The Uniform Trust Code
The Uniform Trust Code
The Uniform Trust Code
David M. English
W.F. Fratcher Professor of Law
University of Missouri-Columbia
Reporter, Uniform Trust Code
TABLE OF CONTENTS
1.
2.
3.
4.
5.
6.
7.
Note: With 10 jurisdictions now having enacted the UTC, it is no longer feasible for this outline to list all
of the variations made in the enacting jurisdictions.
What is the Uniform Trust Code (UTC)? The Uniform Trust Code (2000) is the first
effort by the Uniform Law Commissioners to provide the states with a comprehensive
model for codifying the law of trusts.
2.
Current Status. The UTC was approved by the Uniform Law Commissioners on
August 3, 2000. Following a review by the Commissioners Style Committee, the final
text of the statute was completed on October 9, 2000. The comments to the UTC
were completed on April 25, 2001. The UTC was approved by the American Bar
Associations House of Delegates at its mid-year meeting in February, 2001.
Amendments to the Code were approved by the Commissioners in Summers 2001,
2003 and 2004 and are primarily, but not always, technical in nature. The Code with
comments can be accessed through the Commissioners websites at www.nccusl.org or
www.utcproject.org.
The UTC has been enacted to date in the following ten jurisdictions:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
The UTC was also enacted in Arizona in 2003, but was repealed by Arizona in 2004.
The Arizona Bar is working on another version of the
1
C.
Who are the Uniform Law Commissioners? Uniform Law Commissioners are volunteer
lawyers appointed by the Governors or Legislatures of their respective states to draft
model state laws. Well known uniform acts in the probate area include the Uniform
Probate Code, the Uniform Prudent Investor Act, and the Uniform Principal and
Income Act. While new uniform acts are technically approved by the Commissioners
meeting as a group, the heavy lifting is done by the drafting committee.
D.
Who Drafted the Uniform Trust Code? The UTC was drafted by a committee chaired
by Maurice Hartnett, a Judge of the Delaware Supreme Court and former Justice of the
Delaware Chancery Court with long experience with trust cases. This writer served as
Reporter with responsibility for carrying out the drafting committees decisions on a
day-to-day basis and for preparing the various drafts. The drafting committee was
assisted by numerous advisors, most of whom attended a majority of the twice annual
drafting committee meetings. Groups represented included the American Bar
Association and its Section on Real Property Probate and Trust Law (3 advisors), the
American College of Trust and Estate Counsel, the American Bankers Association, and
the California and Colorado State Bars. Key advice was also provided by the Joint
Editorial Board for Uniform Trusts and Estates Acts and the ACTEC Committee on
State Laws.
E.
What Process Was Followed? The drafting of the UTC was a seven-year process. A
Study Committee Chaired by Judge Hartnett was initially appointed in 1993. The
function of the Study Committee was to decide whether the Commissioners should
undertake the drafting of a comprehensive uniform law on trusts. The Study Committee
recommended the appointment of a drafting committee, which was appointed in 1994.
To gather as much input as possible, the drafting of the UTC was deliberately not
placed on the fast track, but extended over a period of six years.
F.
What Models Did the Drafting Committee Use? While the UTC is the first
comprehensive uniform act on the subject of trusts, comprehensive trust statutes are
already in effect in several states. Notable examples include California, Georgia,
Indiana, and Texas. However, during the drafting process, the trust statutes in all states
were reviewed.
G.
Why a Uniform Trust Code? There are several reasons why the drafting of a Uniform
Trust Code was timely. The primary stimulus for the drafting of the UTC is the much
greater use of the trust in recent years, both in family estate planning and in commercial
transactions, in the United States and internationally. This greater use of the trust, and
consequent rise in the number of day-to-day questions involving trusts, led to a
recognition that the trust law in many states is thin. It also led to a recognition that the
existing uniform acts relating to trusts, while numerous, are fragmentary. The primary
source of trust law in most States is thus the Restatement (Second) of Trusts and the
multivolume treatises by Scott and Bogert, sources that fail to address numerous
practical issues and that on others sometimes provide insufficient guidance. The UTC
will enable states which enact it to specify their rules on trust law with precision and in a
readily available source. Finally, while much of the UTC codifies the common law, the
UTC does make some significant changes.
H.
What Process Should States Follow in Considering the UTC? For states considering
the UTC, the following process is suggested:
1.
Prepare State Law Study. The first step is to determine how enactment of the
UTC would change existing law, both statutes and case law. With respect to
case law, most courts rely heavily on the Restatement of Trusts, on which the
UTC also places major reliance.
2.
Decide on Drafting Model. One approach is to start with the UTC as a base
and then make modifications. The other approach is to begin with existing law
and to add selected provisions of the uniform law. Relying on the UTC as the
starting point will result in greater consistency with other states. It will also
reduce the risk of gaps and inconsistencies.
3.
4.
Decide on Key Local Law Issues. Certain existing local law provisions may be
so well established that change may be unwise or impossible. For example, in
Missouri, the State Bar Committee, while generally receptive to the UTC, has
3
II.
5.
6.
7.
Decide What to do about the Uniform Prudent Investor Act. Article 9 of the
UTC provides a place for an enacting jurisdiction to insert its version of the
Uniform Prudent Investor Act. The comment to that article provides
instructions on how to eliminate overlap between the Uniform Prudent Investor
Act and the provisions of UTC Article 8 describing the fiduciary duties of a
trustee. An enacting jurisdiction will need to determine whether to leave its
version of the Prudent Investor Act where is or codify it as part of the UTC.
8.
Identify and Repeal Statutes Duplicating UTC Provisions. Numerous local trust
statutes may address issues also covered in the UTC. States that have enacted
the Uniform Probate Code should repeal UPC Article VII and the UPC
provision on animal trusts.
9.
Identify Other Policy and Political Issues. While much of the UTC simply
codifies the common law, the UTC does make some changes. Many of these
changes were decided on only following extensive discussion. Most were
decided by consensus, others by close votes. On these close votes, some state
committees may reach opposite conclusions. In the interests of uniformity, the
Commissioners ask that state committees at least start with the presumption that
the uniform law approach is correct. The more significant policy issues are
discussed in Part VI of this outline.
Introduction. There are numerous Uniform Acts on trusts and related subjects, but
none provide comprehensive coverage on trust law issues. Certain of these acts are
4
incorporated into the UTC; others must be repealed. Still others, addressing specialized
topics, will continue to be available for enactment in free-standing form.
B.
C.
Uniform Acts Requiring Replacement or Other Action. The following Uniform Acts are
incorporated into or otherwise superseded by the UTC:
1.
Uniform Probate Code Article VII Originally approved in 1969, Article VII
has been enacted in about 15 jurisdictions. Article VII, although titled Trust
Administration, is a modest statute, addressing only a limited number of topics.
Except for its provisions on trust registration, Article VII is superseded by the
UTC. The provisions of Article VII on jurisdiction are incorporated into Article
2 of the UTC, and its provision on trustee liability to persons other than
beneficiaries are replaced by Section 1010.
2.
Uniform Prudent Investor Act (1994) This Act has been enacted in 42
jurisdictions. This Act, and variant forms enacted in a number of other states,
has displaced the older prudent man standard, bringing trust law into line with
modern investment practice. States that have enacted the Uniform Prudent
Investor Act are encouraged to recodify it as part of their enactment of the
UTC. A place for this is provided in Article 9.
3.
Uniform Trustee Powers Act (1964) This Act has been enacted in 16 states.
The Act contains a list of specific trustee powers and deals with other selected
issues, particularly relations of a trustee with persons other than beneficiaries.
The Uniform Trustee Powers Act is outdated and is entirely superseded by the
UTC, principally at Sections 815, 816 and 1012. States enacting the UTC
should repeal their existing trustee powers legislation.
4.
Uniform Trusts Act (1937) This largely overlooked Act of similar name was
enacted in only six states, none within the past several decades. Despite a title
suggesting comprehensive coverage of its topic, this Act, like Article VII of the
Uniform Probate Code, addresses only a limited number of topics. These
include the duty of loyalty, the registration and voting of securities, and trustee
liability to persons other than beneficiaries. States enacting the UTC should
repeal this earlier namesake.
Uniform Acts Not Requiring Action. The following Uniform Acts are not affected by
enactment of the UTC and do not need to be amended, repealed, or recodified:
1.
Uniform Common Trust Fund Act Originally approved in 1938, this Act has
been enacted in 34 jurisdictions. The UTC does not address the subject of
5
common trust funds. In recent years, many banks have replaced their common
trust funds with mutual funds that may also be available to non-trust customers.
The UTC addresses investment in mutual funds at Section 802(f).
2.
Uniform Custodial Trust Act (1987) This Act has been enacted in 18
jurisdictions. This Act allows standard trust provisions to be automatically
incorporated into the terms of a trust simply by referring to the Act. This Act is
not displaced by the UTC but complements it.
3.
Uniform Management of Institutional Funds Act (1972) This Act has been
enacted in 47 jurisdictions. It governs the administration of endowment funds
held by charitable, religious, and other eleemosynary institutions. The Uniform
Management of Institutional Funds Act establishes a standard of prudence for
use of appreciation on assets, provides specific authority for the making of
investments, authorizes the delegation of this authority, and specifies a
procedure, through either donor consent or court approval, for removing
restrictions on the use of donated funds.
4.
Uniform Principal and Income Act (1997) The 1997 Uniform Principal and
Income Act, which has been enacted in 37 jurisdictions, is a major revision of
the widely enacted Uniform Act of the same name approved in 1962. Because
this Act addresses issues with respect both to decedents estates and trusts, a
jurisdiction enacting the revised Uniform Principal and Income Act may wish to
include it either as part of this Code or as part of its probate laws.
5.
III.
6.
7.
8.
What are Restatements? Restatements, which are written and approved by a national
body of lawyers comprising the members of the American Law Institute, serve a
proactive role close to that of uniform acts. A Restatement is more than a document
that collects and summarizes in one place the common law on a particular subject.
Rather, where the decisions of the courts conflict, a Restatement strives to delineate the
better rule. It also tries to fill in gaps in the law, to promote the rule the courts should
apply when it encounters an issue for the first time. The hope is that the courts of the
different states, by relying on the Restatement as a primary guide for decision, will over
time adopt uniform rules of decision.
B.
IV.
C.
What is Relationship of UTC to Restatement of Trusts? The Uniform Trust Code was
drafted in close coordination with the revision of the Restatement. This coordination has
hopefully made both into better products. The UTC offers the benefit of certain rules.
The Restatement provides a wealth of background materials for interpreting the
language of the UTC.
D.
E.
Why Not Rely on Restatements Alone? Restatements are not statutes. Until accepted
by the courts of a particular state, the courts are free to, and often will, adopt a different
rule. By contrast, Uniform Acts, when enacted, become mandatory rules of law that
can be relied on and are easily accessible to all of a states citizens, whether or not they
are in front of the courts. The UTC will thus serve an important educational function.
Legal practitioners in many states for the first time will be able actually to determine their
states law on trusts. Furthermore, there are numerous practical issues that are best
addressed by specific legislation, such as the UTC, instead of by a more discretionary
guideline such as a Restatement.
Express Trusts. The Uniform Trust Code states the law relating to express
trusts. These are trusts created by settlors who transfer property to a trustee or
declare themselves as trustee of their own property. Following its creation, the
trustee will then hold the property for the benefit of beneficiaries. This is to be
distinguished from what are known as resulting or constructive trusts, which are
remedial devices imposed by the courts and which are excluded from the Code.
2.
Commercial Trusts. Trusts are best known in the United States as a device for
planning an individuals personal estate. But trusts are increasingly being used
as tools for facilitating commercial transactions. Examples of commercial
transactions where the use of trusts is prevalent if not predominant include
8
pension funds, mutual funds for pooling investment assets, and trusts to secure
repayment of corporate debt. The UTC is not directed specifically at
commercial trusts but neither does it exclude them. The extent to which
commercial trusts are subject to the UTC depends on the type of trust and the
laws, other than the UTC, under which the trust was created. Even if the
commercial trust is governed exclusively by another body of law, in interpreting
this other law the courts are free to look to the UTC for guidance. NCCUSL is
currently in the process of drafting a Uniform Business Trust Act which is
expected to be finalized in July 2005.
B.
Organization. The breadth of the UTC is indicated by its organization. The UTC is
organized into 11 articles.
1.
2.
3.
4.
Article 4. This article, the first article of the UTC devoted to the basic
substantive law of trusts, prescribes the requirements for creating, modifying and
terminating trusts. The provisions on the creation of trusts largely track
traditional doctrine; those relating to modification and termination liberalize the
prevailing law.
5.
Article 5. This article covers spendthrift provisions and rights of creditors, both
of the settlor and beneficiaries.
6.
Article 6. This article collects the special rules relating to revocable trusts,
including the standard of capacity, the procedure for revocation or modification,
and the statute of limitations on contests.
7.
Article 7. This article deals with the office of trustee, specifying numerous
procedural rules that apply absent special provision in the trust. Included are
the rules on trustee acceptance, the rights and obligations of cotrustees, the
procedure for resignation, the grounds for removal, the methods for appointing
successors, and trustee compensation.
8.
Article 8. This article details the duties and powers of the trustee. The powers
listed are an updated version of the Uniform Trustee Powers Act, including
coverage of such current topics as the power to deal with environmental
hazards. The specified duties of the trustee, like the duty of loyalty, were
drafted where relevant to conform to the Uniform Prudent Investor Act. The
Uniform Prudent Investor Act prescribes a trustees responsibilities with regard
to the management and investment of trust property. The UTC expands on this
by also specifying the trustees duties regarding distributions to beneficiaries.
9.
Article 9. This article provides a place for a jurisdiction enacting the Code to
codify its version of the Uniform Prudent Investor Act.
10.
Article 10. This article addresses the liability of trustees and rights of
beneficiaries. With respect to the rights of beneficiaries, the article
1.
2.
c.
d.
e.
f.
to protect the privacy of the trust, authorizes trustees to provide, and for
third persons to rely on, written certifications by the trustee as to the
trustees authority. The trustee need not provide the third person with a
10
V.
Article 11. This article deals with the application of the UTC to existing trusts.
The intent is to give the UTC the widest possible application, consistent with
limitations placed on it by the United States Constitution. Consequently, the
UTC generally applies not only to trusts created on or after the effective date,
but also to trusts already in existence.
The Need for Amendment. Uniform laws are frequently amended. Glitches and
inconsistencies in language are discovered, necessitating technical amendments.
Sometimes, major policy issues arise on which the Commissioners find themselves in a
minority position, necessitating more substantive amendments. Generally, the more
complex the uniform act, the more likely it will be amended. Perhaps surprisingly, the
more popular the Act the more likely it will be amended. Uniform acts that attract no
interest may remain on the shelf in a pristine condition. The UTC is both complicated
and receiving wide consideration. That both technical and substantive amendments
have been made is not surprising.
B.
2001 Amendments. The 2001 amendment were almost entirely technical in nature.
Inconsistencies in language were corrected in Sections 105, 110, and 602. The only
substantive amendment was to amend Section 705 to require that a resigning trustee
send notice to a living settlor, although this amendment, like the others, was designed to
fill in an unintended gap. For an explanation of each of the amendments, see the
comments to each of the mentioned sections in the text of the UTC at www.nccusl.org.
C.
D.
2004 Amendments. The 2004 amendments are the most significant and are primarily
substantive, not technical. The amendments can be divided into the following
categories::
1.
have not addressed the issue in the trust instrument, are also made prospective
only. For additional discussion of the amendment, see Part VI, Sections L and
M of this outline. In addition, Section 603 is amended to allow an enacting
jurisdiction, if so inclined, to permit a revocable trust to be kept totally secret
from the remainder beneficiaries even if the settlor becomes incapacitated. For
additional discussion of the amendment, see Part VI, Section I of this outline.
More technical in nature and not discussed in this outline are clarification of the
definition of qualified beneficiary (Section 103) and clarification of which
distributees of charitable trusts are entitled to notice as if they were qualified
beneficiaries (Section 110).
2.
Estate Tax Concern. Section 411(a) codifies the common law rule that a settlor
and beneficiaries may jointly terminate an irrevocable trust. The ACTEC
Committee on Estate and Gift Taxation became concerned that any modification
of the states previous common law might raise a possible estate tax issue.
Although nearly all states provide that a settlor and beneficiaries may jointly
terminate an irrevocable trust, they differ on lesser details, such as whether court
approval is required. Section 411(a) is amended to allow an enacting
jurisdiction to add a court approval requirement. Alternatively, the state may
elect to simply delete Section 411(a), in which event the states previous law on
trust termination and modification would presumably control. For additional
discussion of the amendment to Section 411(a), see Part VI, Section F of this
outline. To implement the amendment to Section 411(a), conforming
amendments to Sections 301 and 410 may also be necessary.
In addition, a new Section 301(d) is added, which provides that a settlor cannot
represent a beneficiary with respect to a Section 411(a) termination and
modification. For additional discussion of this amendment, see Part VI, Section
F of this outline.
3.
Role of Attorney General. Because the role of Attorneys General with respect
to enforcement of charitable trusts varies greatly around the country, the
language in Section 110(c) [now Section 110(d)] granting the attorney general
the rights of a qualified beneficiary has been placed in brackets and made
optional. States deleting ir amending Section 110(c) may also need to amend
Section 704(d), dealing with appointment of successor trustees of charitable
trusts.
4.
Changing the Judge-Made Law. The Uniform Trust Code does not make sweeping
changes in the common law of trusts, but neither does it woodenly copy the previous
judge-made law. The UTC makes significant strides. What follows is a description of
the more important changes made by the UTC in the rules prevailing in most states.
These are also the issues likely to receive the most discussion when the UTC is
considered by the states, which is why they are highlighted here.
B.
b.
the requirement that a trustee act in good faith and in accordance with
the trust purposes (subsection (b)(2));
c.
d.
e.
the rights of third parties in their dealings with the trustee (subsection
(b)(11)); and
f.
the trustees duty to inform the qualified beneficiaries age 25 and over
of certain matters relating to the administration of an irrevocable trust
13
C.
2.
Policy Issues. The most discussed issue in the drafting of the UTC and also
since its approval is the extent to which a settlor may waive reporting to the
beneficiaries and responding to a beneficiarys request for information. The
provision most at issue is summarized in f immediately above. The waiver issue
is discussed further in Part V, Section L of this outline.
3.
Procedural Rules. While most of the procedural issues involved in administering a trust
can be addressed in the trust instrument, it is difficult to anticipate all questions. Even if
the drafter does anticipate every issue, the drafter will frequently rely on the local trust
statute for guidance on the language to employ. Oftentimes, the drafter will choose to
let the statute control. The UTC specifies numerous procedural rules for administering a
trust. All of these procedures are subject to override in the terms of the trust, but the
drafters of the UTC expect that many scriveners of trust instruments may prefer to rely
on the Code.
1.
The Rules. Among the procedural issues addressed in the UTC are:
a.
b.
c.
(Section 701);
2.
d.
e.
f.
Policy Issues. All of the above items were the subject of extensive discussion
during the drafting of the UTC. The rules try to further several not always
consistent objectives.
a.
b.
c.
d.
15
(a)
(b)
(c)
2.
The Codes Approach. The UTC does not and probably cannot resolve the
difficult cases. Attempts to define principal place of administration in the terms
of the trust were not successful. For cases in which determining a trusts
principal place of administration is important, settlors are encouraged to address
the issue in the terms of the trust. Under Section 108(a) of the UTC, a
provision in the trust terms designating the principal place of administration is
valid and controlling as long as a trustees principal place of business is located
in or a trustee is a resident of the designated jurisdiction, or all or part of the
trusts administration occurs in the designated place.
4.
5.
Policy Issues. The most debated issue in the drafting process and on the floor
during the final approval process was the appropriate default rule for
transferring the principal place of administration. The draft as presented to the
Commissioners at the 2000 Annual Meeting allowed the trustee to transfer the
principal place of administration upon giving 60 days advance notice to the
qualified beneficiaries. Should a beneficiary then object, the beneficiary would
have been forced to go to court to block the transfer. During the floor debate,
the suggestion was made that a transfer should be allowed only if all qualified
beneficiaries consented or a court order had been obtained. The provision as
finally approved, allowing any qualified beneficiary to block the transfer by filing
an objection with the trustee, was a compromise solution.
Modifications in Enacting Jurisdictions. Wyoming provides that the settlor may
designate the settlors domicile as the principal place of administration even
though the domicile does not otherwise have any connection to the trust. New
Hampshire and Tennessee allow a trustee to transfer the trusts principal place
of administration unless a majority of qualified beneficiaries object.
17
E.
2.
3.
a.
b.
c.
d.
e.
4.
b.
release of a trustee from potential liability (Section 1009).
Representation Principles. The UTC provides comprehensively for the
representation of beneficiaries and others unable to represent themselves, both
with respect to notices and consents. Among the representation concepts:
18
a.
b.
c.
d.
(b)
(c)
(d)
(e)
(f)
e.
5.
6.
b.
c.
d.
trustees compensation;
7.
8.
e.
f.
Policy Issues. Among the issues discussed during the drafting process:
a.
b.
c.
discretionary distribution.
The District of Columbia, Missouri and Wyoming provide that the holder of a
testamentary general power of appointment may bind those whose interests are
subject to the power regardless of possible conflict of interest. The District of
Columbia and Missouri also expand the definition of general testamentary
power to include a power exercisable in favor of anyone other than the
powerholder, the powerholders estate, the powerholders creditors, or the
creditors of the powerholders estate.
The District of Columbia and Wyoming modify the provision on representation
by parents. In Wyoming, only a custodial parent may represent and bind a
child, but that parent may represent not only a minor or unborn child but also an
incapacitated child and any descendants of such children. The District of
Columbia provides that a person may represent a grandchild or more remote
descendant.
Wyoming adds a new category of representative, providing that a qualified
beneficiary may represent and bind a nonqualified beneficiary who might
succeed to the qualified beneficiarys interest. The District of Columbia
provides that a qualified beneficiary may represent any beneficiary who may
succeed to the interest under the terms of the trust or pursuant to the exercise of
a power of appointment. The new provisions are not as significant as they might
first appear. The authority of the qualified beneficiary in each case is inoperative
in the event of conflict of interest. Furthermore, situations where the qualified
beneficiary might represent other beneficiaries are also situations where virtually
representation would likely already apply.
Tennessee clarifies that a beneficiary may be represented by a person
designated in the terms of the trust, a provision that would be valid in any event
without statutory authorization. Tennessee also authorizes a beneficiary to be
represented by a person designated by the beneficiaries. However, such an
agreement would presumably by valid in any case under general principles of
agency law.
F.
Philosophy and Significant Changes. Due to the increasing use in recent years
of long-term trusts, there is a need for greater flexibility in the restrictive rules
that apply concerning when a trust may be terminated or modified other than as
provided in the instrument. The UTC provides for this increased flexibility but
22
without disturbing the principle that the primary objective of trust law is to carry
out the settlors intent. Among the provisions enhancing the ability to modify or
terminate a trust:
a.
b.
c.
A trust may be reformed due to the settlors mistake of fact or law even
if the original terms of the trust, as originally but mistakenly created, are
unambiguous (Section 415).
d.
To achieve the settlors tax objectives, the court may modify the terms
of the trust as long as the modification does not violate the settlors
probable intention. The court may also give the modification retroactive
effect (Section 416).
2.
3.
5.
Uneconomic Trust. Section 414 of the UTC authorizes the court to terminate
an uneconomical trust of any size, and allows a trustee, without approval of
court, to terminate a trust with a value of $50,000 or less. Before terminating
the trust, the court or trustee must conclude that the value of the trust property is
insufficient to justify the cost of administration. The figure $50,000 is placed in
brackets in recognition that many states may wish to change the amount. Initial
indications are that many states will increase the amount to $100,000.
6.
7.
9.
Policy Issues. The sections of the UTC on trust modification and termination are
innovative and there was considerable debate on each of the changes. These
innovations are detailed in Number 1 above. The ultimate issue comes down to
whether liberalizing the standards enables the settlors purposes to be better
fulfilled or instead presents too great a risk that the trust as modified or
terminated will bear little resemblance to what the settlor would have preferred.
10.
Scope. Charitable gifts may be made in numerous ways. The donor may
create and transfer property to a non-profit corporation. The donor may make
an outright gift to charity in the donors will. The donor may transfer property
directly to a charity but subject its use to various restrictions. Finally, the donor
may create a charitable trust. The UTC, being a trust code, only addresses the
law with respect to charitable trusts. However, the topics addressed in the
UTC, such as permitted charitable purpose and cy pres, are also relevant to
other forms of charitable giving.
2.
3.
Cy Pres. Upon failure of a charitable purpose, the court may apply cy pres to
reform the disposition to better carry out the settlors charitable purposes. If
the settlors charitable purpose is deemed specific rather than general, however,
under traditional principles the charitable disposition fails and the property is
returned to the settlor or settlors successors in interest. Section 413(a) of the
UTC liberalizes the doctrine of cy pres in a way believed more likely to carry
out the average settlors intent. First, the UTC expands the ability of the court
to apply cy pres. The court may apply cy pres not only if the original scheme
becomes impossible or unlawful, but also if it becomes impracticable or
wasteful. Second, the UTC creates a presumption in favor of general charitable
intent. In applying cy pres, the court cannot divert the trust property to a
noncharity unless the terms of the trust expressly so provide.
4.
6.
Policy Issues.
a.
b.
H.
2.
3.
a.
b.
c.
for the trustee/beneficiarys own benefit could result in a creditor being able to
reach the trustee/beneficiarys interest. The concern was triggered by a
statement in Restatement (Third) of Trusts 60, comment g, that discretionary
interests of a trustee/beneficiary are subject to claims of the trustee/beneficiarys
creditors no matter how limited the discretion. Concluding that the Restatement
position, if valid, could disrupt much conventional estate planning, the 2004
amendments revise Sections 103, 504, and 814 to create a safe harbor from
creditor claims if the discretionary power is subject to an ascertainable
standard.
4.
5.
Public Policy Exceptions. A key policy issue in drafting the UTC was
determining which classes of creditors should be exempt from the spendthrift
bar. In determining the exceptions, the drafting committee did not start from
scratch but paid particular attention to the exceptions listed in Restatement
(Second) of Trusts 157, and Restatement (Third) of Trusts 59. The
following are the principal exceptions:
a.
spouse can collect only to the extent the trustee has abused the
discretion (Section 504). Other creditors are not allowed to collect
from a discretionary trust, no matter how stingy the trustee has been in
exercising the discretion.
b.
6.
7.
Crummey and 5 and 5 Powers: Although Section 505 of the UTC treats the
holder of a power of withdrawal the same as the settlor of a revocable trust, an
exception is created for Crummey and 5 and 5 powers. Upon the release or
lapse of a power of withdrawal, assets falling within the annual exclusion or 5
and 5 limit are exempt from claims of the holders creditors.
8.
Policy Issues. Among the issues debated during the drafting process:
a.
b.
some states, that is, a settlor may allow a beneficiary to assign while at
the same time erecting a spendthrift shield against the claims of the
beneficiarys creditors. Even with the Codes requirement that a
spendthrift provision, to be valid, must restrain both voluntary and
involuntary transfer, the settlor can in effect give a beneficiary power to
assign the interest by granting the settlor a power of appointment.
c.
9.
I.
Summary. The revocable trust is the most common trust created today in the
United States. This heavy use of the revocable trust is a recent phenomenon,
beginning decades if not centuries after most traditional trust law was
formulated. The provisions of the UTC on revocable trusts are among its most
important and most innovative, dealing largely with issues unaddressed at
common law. The UTC recognizes that on many issues the revocable trust
should be treated as the functional equivalent of the will. Most of the relevant
provisions on revocable trusts are contained in Article 6.
2.
Capacity Standard. Reflecting the trend in the case law, Section 601 of the
UTC provides that the standard for creating, amending, revoking, adding
property to a revocable trust, or otherwise directing the actions of a trustee, is
the same as that required for a will.
4.
Rights While Settlor Competent. Section 603 provides that while the settlor has
capacity, all of the rights of the beneficiaries are subject to the settlors exclusive
control. Notices that would otherwise be given to the beneficiaries must instead
be given to the settlor, and the settlor is authorized to give binding consents on a
beneficiarys behalf. Access to the trust document is also within the settlors
control. Upon a settlors loss of capacity, however, the beneficiaries may
exercise their rights as beneficiaries absent contrary intent in the terms of the
trust. Concluding that there is a lack of consensus on the appropriate rule for
beneficiary rights upon the settlors loss of capacity, the 2004 amendments
bracket the language in 603(a) and the settlor has capacity to revoke the trust,
thereby giving enacting jurisdictions the option to provide that a settlors
exclusive control does not end upon loss of capacity.
5.
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6.
Rules of Construction. The drafters agreed that the rules of construction for
trusts should track those applicable to wills, but were fully aware that
disagreements will arise when one gets down to specifics. Disagreements may
arise as to which rules of will construction ought to be extended to trusts as well
as with the specific content of those rules. Section 112 of the UTC provides
that the rules of will construction apply as appropriate to the interpretation of the
terms of a trust and the disposition of the trust property. However, the section
is placed in brackets with the suggestion made in the comments that the enacting
jurisdiction would be better served by enacting specific and detailed rules.
7.
Creditor Claims. Section 505(a)(3) of the UTC clarifies that the assets of a
revocable trust are liable for the claims of a settlors creditors to the extent the
probate estate is insufficient. The UTC does not try to resolve the many other
issues that can arise, such as liability among different categories of nonprobate
assets, whether claims against nonprobate assets should be subject to a special
statute of limitations, and whether this period can be shortened by the giving of
notice. The appropriate answers to these questions will depend on the
particulars of the states probate code. Section 6-102 of the Uniform Probate
Code, added to that Code in 1998, may be looked to as a model both by
states that have enacted the UPC as well as by those having different probate
systems.
8.
b.
9.
J.
3.
removal of the trustee would best serve the interests of the beneficiaries;
b.
c.
Policy Issues. Trustees in many states may be removed only for breach of trust
or other untoward act. This standard gives great weight to the settlors
particular selection of trustee. Because trust instruments typically place weight
on a trustees judgment and exercise of discretion, the particular trustee selected
becomes an important term of the trust, a term which should not easily be
changed. The Code changes the law on trustee removal in two respects. First,
it allows removal for less serious but still ineffective performance, in particular
the persistent failure to effectively administer the trust. Second, in situations
where the link between the settlor and trustee has been broken, the emphasis
turns to whether the particular trustee is appropriate to the trust, not whether the
trustee has committed particular acts of misconduct. The trigger for this
alternative test, described in 2. above, is substantial change of circumstances or
request of the qualified beneficiaries.
During the drafting process, the American Bankers Association Advisor
strongly advocated for the traditional good cause standard. Concerns were
expressed that a more liberal standard would encourage beneficiaries to petition
for removal because of decisions that the beneficiaries simply did not like, such
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K.
The Controversy. The common trust fund has in recent years been
disappearing from the portfolios of financial institution trustees, and is being
replaced by proprietary and other forms of mutual funds. An advantage of
mutual funds is that taxation of capital gains can be avoided upon the trusts
termination. Holdings of common trust funds, because they could not be held
other than in trust, had to be liquidated. Mutual funds, on the other hand, can
be distributed in kind. Despite this advantage, investment in proprietary mutual
funds has caused considerable controversy and litigation, implicating the
trustees duty of loyalty, the duty to invest with prudence, and the right to
receive only reasonable compensation. Because financial institution trustees
ordinarily provide advisory services to and receive compensation from the very
proprietary funds which they created, the contention is made that investing the
assets of individual trusts in proprietary mutual funds is not necessarily prudent
but is made primarily to generate additional fee income. In addition, because
the financial institution trustee often will also charge its regular fee for
administering the trust, the contention is made that the financial institution
trustees total compensation, both direct and indirect, is excessive.
2.
The Codes Approach. Despite these concerns, nearly all states have passed
statutes authorizing financial institution trustees to invest in mutual funds, even if
the investment will generate additional fees for the trustee. Recognizing this
political reality, Section 802(f) of the UTC does not prohibit investment in
mutual funds from which the trustee derives additional fee income but provides
instead that such investments, while not automatically self-dealing, are subject to
all other fiduciary responsibilities. When investing in a fund from which the
trustee, or its affiliate, receives fees for providing services other than as trustee,
the trustee must not place its interests over those of the beneficiaries and the
investment must otherwise comply with the enacting jurisdictions prudent
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investor rule. Furthermore, the trustee must disclose at least annually to the
persons entitled to receive the trustees annual report the rate of extra
compensation received for providing services to the fund and the method by
which this compensation was determined. The 2004 amendments
L.
3.
4.
Philosophy. Section 813 of the UTC fills out and adds detail to the trustees
duty to keep the beneficiaries informed of administration. When in doubt, the
UTC favors disclosure to beneficiaries as being the better policy. The UTC
imposes both a general obligation on the trustee to keep the qualified
beneficiaries reasonably informed of administration as well as several specific
notice requirements.
2.
interest; the trustees version of what is material may differ markedly from what
the beneficiary might find relevant.
3.
The Waiver Issue. The most discussed issue in the drafting of the UTC and
subsequent to its approval is the extent to which a settlor may waive the
requirements of Section 813. Most of the specific notice requirements can be
waived. This issue is addressed in Section 105(b)(8)-(9). Not waiveable is the
requirement that the trustee inform qualified beneficiaries age 25 or older of the
trusts existence and of the right to request trustees reports. With respect to
any beneficiary of an irrevocable trust regardless of age, the trustee also may
not waive the trustees obligation to respond to a request for trustees report
and other information reasonably related to the trusts administration. In other
words, if a beneficiary finds out about the trust and makes a request for
information, the trustee must respond to the request even if the trustee was not
obligated to inform the beneficiary about the trust in the first instance.
4.
Possible State Responses. While not yet enacted in any state, the ability of the
settlor to waive the Codes notice requirements has received considerable
comment among state bar committees. One response has been to eliminate or
lower the age limit in Section 105(b)(8) so that the obligation to inform the
beneficiaries of the existence of the trust is applicable to all adult beneficiaries.
Another approach is to allow a settlor to waive notice to remainder beneficiaries
regardless of age. Yet another response is to allow a settlor to direct a trustee
to keep silent about the trust even in response to a specific request by a
beneficiary.
The waiver issue brings into direct conflict the goal of carrying out settlor intent
with the goal of making certain the beneficiaries have sufficient information to
enforce their interests. The result is a compromise of which some on both sides
of the issue will not be satisfied. The extent to which a settlor may waive
notices and other information requirements is not a new issue. Limitations on
the ability to waive is found in case law and in the Restatement (Second) of
Trust Law. Considering the issue in the form of a statute brings the issue into
much sharper focus, however.
5.
2004 Amendments. Realizing that there is a lack of consensus on the issue, the
Commissioners in 2004 amended Section 105(b)(8)-(9) by placing it in
brackets, thereby making it an optional provision. Alternatively, the state may
modify Section 105(b)(9) to make it applicable only to qualified beneficiaries.
Rather than deleting the provision, however, states are encouraged to remain
some requirement of notice, particularly for current beneficiaries. Allowing a
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trust to be kept totally secret makes the trustee less accountable and opens the
possibility that the trust will be held invalid as illusory.
5.
Policy Issues. The waiver issue is discussed immediately above. The other
major issue discussed was the right of a beneficiary to demand a copy of the
complete trust instrument if such right is not waived in the terms of the trust.
Some states limit required disclosure to provisions material to the beneficiarys
interest. Such a limitation certainly promotes privacy for settlors for whom
privacy is a desired goal. But who determines which provisions are relevant?
The trustee or the beneficiaries? Perhaps the answer is to let the court
determine in camera which provisions are relevant. But who should be
responsible for bringing the petition - the trustee or the beneficiary?
6.
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M.
Summary of Provision. Section 1106 provides that the Code generally applies
to trusts created prior to its effective date. With respect to a judicial proceeding
concerning a trust, the UTC applies unless the court determines that the Code
provision would substantially interfere with effective control of the judicial
proceedings or interfere with the rights of the parties. Rules of construction in
the UTC, which are far fewer than in a typical probate code, apply to trust
instruments executed prior to the Codes effective date unless there is a clear
indication of a contrary intent in the terms of the trust. The Codes provisions
are subject to constitutional limitation. The Code cannot be applied
retroactively to divest accrued property rights.
The 2004 amendments include an amendment clarifying that the duty to notify
beneficiaries under 813(b)(2) and (3) is prospective only. Because both
provisions trigger required notices 60 days following a trustees acceptance or
the date a trust becomes irrevocable, applying these provisions to preexisting
trusts would have been impractical.
2.
3.
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VII.
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