I have written this article for information purposes, and I hope you learn something from it. Though I would like to state it is current and up to date, in all candor, I can't. In most cases, the concepts are relatively accurate (except for obviously old and dated materials, primarily related to taxes). You should confer with your own lawyer about issues that affect you and your family.
COMMENTS ON THE UNIFORM TRUST CODE
The American Bar Association and its Real Property, Probate and Trust Law Sections, as well as AARP, are lobbying for the adoption of the Uniform Trust Code (UTC) in all states. To date, and as of 2012, twehty five states have adopted the Uniform Trust Code. Oklahoma has not. To learn about the uniform law itself, visit http://en.wikipedia.org/wiki/United_States_trust_law.
The UTC in Oklahoma. Let’s first go into the history of the legislation. As you probably know, the National Conference of Commissioners on Uniform State Laws (NCCUSL) is urging that the UTC be enacted in all states. The Oklahoma House of Representatives approved it in 2004, but the matter was removed as an agenda item in a Senate Committee, and no further action was taken. Efforts to block its adoption have been successful, and it is unlikely that it will be adopted in Oklahoma in the near future. Notwithstanding, I have some suggestions for reigning in the UTC, which I give throughout this article, and at the conclusion of this article. But first, let's see what good and evil concepts are in the UTC.
When I first learned about the UTC in 2002, the Oklahoma Bar Association was asked to endorse the model act. At the state bar convention, the delegates did not endorse the model act, and referred the proposed law to the Estate Planning, Probate and Trust Section. Thereafter, this committee met with regularity for several months in 2003. As a result of these meetings, the committee recommended revisions be made to several sections of the UTC, with the objective of conforming the model act to what the committee believed was the current law on trusts in Oklahoma.
In 2003, the delegates to the bar convention recommended the legislature adopt the model act, with amendments suggested by the Estate Planning, Probate and Trust Section. If enacted, the UTC would repeal the Oklahoma Trust Act, and also codify much case law, and would effectively replace any impact the Restatement of Trusts might have on trust administration or trust litigation. The proposed law is retroactive, so it will apply to all trusts created in Oklahoma.
The UTC covers literally all topics normally dealt with in trusts: creating a trust, duties of trustees, standards of care applicable to trustees, trustee reporting requirements, court supervision of trusts, statutes of limitation, and many other topics. The legislation is about 50 pages in length. Notwithstanding its length, it is a default set of rules that only comes into play if the trust instrument itself does not deal with a particular topic. (Section 5)
Mandatory Provisions of UTC. There are mandatory provisions of the UTC that cannot be waived by the trust instrument. The UTC topics that cannot be waived by the trust instrument are listed below (Section 5). For purposes of this article, I have paraphrased the proposed statutory language. Here is a list of what cannot be changed:
The requirements for creating a trust.
The duty of the trustee to act in good faith and “in accordance with the purposes of the trust”
The requirement that the trust be for the benefit of its beneficiaries
The requirement that the trust have a purpose which is lawful, not contrary to public policy, and that its objectives are possible to achieve.
Limiting the power of a court to modify or terminate the trust.
Limiting certain creditors’ rights if there are spendthrift provisions in a trust.
Limiting the power of a court to dispense with, require, modify or terminate a bond.
Limiting the power of a court to adjust the trustee’s compensation.
Limiting the Trustee’s obligation to keep qualified beneficiaries informed of the administration of the trust.
Lowering fiduciary standards for trustees.
Modifying how third parties deal with trustees.
Modifying the statutes of limitation applicable to trusts.
Limiting the power of the court to take action in trust matters; and
Imposing subject matter jurisdiction and venue rules, if litigation is brought.
Rather than discuss all of the mandatory provisions of the UTC, and all of the sections of the UTC, let me comment on some proposed changes, which affect existing Oklahoma law.
Commentary: Qualified Beneficiaries. The UTC creates a new category of beneficiary, known as a “qualified beneficiary”. Unless the trust instrument provides otherwise, a qualified beneficiary is defined to include:
A permissible distributee of a present interest in trust income or principal, or
A beneficiary who has a vested remainder interest in the trust (Section 3(12)
Thus, qualified beneficiaries include both contingent and vested beneficiaries. Under the UTC, qualified beneficiaries are given certain rights, such as, the right to:
receive notice of a trustee’s resignation (Section 54);
receive notice of a trustee’s proposal to combine or divide trusts (Section 38);
receive notice of a trustee’s proposal to change the principal place of administration of the trust (Section 8);
consent to the appointment of successor trustees under certain circumstances (Section 53); and
consent to the transfer of the principal place of administration of the trust (Section 8).
In addition, the trustee is required to disclose certain information to qualified beneficiaries, viz., to:
keep qualified beneficiaries reasonably informed of the administration of the trust;
provide them with material facts necessary for them to protect their interest in the trust. In that regard, the trustee must furnish a copy of the entire trust instrument to any qualified beneficiary who requests it, notify qualified beneficiaries of the existence of the trust, the identity of the settlor of the trust, of the beneficiary’s right to request a copy of the trust, and a beneficiary’s right to receive an annual report of the trustee’s administration of the trust. (Section 71).
In matters of administration, the trustee must give qualified beneficiaries an annual report which lists the trust property, its market value, the liabilities of the trust, the receipts and disbursements of the trust, and the source and the amount of the trustee’s compensation. (Section 71)
What does all this mean? If a trust was drafted in 1985, and was not later amended to re-define the meaning of “qualified beneficiaries”, then contingent beneficiaries under the trust (who might be children, grandchildren, in-laws and the like) would suddenly be granted access to information about the grantors’ trust estate (that is, how Mom and Dad are spending their money). If Mom and Dad (as the settlors of the trust) attempt to move the trust to another state (which has not adopted the UTC), the contingent beneficiaries are apparently entitled to vote on whether the move can be completed. (Section 8)
Because of the disclosure requirements, and the fact the UTC is retroactive, the meaning of “qualified beneficiaries” should be re-defined in most trust instruments. The OBA committee was unwilling to modify the statutory definition of “qualified beneficiary”, but Oklahoma’s version of the UTC clearly permits the trust instrument to re-define the meaning. To maintain the status quo (and not give contingent beneficiaries additional rights under the UTC), you might consider defining “qualified beneficiaries” to mean:
For purposes of this trust agreement, a “qualified beneficiary” is a vested (not contingent) beneficiary who is entitled to receive present (not future) income or principal distributions; the definition of a qualified beneficiary does not include (and specifically excludes) any contingent beneficiary or any vested remainder beneficiary.
I believe if the trust instrument were to re-define the meaning of “qualified beneficiaries”, then all of the notification and disclosure requirements of the UTC would be negated and would be inapplicable, and one of the objections to Oklahoma’s adoption of the UTC would be removed.
Commentary: Spendthrift Provisions. The UTC changes Oklahoma law relating to spendthrift trusts. If there are no spendthrift provisions in the trust, then creditors have statutory rights to obtain a court order attaching a beneficiary’s interest in the trust, and perhaps order the sale of that interest (Section 42). Even if a trust contains a spendthrift provisions for beneficiaries, the UTC permits creditors to enforce claims in behalf of a beneficiaries’ children, spouse or persons who have provided necessary services to the beneficiary, to enforce claims against the beneficiaries themselves who have been provided services rendered to protect the beneficiaries’ interest in the trust (presumably lawyers), and certain government claims, such as unpaid taxes. (Section 41).
Mark Merric, Robert D. Gillen, and Jane Freeman have written an article dealing with the spendthrift provisions of the UTC, Malpractice Issues and the Uniform Trust Code, Estate Planning Journal, December, 2004 (WG&L). Their observations are worth repeating:
“Several articles have discussed in detail the significantly decreased asset protection available following changes to the common law by the UTC and the Restatement (Third) of Trusts (“Restatement Third”). Some of these concerns are as follows:
The UTC and Restatement Third abolish the 125-year common law distinction between a discretionary trust and a support trust, so that discretionary trusts must now rely on spendthrift protection for their asset protection value. Two types of trusts owe their existence to the discretionary trust/support trust dichotomy. Traditionally, special needs trusts were trusts created for children with physical or emotional handicaps. Further, many high net-worth trusts have relied on the discretionary trust/support trust dichotomy as an integral part of wealth preservation planning.
Increased remedies would be available to an exception creditor which would prevent a trustee from directly paying the expenses of the beneficiary and would permit an exception creditor, and possibly any creditor, to attach a beneficial interest in the trust. The creditor could then wait for future distributions to satisfy the claim.
The increased UTC remedies would allow the judicial foreclosure sale of all beneficial interests, including current distribution interests (i.e., income interests) as well as remainder interests from both discretionary and support trusts.
The UTC most likely creates a property interest in all current beneficial interests as well as in remainder interests. Consequently, in many states, beneficial interests will be classified as marital property to be distributed in divorce, and also will be used to impute trust income for the purpose of child support or alimony computations.
Under the UTC and Restatement Third, a spouse has the ability to force a distribution from all discretionary and support trusts in order to satisfy a claim for child support or alimony. Furthermore, the spouse may seek the payment of legal fees directly from the trust.
Depending on how a special needs trust is drafted, the creation of a property interest or a sufficient enforceable right may result in a third-party special needs trust being classified as an available resource. This will most likely cause the beneficiary to be disqualified for governmental aid (such as Medicaid).
A bankruptcy trustee, standing in the shoes of a debtor-beneficiary, may be able to force a distribution from the trust on behalf of all creditors due to the creation of a property interest or a sufficient enforceable right.
The UTC treats inter vivos general powers of appointment as the equivalent of ownership, permitting any creditor to attach and exercise the power of appointment.”
To cure these “ills”, one might consider drafting around the problems, such as, adding spendthrift provisions for all trusts, and giving the trustee a list of instances when he or she can make discretionary distributions – as well as redefining the meaning of “qualified beneficiaries”. The trustee could be instructed how to deal with creditors in a variety of ways. Here are some paragraphs which could be added to a trust, which might resolve some of the concerns dealing with creditors and creditors’ rights:
If this instrument contains any spendthrift provisions, then settlor or settlors declare and the trustee or trustees agree that such spendthrift provisions constitute a material purpose of this trust.
If any beneficiary’s former spouse attempts by court proceeding or otherwise, to attach such distributions, for any purpose, including, without limitation, unpaid support alimony (or rehabilitative alimony), then, in such event, such distributions shall be regarded as being discretionary distributions, which shall not be subject to attachment.
If the Trustee is granted discretion in making distributions to any beneficiary, such as, distributions for the beneficiary’s health, education, support, or general welfare, the standards (or factors) to be used in determining whether any distribution is to be made, or the amount of any distribution, include the beneficiary’s income and other financial resources, the beneficiary’s spending habits, the beneficiary’s accustomed standard of living, the beneficiary’s financial acumen, the beneficiary’s credit worthiness and stature (and credit report), the beneficiary’s immediate and long term needs (including any extraordinary health need, including the procuring of health insurance), the beneficiary’s intended use for the cash or property distributed from the trust estate, the beneficiary’s academic record, the beneficiary’s susceptibility to substance abuse, and the beneficiary’s employment history. The Trustee may deny distributions, based on one or a combination of these factors, or may make distributions, based on one or a combination of these factors. Once such a decision is made by the Trustee, such decision shall be regarded as being made in the sole and absolute discretion of the Trustee.
As with all new legislation, there will be problems; hopefully, there will not be too many "holes in the roof", and if there are, perhaps we can patch them with added "instructions to the trustee".
Commentary: Statute of Limitations. One positive change the UTC will have in Oklahoma deals with the Statute of Limitations; the UTC limits lawsuits from being brought after (a) one year after the beneficiary is given a report concerning various items, (Section 87), or (b) two years after termination of the trust, termination of the beneficiary’s interest, removal, resignation or death of the trustee, or receipt of a report which adequately discloses the nature of the potential claim. (Section 87).
Commentary: Modification of Irrevocable Trusts. In certain instances, irrevocable trusts can be modified, if the beneficiaries of the trust consent to the modification. (Section 32; 60 OS §1132) Although this provision may be of concern to lawyers who prepare special needs trusts, the protection of having a court approve a modification of an irrevocable trust should comply with the requirement that special needs trusts be irrevocable. (Section 32)
Commentary: Retroactivity. Although the UTC is retroactive, the verbiage used in the Code does give some protection to existing trusts. First, any act done before the effective date of the UTC is not affected by the new law. In addition, if rights are granted under the new law, but conflict with rights in existence under previous law, then the previous law continues to apply, even though prior law is repealed by the UTC. (Section 99) Finally, there is the constitutional argument that no legislation can be enacted which impairs the obligations of contract (Article I, Section 10, U.S. Constitution)
Members of the OBA committee believed it would be easier to have a uniform set of laws, which are applicable both prospectively as well as retroactively. Stated differently, without retroactivity, Oklahoma would have two sets of trust laws. Although we certainly have that situation with other laws, such as the statute of descent and distribution (84 OS §44), the committee thought it would be better to make the UTC retroactive.
Closing Comments. This brief article attempts to mention issues which affect many of my clients. To my knowledge, no one wants to give up control of his or life, and in estate planning, give contingent beneficiaries more power than the settlors who create the trust. That said, the UTC will assist corporate trustees as they administer trusts, and may assist a judge who is unfamiliar with trusts, to understand more clearly the rights accorded contingent beneficiaries (or vested beneficiaries). If the notion of “full disclosure” to remote beneficiaries is a stumbling block to our clients, then we must be prepared to re-define the meaning of “qualified beneficiary”, and perhaps add other provisions to existing trusts, to meet their estate planning objectives and maintain the privacy of their affairs.
From a client’s perspective, having the UTC in effect might lead to shorter and simpler trust instruments. Theoretically, it would be possible to draft a one-page trust, which would be very easy to understand. The draftsman could eliminate boiler-plate sections dealing with trustee’s powers, duties to notify, duties upon termination of the trust, because all of these topics are covered by the UTC.
Suggested additions to trust language, so as to give the Settlors control over their trusts:
1. In the event any provision of this trust instrument conflicts with any applicable state law (in existence now, or which may be enacted hereinafter, including without limitation, the Uniform Trust Code), the provisions of this trust instrument shall prevail.
2. If this instrument contains any spendthrift provisions, then settlor declares and the trustee or trustees agree that such spendthrift provisions constitute a material purpose of this trust.
3. This trust may be amended in writing, including a writing on this instrument, by the settlor and the trustee, and such writing shall constitute a valid amendment to this trust. Such writing shall be dated, and either signed or initialed. There is no requirement that such amendment be witnessed, or that signatures be notarized or authenticated.
4. No bond shall be required of any trustee serving hereunder.
5. If the trustee is an individual who becomes incapacitated, as determined by the trustee’s physician, or if there is no such physician, then by two independent physicians, the incapacitated trustee shall no longer be qualified to serve in the office of trustee; in such event, the trustee who is designated as a successor trustee, under the terms of this trust, shall become the trustee, and assume the office of trustee. There is no requirement that such incapacity be determined by a Court proceeding.
6. If any beneficiary’s former spouse attempts by court proceeding or otherwise, to attach such distributions, for any purpose, including, without limitation, unpaid support alimony (or rehabilitative alimony), then, in such event, such distributions shall be regarded as being discretionary distributions, which shall not be subject to attachment.
7. For purposes of this trust agreement, a “qualified beneficiary” is a vested (not contingent) beneficiary who is entitled to receive present (not future) income or principal distributions; the definition of a qualified beneficiary does not include (and specifically excludes) any contingent beneficiary or any vested remainder beneficiary.
8. If the Trustee is granted discretion in making distributions to any beneficiary, such as, distributions for the beneficiary’s health, education, support, or general welfare, the standards (or factors) to be used in determining whether any distribution is to be made, or the amount of any distribution, include the beneficiary’s income and other financial resources, the beneficiary’s spending habits, the beneficiary’s accustomed standard of living, the beneficiary’s financial acumen, the beneficiary’s credit worthiness and stature (and credit report), the beneficiary’s immediate and long term needs (including any extraordinary health need, including the procuring of health insurance), the beneficiary’s intended use for the cash or property distributed from the trust estate, the beneficiary’s academic record, the beneficiary’s susceptibility to substance abuse, and the beneficiary’s employment history. The Trustee may deny distributions, based on one or a combination of these factors, or may make distributions, based on one or a combination of these factors. Once such a decision is made by the Trustee, such decision shall be regarded as being made in the sole and absolute discretion of the Trustee.
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