Wills & Trusts
Visiting Prof. Gerry W. Beyer
[for use with Review Session Three]
Connie, who died in 1989, left a will which created a trust of which her son, Sam, was to be both trustee and life income beneficiary.† On Samís death, the successor trustee was to distribute the corpus outright to the then surviving issue of Connieís predeceased daughter, Deborah.† The trust contained a standard clause regarding trusteeís powers, including the power to ďsell, invest, and manageĒ the trust property.
Common shares of Hercules Corp., a well-established, successful manufacturing company, made up 30% of the original trust corpus.† For years, Hercules regularly paid generous cash dividends, all of which Sam, as trustee, allocated to income.† In 1993, instead of paying a cash dividend, Hercules distributed a dividend of its own stock. which Sam also allocated to income.
In January 1994, Fabulon, Inc., a newly formed company, made an initial public offering of its common stock.† The prospectus stated that Fabulon had created a new material similar to fiberglass, but which experimental testing had shown to be of superior durability.† The prospectus further disclosed the companyís intent to distribute most of its earnings as dividends.
After reading the Fabulon prospectus in February 1994, Sam sold the trustís Hercules stock to his wife at its current fair market value.† The sale of stock produced a profit for the trust, and Sam allocated the capital gain portion to the income account.† He used the balance of the proceeds to purchase Fabulon stock for the trust.
Hercules continued to prosper and its stock continued to appreciate.† Fabulonís product failed and, in December 1995, Fabulon went bankrupt and its stock became worthless.
Has Sam breach his duties as trustee?† Discuss.
The following provisions are found in the valid will of Phil A. Thropist:
Article IV ó Trusts
A.††† I give $500 to my son, Frank, with the expectation that he will distribute it to his children.
B.††† I give $1,000 to my son, George, in trust to pay the income to my devoted friend, Joe College, if he survives me.
C.††† I give $1,000 to my brother, Henry, to pay the income to the March of Dimes.
D.††† I give the entire contents of my safety deposit box (#421A) at Octopus National Bank to my son Frank, in trust, to pay the income to Susan Swails for life, remainder to Sam Matteson.† If Susan does not survive me, the gift in trust is cancelled and the contents of the box are to go outright to Sam.
E.††† I give $1,000 to my darling wife, Sarah, in trust, to keep the grandfather clock, which I left her in Article II of my will, in running condition.
F.††† I give the rest, residue, and remainder of my estate to the trustees, in trust, of the trust established by me on * * * . [full description of trust].
Mr. Thropist executed this will on January 3, 1950, and died on November 13, 1998.† Frank refuses to distribute any of the $500 to his children but rather has pur≠chased a new set of reporters for his law office with the money.† Joe College died on September 1, 1998, leaving a wife and two children.† Henry now resides in the California State Home for the Criminally Insane after being judged incompetent.† The safety deposit box referred to in part D is empty and contains a note saying, ďI intend to place $10,000 cash in this box before I die.Ē† The trust referred to in part F is valid in all respects.† When the will was executed, Frank and George were the sole beneficiaries of the trust.† In 1976 the trust was validly amended by Mr. Thropist changing the beneficiary to his wife, Sarah.
Discuss the issues raised by these facts.† Assume that the California Trust Law and other relevant statutes were in force in their present form at all relevant times.† No other provision of Mr. Thropistís will is relevant to this problem.
You have been hired by the Last National Bank (LNB) of California to advise them on trust matters.† LNB tells you it was named as the trustee for an inter vivos trust to pay income to A for life, remainder to B.† LNB wants to know its rights, obligations, duties, etc. with regard to the following items.† Explain your answers fully.† Assume that no provisions of the trust instrument are relevant unless specifically stated.
A.††† LNB wants to commingle some of the assets of this trust with the assets of other trusts for which it is also named as trustee.
B.††† LNB wants to invest trust assets in the TranAl Corporation.† This corporation claims its scientists are on the verge of being able to make aluminum transparent.
C.††† LNB is considering selling a particular trust asset.† Walter, one of the beneficiaries, is interested in purchasing the asset.
D.††† LNBís president wants to purchase one of the trust assets.† She is willing to pay the fair market value of the asset.† The trust instrument specifically grants the trusteeís officers the power to buy trust assets.
Violates duty of self-dealing.†
Trust provision authorizing the sale is ineffective because the trustee
is a corporation.
Perhaps seek a court waiver.
Johnson established a [valid] trust for his son, Ben, to terminate at age 21.† Johnson was named Trustee with Merchants Bank as Alternate.† The stock contributed to the trust increased in value to a substantial sum and Johnson feared that Ben might spend it all in riotous living.† On Benís 20th birthday, Johnson asked Ben to sign an agree≠ment to extend the trust when he became 21 to terminate at age 27.† Ben agreed and signed the requested contract.† Johnson died about three months later and when Ben turned 21, he demanded that he receive the trust corpus.† Upon refusal of the trustee, Ben filed suit to have the trust terminated.
Discuss the issues raised by these facts under California law.
Popís wife died in 1980.† In 1985, Pop properly executed a will which did not name a trustee, but provided that $100,000 was to be held in trust for ten years following Popís death, with all income to be accumulated in the trust.† At the end of the ten year period, all money in the trust was to be distributed in equal shares to persons who had both (1) been employed by Pop at the time of his death and (2) survived to the end of the ten year period.† All the rest of Popís property, including his house, was to be distributed at the time of his death in equal shares to Popís two children, Sam and Dona.
In 1988, Pop properly executed and delivered to Dona a deed giving his house to Dona.
In 1989, Sam fraudulently convinced Pop that Dona had died.† Actually, Dona was still alive.
Because he believed that Dona was dead, Pop properly executed a new will in 1990, revoking the 1985 will, precisely repeating the trust provisions of the 1985 will, and providing that all Popís other property, including the house, was to go to Sam.
Later in 1990 Sam died, leaving two surviving children, Gail and Greg.
Pop died in 1991, leaving as his only surviving relatives: his daughter, Dona; his grandchildren, Gail and Greg; and his aunt, Maude.
At his death in 1991, Popís estate was sufficient to pay all valid bequests and devises.
A.††† Did Popís 1990 will effectively revoke the 1985 will?† Discuss.
B.††† After Popís death, who owned the house?† Discuss.
C.††† Was Popís attempt to establish a trust for his employees effective and, if so, to whom are trust distributions to be made?† Discuss.
D.††† Of the property which will be distributed to Popís relatives, which relatives will get what fractions of the property?† Discuss.
Tom is trustee of a trust created by Abe in 1986.† The corpus consists of stocks and bonds worth $150,000, an apartment house appraised at $650,000 in a neighborhood which is becoming increasingly industrial, and a vacant lot.† Yearly net income from the stocks and bonds is $12,000, and from the apartment house is $36,000.† Tom has held the lot for five years, not wanting to sell it at a sacrifice because the uncertainty of zoning and the location of a proposed highway.† The trust instrument directs Tom to pay the income from the trust to Abe for life and, at Abeís death, to divide the corpus between Abeís children, Ben and Cathy.
At the end of 1991, Tom sold the vacant lot for $50,000, the fair market value.† He also sold some stocks for $35,000, realizing a $10,000 gain.† Tom used this money along with $25,000 of accumulated rental income to build an addition to the apartment house.
In another 1991 transaction, Tom sold for $25,000 stocks that had been purchased for $25,000, and lent the proceeds to PQ Corp. at 1%, below the prevailing interest rate.† The loan is secured by a first mortgage on unimproved realty worth $30,000.† For several years, Tom has performed substantial services for PQ Corp. as a consulting engineer.† He owns 100 shares of its common stock.† There are 1,000,000 PQ shares outstanding.
1.† Has Tom breached his duties as trustee and, if so, what are his liabilities to the beneficiaries?† Discuss.
2.† Has Abe received all the income to which he is entitled?† Discuss.