Invasions of Trust Corpus - Wills and Trusts - Solved Past Paper, Exams of Law

Download Invasions of Trust Corpus - Wills and Trusts - Solved Past Paper and more Exams Law in PDF only on Docsity! ID: FINAL_Wills_LS1_Pagano_2010FL Pagano [D: (Exam Number) Name: Exam Name: FINAL_Wills_LS1_Pagano_2010FL instructor: Pagano Grade: $5 Page 1 of 1 Exam taken with Soffest v10.0 ID: FINAL_Wills_LS1_Pagano_2010FL Pagano 1) 1. Maria has rights to a mandatory payment of the income from the corpus of the trust her late husband Sam created for her. She has aright receive the corpus for her support after the trustee, Jake, takes into account her other resources. While the purpose of the trust is for Maria's support, it is not a fully discretionary trust. Jake must distribute the income of the trust to Maria each year, and Jake has the discretion to invade the corpus of the trust if Maria cannot be comfortably supported with all of the tesources available to her. Under the terms of the trust, Maria's income/corpus payments will terminate at the end of her life or her remarriage. Maria wishes to marry and wants more money from the trust because she believes she will need more money with her new husband. Her best argument would be to argue that the trust terms should be modified because they serve an illicit purpose. She could try to argue that not allowing her to keep receiving income while if she remarries Gn ene she was 25 years Sam's junior when her and Sam married. Sam's will is a testamentary trust, which means the trust was established in his will. Under the common law Chaflin Doctrine, even if all the beneficiaries of a trust are ascertained and agree to modify the trust (which is unlikely because Maria's continued payments diminish their gift and Sam's children probably wouldn't want to see their father's gift go to support his widow's impoverished second husband), the court would not modify the trust if it would violate a material provision of the settlor. In this case, allowing Maria to remarry would clearly violate a provision of the trust. Modernly, the common law rule has been relaxed some what, and in jurisdictions (jx) like California, a dispositive or administrative provision of the trust can be modified if continuing the trust would frustrate the settlor's intent or has Page 1 of 5 {Question 1 continued) ID: FINAL Wills _LS1_Pagano_2010FL Pagano the duty to account to the remainder beneficiaries. The duty of impartiality is another matter. As trustee, Jake cannot favor the lifetime income beneficiary over the remainder beneficiaries. Giving Maria $30k/year of the corpus that she doesn't need because the income because she had other sources means that Jake is diminishing the Able and Ben's gift. A ad -. > 3. By selling all the trust assets and making an unsecured loan to Executive Builders, Jake has violated several cannons of trust ethics. First and foremost, Jake violated the duty to act as a prudent investor. This rule states that under the modern portfolio rule, a trustee has a duty to diversify the trust assets. Because Jake must also take into account the remainder beneficiaries, he cannot invest in stocks that would only be high yield/high risk, which would tend to favor the lifetime income beneficiary. Although the loan had very favorable terms ($10k/year in interest with a principal payoff in ten years), this is still an imprudent investment because all of the trust income was put into this investment scheme. Jake had a duty to attempt to offset any loses from investment by diversifying other parts of the corpus. As in #2, Jake likely also violated the tule of impartiality, because this risky scheme benefited Maria in $120k/year in income for almost three years, and ended up leaving nothing for the remainder beneficiaries. While there are some exceptions to the prudent investor rule, such as keeping stock in a closed corporation or keeping property in a family, none of these apply. Jake has also has a conflict of interest as trustee. Since Executive Builders was a client of Jake's the loan was likely not an arms length dealing. Jake would want to keep his long time client happy, and in doing so have him a loan that they needed. This Page 4 of 5 (Question 1 continued) ID: FINAL_Wills_LS1_Pagano_2010FL Pagano could be grounds for removal as trustee. The facts do not suggest that Jake was involved in self-dealing. As trustee, he would be the one to make investment decisions for the trust. He did not buy the corpus of the trust, but instead loaned it to someone he had a relationship with. Pursuant to In re Rothko, the measure of damages in a trustee conflict situation is not "no further inquiry” as it would in trustee self dealing, but whether or not the transaction was commercially reasonable. If it not commercially reasonable, Jake would be tiable to Maria (assuming still alive and unmarried), Able, and Ben. This transaction is not commercially reasonable. Although he did obtain a favorable interest rate that seem to work for a few years, not having any security on the loan was very risky. Since Jake sold the entire corpus to make the loan to Executive Builders with no security to get the money back he lost it because he cannot collect if Exec builders goes bankrupt with no assets. Instead of preserving the assets it squandered it away; whereas if he had diversified at least some of the trust would have been preserved. Page 5of5 ID: FINAL _Wills_LS1_Pagano_2010FL Pagano END OF EXAM Page 1 of 0