Practical Drafting Under The Uniform Trust Code

Introduction

The Uniform Trust Code (UTC) is the first national codification of the law of trusts.  Since it was completed by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 2000, the UTC has been adopted by 18 states¹ and the District of Columbia.  The UTC is under consideration in other states and is likely to be enacted in other states in the future.

It should be noted that many of the enacting jurisdictions have deviated from the terms of the UTC as adopted by NCCUSL and that, in the years since the initial adoption of the UTC, NCCUSL has made the inclusion of certain provisions optional because of lack of consensus about those provisions.  It is important, therefore, to review the UTC as enacted in a particular state.

Scope of UTC

The UTC consists of 11 articles.  A brief summary of the articles is set forth below:

Article 1 - General Provisions and Definitions
This article includes general provisions and provides definitions of the terms used in the act.  In addition, it lists the mandatory rules that cannot be overridden in a trust instrument.  It also includes provisions about the governing law and the principal place of administration of trusts.

Article 2 - Judicial Proceedings
This article addresses selected issues involving judicial proceedings concerning trusts, particularly trusts having contacts with more than one jurisdiction.  It provides that 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.

Article 3 - Representation
This article provides rules permitting representation of beneficiaries and other interested persons, both by fiduciaries and through "virtual representation."  The representation provisions permit a representative to act on behalf of and bind another person, both in judicial and nonjudicial settings.  This article also authorizes a court to appoint a representative if the court concludes that representation of a person might otherwise be inadequate.

Article 4 - Creation, Validity, Modification and Termination of Trusts
In addition to codifying the traditional requirements for creating trusts, this article provides flexible rules for modifying and terminating trusts under certain circumstances.  This article also addresses the combination and division of trusts, the application of the cy pres doctrine, and the creation and enforceability of pet trusts.

Article 5 - Creditors' Claims; Spendthrift and Discretionary Trusts
This article addresses the validity and effects of a spendthrift provision and sets forth the rights of the settlor's and the beneficiaries' creditors.

Article 6 - Revocable Trusts
This article provides special rules applicable to revocable trusts.  It includes provisions addressing the amendment and revocation of revocable trusts, the authority of an attorney-in-fact to act on behalf of the settlor of a revocable trust, and the time period for contesting the validity of a revocable trust.

Article 7 - Office of Trustee
This article provides the default rules governing trustees, including actions of co-trustees, procedures for resignation of a trustee, removal of a trustee, and the appointment of a successor trustee.  It also addresses trustee compensation and reimbursement for expenses.

Article 8 - Duties and Powers of Trustee
This article states the basic duties of a trustee, including the duty to inform and report to beneficiaries, and lists the trustee's powers.

Article 9 - Uniform Prudent Investor Act
This article sets forth the prudent investor rule and provides specific language that can be used to invoke the rule.

Article 10 - Liability of Trustees and Rights of Persons Dealing with Trustees
This article addresses remedies for breach of trust, defenses to claims of breach of trust, and the effect of an exculpatory clause.

Article 11 - Miscellaneous Provisions
This article addresses miscellaneous topics such as uniformity of application, electronic signatures, and effective dates.  Except as otherwise provided in the act, the provisions of the act apply to all trusts created before, on, or after the effective date.

Default and Mandatory Rules of UTC

In drafting under the UTC, it is important to understand that there are certain provisions of the act that are mandatory and cannot be altered by drafting.  The mandatory rules are set forth in Section 105 of the UTC and are listed below:

• The requirements for creating a trust.²
• The duty of a trustee to act in good faith and in accordance with the purposes of the trust.³
• The requirement that a trust and its terms be for the benefit of its beneficiaries, and that the trust have a purpose that is lawful, not contrary to public policy and possible to achieve.⁴
• The power of the court to modify or terminate a trust.⁵
• The effect of a spendthrift provision and the rights of certain creditors and assignees to reach a trust.⁶⁶
• The power of the court to require, dispense with, or modify or terminate a bond.⁷
• The power of a court to adjust a trustee's compensation specified in the terms of the trust which is unreasonably low or high.⁸
• The duty to notify qualified beneficiaries of an irrevocable trust who have attained 25 years of age of the existence of the trust, the identity of the trustee, and their right to request trustee reports.⁹
• The duty to respond to the request of a beneficiary of an irrevocable trust for trustee reports and other information reasonably related to the administration of the trust.¹⁰
• The effect of an exculpatory term.¹¹
• The rights of persons other than trustees and beneficiaries (such as purchasers of trust property and creditors). ¹²
• Periods of limitation for commencing a judicial proceeding.¹³
• The power of a court to take such action and exercise such jurisdiction as may be necessary in the interests of justice.¹⁴
• The subject matter jurisdiction of the court and venue for commencing a proceeding.¹⁵

Aside from these mandatory rules, the settlor of a trust is free to incorporate whatever provisions he or she may deem appropriate in order to carry out the purposes of the trust.  The remainder of this article will provide drafting suggestions and considerations under the UTC.

Specific Drafting Suggestions and Considerations under the UTC

Notice, Information and Report Requirements

Section 813 of the UTC provides generally that a trustee shall keep the qualified beneficiaries of a trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.  More specifically, Section 813 requires that the trustee shall (i) upon the request of a beneficiary, furnish to the beneficiary a copy of the trust instrument, (ii) within 60 days after accepting a trusteeship, notify the qualified beneficiaries of the acceptance and of the trustee's name, address, and telephone number, (iii) within 60 days after the trustee acquires knowledge of an irrevocable trust, notify the qualified beneficiaries of the trust's existence, of the identity of the settlor, of the right to request a copy of the trust instrument, and of the right to a trustee's report, and (iv) notify the qualified beneficiaries in advance of any change in the trustee's compensation.  A trustee also is required to send a report (an accounting) to all current distributees, permissible distributees, and to any other beneficiaries who request it.

If the UTC as enacted in a particular state permits the settlor to waive or modify the duties of the trustee to provide notice, information, and reports to the beneficiaries, the settlor should consider whether, and to what extent, to relieve the trustee of these notification and reporting requirements.  For some settlors, and in some situations, giving the beneficiaries information about the trust will be the right course of action.  However, in some situations, settlors will not want disclosure.  For example, a settlor may set up a trust for his or her surviving spouse and the settlor will not want information about the trust to be made available to the remainder beneficiaries (e.g., the settlor's children from a prior marriage) until after the spouse's death.  A settlor who is setting up a trust for an irresponsible or unmotivated beneficiary may want the trust to serve as a "safety net" for the beneficiary and may not want the beneficiary to know about the trust at any point (unless and until distributions are made to the beneficiary).  If the settlor is interested in maintaining the privacy of the trust to the maximum extent possible under applicable law, the trust could include a general statement that the settlor waives, to the fullest extent permitted by law, any and all duties of the trustee to give notice, information, and reports to any beneficiary.

In those jurisdictions where the notice and reporting requirements are mandatory and cannot be waived or modified, a settlor establishing a trust for multiple beneficiaries might consider establishing multiple trusts with different beneficiaries so that the beneficiaries of one trust have rights to information about the trust in which they have a beneficial interest but no rights to information about the other trust(s) in which they have no beneficial interest.

Specify the Material Purposes of the Trust

In addition to providing general guidance to the trustee with respect to the material purpose(s) of the trust, explaining the material purpose(s) of the trust will aid in the application of specific statutory provisions that depend on the "material purpose" of the trust.  For example, Section 411(b) provides that a noncharitable, irrevocable trust may be modified or terminated upon consent of all of the beneficiaries if the court concludes that such modification or termination is not inconsistent with any material purpose of the trust.  Rather than speculating about the material purpose(s) of the trust, consideration should be given to specifying the material purpose(s) so that a court that is asked to modify or terminate the trust has a clear understanding of the settlor's intention in establishing the trust.

Section 411 of the UTC provides that a spendthrift provision in the terms of the trust is not presumed to constitute a material purpose of the trust.  If a settlor is establishing a trust with the specific intention of providing creditor protection for the beneficiary, presumably, the settlor would not want the beneficiary to be able to seek termination of the trust.  In this situation, the settlor would be well advised to state that the spendthrift provision is a material purpose of the trust.

The settlor may strongly believe that a particular person should serve as trustee for as long as possible.  The settlor may have selected the trustee because the trustee shares the settlor's investment management philosophy or because the settlor believes that the trustee is best suited to manage a business that is part of the trust.  If the settlor does not state that the service of the particular trustee is a material purpose of the trust, the trustee could be removed upon the request of the beneficiaries.  Section 706(b)(4) of the UTC permits a court to remove a trustee upon the request of all qualified beneficiaries if the court finds that the removal best serves the interests of the beneficiaries and is not inconsistent with a material purpose of the trust.  The court, therefore, could interfere with the settlor's selection of the trustee if it is not made clear that the selection of the trustee serves a material purpose of the settlor.

Limitations on or Expansion of Representation Provisions

The representation provisions in Article 3 of the UTC serve a very useful purpose.  They permit a representative to act on behalf of, and bind, persons who are not able to act on their own.  For example, a representative can act on behalf of a minor or unborn beneficiary, a disabled beneficiary, or a beneficiary whose whereabouts are unknown.  The representative can act on behalf of the beneficiary to approve a trustee's reports, receive notice of a proposed transfer of principal place of administration or of a trustee's resignation, or to enter into a judicial or nonjudicial agreement relating to the trust.

The settlor may wish to limit or expand the persons who may serve as representatives under Article 3.  The settlor may specify the specific person (by name or by relationship) who may represent a particular beneficiary.  On the other hand, if the settlor wishes to prevent a particular person from representing another person, the settlor may expressly state that such representation will not be permitted.

Modification or Termination of Trusts by Attorney-in-Fact

An irrevocable trust can be modified or terminated upon the consent of the settlor and the beneficiaries, without court approval.  What if modification or termination of an irrevocable trust would be beneficial but the settlor is incapacitated and not able to consent to the modification or termination?  Section 411(a)(1) of the UTC provides that a settlor's power to consent to a modification or termination of an irrevocable trust may be exercised by an attorney-in-fact, but only if expressly authorized in the power of attorney or in the terms of the trust.  Similarly, with regard to a revocable trust, Section 602(e) permits an attorney-in-fact to exercise the settlor's powers to revoke, amend, or distribute a revocable trust only if expressly authorized in the power of attorney or in the terms of the trust.

In appropriate circumstances, therefore, consideration should be given to including in the settlor's power of attorney, in the terms of the trust, or both, express authorization for the attorney-in-fact to consent to the modification or termination of an irrevocable trust or to revoke, amend, or distribute a revocable trust.

Termination of Small Trust

The UTC provides a simple mechanism for termination of a small trust. Under Section 414, the trustee may terminate a trust with a value of less than $50,000 if the trustee concludes that the value of the trust property is insufficient to justify the cost of administration.  This statutory provision will apply unless the settlor provides otherwise.  The settlor may wish to increase or decrease the dollar figure that applies to the trustee's unilateral termination of a trust.

Presumption of Revocability of Trust

Under common law, a trust is presumed irrevocable unless there is evidence of a contrary intent.  Section 601(a) of the UTC changes the common law and provides that a settlor may revoke or modify a trust unless the terms of the trust expressly state that the trust is irrevocable. It is certainly good practice to state in the terms of the trust whether it is revocable or irrevocable.  In those cases where the trust is intended to be irrevocable for tax or other purposes, in a UTC jurisdiction, it is critically important to say so.

Unanimous Action by Trustees

The default rule under the UTC is that three or more co-trustees can act by majority.  Often, majority action is consistent with the settlor's wish.  However, if the settlor wants unanimous action by trustees, or if the settlor wants a particular trustee to be part of any majority vote, it is essential under the UTC to state that requirement.

Delegation by Trustee

Section 703(e) of the UTC provides that "[a] trustee may not delegate to a
cotrustee the performance of a function the settlor reasonably expected the trustees to perform jointly."  If the settlor is not available to state his or her reasonable expectation about delegation of trustee functions, it may be difficult to determine what the settlor had in mind, unless the trust instrument provides guidance.

In some cases, the settlor may expressly state that a co-trustee may delegate any and all powers to a co-trustee.  In other cases, the settlor may prefer to delegate investment and administrative functions, but not discretionary distribution decisions.  The settlor can and should specify which trustee powers, if any, are delegable and which are not.

Exculpatory Clause

Section 1008 of the UTC provides that an exculpatory clause relieving the trustee of liability that is drafted or caused to be drafted by the trustee is invalid unless the trustee proves that the exculpatory clause is fair under the circumstances, and that its existence and contents were adequately communicated to the settlor.  When the settlor requests the drafting attorney to serve as the trustee, this provision is likely to be problematic for the attorney/trustee.

In such a situation, the drafting attorney may wish to ask the settlor to sign a specific statement acknowledging the existence and effect of an exculpatory clause.  Such a signed statement should be useful in demonstrating that the existence and contents of the exculpatory clause were adequately communicated to the settlor.

Certification of Trust

Instead of furnishing a copy of the trust instrument to a third party (such as a financial institution), Section 1013 of the UTC permits the trustee to furnish to a third party a certification of trust containing basic information about the trust and the trustee.  This permits the trustee to certify the existence of the trust and give a third party other relevant information about the trust without having to disclose the dispositive terms of the trust.

Conclusion

The first step in knowing how to draft under the UTC is to become familiar with the UTC as enacted in the jurisdiction whose governing law will apply to the trust.  The next step is to seek to understand the settlor's objectives in establishing the trust.  The final step is to draft around the default provisions of the UTC, to the extent possible, to achieve the settlor's objectives.

¹ The 18 states adopting the UTC are:  Alabama, Arkansas, Florida, Kansas, Maine, Missouri, Nebraska, New Hampshire, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, Wyoming.