CHAPTER 12: INTRODUCTION TO TRUSTS MATCHING a. legal title b. cestui que trust c. equitable title d. testamentary trust e. trust agreement f. principal g. income h. Restatement of the American Law of Trusts i. Uniform Trust Code j. parol evidence 1. The monetary gain that is generated from the principal of a trust 2. A uniform law available for adoption by states to provide a uniform codified law on trusts 3. The capital or property of a trust 4. The authority on trust law in most states 5. The form of ownership of trust property held by the trustee and giving him/her the right to control and manage the property for another’s benefit 6. Oral testimony or written evidence 7. A contract, made between and signed by the settlor and trustee, that creates a trust 8. The person who has the enjoyment and benefit of trust property 9. A trust included in a will 10. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. The right of the beneficiary to receive the benefits of the trust ANS: G ANS: I ANS: F ANS: H ANS: A ANS: J ANS: E ANS: B ANS: D ANS: C 316 Test Bank Answer Keys TRUE/FALSE 1. The trust instrument must either specifically describe the trust property or clearly define the procedure to be followed in identifying the trust property. ANS: T True Correct. The court cannot enforce the trust unless the trust property exists. False Incorrect. The validity of a trust depends on its enforceability. 2. Any transferable interest in an object of ownership may become trust property. ANS: T True Correct. This includes ownership of real or personal property. False Incorrect. A business interest could serve as trust property. 3. A single trust may have only one beneficiary. ANS: F False Correct. The settlor may choose to make the beneficiaries joint tenants. True Incorrect. Multiple beneficiaries usually hold the property as tenants in common. 4. Beneficiaries of a trust must be defined by name. ANS: F False Correct. Beneficiaries may be defined by class designation. True Incorrect. A trust can be set up, for example, “for the benefit of my grandchildren.” 5. An infant may be a beneficiary of a trust. ANS: T True Correct. A guardian would generally be required to act as the beneficiary for an infant. False Incorrect. Any person capable of owning property may be a beneficiary. 6. Trustees must generally be paid. ANS: T True Correct. However, family members acting as trustees may decline compensation. False Incorrect. Trustees perform work for the trust when they buy, sell, and invest property. 7. After the creation of a trust, title to property placed in the trust passes to at least two persons with the trustee receiving the equitable title and the beneficiary receiving the legal title. ANS: F False Correct. The beneficiary receives the equitable title. True Incorrect. The trustee receives the legal title. 8. A settlor may cancel a trust if a property transfer is accomplished through duress. ANS: T True Correct. Fraud or undue influence would also be grounds for voiding a trust. False Incorrect. Such a trust would be voidable. 9. The settlor’s retention of control over the trust arrangement exposes the settlor to tax liability for the trust income. ANS: T True Correct. The power to revoke the trust exposes the settlor to this liability. False Incorrect. This is one reason why the settlor may choose to make the trust irrevocable. 10. If there are two trustees, one may make a determination to take action without the other’s consent. ANS: F False Correct. If there are only two trustees, they must agree on any action concerning trust property. True Incorrect. This is usually only true if there are more than two trustees and the trustee taking action is also the settlor. MULTIPLE CHOICE 1. Which is NOT an essential element of a trust? a. A sale or gift of property b. One or more beneficiaries c. Real or personal property d. One or more trustees ANS: A A sale or gift of property Correct. A trust differs from other legal property transactions, such as a sale or gift of property. One or more beneficiaries Incorrect. Beneficiaries receive benefits and enforce the trust. Real or personal property Incorrect. Real or personal property is transferred to the trust. One or more trustees Incorrect. Trustees administer and manage the trust. The settlor, who creates the trust, is another essential element of a trust. 2. To be a settlor, a person must meet all of the following requirements EXCEPT: a. Own a transferable interest in property b. Have the right or power to dispose of a property interest c. Act as the beneficiary d. Have contractual capacity ANS: C Act as the beneficiary Correct. The settlor is allowed, but not required, to be the beneficiary. Own a transferable interest in property Incorrect. The settlor must own a transferable interest in property. Have the right or power to dispose of a property interest Incorrect. Without this right, property cannot legally be transferred. Have contractual capacity Incorrect. Settlors may not be insane, a minor, or intoxicated at the time of the creation of a trust. 3. The court may appoint or replace a trustee in all of the following circumstances EXCEPT: a. The trustee is incompetent b. The named trustee declines the position. c. The trustee dies. d. The named trustee is also a cobeneficiary. ANS: D The named trustee is also a co-beneficiary. Correct. The trustee can be a co-beneficiary, but not the sole beneficiary. The trustee is incompetent. Incorrect. If a trustee’s incompetence is shown, the court can appoint a replacement trustee. The named trustee declines the position. Incorrect. The court will not allow a trust to fail for lack of a trustee. The trustee dies. Incorrect. If the trustee dies, a new trustee must be named. 4. Which is an invalid trust combination? a. The settlor, trustee, and beneficiary are three different people. b. The settlor is also a co-trustee and a co-beneficiary. c. The settlor is also the trustee and beneficiary. d. The settlor is also the beneficiary, and another person is the trustee. ANS: C The settlor is also the trustee and beneficiary. Correct. The settlor may be the trustee or the beneficiary, but not both. The settlor, trustee, and beneficiary are three different people. Incorrect. This is a common trust combination. The settlor is also a co-trustee and a co-beneficiary. Incorrect. This is legal as long as the settlor is not the sole beneficiary or trustee. The settlor is also the beneficiary, and another person is the trustee. Incorrect. The settlor may be a beneficiary or a trustee, but not both. 5. Which is NOT considered valid grounds for the removal of a trustee? a. Lack of capacity b. Resignation of the trustee c. Commission of a crime d. Showing favoritism to one or more beneficiaries ANS: B Resignation of the trustee Correct. If the trustee resigns, there is no need for court removal. Lack of capacity Incorrect. A trustee must have legal capacity. Commission of a crime Incorrect. This is especially valid when the crime involves dishonesty. Showing favoritism to one or more beneficiaries Incorrect. The beneficiaries must be treated equally. 6. The trustee in the trust instrument is granted the power to do all of the following EXCEPT: a. Delegate the performance of personal duties b. Hire attorneys and stockbrokers c. Subdivide or exchange real property d. Lend or borrow money ANS: A Delegate the performance of personal duties Correct. The trustee acts as the fiduciary. Hire attorneys and stockbrokers Incorrect. The trustee can also hire accountants and insurance agents. Subdivide or exchange real property Incorrect. The trustee can also develop or improve real property. Lend or borrow money Incorrect. The trustee can lend or borrow money and pledge or mortgage the trust property. 7. Which is NOT a trustee’s duty? a. Duty to account b. Duty of performance and due care c. Duty to make payments of income and principal to the named beneficiaries d. Duty to prevent the investment of the trust property ANS: D Duty to prevent the investment of the trust property Correct. The trustee is required to invest the property in enterprises that will yield income. Duty to account Incorrect. The trustee must keep accurate records to account for expenditures, investments, and other actions. Duty of performance and due care Incorrect. The trustee’s main duty is to carry out the terms and purpose of the trust. Duty to make payments of income and principal to the named beneficiaries Incorrect. The beneficiaries may be income beneficiaries or remainder beneficiaries. 8. Which duty prohibits a trustee from personally profiting from his/her position as trustee (other than the compensation allowed by contract or law)? a. Duty to take possession of and preserve trust property b. Duty of loyalty c. Duty to prevent the investment of the trust property d. Duty to make payments of income and principal to the named beneficiaries ANS: B Duty of loyalty Correct. The loyalty duty applies to all persons in a fiduciary capacity. Duty to take possession of and preserve trust property Incorrect. The trustee must protect the property from loss or damage. Duty to prevent the investment of the trust property Incorrect. The trustee is required to invest the property in enterprises that will yield income. Duty to make payments of income and principal to the named beneficiaries Incorrect. The beneficiaries may be income beneficiaries or remainder beneficiaries. 9. Which is an example of remainder beneficiary expenses? a. Royalties b. Depreciation c. Stock splits d. Costs incurred in the sale or purchase of principal ANS: D Costs incurred in the sale or purchase of principal Correct. Such costs are an extraordinary expense. Royalties Incorrect. Royalties are an income beneficiary receipt. Depreciation Incorrect. Depreciation is an ordinary expense. Stock splits Incorrect. Stock splits are a remainder beneficiary receipt. 10. Which judicial remedy can a beneficiary use to be compensated monetarily (either directly or through the trust) for a trustee’s breach of trust? a. Civil lawsuit to compel the trustee to reimburse the trust for any loss or depreciation in value of the trust property b. Removal of the trustee and appointment of a new trustee c. An injunction to compel the trustee to do or refrain from doing the act that would constitute the breach of trust d. Suing for specific performance ANS: A Civil lawsuit to compel the trustee to reimburse the trust for any loss or depreciation in value of the trust property Correct. The trustee would be required to repay the trust. Removal of the trustee and appointment of a new trustee Incorrect. A trustee can be removed for misconduct, such as failure to invest the property. An injunction to compel the trustee to do or refrain from doing the act that would constitute the breach of trust Incorrect. Such an injunction would not directly result in a payment to either the trust or beneficiary. Suing for specific performance Incorrect. This would compel the trustee to perform the duties created by the trust.