Third Quarterly Issue
Fall 2002
UTC NOTES
UNIFORM TRUST CODE PROJECT
AWARDED FOUNDATION GRANTS
The National Conference of Commissioners on Uniform State Laws
was awarded two substantial grants to support of the Uniform Trust Code, the
first national codification of the law of trusts. The American College of Trust
and Estate Counsel granted NCCUSL $20,000 to conduct educational seminars about the UTC. The
Uniform Law Foundation granted $22,000 to fund a video and DVD about the UTC.
ACTEC Foundation Grant
Uniform Law Foundation Grant
The ACTEC Foundation grant will be used
to provide educational seminars in the states on the
UTC. Four seminars will be held this Fall/Winter
and four in the Fall of 2003. The regional seminars
are hosted by the study group of a state and a
participant from nearby state study groups are
invited to attend and discuss key areas of the UTC.
David English, the Reporter for the Uniform Trust
Code, is scheduled to give the main presentation at
each and answer the participants’ questions. The
Fall 2002 ACTEC Regional UTC Seminars will be
held in Utah, Florida, Ohio and Connecticut.
The purpose of the ACTEC Foundation is
to support the educational and other charitable
activities of the American College of Trust and
Estate Counsel by sponsoring research and the
dissemination of knowledge concerning the
improvement of the legal system in probate, trust,
tax, and related areas of the law.
The Uniform Law Foundation Grant was
used to film a video titled, “Studying the Uniform
Trust Code,” which features David English, John
Langbein and Raymond Young. The video
addresses key areas of the UTC and was sent to
state study groups throughout the United States. A
DVD on the Code will also be produced.
The Uniform Law Foundation is
dedicated to the guiding principle that uniformity
of state law, on all subjects where uniformity is
desirable and practicable, contributes to the
general welfare of the citizens of the United States
(1) by facilitating commerce, (2) by increasing
understanding of and respect for the laws of the
states and (3) by assisting the citizens of the states
in their pursuit of the benefits of a free society.
The ULF promotes uniformity of state laws by
making funds available for study, research and
development, and educational efforts, carried out
by, or in support of the activities of, the NCCUSL.
INSIDE...
UTC State Report....................................................p. 2
Kartiganer & Young on Beneficiaries......................p. 3
Halbach on The Office of Trustee.......................... p. 7
Financial Planners Endorse UTC...........................p. 10
Questions Answered..............................................p. 11
UTC Notes is published by the National
Confe rence of C omm issioners o n Uniform
S t at e L a w s under the direction of David M.
English, Chair, Uniform Trust C ode Advisory
Comm ittee.
Page 1 of 11
UTC STATE REPORT
With over thirty state bar associations or legislative study committees reviewing the
Uniform Trust Code, the National Conference of Commissioners on Uniform State Laws
anticipates that 2003 and 2004 will be big legislative years for the UTC. Some states have
completed their studies and are ready for legislative action in 2003. Some states are in the midst
of a section by section analysis with plans for 2004. And some states are just beginning a review
of the Code. Following are comments about developments with the UTC in some of the states
around the country.
Arizona’s Bar Association has almost completed its study of the Uniform Trust Code
and an introduction of the bill in 2003 is expected. Colorado completed its study of the UTC in
2002. We are hoping for an enactment in 2003 particularly since the Bar is recommending the
UTC with little change be adopted. Connecticut’s Bar Association unanimously endorsed the
UTC in 2002, and a bill was raised in Judiciary Committee in 2002. A full introduction is
anticipated in 2003. The UTC has been introduced in the District of Columbia and may be
passed into law by the end of 2002. The Florida Bar is about half-way through its review of the
Uniform Trust Code and will be hosting a UTC Regional Seminar on November 22nd. A study
group in Idaho began its work in June. Indiana has appointed a Legislative Study Group and a
hearing about the UTC was conducted last Fall. Indiana already has a fairly comprehensive trust
law upon which the UTC was partially based. We hope for an introduction in 2003. Iowa has an
earlier version of the Uniform Trust Code adopted there in 1999. The challenge is to determine
what changes and additions are needed to make it “uniform.” Montana’s UTC study group will
begin its review of the UTC this Fall and plans to recommend adoption in 2003. Ohio is in the
midst of a thorough UTC study and the Ohio State Bar Association will be hosting a UTC
Regional Seminar on the Code on December 9th. Oregon begins its review of the UTC in
October. Because Oregon’s Legislature only meets every other year, we do not expect an
introduction until 2005. Pennsylvania’s study group is nearing a final draft of the UTC. Utah’s
Legislative Study Committee on the Uniform Trust Code has been meeting monthly and will be
hosting a UTC Regional Seminar on October 4th in Salt Lake City. A member from the Arizona,
Colorado and New Mexico study groups are scheduled to attend the seminar. Virginia has begun
its work on the UTC and expects to complete work in 2004. Wyoming’s Legislative Study
Committee will likely finish its work for a bill introduction in 2003.
NCCUSL, the Joint Editorial Board for Uniform Trust and Estate Acts and the UTC
Advisory Committee continue to work to assist state UTC study groups through newsletters,
videos, state law comparisons, seminars and a soon-to-be developed UTC website. For more
information or assistance with studying the UTC, please contact Michelle Clayton at
[email protected] or (312) 915-0278.
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THE UTC
HELP FOR BENEFICIARIES AND THEIR ATTORNEYS
By: Joseph Kartiganer and
Raymond H. Young
Except for those few states that have comprehensive trust codes, statutory law in the United States
pays little attention to the rights of beneficiaries, other than as the implied reciprocal of the duties of
trustees. Except for those few attorneys who have had the occasion to represent beneficiaries in disputes
with trustees, attorneys rarely have a comprehensive view of the status of beneficiaries in relation to the
trust, the trustee, and the settlor. Fewer still have a clear idea of certain fundamental concepts of trust law,
particularly the concept that the trust must be solely for the benefit of the beneficiaries.
FUNDAMENTAL STATEMENT IN THE UN I FO R M TRUST CODE (UTC)
The UTC requires the trustee to administer the trust in accordance with the interests of the
beneficiaries. UTC 801. It also requires that a trust and its terms must be for the benefit of its
beneficiaries. UTC 404. These requirements are mandatory, and cannot be waived by the settlor, UTC
105.
This mandatory benefit of the beneficiaries standard is perhaps obvious, but is often overlooked.
Its articulation focuses attention on the rights and interests of beneficiaries, and serves as a guide to
interpretation and application of all provisions of UTC, and to the future development of trust law.
The defined “interests of the beneficiaries” are the beneficial interests provided in the terms of the
trust. UTC 104(7). The commentary points out that the purpose of this clarification is to make it clear
that it is the interests under the trust that are to be best served, not the best interests of the beneficiaries as
they might define them for themselves; a beneficiary who wants to take a trip around the world or a
chance to take a year off to “find” himself or herself will have to find those purposes within the terms of
the trust.
MAJOR CHANGES
Modification or termination of noncharitable irrevocable trust by consent of beneficiaries. It is
established doctrine, not always recognized, even by some trust law practitioners, that irrevocable noncharitable trust provisions may be modified by agreement of all beneficiaries, provided no material
purpose of the trust is defeated. Restatement (Third) of Trusts § 65(1) (Tent. Draft No. 3, 2001);
Restatement (Second) of Trusts § 337 (1959). Even a material purpose of the trust may be overridden if
the settlor joins with the beneficiaries. Restatement (Third) of Trusts § 65(2) (Tent. Draft No. 3, 2001);
Restatement (Second) of Trusts § 338 (1959).
The UTC adopts this existing doctrine. UTC 411. It expands and strengthens it in three respects:
(1)
Expanded representation provisions authorize consent on behalf of persons who are
minors, incapacitated, or unborn and unascertained; to the extent there is no conflict of interest, that
representation can be given by parents, persons having substantially identical interests, and by fiduciaries.
UTC 303 and 304.
(2)
Under present doctrine, modification or termination is not permitted if it would defeat a
material purpose of the trust. Arbitrary application of this limitation is restricted by the UTC, which
provides that a spendthrift provision in the terms of the trust is not automatically presumed to constitute a
material purpose. UTC 411(e). This provision does not eliminate the material purpose doctrine itself; for
example, a deferral of distribution until a specified age can be a material purpose of the trust, even in the
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absence of a spendthrift clause.
(3)
Under the UTC, a proposed modification or termination may be approved even in the
absence of consent by all beneficiaries, provided a court is satisfied that, had all of the beneficiaries
consented, the trust could have been modified or terminated, and the interests of the non-consenting
beneficiary will be adequately protected. UTC 411(e). This permits a court to approve elimination of the
holdout or holdup beneficiary with adequate provision for that beneficiary’s interest.
Court approval of modification or termination on unanimous consent, although not required, can
be obtained if fiduciaries or beneficiaries wish the added protection of a court judgment, particularly upon
such questions as material purpose, adequate protection of interests, or adequacy of representation. UTC
410(b).
Irrevocable charitable interests are not subject to modification or termination under UTC 411, but
only under the doctrine of cy pres, UTC 413.
Filling vacancy in trusteeship. Absent a controlling provision in the terms of the trust, the UTC
allows appointment of a successor trustee by unanimous agreement of the qualified beneficiaries
(essentially those to whom current distributions may be made or who are presumptive remaindermen).
UTC 704(c). The appointment is effective without court action. If the qualified beneficiaries fail to make
an appointment, the successor may be appointed by the court
Beneficiaries’ right to information. UTC restates and makes improvements to beneficiaries’ rights
to information consistent with good trust administration practices. The trustee must keep the qualified
beneficiaries of the trust reasonably informed about the administration of the trust and of the material
facts necessary for them to protect their interests. UTC 813. In appropriate circumstances the trustee may
be required to provide advance notice of transactions involving real estate, closely held business interests,
and other difficult to value assets. UTC 813 (comment); Allard v. Pacific National Bank, 663 P.2d 104
(Wash. 1983); Estate of Anderson, 148 Cal. App. 3rd , 196 Cal. Rep. 782 (1983).
Also, unless unreasonable under the circumstances, a trustee must respond to a beneficiary’s
request for information related to the administration of the trust, unless the request is unreasonable. UTC
813(a). The rights of the beneficiaries under this section are mandatory, and may not be waived by the
settlor. UTC 105(a)(9).
Beneficiaries who are not qualified beneficiaries are not routinely entitled to information and
reports, but a nonqualified beneficiary who requests notice is thereafter entitled to receive notice. UTC
110(a).
Subject to waiver by the settlor, a beneficiary is entitled to demand a copy of the whole trust
instrument, not just the portion the trustee deems relevant. UTC 813(b)(1).
The trustee is required to notify the qualified beneficiaries of the existence of the trust, the
trustee’s identity, the settlor’s identity, and of the right to receive trustee’s reports. This provision is
mandatory with respect to qualified beneficiaries 25 years of age or over, but is a default rule, waivable by
the settlor, for qualified beneficiaries under age 25. UTC 105(a)(8).
Subject to waiver by the settlor, the qualified beneficiaries are entitled to advance notice of any
change in the method or rate of trustee’s compensation. Distributees or permissible distributees of trust
income or principal, and other qualified or nonqualified beneficiaries who request it, are entitled to reports
from the trustee at least annually and at the termination of the trust, setting forth the trust property,
liabilities, receipts and disbursements, including the trustee’s compensation, and a listing of the trust
assets and, if feasible, their respective market values. UTC 813(c). The trustee’s duty to send this
information regardless of demand is a default rule that may be waived by the settlor, but the settlor may
not waive the requirement that the trustee furnish reports once the trustee receives a request from a
beneficiary.
While a trust is revocable and the settlor has capacity, all rights are subject to the control of the
settlor, and the duties of the trustee are owed exclusively to the settlor. However, if the settlor of a
revocable trust loses capacity, then, unless waived by the settlor, the rights of the beneficiaries pass to and
Page 4 of 11
are held by the beneficiaries, including the rights to information and reporting, UTC 603(b). This default
rule recognizes the practical transition to the equivalent of an irrevocable trust.
Policy. The beneficiaries’ rights to information and reports are among the most important
provisions in the UTC. They also are among the provisions that have attracted the most attention. The
UTC provisions reflect a compromise position between opposing viewpoints.
Objections raised to beneficiaries’ rights to information include the wishes of some settlors who
believe that knowledge of trust benefits would not be good for younger beneficiaries, encouraging them to
take up a life of ease rather than work and be productive citizens. Sometimes trustees themselves desire
secrecy and freedom from interference by beneficiaries.
The policy arguments on the other side are: that the essence of the trust relationship is accounting
to the beneficiaries; that it is wise administration to account and inform beneficiaries, to avoid the greater
danger of the beneficiary learning of a breach or possible breach long after the event; and that there are
practical difficulties with secrecy (for example, the Trustee must tell a child that he or she is not eligible
for financial aid at college because the trust will pay, and must determine whether to accumulate income
at high income tax rates or pay it out for inclusion in the beneficiary’s own return). Furthermore, there is
the practical advantage of a one year statute of limitations where the beneficiary is informed of the trust
transactions and advised of the bar if no claim is made within the year. UTC 1005. In the absence of
notice, the trustee is exposed to liablility for the term of the trust plus five years. UTC 1005(c).
STATEMENTS EXPRESSING FUNDAMENTAL RIGHTS DEVELOPED BY CASE LAW BUT RARELY CODIFIED.
Duty of loyalty. The beneficiaries’ chief protection is the trustee’s duty of loyalty, which includes
the duty to administer the trust solely in the interests of the beneficiary. UTC 802(a). A beneficiary has a
right to set aside any transaction entered into by the trustee for the trustee’s own personal account or that
is otherwise affected by a conflict between the trustee’s fiduciary and personal interests (other than
corporate trustees’ use of proprietary mutual funds), unless the transaction was authorized by the terms of
the trust, approved by the court, or otherwise protected by lapse of time or by release. UTC 802(b).
Beneficiaries are given the right to set aside a transaction between the trustee and the beneficiary,
even if it does not concern trust property, if it occurs during the existence of the trust (while the trustee
retains significant influence over the beneficiary), and from which the trustee obtains an advantage, unless
the trustee establishes that the transaction was fair to the beneficiary. UTC 802(d).
The trustee, in voting shares of stock or exercising powers of control over business interests, must
act in the best interests of the beneficiaries and, if the trustee is the sole or controlling owner of a
corporation or other form of enterprise, must elect or appoint directors or managers who will act to best
serve the interests of the beneficiaries. UTC 802(g).
Beneficiaries have additional protection from limits on the breadth of discretion that may be
granted to trustees in the terms of the trust: a discretionary power, even one described as “absolute”,
“sole”, or “uncontrolled”, must nevertheless be exercised in good faith, in accordance with the terms and
purposes of the trust, and the interests of the beneficiaries. UTC 814(a). This is a useful restatement of
generally accepted present trust doctrine.
Remedies. Beneficiaries are entitled to remedies for breach of trust, including injunctions,
damages or surcharge, orders to account, removal, denial or reduction of compensation, and other
appropriate equitable remedies. UTC 1001.
Damages. The measure of damages in case of breach is the greater of the amount required to
restore the trust to what it would have been had the breach not occurred or the profit the trustee made by
reason of the breach. UTC 1002. This measure includes not only recovery of lost income or principal, but
also capital gain or appreciation that would have resulted from proper administration. Even if there is no
loss, the trustee may not benefit, and must account for any profit made by the trustee by reason of the
breach.
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Damages in absence of breach. Even in the absence of a breach, a trustee is accountable to an
affected beneficiary for any profit made by the trustee arising from the administration, such as a receipt by
the trustee of a commission or bonus from a third party for actions relating to the trust’s administration.
Fees and costs. A beneficiary may be awarded litigation costs if the litigation is deemed
beneficial to the trust. UTC 1004.
Exculpation. An exculpatory clause relieving a trustee of liability for breach is unenforceable if
the breach is committed in bad faith or with reckless indifference to the purposes of the trust or the
interests of the beneficiaries, or if the exculpatory clause was inserted as the result of abuse by the trustee
of a fiduciary or confidential relationship. UTC 1008. An exculpatory term drafted or caused to be
drafted by the trustee is invalid as an abuse unless the trustee proves that the exculpatory term is both fair
under the circumstances and that its existence and contents were adequately communicated to the settlor.
Release. A consent, release or ratification may release a trustee from liability for breach of trust,
unless it was induced by improper conduct of the trustee or, at the time of its execution the beneficiary did
not know of the his or her rights or of the material facts relating to the breach. UTC 1009.
OTHER BENEFICIARY RIGHTS.
A court may remove a trustee for the usual causes, including serious breach of trust, lack of
cooperation among co-trustees substantially impairing administration, unfitness, unwillingness or
persistent failure to administer the trust effectively. New grounds for removal are (1) a substantial change
of circumstances or (2) removal is requested by all of the qualified beneficiaries, in either case provided
the court finds that removal best serves the interests of all of the beneficiaries, is not inconsistent with a
material purpose of the trust, and a suitable co-trustee or successor trustee is available. UTC 706(b)(4).
Situs change. Any beneficiary has the right to veto a non-judicial change of situs of
administration, requiring that there be no change absent court action. UTC 108(e).
Nonjudicial settlements. “Interested persons,” including beneficiaries, have the right to enter into
nonjudicial settlement agreements, provided the agreement does not violate a material purpose, and has
terms and conditions that could be properly approved by the court. UTC 111. They may take advantage
of virtual representation rules with respect to any matter involving a trust. UTC 303 and 304. Matters
that may be resolved by such a nonjudicial settlement agreement include interpretation or construction of
the terms of the trust, approval of a trustee’s report or accounting, direction to a trustee to refrain from
performing a particular act, a grant to the trustee of any necessary or desirable power, resignation or
appointment of a trustee, determination of a trustee’s compensation, transfer of a trust’s principal place of
administration, and liability of a trustee for an action relating to the trust.
CONCLUSION
UTC provides a bill of rights for beneficiaries, education for trustees, guideposts for courts, and,
perhaps most important of all, education for attorneys.É
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The Office of Trustee: Cotrustees, Removal,
Compensation and Delegation
by Edward C. Halbach, Jr.
[The following is the second of three essays summarizing and adapting UTC-relevant portions of the 1999 Joseph Trachtman Lecture (for the
American College of Trust & Estate Counsel): Halbach, “Uniform Acts, Restatements and Trends in American Trust Law at Century’s End,” 25
ACTEC Notes 101 (1999), updated and republished at 88 Calif. L. Rev. 1877 (2000).]
Introduction
Article 7 of the Uniform Trust Code contains
nine sections that include some departures from, and
numerous clarifications or reaffirmations of, various
principles of the common law relating to the office of
trustee. Also of immediate relevance to the fiduciary
office is a provision of Article 8 (Section 807)
dealing with trustees’ duties and responsibilities with
respect to the delegation of fiduciary authority.
The overall effort in these sections is to
modernize and clarify default trust law and to reflect
usual or generally desirable practices of lawyers
experienced in drafting trust instruments.
Compensation
The trustees of both charitable and private
trusts are normally presumed in this country to be
entitled to compensation. (English law, incidentally,
has long been and continues to be quite different.)
But how is fiduciary compensation to be determined?
The promulgation of the Uniform Probate
Code in 1969 accelerated the process of substituting
a rule of reasonable compensation for the previously
widespread use of statutory fee schedules for
executors and administrators. In the case of trustees,
the need and justification is even stronger for
abandoning statutory schedules or standard fees in
favor of compensation that is “reasonable under the
circumstances”, in the terms of Uniform Trust Code
Section 708(a). This “stronger case” is reflected in
the rules of some jurisdictions that continue to
provide statutory fees for personal representatives but
have adopted a statutory or common law rule of
reasonable compensation for trustees in the absence
of contrary provision in the terms of the trust.
An accompanying trend recognizes that
courts have equitable authority to authorize or require
departures from fee schedules prescribed either in the
terms of trusts or by statute when circumstances
show those schedules to be distinctly inadequate or
distinctly excessive. See, e.g., Restatement Third
of Trusts (hereafter simply Trusts Third) § 38,
Comments c and e. Specifically, Uniform Trust
Code Section 708(b) states that a trustee is entitled
to compensation in accordance with terms of the
trust but that “the court may allow more or less
compensation if: (1) the duties of the trustee are
substantially different from those contemplated
when the trust was created; or (2) the compensation
specified by the terms of the trust would be
unreasonably low or high.”
Furthermore, increased flexibility and room
for the exercise of sound discretion also need to be
and are being recognized in statutes, cases, and
literature with respect to both the compensation
entitlements of multiple trustees and the effects on
fiduciary compensation when trustees employ
agents (see Delegation, below) or advisers.
Statutory rules and arbitrary doctrine have often
impeded the exercise of common sense in these
situations. Accordingly, the need for flexibility is
emphasized and guidance is offered by an
increasing number of modern cases and statutes, as
well as treatise discussions. See, e.g., Trusts Third
§ 38, Comments c (especially Illustration 1) and i,
and also reporter’s notes thereto. The Comment to
Uniform Trust Code Section 708 describes the role
and nature of the flexibility allowed and
contemplated by its rule of “compensation that is
reasonable under the circumstances.”
Decision Making by Multiple Trustees
Although the law of charitable trusts has
generally provided for majority rule when the trust
has three or more trustees, the common law has
traditionally required unanimity of action by the
trustees of private trusts. Even in private trust
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situations, however, decision making by majority
vote is provided for by the terms of many trusts
having three or more trustees and is prescribed as
default law in a number of statutes.
Recognizing the drafting tendencies of estate
planners, a trend in legislation, and the satisfactory
long-term experience with the charitable trust rule,
Uniform Trust Code Section 703 provides a rule of
majority control for three or more co-trustees as the
preferred common law view in the absence of a
contrary provision in the terms of the trust. This is
similar to the default rule recently adopted by the
American Law Institute in Trusts Third § 39. This
departure from traditional common law had solid
support from the UT C drafting committee and from
the advisory groups for both the NCCUSL and ALI
projects.
Majority control ordinarily excuses a
dissenting trustee from liabilities resulting from
majority action, but it is important to note that it does
not relieve minority or dissenting trustees of their
normal fiduciary responsibilities. These include
duties to remain informed with regard to trust
matters, to participate in fiduciary deliberations, and
to take action as reasonable to enjoin or otherwise
prevent a breach of trust by the majority. (See
Restatement Second of Trusts §§ 184, 224.) The
Uniform Trust Code codifies these principles.
Specifically, Section 703(h) provides that a
dissenting trustee “who joins in an action at the
direction of the majority of the trustees and who
notified any cotrustee of the dissent at or before the
time of the action” is not liable for the action unless
it constitutes a “serious breach of trust”; and Section
703(g) requires that cotrustees “exercise reasonable
care to prevent a cotrustee from committing a serious
breach of trust” and “compel a cotrustee to redress a
serious breach of trust.” A serious breach of trust
may consist of a single act that is likely to cause
significant harm or involves flagrant misconduct, or
it may consist of a series of lesser breaches, none of
which individually constitutes a serious breach but,
when considered together, amount to serious
misconduct. See David M. English, The Uniform
Trust Code (2000): Significant Provisions and Policy
Issues, 67 MO. L. Rev 198, n.226 (2002).
Delegation
In the absence of a contrary provision in the
terms of a trust, traditional case law and treatise
pronouncements have grudgingly accepted
delegation by trustees only on narrowly confined
bases. Thus, for example, earlier Restatements
have allowed delegation only for “ministerial” acts
or to the extent the trustee has no reasonable
alternative, and they have specifically forbidden
delegation of the “power to select investments.”
Trusts Third, in its initial volume on The Prudent
Investor Rule, significantly changed the
Restatement position on the trustee’s duty with
regard to delegation, and this revised view was
thereafter codified in Section 9(c) of the Uniform
Prudent Investor Act.
The Uniform Trust Code does nothing to
disturb the prudent investor rule’s progress in the
matter of delegation by trustees, expressly
reaffirming this modernization of the trust law.
Specifically, Uniform Trust Code 807(a) states: “A
trustee may delegate duties and powers that a
prudent trustee of comparable skills could properly
delegate under the circumstances. The trustee shall
exercise reasonable care, skill, and caution in: (1)
selecting an agent; (2) establishing the scope and
terms of the delegation, consistent with the
purposes and terms of the trust; and (3) periodically
reviewing the agent’s actions in order to monitor
the agent’s performance and compliance with the
terms of the delegation.”
Section 807(c) adds: “A trustee who
complies with subsection (a) is not liable to the
beneficiaries or to the trust for an action of the
agent to whom the function was delegated.”
Sections 807(b) and (d) impose upon the agent “a
duty to the trust to exercise reasonable care to
comply with the terms of the delegation” and
provides that, by accepting “a delegation...from the
trustee,” the “agent submits to the jurisdiction of
the courts of this State.” (Article 9 of the Code and
its General Comment provide for and discuss
incorporation of the Uniform Prudent Investor Act,
which has already been enacted in most states.)
For better understanding of the rule of
Section 807 and this aspect of the Uniform Prudent
Investor Act, the rule and commentary of Trusts
Third should be helpful. Official commentary on
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investment activities in Trusts Third observes that
“the trustee has power, and may sometimes have a
duty, to delegate such functions and in such manner
as a prudent investor would delegate under the
circumstances.” An appendix to The Prudent
Investor Rule volume partially and preliminary
amends the rule of prior Restatement § 171
(eventually to be Trusts Third § 80); the amended
version states: “A trustee has a duty personally to
perform the responsibilities of the trusteeship except
as a prudent person might delegate those
responsibilities to others,” adding that “in deciding
whether, to whom, and in what manner to delegate
fiduciary authority ... and thereafter in supervising
agents, the trustee is under a duty ... to exercise
fiduciary discretion and to act as a prudent person
would act in similar circumstances.” Amended
Comment f of that appendix section adds that
delegation is “not limited to the performance of
ministerial acts” but that in “appropriate
circumstances delegation may extend, for example, to
discretionary acts, to the selection of trust
investments or the management of specialized
investment programs, or to other activities of
administration involving significant judgment....” A
trustee’s exercise of this discretionary authority is
judicially reviewable only for abuse, based on failure
to exercise the required degree of care, skill, or
caution.
The foregoing principles with regard to
delegation of trustees’ authority apply to the
employment and use of agents but do not necessarily
apply to possible situations of delegation among
cotrustees.
The latter involve different
considerations and require greater caution, and
therefore require qualification of the legal principles
to be applied. After all, a trustee cannot hire, fire,
and control a cotrustee. This matter will receive more
examination and elaboration later in the Trusts Third
project, but is addressed briefly in Section 703(e) of
the Uniform Trust Code. That section provides that
a trustee may not delegate to a cotrustee “the
performance of a function the settlor reasonably
expected the trustees to perform jointly,” and also
that ordinarily “a trustee may revoke a delegation
previously made.” Subsections (c) and (d) further
require a cotrustee to participate in the performance
of trustee functions “unless the cotrustee is
unavailable to perform the function because of
absence, illness, disqualification under other law, or
other temporary incapacity or the cotrustee has
properly delegated the performance of the function
to another trustee” but add that, if a cotrustee is
unavailable for one of the foregoing reasons “and
prompt action is necessary to achieve the purposes
of the trust or to avoid injury to the trust property,
the remaining cotrustee or a majority of the
remaining cotrustees may act for the trust.” The
Comment to subsection (e) recognizes that the rule
differs from that applicable agents under Section
807 of the Code because settlors generally select
cotrustees for a reason and with some expectations
concerning functions the trustees will perform
jointly, noting that these reasons and expectations
ought to control the scope of permitted delegation
between cotrustees.
Resignation, Removal, and Replacement of
Trustees
It is generally stated that a trustee may
resign only with the approval of the court, absent
other provision in the terms of the trust or consent
of all beneficiaries. Uniform Trust Code Section
705(a)(2) attempts to facilitate the process by also
allowing resignation by 30-day notice to “qualified
beneficiaries” (defined in Section 103(12)), but
otherwise continues the requirement of court
approval in Section 705(a)(2). Trusts Third (§ 36)
allows a trustee to resign simply “upon terms
approved by a proper court” in the absence of the
consent of all beneficiaries or other procedure
authorized in the terms of the trust.
Uniform Trust Code Section 704, codifying
what is probably the law of most states, provides
that a vacancy in a trusteeship need not be filled if
one or more cotrustees remain in office (subsection
(b)) but authorizes the court to appoint an additional
trustee (or a “special fiduciary”) “whenever the
court considers the appointment necessary for the
administration of the trust” (subsection (d)).
Incidentally, this latter provision recognizes the
court’s authority to appoint an additional or special
trustee as necessary even in the absence of a
vacancy in the trusteeship.
Section 704(c)
prescribes the order of priority when a vacancy is to
be filled, listing first a person designated as
successor trustee in the terms of the instrument,
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then a person appointed by “unanimous agreement of
the qualified beneficiaries,” and finally a person
appointed by the court.
Because traditional principles allowing
removal of trustees for cause have been sufficiently
flexible and generally satisfactory, Uniform Trust
Code Section 706 seeks mainly to provide modest
clarification and elaboration. (See further Trusts
Third § 37.) Without disregarding the settlor’s
intentions and proper interests in the matter, the
Section attempts particularly to heighten sensitivity
to the needs and best interests of the beneficiaries. In
fact, “Interests of the beneficiaries” is a defined term
in the Code, meaning the “beneficial interests
provided in the terms of the trust” (Section 103(7));
and Section 706(b), in enumerating grounds of
removal, expressly authorizes removal if “there has
been a substantial change of circumstances or
removal is requested by all of the qualified
beneficiaries” and “the court finds that removal of
the trustee best serves the interests of all the
beneficiaries and is not inconsistent with a material
purpose of the trust, and a suitable cotrustee or
successor trustee is available.”
Concluding Observations
In addition to the above matters, Article 7
(Office of Trustee) also deals, in a quite conventional
manner although with what may sometimes be
helpful clarification or elaboration, with such
subjects as accepting or declining trusteeships, the
bonding of trustees, reimbursement of expenses, and
delivery of property by or on behalf of a former
trustee. Even these provisions should have value in
states in which these areas of the trust law have not
been developed either through appellate decisions or
by earlier legislation.
In these and other respects, the matters
discussed throughout this partial review of the
Uniform Trust Code represent significant progress in
setting out clear statutory law and in modifying
various features of the common law that have been
widely believed to be out of date or otherwise less
than satisfactory.É
FINANCIAL PLANNING
ASSOCIATION ENDORSES
UNIFORM TRUST CODE
The Financial Planning Association
(“FPA”) fully endorsed the Uniform Trust
Code for adoption in the states. The FPA
spent a considerable amount of time at both
the national and local level scrutinizing and
discussing the Uniform Trust Code and the
Uniform Prudent Investor Act and came to
the determination that “both of these
uniform acts would benefit consumers and
professionals in the financial services
profession.”
The Financial Planning Association is
the largest organization in the United States
representing financial planners and affiliated
firms. FPA is domiciled in Washington,
D.C., with administrative offices in Atlanta
and Denver, and represents approximately
29,000 financial planners in the United
States. The Uniform Trust Code has also
received endorsements from the AARP, the
American Bar Association and the ABA
Section on Real Property, Probate and Trust
Law.
Page 10 of 11
UTC QUESTIONS ANSWERED:
Principal Place of Administration - Section 108
Why is determining a trust’s principal place of administration important?
•
It may determine which state’s income tax applies to the trust.
•
It will establish which court has primary jurisdiction concerning trust
administrative matters or venue for bringing a proceeding.
•
Locating a principal place of administration in a particular jurisdiction also makes
it more likely that the particular jurisdiction’s law will govern the trust.
What has caused the difficulty in determining a trust’s principal place of administration?
Trust administration has become more complex because cotrustees may be located in different
states, or a corporate trustee’s personal trust officers may be located in one state, its investment division in
another, and its operations facilities yet somewhere else. Also, a variety of nontrustees, such as advisors
and trust protectors, may play a role in the trust’s administration.
Does the Uniform Trust Code handle these issues?
Concluding that the fact situations were simply too diverse to allow the development of a
straightforward statutory test, the drafters of the UTC did not attempt to define principal place of
administration. However, the UTC otherwise facilitates the locating of a trust in a particular jurisdiction.
In what ways does the Code determine the location of a trust?
First, a provision in the trust terms designating the principal place of administration is valid and
controlling if a trustee’s principal place of business is located in or a trustee is a resident of the designated
jurisdiction, or all or part of the trust’s administration occurs in the designated place.
What happens if the trust fails to address the subject?
The UTC specifies a procedure for transferring the principal place of administration, whether to
another state or country. The transfer must facilitate the trust’s administration, and the trustee must
inform the qualified beneficiaries of the transfer at least sixty days in advance.
What if a qualified beneficiary objects?
If a qualified beneficiary objects within the date specified in the notice, a trustee must obtain a
court order. “Qualified beneficiary” is a defined term in the UTC and excludes a beneficiary with a
remote remainder interest.
Under what circumstances are trusts moved to other states?
Sometimes moving a trust offers the advantage of a lower income tax rate. It may also become a
necessity if the trustee or beneficiaries have changed their residence. But, movement of trusts is also
triggered by merger of financial institutions which are sometimes followed by the elimination of local
trust operations, and at least in the perception of some beneficiaries, by less personal and attentive
service.
What is the default rule in the UTC?
The mixed reviews on the benefits of transferring a trust caused much debate on the appropriate
default rule. The final provision was a compromise. It allows the trustee to transfer the principal place of
administration upon 60 days advance notice to the qualified beneficiaries, who may block the transfer by
filing an objection with the trustee.
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