University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

181

Pages:

2
Author:

bratrochanter

This section discusses trusts, their types, and the responsibilities of a trustee in managing trust property: 1. Trust Terminology: o The person who creates a trust is the settlor or trustor. o The trustee holds legal title to the property for the benefit of the beneficiary, who holds equitable title. o The corpus (or res) refers to the property held in trust, and a distinction is made between this principal and the income it generates. 2. Types of Trusts: o Inter Vivos Trust: Established during the settlor’s lifetime. o Testamentary Trust: Created through a will, effective only after the settlor’s death. o Charitable Trust: Benefits society rather than specific individuals. These are flexible, and courts may redirect the trust’s purpose under the cy pres doctrine if it becomes impossible to fulfill the original intent. o Spendthrift Trust: Contains a clause to prevent beneficiaries from transferring their interest or allowing creditors to claim it directly. o Totten Trust: A revocable bank account trust where the balance transfers to a named beneficiary upon the depositor's death. 3. Creation of Express Trusts: The following requirements apply: o The settlor must have legal capacity. o A present intent to create the trust must be clear. o Specific property must be conveyed. o The trust must have a proper purpose. o The beneficiaries must be clearly identified. 4. Powers and Duties of Trustees: o Trustees are responsible for managing trust property and must act prudently and loyally, avoiding conflicts of interest. o Trustees have a fiduciary duty to manage the trust for beneficiaries' benefit and to act with the care of a “prudent person” standard, especially if they have specialized skills. o They must properly allocate between principal and income to ensure fairness between different types of beneficiaries, such as income beneficiaries and remaindermen (those who receive the principal after the income beneficiary’s interest ends). o Trustees may be held personally liable if they breach their duties or fail to meet required standards, impacting beneficiaries or third parties. 5. Liability and Allocation of Trust Assets: o Trustees can face personal liability if they mishandle trust property or do not act in beneficiaries’ best interests. o Income vs. Principal: Ordinary income (e.g., interest) generally goes to income beneficiaries, while gains from principal transactions (e.g., property sales) benefit remaindermen, per trust terms or applicable law. This section highlights the careful management required in trusts to fulfill the settlor's intent, ensure equitable treatment of beneficiaries, and protect the trust assets.