Chapter 12: Introduction
CHAPTER 12: INTRODUCTION
TO TRUSTS
MATCHING
a.legal title
b.cestui quetrust
c.equitable title
d.testamentary trust
e.trust agreement
f.principal
g.income
h.Restatement of the American Law of Trusts
i.Uniform TrustCode
j.parol evidence
1.The monetary gain that is generated from the principal of atrust
2.A uniform law available for adoption by states to provide a uniform codified law on trusts
3.The capital or property of atrust
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’sbenefit
6.Oral testimony or writtenevidence
7.A contract, made between and signed by the settlor and trustee, that creates atrust
8.The person who has the enjoyment and benefit of trust property
9.A trust included in a will
10.The right of the beneficiary to receive the benefits of thetrust
1.ANS: G
2.ANS: I
3.ANS: F
4.ANS: H
5.ANS: A
6.ANS: J
7.ANS: E
8.ANS: B
9.ANS: D
10.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 trustproperty.
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 legaltitle.
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 trustincome.
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 atrust?
a.A sale or gift of property
b.One or morebeneficiaries
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 propertyinterest
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 circumstancesEXCEPT:
a.The trustee is incompetent
b.The named trustee declines theposition.
c.The trusteedies.
d.The named trustee is also a co-beneficiary. 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 differentpeople.
b.The settlor is also a co-trustee and a co-beneficiary.
c.The settlor is also the trustee andbeneficiary.
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 atrustee?
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 followingEXCEPT:
a.Delegate the performance of personalduties
b.Hire attorneys andstockbrokers
c.Subdivide or exchange realproperty
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’sduty?
a.Duty to account
b.Duty of performance and duecare
c.Duty to make payments of income and principal to the namedbeneficiaries
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 orlaw)?
a.Duty to take possession of and preserve trustproperty
b.Duty of loyalty
c.Duty to prevent the investment of the trustproperty
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 beneficiaryexpenses?
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 oftrust?
a.Civil lawsuit to compel the trustee to reimburse the trust for any loss or depreciation in value of the trustproperty
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 oftrust
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.