a personal guardian for minor children. b. It can dispose of property that the testator neglected to add to the trust before death. c. It can dispose of property acquired by the testator through gifts, inheritance, or good fortune shortly before death. d. It can be used independently as a substitute for a will. It can be used independently as a substitute for a will. Correct. A pour-over will must be used in conjunction with an existing living trust. It can allow the testator to name a personal guardian for minor children. Incorrect. A pour-over will also allows the testator to name a property guardian for minor children. It can dispose of property that the testator neglected to add to the trust before death. Incorrect. A pour-over will directs the residue of the estate into an existing living trust. It can dispose of property acquired by the testator through gifts, inheritance, or good fortune shortly before death. Incorrect. A pour-over will directs the residue of the estate into an existing living trust.