Trust Law: Mastering the Fundamentals

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Chapter 1: Classification of Trusts

1. Read Chapter 1: Classification of Trusts.
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2. Define the three main modes of trust creation: express, resulting, and constructive.
AI CHEAT: Trusts are categorized by how they are created—either through deliberate intent or by operation of the law to ensure fairness:
  • Express Trusts: Created by the intentional act of the settlor. This is done through clear language (written or oral) expressing the desire to split legal and equitable title.
  • Resulting Trusts: These are implied by law based on the presumed intent of the parties. They "result" (revert) back to the settlor when an express trust fails or when someone pays for property but puts it in another's name without intending a gift.
  • Constructive Trusts: These are imposed by the court as an equitable remedy. They are designed to prevent unjust enrichment when someone has obtained title to property through fraud, breach of duty, or unconscionable conduct.
3. Explain the requirements of an express trust under black letter law.
AI CHEAT (SEE ERRATA): To be valid under "Black Letter Law," an express trust must satisfy the Five Certainties/Elements:
  • Intent: The settlor must demonstrate a clear subjective intent to create a trust. This requires mandatory language (e.g., "I direct") rather than precatory language (e.g., "I wish" or "I hope").
  • Capacity: The settlor must be of legal age and possess the mental capacity to contract and transfer property.
  • Trust Res (Subject Matter): There must be specific, identifiable property currently in existence. You cannot have a trust for "future profits" that don't exist yet.
  • Ascertainable Beneficiaries (Object): The beneficiaries must be clearly identifiable or belong to a strictly defined class so the court knows who has standing to enforce the trust.
  • Legal Purpose: The trust must not be created for an illegal objective or anything that violates public policy (e.g., a trust to encourage divorce or crime).
4. Describe when a resulting trust arises, including examples.
AI CHEAT: A resulting trust occurs by operation of law when property is transferred, but the beneficial interest does not follow the legal title. Effectively, the property "results" (springs back) to the settlor or their estate.
  • Failure of an Express Trust: If an express trust is created but fails for a legal reason (e.g., the beneficiary dies without a successor or the purpose becomes impossible), the trustee holds the property in a resulting trust for the settlor.
  • Purchase Money Resulting Trust (PMRT): Arises when Party A pays the purchase price for property, but legal title is taken in the name of Party B. Unless Party B can prove it was a gift or loan, the law presumes B holds it for the benefit of A.
  • Surplus Property: If a trust is fully executed (e.g., a trust to pay for a specific wedding) and there are funds left over, the remainder results back to the settlor rather than being kept by the trustee.
5. Describe the purpose and effect of a constructive trust in equity.
AI CHEAT (SEE ERRATA): Unlike express trusts, a constructive trust is not an actual trust relationship; it is a remedial device imposed by a court of equity to prevent unjust enrichment.
  • Purpose: To rectify situations where someone has acquired legal title to property "wrongfully" (e.g., via fraud, duress, undue influence, or a breach of fiduciary duty).
  • Effect: The court treats the "wrongdoer" as a trustee who has only one duty: to convey the property to the person who is rightfully entitled to it.
  • Example: If a trustee steals trust funds to buy a house in their own name, the court will impose a constructive trust on that house, forcing the thief to hand the title over to the defrauded beneficiaries.
6. Differentiate between revocable and irrevocable trusts, including key legal consequences.
AI CHEAT: The primary distinction lies in whether the settlor retains the power to "undo" the trust.
  • Revocable Trusts: The settlor can amend or terminate the trust at any time.
    • Legal Consequence: Assets are usually still considered the settlor’s property for tax and creditor purposes. It is primarily a tool to avoid probate.
  • Irrevocable Trusts: Once created, the settlor gives up the power to change or end the trust (subject to narrow legal exceptions).
    • Legal Consequence: Assets are removed from the settlor’s taxable estate. This offers asset protection from the settlor's creditors, as they no longer "own" the property.
  • Key Rule: Under the Uniform Trust Code (UTC), a trust is presumed revocable unless the document explicitly states it is irrevocable.
7. List the elements of a charitable trust and explain the doctrine of cy pres.
AI CHEAT: Charitable trusts are unique because they are created for the benefit of the public at large rather than specific individuals.
  • Elements of a Charitable Trust:
    • Must have a charitable purpose (e.g., relief of poverty, advancement of education/religion, health, or government purposes).
    • Must benefit an indefinite group (you cannot create a "charitable" trust for your own family).
    • It can potentially last forever (exempt from the Rule Against Perpetuities).
  • The Doctrine of Cy Pres: Meaning "as near as possible." If the trust’s specific charitable purpose becomes illegal, impossible, or permanently impracticable, the court can redirect the funds to another charity that aligns as closely as possible with the settlor's original intent.
8. List and explain three features of a spendthrift trust.
AI CHEAT: A spendthrift trust includes a specific provision that restricts a beneficiary's ability to transfer their interest and prevents creditors from reaching the assets before they are distributed.
  • Restraint on Alienation: The beneficiary is legally prohibited from selling, giving away, or pledging their future interest in the trust as collateral for a loan.
  • Creditor Protection: Because the beneficiary doesn't "own" the assets yet, their creditors cannot sue the trustee to force a payment or attach the trust property to satisfy the beneficiary's debts.
  • The "Control" Exception: Once the trustee actually distributes a check to the beneficiary, that money is no longer protected. The "shield" only exists while the money is inside the trust.
9. Define and compare discretionary trusts and support trusts.
AI CHEAT: These trusts differ based on the level of authority given to the trustee and the specific "trigger" for making a distribution.
  • Discretionary Trusts: The trustee has absolute power to decide if, when, and how much of the trust income or principal to distribute. The beneficiary has no legal "right" to the money until the trustee exercises that discretion.
    • Consequence: Provides the highest level of creditor protection because the beneficiary cannot legally compel a payout.
  • Support Trusts: The trustee is mandated to distribute funds as necessary for the beneficiary's HEMS (Health, Education, Maintenance, and Support). The trustee must pay if the beneficiary demonstrates a need for these specific categories.
    • Consequence: Ensures the beneficiary's standard of living is maintained, but "necessaries" creditors (like a hospital) may be able to reach the funds more easily.
  • Comparison: In a support trust, the standard is objective (the need), whereas in a discretionary trust, the standard is subjective (the trustee's choice).
10. Explain the significance of fixed, class, and contingent beneficiary designations.
AI CHEAT: These designations define the legal "certainty" of who receives trust assets and under what conditions they receive them.
  • Fixed Beneficiaries: Specific individuals named to receive a set portion of the trust (e.g., "50% to Alice, 50% to Bob").
    • Significance: Provides maximum certainty and allows beneficiaries to know exactly what their interest is worth.
  • Class Designations: Beneficiaries are defined as a group rather than by name (e.g., "all my grandchildren").
    • Significance: Allows the trust to remain "open" to future members (like grandchildren not yet born) without needing to amend the document.
  • Contingent Beneficiaries: Their right to receive assets depends on a specific event occurring (e.g., "to Charlie, provided he reaches age 25").
    • Significance: Protects the settlor's intent by ensuring assets only go to those who meet certain milestones or survive other beneficiaries.
11. Explain the Rule Against Perpetuities in relation to dynasty trusts.
AI CHEAT (SEE ERRATA): The Rule Against Perpetuities (RAP) and Dynasty Trusts represent the tension between preventing "dead hand control" and allowing families to preserve wealth for generations.
  • The Rule Against Perpetuities: The traditional common law rule states that "no interest is good unless it must vest, if at all, not later than 21 years after some life in being at the creation of the interest."
    • Purpose: To prevent property from being tied up in a trust forever, ensuring it eventually returns to the open market.
  • Dynasty Trusts: These are long-term, irrevocable trusts designed to last for many generations (or even forever), allowing wealth to grow tax-free without being subject to estate taxes at each death.
  • The Relationship: To create a Dynasty Trust, the settlor must establish it in a jurisdiction that has either abolished the RAP or extended it significantly (e.g., 360 years or 1,000 years).
  • "Wait and See" Doctrine: Many modern courts don't strike down a trust immediately; instead, they "wait and see" if the interest actually fails to vest within the RAP time limit before taking action.

Chapter 2: The Parties to a Trust and Their Legal Standing

12. Read Chapter 2: The Parties to a Trust and Their Legal Standing.
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13. Define “trust” as a legal and fiduciary relationship involving three core roles.
AI CHEAT: A trust is a fiduciary relationship with respect to property, arising from a settlor's manifestation of intent to create it and subjecting the person who holds title to the property to duties to deal with it for the benefit of another.
  • The Fiduciary Bond: This is a relationship of "utmost good faith." The trustee is legally required to act with total loyalty to the beneficiaries, putting the beneficiaries' interests above their own.
  • The Three Core Roles:
    • Settlor (or Grantor): The person who creates the trust and provides the property (the "Trust Res").
    • Trustee: The individual or entity that holds legal title and manages the assets.
    • Beneficiary: The person or entity that holds equitable title and receives the benefits (income or assets).
14. Identify the three principal parties to any trust.
AI CHEAT: A trust is a tripartite relationship where legal and equitable interests are split among three distinct parties.
  • 1. The Settlor: The originator who provides the trust property and manifests the unequivocal intent to create the fiduciary relationship. They must possess legal capacity and own the property being conveyed.
  • 2. The Trustee: The fiduciary appointed to hold legal title and administer the property strictly for the beneficiaries. The book describes them as a steward in conscience rather than an owner in substance.
  • 3. The Beneficiaries: The individuals or entities for whose benefit the trust is established. They hold equitable title, which grants them the legal standing to enforce the trust and receive its bounty.
15. Sketch how they are related in the trust.
AI CHEAT: The trust relationship is a "split" of property ownership. Think of it as a triangle of power where the property (the Res) sits in the middle.
  • The Transfer: The Settlor transfers Legal Title to the Trustee and Equitable Title to the Beneficiary. Once this transfer is complete, the Settlor typically "drops out" of the relationship unless they have specifically reserved powers in the trust document.
  • The Fiduciary Bond: The Trustee and Beneficiary are connected by a Fiduciary Duty. The Trustee holds the "burden" (the management and legal responsibility), while the Beneficiary holds the "benefit" (the enjoyment and right to the assets).
  • The Enforcement: Because the Beneficiary holds Equitable Title, they have the Standing to take the Trustee to court if the Trustee fails to manage the property according to the Settlor's instructions.
16. Explain the legal capacity and role of the settlor, including their power to reserve rights or revoke.
AI CHEAT: The timing and method of creation determine whether a trust remains a private arrangement or falls under court supervision.
  • 1. Inter Vivos (Living) Trusts: Created and effective during the settlor's lifetime. These are often used to avoid the probate process and allow the settlor to maintain control or manage assets while still alive.
  • 2. Testamentary Trusts: Established through a settlor's Last Will and Testament and only become effective upon their death. Because they are born from a will, they are inherently subject to probate court jurisdiction.
  • The "Court Control" Factor: Testamentary trusts require judicial approval for trustee appointments and annual accountings, whereas Inter Vivos trusts can be designed to be "sovereign" and closed to court governance.
17. Essay: Define and distinguish revocable vs. irrevocable trust powers retained by a settlor.
AI CHEAT: The Statute of Frauds acts as a legal gatekeeper to ensure that specific types of trusts are recorded in writing to prevent fraud.
  • Real Property Rule: Any trust involving land or buildings must be in writing and signed to be enforceable in court.
  • Testamentary Rule: Trusts created through a will must be in writing and comply with all legal formalities. These only take effect after the death of the creator.
  • Personal Property: Oral trusts for personal items like money or jewelry are sometimes allowed but are viewed with skepticism by judges.
  • Evidence Standard: For an oral trust to be valid, its terms must be proven by clear and convincing evidence rather than just a simple majority of proof.
18. Sketch an example of the trustee and their fiduciary obligation to administer the trust property.
AI CHEAT: A trust is not effective until the property is actually delivered and legal title is transferred to the trustee.
  • The Requirement of Transfer: The settlor must transfer legal title of the trust property to the trustee. If this transfer does not happen, the trust never becomes effective.
  • Real Property: Any real estate must be conveyed specifically by deed to be validly placed into the trust.
  • Personal Property: This may be delivered physically or through constructive methods, such as a written assignment or official registration.
  • Delivery of Control: Holding title is not enough. The settlor must also deliver control of the property. Holding title without the intent to vest fiduciary duty results in no trust.
19. Name and describe the five core duties of a trustee.
AI CHEAT (ERRATA BELOW): Special purpose trusts are designed to solve specific problems like estate taxes, probate delays, or complex asset transfers.
  • Pour-Over Trusts: These work in tandem with a will. The will contains a provision that pours assets into a pre-existing trust at the time of death. This ensures that assets not formally retitled during life still end up under the trust's protection.
  • Life Insurance Trusts: Often called an ILIT, this is an irrevocable trust created specifically to own and control a life insurance policy. Its primary goal is to keep the death benefit out of the settlor's taxable estate.
  • Spendthrift Provisions: While often part of a larger trust, these are special clauses that prevent a beneficiary from selling their interest or creditors from seizing the assets before they are paid out.
  • Charitable Remainder Trusts: A specialized tool where the settlor or another beneficiary receives income for a set period, after which the remaining assets go to a designated charity.
AI CHEAT: These duties are the prime directives of a trustee. They are not suggestions; they are strict legal requirements that, if broken, trigger the remedies we discussed in the breach of trust section.
  • 1. Duty of Loyalty: The most fundamental duty. The trustee must act solely in the interest of the beneficiaries. Any act of self-dealing or using trust assets for personal gain is a direct violation.
  • 2. Duty of Prudence: Often called the Prudent Investor Rule. The trustee must manage the trust with the same care, skill, and caution that a reasonable person would use when managing their own property.
  • 3. Duty of Impartiality: The trustee cannot play favorites. They must balance the interests of current income beneficiaries with the interests of those who will receive the principal later.
  • 4. Duty to Segregate: Trust property must never be mixed with the trustee personal assets. This is the duty to keep the trust res separate and clearly labeled to prevent accidental loss or seizure by creditors.
  • 5. Duty to Inform and Account: The trustee must keep the beneficiaries reasonably informed about the administration of the trust and provide a formal report of all transactions when requested.
20. Essay: What constitutes a breach of fiduciary duty by a trustee and the consequences.
AI CHEAT (ERRATA BELOW): A trust is designed as a fortress, but every fortress needs a gate. Modification and termination rules define how that gate is opened to adapt to new realities or to close the estate forever.
  • Revocable versus Irrevocable: Revocable trusts remain under the total control of the settlor for changes or dissolution. Irrevocable trusts are generally fixed and require either a court order or the unanimous agreement of all beneficiaries to be altered.
  • The Role of the Trust Protector: A protector can be given the power to amend administrative details or even dissolve the trust if its original purpose is finished or becomes impossible to achieve.
  • The Disposition Clause: This part of the document explains how assets are handed out when the trust reaches its end. It ensures the property passes correctly and ends any further legal claims against the trustee.
  • Natural Termination: Many trusts end automatically when a specific event happens, such as the death of a beneficiary or a child reaching a certain age.
AI CHEAT: A breach occurs when a trustee fails to fulfill any duty owed to the beneficiaries. It does not require a malicious intent; even a well-meaning mistake can be a breach if it violates the strict standards of equity.

What Constitutes a Breach?

  • Self-Dealing: This is the most serious breach. It happens when a trustee uses trust assets for personal gain or enters into a transaction where they are on both sides of the deal.
  • Negligence in Management: Failing to exercise the Duty of Prudence, such as leaving trust funds in a non-interest-bearing account or making high-risk, unapproved investments.
  • Commingling: Mixing trust property with personal assets. Even if no money is lost, the act of commingling is a breach because it threatens the safety of the trust res.
  • Failure to Disclose: Keeping beneficiaries in the dark about the status of the trust or refusing to provide an accounting.

The Consequences

  • Personal Liability: The trustee may be surcharged, meaning they must pay back the trust for any losses using their own personal money.
  • The Right to Trace: Equity allows beneficiaries to follow trust property that was wrongfully taken and reclaim it, even if it has changed form.
  • Removal: A court of equity can strip the trustee of their legal title and appoint a successor to protect the remaining assets.
  • Constructive Trust: If the trustee made a profit from a breach, the court can declare that profit is held in a constructive trust for the beneficiaries.
21. Define a beneficiary and distinguish between legal and equitable title.
AI CHEAT (ERRATA BELOW): Fiduciary duties are the absolute legal and moral requirements that bind a trustee to act for the benefit of others. They are enforced by equity and held to a higher standard than ordinary business deals.
  • Duty of Loyalty: The trustee must act solely in the interest of the beneficiaries and avoid any self-dealing or conflicts of interest.
  • Duty of Prudence: This is also known as the Duty of Care. This requires managing trust property with the skill and caution that a sensible person would use for their own affairs.
  • Duty to Segregate: Trust assets must be kept strictly separate from the trustee personal property and clearly identified as trust property.
  • Duty of Impartiality: The trustee must treat all beneficiaries fairly and cannot favor one over another unless the trust document specifically allows it.
  • Duty to Inform and Account: Beneficiaries have a legal right to receive regular updates and clear reports on how the trust assets are being managed.
AI CHEAT: A trust is essentially a split in the concept of ownership. Instead of one person holding everything, the rights are divided between two parties to ensure the property is managed for a specific purpose.
  • Beneficiary Defined: The person or entity for whose benefit the trust property is held and managed. They are the "why" behind the trust's existence.
  • Legal Title: This is held by the Trustee. It is the formal ownership that gives the trustee the power to manage, sell, or invest the property. It carries the weight of responsibility and liability.
  • Equitable Title: This is held by the Beneficiary. Also known as "beneficial interest," it is the right to the use, enjoyment, and profit of the assets without the burden of management.
  • The Fusion Rule: If the same person ever holds both the absolute legal title and the absolute equitable title, the trust "merges" and ceases to exist because you cannot owe a fiduciary duty to yourself.
22. Explain the difference between vested and contingent beneficiaries with one example of each.
AI CHEAT (ERRATA BELOW): A breach of trust occurs when the trustee fails to perform any duty owed to the beneficiaries. Equity does not just punish the trustee; it seeks to make the trust whole again.
  • Surcharge: The court can order the trustee to pay out of their own pocket to restore the trust to the value it would have reached if the breach never happened.
  • Falsification: If a trustee makes an unauthorized investment, the beneficiary can choose to ignore that transaction and demand the original money back as if the trade never occurred.
  • Traced Assets: If a trustee steals money to buy a car, equity allows the beneficiary to follow the money and claim ownership of that car. This is called the Right to Trace.
  • Removal: The most direct remedy is simply firing the trustee. The court can remove a trustee who is dishonest, incapable, or even just constantly fighting with the beneficiaries.
AI CHEAT: The difference lies in certainty. A vested interest is a "done deal" that just hasn't arrived yet, while a contingent interest is a "maybe" that depends on a specific event.
  • Vested Beneficiary: This person has an immediate, fixed right to receive the property in the future. There are no conditions that could take it away; they are simply waiting for a prior interest to end.
  • Example of Vested: A trust says "Income to Mother for her life, and then the principal to Son." Son is vested because Mother will eventually pass away, making his receipt of the property certain.
  • Contingent Beneficiary: This person's right to the property only "wakes up" if a specific, uncertain event happens. If that condition is never met, they get nothing.
  • Example of Contingent: A trust says "Principal to Daughter only if she graduates from law school." If Daughter never graduates, her interest never becomes active.
23. List the remedies available to a beneficiary when the trustee breaches a duty.
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24. Explain the role and authority of a trust protector, including common powers they may hold.
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25. Define a trust advisor and describe how they interact with trustees in a directed trust.
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26. Describe the purpose of a trust enforcer in purpose trusts (e.g., animal care trusts).
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27. Identify who has legal standing to bring suit or defend in matters concerning the trust and why.
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28. Describe a circumstance under which a beneficiary may file suit against a trustee.
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29. Explain when and how a settlor may have standing in court proceedings.
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30. Differentiate between standing held in revocable versus irrevocable trusts.
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31. State the rule on co-trustees: how they act, decide, and share liability.
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32. Draft a paragraph summarizing the duties of a trustee in plain language for a lay client.
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33. Identify fiduciary conflicts in a fact pattern involving a trustee-beneficiary dual role.
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34. Essay: Create a scenario involving a trust dispute between a trustee and a remainder beneficiary regarding asset distribution.
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35. Create a trust party map showing settlor, trustee, protector, beneficiaries (income & remainder), and enforcer.
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Chapter 3: Creation and Formal Requirements of Trusts

36. Read Chapter 3: Creation and Formal Requirements of Trusts.
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37. Recite the five core elements of a valid express trust.
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38. Explain the meaning of “intent to create a trust” and give one example of sufficient and insufficient language.
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39. Define “trust res” and list at least four examples of valid trust property.
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40. Identify which types of trusts allow indefinite beneficiaries and which require definite ones.
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41. Describe what happens if no trustee is named in a trust document.
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42. Explain when a trust must comply with the Statute of Frauds.
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43. Describe the execution requirements for a testamentary trust.
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44. List three acceptable ways to transfer personal property into a trust.
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45. Explain the legal significance of “delivery” in establishing a trust.
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46. Define a pour-over trust and state the timing required for its validity.
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47. Sketch how a life insurance trust is funded and administered.
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48. Essay: Distinguish between a resulting trust and a constructive trust.
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49. Describe the court’s power to reform a trust or appoint a trustee in the event of drafting failure.
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50. Draft a simple inter vivos trust clause naming trustee, beneficiary, and property.
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Chapter 4: Trustee Powers, Duties, and Breach of Fiduciary Obligation

51. Read Chapter 4: Trustee Powers, Duties, and Breach of Fiduciary Obligation.
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52. Review a flawed trust example and identify which of the five essential elements is missing.
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53. Explain what a court may do if a valid trust was intended but not perfectly executed.
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54. List three sources of trustee powers.
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55. Name five common trustee powers used in standard administration.
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56. Explain the legal limit on trustee self-enrichment.
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57. Sketch the difference between an implied and expressly granted power.
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58. Draft an article for a trust giving powers but creating certain limitations for the trustee.
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59. Define and explain the duty of loyalty.
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60. Define and explain the duty of prudence (and the prudent investor rule).
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61. Define the duty to segregate trust assets.
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62. Explain the duty of impartiality in distribution.
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63. Explain the duty to inform and account to beneficiaries.
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64. Describe the duty to enforce and defend trust property.
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65. Sketch four examples of acts that may constitute a breach of trust.
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66. Name three equitable remedies available for a breach.
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67. Explain how a constructive trust may arise as a remedy.
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68. Explain what a surcharge is in fiduciary litigation.
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69. Give one example where a trustee’s good faith is not a defense to breach.
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70. List two valid defenses a trustee may raise to avoid personal liability.
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71. Essay: Create a scenario where one trustee breaches duty and another fails to intervene.
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72. Draft a short fiduciary report showing compliance with duties.
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Chapter 5: Drafting a Trust – Structure, Sovereignty, and the Court Control Test

73. Read Chapter 5: Drafting a Trust – Structure, Sovereignty, and the Court Control Test.
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74. List the five core sections every trust instrument must contain.
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75. Sketch the difference between a private trust and a testamentary trust.
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76. State the purpose of a Schedule A.
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77. Sketch the settlor’s role and the risk of retaining excessive control.
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78. Define the Court Control Test and how to draft against it.
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79. Identify two clauses that prevent unwanted court supervision.
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80. Explain the Control Test and its application in tax or legal scrutiny.
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81. Describe how to ensure the trustee, not the settlor, exercises true control.
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82. Define a Trust Protector and list two powers they may hold.
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83. Explain the function of an Arbitration Clause in a trust.
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84. List two responsibilities of a Successor Trustee.
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85. Draft a Disposition Clause for final trust termination.
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86. Draft a full Title, Recital, and Purpose section for a private irrevocable trust.
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87. Identify three errors in a sample trust that would subject it to court control.
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88. Prepare a private trust clause that explicitly bars judicial interference.
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89. Write a testamentary trust.
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Manual Errata: Course Book Alignment
Refinement for Item #3 (The Five Elements): The Course Book identifies the 5th element specifically as a named or court-appointed trustee. It notes that while a settlor must manifest intent, the trust itself requires a fiduciary to hold the "res" to be valid.
Refinement for Item #5 (Constructive Trusts): The text explicitly adds "Mistake" as a ground for this remedy. Its purpose is to restore title where equity detects a "wound to conscience" and binds the enriched party as a trustee.
Correction for Item #11 (Rule Against Perpetuities): The text strictly follows traditional law: there is no "wait and see". If there is any possibility an interest vests after the perpetuities period, it is void from the start.