Uniform Trust Code

PREFATORY NOTE

The Uniform Trust Code (2000) is the first national codification of the law of trusts. The primary stimulus to the Commissioners’ drafting of the Uniform Trust Code is the greater use of trusts in recent years, both in family estate planning and in commercial transactions, both 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, has led to a recognition that the trust law in many States is thin. It has also led to a recognition that the existing Uniform Acts relating to trusts, while numerous, are fragmentary. The Uniform Trust Code will provide States with precise, comprehensive, and easily accessible guidance on trust law questions. On issues on which States diverge or on which the law is unclear or unknown, the Code will for the first time provide a uniform rule. The Code also contains a number of innovative provisions.

Default Rule: Most of the Uniform Trust Code consists of default rules that apply only if the terms of the trust fail to address or insufficiently cover a particular issue. Pursuant to Section 105, a drafter is free to override a substantial majority of the Code’s provisions. The exceptions are scheduled in Section 105(b).

Innovative Provisions: Much of the Uniform Trust Code is a codification of the common law of trusts. But the Code does contain a number of innovative provisions. Among the more significant are specification of the rules of trust law that are not subject to override in the trust’s terms (Section 105), the inclusion of a comprehensive article on representation of beneficiaries (Article 3), rules on trust modification and termination that will enhance flexibility (Sections 410-417), and the inclusion of an article collecting the special rules pertaining to revocable trusts (Article 6).

Models for Drafting: While the Uniform Trust Code is the first comprehensive Uniform Act on the subject of trusts, comprehensive trust statutes are already in effect in several States. Notable examples include the statutes in California, Georgia, Indiana, Texas, and Washington, all of which were referred to in the drafting process. Most influential was the 1986 California statute, found at Division 9 of the California Probate Code (Sections 15000 et seq.), which was used by the Drafting Committee as its initial model.

Existing Uniform Laws on Trust Law Subjects: Certain older Uniform Acts are incorporated into the Uniform Trust Code. Others, addressing more specialized topics, will continue to be available for enactment in free-standing form.

The following Uniform Acts are incorporated into or otherwise superseded by the Uniform Trust Code:

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 Uniform Trust Code. Its provisions on jurisdiction are incorporated into Article 2 of the Code, and its provision on trustee liability to persons other than beneficiaries are replaced by Section 1010.

Uniform Prudent Investor Act (1994) – This Act has been enacted in 35 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 Uniform Trust Code. A place for this is provided in Article 9.

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 Uniform Trust Code, principally at Sections 815, 816, and 1012. States enacting the Uniform Trust Code should repeal their existing trustee powers legislation.

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 UPC, 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 Uniform Trust Code should repeal this earlier namesake.

The following Uniform Acts are not affected by enactment of the Uniform Trust Code and do not need to be amended or repealed:

Uniform Common Trust Fund Act – Originally approved in 1938, this Act has been enacted in 34 jurisdictions. The Uniform Trust Code does not address the subject of 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 Code addresses investment in mutual funds at Section 802(f).

Uniform Custodial Trust Act (1987) – This Act has been enacted in 14 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 Uniform Trust Code but complements it.

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.

Uniform Principal and Income Act (1997) – The 1997 Uniform Principal and Income Act 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 decedent’s 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.

Uniform Probate Code – Originally approved in 1969, and enacted in close to complete form in about 20 States but influential in virtually all, the UPC overlaps with trust topics in several areas. One area of overlap, already mentioned, is UPC Article VII. Another area of overlap concerns representation of beneficiaries. UPC Section 1-403 provides principles of representation for achieving binding judicial settlements of matters involving both estates and trusts. The Uniform Trust Code refines these representation principles, and extends them to nonjudicial settlement agreements and to optional notices and consents. See Uniform Trust Code, Section 111 and Article 3. A final area of overlap between the UPC and trust law concerns rules of construction. The UPC, in Article II, Part 7, extends certain of the rules on the construction of wills to trusts and other nonprobate instruments. The Uniform Trust Code similarly extends to trusts the rules on the construction of wills. Unlike the UPC, however, the Trust Code does not prescribe the exact rules. Instead, Section 112 of the Uniform Trust Code is an optional provision applying to trusts whatever rules the enacting jurisdiction already has in place on the construction of wills.

Uniform Statutory Rule Against Perpetuities – Originally approved in 1986, this Act has been enacted in 27 jurisdictions. The Act reforms the durational limit on when property interests, including interests created under trusts, must vest or fail. The Uniform Trust Code does not limit the duration of trusts or alter the time when interests must otherwise vest, but leaves this issue to other state law. The Code may be enacted without change regardless of the status of the perpetuities law in the enacting jurisdiction.

Uniform Supervision of Trustees for Charitable Purposes Act (1954) – This Act, which has been enacted in four States, is limited to mechanisms for monitoring the actions of charitable trustees. Unlike the Uniform Trust Code, the Supervision of Trustees for Charitable Purposes Act does not address the substantive law of charitable trusts.

Uniform Testamentary Additions to Trusts Act – This Act is available in two versions: the 1960 Act, with 24 enactments; and the 1991 Act, with 20 enactments through 1999. As its name suggests, this Act validates pourover devises to trusts. Because it validates provisions in wills, it is incorporated into the Uniform Probate Code, not into the Uniform Trust Code.

Role of Restatement of Trusts: The Restatement (Second) of Trusts was approved by the American Law Institute in 1957. Work on the Restatement Third began in the late 1980s. The portion of Restatement Third relating to the prudent investor rule and other investment topics was completed and approved in 1990. A tentative draft of the portion of Restatement Third relating to the rules on the creation and validity of trusts was approved in 1996, and the portion relating to the office of trustee, trust purposes, spendthrift provisions and the rights of creditors was approved in 1999. The Uniform Trust Code was drafted in close coordination with the writing of the Restatement Third.

Overview of Uniform Trust Code

The Uniform Trust Code consists of 11 articles. The substance of the Code is focused in the first 10 articles; Article 11 is primarily an effective date provision.

Article 1 – General Provisions and Definitions – In addition to definitions, this article addresses miscellaneous but important topics. The Uniform Trust Code is primarily default law. A settlor, subject to certain limitations, is free to draft trust terms departing from the provisions of this Code. The settlor, if minimum contacts are present, may in addition designate the trust’s principal place of administration; the trustee, if certain standards are met, may transfer the principal place of administration to another State or country. To encourage nonjudicial resolution of disputes, the Uniform Trust Code provides more certainty for when such settlements are binding. While the Code does not prescribe the exact rules to be applied to the construction of trusts, it does extend to trusts whatever rules the enacting jurisdiction has on the construction of wills. The Uniform Trust Code, although comprehensive, does not legislate on every issue. Its provisions are supplemented by the common law of trusts and principles of equity.

Article 2 – Judicial Proceedings – This article addresses selected issues involving judicial proceedings concerning trusts, particularly trusts having contacts with more than one State or country. The courts in the trust’s principal place of administration have jurisdiction over both the trustee and the beneficiaries as to any matter relating to the trust. Optional provisions on subject-matter jurisdiction and venue are provided. The minimal coverage of this article was deliberate. The Drafting Committee concluded that most issues related to jurisdiction and procedure are not appropriate to a Trust Code, but are best left to other bodies of law.

Article 3 – Representation – This article deals with the representation of beneficiaries and other interested persons, both by fiduciaries (personal representatives, guardians and conservators), and through what is known as virtual representation. The representation principles of the article apply to settlement of disputes, whether by a court or nonjudicially. They apply for the giving of required notices. They apply for the giving of consents to certain actions. The article also authorizes a court to appoint a representative if the court concludes that representation of a person might otherwise be inadequate. The court may appoint a representative to represent and approve a settlement on behalf of a minor, incapacitated, or unborn person or person whose identity or location is unknown and not reasonably ascertainable.

Article 4 – Creation, Validity, Modification and Termination of Trust – This article specifies the requirements for creating, modifying and terminating trusts. Most of the requirements relating to creation of trusts (Sections 401 through 409) track traditional doctrine, including requirements of intent, capacity, property, and valid trust purpose. The Uniform Trust Code articulates a three-part classification system for trusts: noncharitable, charitable, and honorary. Noncharitable trusts, the most common type, require an ascertainable beneficiary and a valid purpose. Charitable trusts, on the other hand, by their very nature are created to benefit the public at large. The so called honorary or purposes trust, although unenforceable at common law, is valid and enforceable under this Code despite the absence of an ascertainable beneficiary. The most common example is a trust for the care of an animal.

Sections 410 through 417 provide a series of interrelated rules on when a trust may be terminated or modified other than by its express terms. The overall objective of these sections is to enhance flexibility consistent with the principle that preserving the settlor’s intent is paramount. Termination or modification may be allowed upon beneficiary consent if the court concludes that the trust or a particular provision no longer serves a material purpose or if the settlor concurs; by the court in response to unanticipated circumstances or to remedy ineffective administrative terms; or by the court or trustee if the trust is of insufficient size to justify continued administration under its existing terms. Trusts may be reformed to correct a mistake of law or fact, or modified to achieve the settlor’s tax objectives. Trusts may be combined or divided. Charitable trusts may be modified or terminated under cy pres to better achieve the settlor’s charitable purposes.

Article 5 – Creditor’s Claims; Spendthrift and Discretionary Trusts – This article addresses the validity of a spendthrift provision and other issues relating to the rights of creditors to reach the trust to collect a debt. To the extent a trust is protected by a spendthrift provision, a beneficiary’s creditor may not reach the beneficiary’s interest until distribution is made by the trustee. To the extent not protected by a spendthrift provision, a creditor can reach the beneficiary’s interest, subject to the court’s power to limit the award. Certain categories of claims are exempt from a spendthrift restriction, including certain governmental claims and claims for child support or alimony. Other issues addressed in this article include creditor claims against discretionary trusts; creditor claims against a settlor, whether the trust is revocable or irrevocable; and the rights of creditors when a trustee fails to make a required distribution within a reasonable time.

Article 6 – Revocable Trusts – This short article deals with issues of significance not totally settled under current law. The basic policy of this article and of the Uniform Trust Code in general is to treat the revocable trust as the functional equivalent of a will. The article specifies a standard of capacity, provides that a trust is presumed revocable unless its terms provide otherwise, prescribes the procedure for revocation or amendment of a revocable trust, addresses the rights of beneficiaries during the settlor’s lifetime, and provides a statute of limitations on contests.

Article 7 – Office of Trustee – This article contains a series of default rules dealing with the office of trustee, all of which may be modified in the terms of the trust. Rules are provided on acceptance of office and bonding. The role of the cotrustee is addressed, including the extent that one cotrustee may delegate to another, and the extent to which one cotrustee can be held liable for actions of another trustee. Also covered are changes in trusteeship, including the circumstances when a vacancy must be filled, the procedure for resignation, the grounds for removal, and the process for appointing a successor trustee. Finally, standards are provided for trustee compensation and reimbursement for expenses.

Article 8 – Duties and Powers of Trustee – This article states the fundamental duties of a trustee and enumerates the trustee’s powers. The duties listed are not new, although some of the particulars have changed over the years. This article was drafted where possible to conform to the Uniform Prudent Investor Act. The Uniform Prudent Investor Act prescribes a trustee’s responsibilities with respect to the management and investment of trust property. This article also addresses a trustee’s duties regarding distributions to beneficiaries.

Article 9 – Uniform Prudent Investor Act – This article provides a place for a jurisdiction to enact, reenact or codify its version of the Uniform Prudent Investor Act. States adopting the Uniform Trust Code which have previously enacted the Uniform Prudent Investor Act are encouraged to reenact their version of the Prudent Investor Act in this article.

Article 10 – Liability of Trustees and Rights of Persons Dealing With Trustees – Sections 1001 through 1009 list the remedies for breach of trust, describe how money damages are to be determined, provide a statute of limitations on claims against a trustee, and specify other defenses, including consent of a beneficiary and recognition of and limitations on the effect of an exculpatory clause. Sections 1010 through 1013 address trustee relations with persons other than beneficiaries. The objective is to encourage third parties to engage in commercial transactions with trustees to the same extent as if the property were not held in trust.

Article 11 – Miscellaneous Provisions – The Uniform Trust Code is intended to have the widest possible application, consistent with constitutional limitations. The Code applies not only to trusts created on or after the effective date, but also to trusts in existence on the date of enactment.

The Drafting Committee was assisted by numerous officially designated advisors and observers, representing an array of organizations. In addition to the American Bar Association advisors listed above, advisors and observers who attended a majority of the Drafting Committee meetings include Edward C. Halbach, Jr., Reporter, Restatement (Third) of Trust Law; Kent H. McMahan, American College of Trust and Estate Counsel; Alex Misheff, American Bankers Association; and Lawrence W. Waggoner, Reporter, Restatement (Third) of Property: Wills and Other Donative Transfers. Significant input was also received from the Joint Editorial Board for Uniform Trusts and Estates Acts and the Committee on State Laws of the American College of Trust and Estate Counsel.