REAL PROPERTY, PROBATE AND TRUST JOURNAL
FALL 2005
VOL. 40, NO. 3
TABLE OF CONTENTS
SUPERMARKET USE AND EXCLUSIVE CLAUSES, PART THREE—
HORRENDOUS WORLD WAR REMOLDS THE AMERICAN
SUPERMARKET
Emanuel B. Halper
403
PLANNING WITH DOMESTIC ASSET-PROTECTION
TRUSTS: PART II
Richard W. Nenno
477
THE INTERRELATIONSHIP BETWEEN THE ELECTIVE
SHARE AND THE MARITAL DEDUCTION
Donna Litman
539
SPENDTHRIFT AND DISCRETIONARY TRUSTS: ALIVE
AND WELL UNDER THE UNIFORM TRUST CODE
Alan Newman
567
REAL PROPERTY, PROBATE AND TRUST JOURNAL
VOLUME 40
FALL 2005
NUMBER 3
EDITOR
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The Rockefeller Group
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First American Title Insurance Company
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REAL PROPERTY, PROBATE AND TRUST JOURNAL
VOLUME 40
FALL 2005
NUMBER 3
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SUPERMARKET USE AND EXCLUSIVE CLAUSES,
PART THREE—HORRENDOUS WORLD
WAR REMOLDS THE AMERICAN SUPERMARKET
Emanuel B. Halper*
Editors’ Synopsis: This Article provides specific insight into the history
of retail trends and the retail enterprise generally. Although this Article
is particularly useful to a real estate lawyer seeking a guide to the
drafting and use of supermarket use and exclusive clauses in leases,
Professor Halper has ensured that any lawyer, entrepreneur, or historian will find this Article a fascinating and useful read by highlighting
the development of the American small business model in the period of
pre-War mobilization leading up to the Japanese attack on Pearl Harbor.
I.
WHERE WE’VE BEEN—PARTS ONE AND TWO . . . . . . . 404
A. The First Phase (1930 through 1936) . . . . . . . . . . . . . . . .
1. Store Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. Availability of Parking Facilities . . . . . . . . . . . . . . . .
3. Credit and Delivery Policy . . . . . . . . . . . . . . . . . . . . .
4. Product Mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5. In-Store Service Policy . . . . . . . . . . . . . . . . . . . . . . . .
6. Price Policy and Cost Structure . . . . . . . . . . . . . . . . .
B. The Second Phase (January 1, 1937 through August 31,
1939) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1. Efficient Merchandise Movement . . . . . . . . . . . . . . . .
2. Store Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. Store Ambiance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. The Third Phase (September 1, 1939 through December
7, 1941) Begins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1. Supermarkets Progress . . . . . . . . . . . . . . . . . . . . . . . .
a. Progress in Store Size . . . . . . . . . . . . . . . . . . . . . .
b. Progress in Product Mix . . . . . . . . . . . . . . . . . . . .
c. Progress Toward Self-Service . . . . . . . . . . . . . . .
d. Progress as to Ambiance . . . . . . . . . . . . . . . . . . .
*
409
409
409
409
410
410
410
411
411
412
412
413
413
413
413
413
414
President, American Development & Consulting Corp; Special Professor of Law,
Hofstra University School of Law; Author, GROUND LEASES AND LAND ACQUISITION
CONTRACTS (1988) and SHOPPING CENTER AND STORE LEASES (rev. ed. 2001). I happily
share credit for this Article with my son and colleague, Dan Halper. Dan did a good deal of
the research, wrote part of the text, and edited the final draft.
404
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
II.
THE THIRD PHASE (SEPTEMBER 1, 1939, THROUGH
DECEMBER 7, 1941) CONTINUES—MOBILIZATION
FOR WAR AND ITS EFFECT ON THE SUPERMARKET
BUSINESS MODEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415
A. Critical Shortages with Surprising and Far-Reaching
Effects on the Supermarket Industry . . . . . . . . . . . . . . . . .
B. The Fear of Food Surpluses Abates, and the Fear of Food
Shortages Mounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1. Raw Material Shortages . . . . . . . . . . . . . . . . . . . . . . .
a. Aluminum Shortages . . . . . . . . . . . . . . . . . . . . . . .
b. Steel Shortages . . . . . . . . . . . . . . . . . . . . . . . . . . .
c. Tin Shortages . . . . . . . . . . . . . . . . . . . . . . . . . . . .
d. Rubber Shortages . . . . . . . . . . . . . . . . . . . . . . . . .
2. Labor Shortages . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
a. Conversion to Defense Production . . . . . . . . . . . .
b. Conscription . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Unfinished Tasks for the Supermarket Industry on the
Eve of Pearl Harbor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. The Last Steps on the Road to War . . . . . . . . . . . . . . . . . .
1. Roots of Japanese-American Hostility . . . . . . . . . . . .
2. Japan and the United States Drift Closer to War . . . .
3. Japan Gets Ready to Attack the United States . . . . . .
4. Progress Assessment by Defense Production
Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5. December 6, 1941, the Day Before X Day . . . . . . . . .
6. December 7, 1941, the Day that Lives in Infamy . . . .
419
420
428
430
433
436
438
440
440
441
448
449
449
452
455
458
460
461
III. THE FOURTH PHASE—WORLD WAR II SHORTAGES
SHAPE THE SUPERMARKET BUSINESS MODEL . . . . . . . . 465
A. America Declares War and War is Declared on America .
B. America Displays Its Own Ugly Side . . . . . . . . . . . . . . . .
C. Mobilization for War Leads to Consumer Goods Shortages and Changes in the Supermarket Business Model . . .
1. Mobilization for All-Out War Leads to Shortages . . .
465
467
469
469
I. WHERE WE’VE BEEN—PARTS ONE AND TWO
Here I am again with another article on the supermarket. It’s the
third installment of a five-part series. The first was published in the
FALL 2005
Supermarket Use and Exclusive Clauses, Part Three 405
Hofstra Law Review in 20011 and the second in the last issue of this
Journal2. This series focuses principally on what some insist is a simple
question, what is a supermarket. Do you wonder why I need five articles
to answer that question and believe that a five-year old could do a perfectly satisfactory job in a paragraph or less? When he was a five-year old,
my son (now my collaborator and a real estate lawyer in his own right)
thought he could define supermarket chain at least as well as I could.
Son: “Dad, I know what a supermarket chain does.”
Father: “Really! That’s terrific. What does it do?”
Son: “A supermarket chain keeps the customers away from
the cash register when the cashier takes her break.”
He had a good sense of humor even then.
Humor aside, what’s your answer? To some people, supermarket
and grocery store are interchangeable words. They aren’t. Some people
believe that a department store that sells food is a supermarket. It isn’t.
Some people have a hard time distinguishing between a drugstore that
sells food and a supermarket that sells drugs and believe they are the same.
They aren’t.
Defining the supermarket is not an academic pursuit or intense
preparation for trivia games. The word, supermarket, finds its way into
countless shopping center lease use and exclusive clauses, and millions of
dollars can hang on the definition. Experienced lease negotiators and
readers who waded through the first and second installments of this series
know how important use and exclusive clauses are. They delineate product
boundaries for the merchants of a shopping center and preserve diversity
among the merchants of the shopping center, a singularly important aspect
of a shopping center’s customer appeal. The use clause empowers the
landlord to restrict the kinds of merchandise to be sold by the store governed by the lease. By enforcing use clause restrictions, a landlord can
limit the extent to which the shopping center’s tenants compete with each
other or mimic each other’s merchandise mix and style. Conversely, the
exclusive clause is an important tool for tenants seeking to bar landlords
from leasing space to competitors or merchants selling repugnant stuff like
X-rated videos.
Use and exclusive clauses shouldn’t be negotiated carelessly. A
poorly drafted use clause can cause no end of trouble for a landlord
1
Supermarket Use and Exclusive Clauses, 30 HOFSTRA L. REV. 297 (2001).
Supermarket Use and Exclusive Clauses, Part Two–The Industry Gains a Foothold,
40 REAL PROP. PROB. & TR. J. 191 (2005).
2
406
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
including an imbalance in tenant mix, contentious lawsuits by tenants
seeking to enforce exclusive clauses, and add considerable difficulty to the
leasing process. From the tenant’s point of view, a poorly drafted exclusive clause can hamper or even destroy its sales and profits.
To avoid the problems shopping center landlords and tenants face as
a result of poorly drafted use and exclusive clauses, lease negotiators need
to draft clauses that accurately and appropriately regulate the tenant’s
business operations. To get there, they obviously need to learn what the
tenant’s business is—but not only that. They need to anticipate the twists
and turns the tenant’s business might take in the future. That’s the tough
part.
Our best guide to future shifts in retail operations is to trace the
history of a retail enterprise from its origins to the present. Long-term
trends in product mix, store size, and sales techniques can provide insightful clues into potential future changes. Retail enterprises are in constant
flux. Merchants change their sales methods. They introduce new products,
and they discard others. Sometimes the shift works well and boosts sales
and profits—but not always. Yesterday’s discarded technique often
bounces back with a new name and becomes the fresh, new, and exciting
way of doing business.
Many retail businesses burst on the scene with unique solutions to
consumer needs and, at first, succeed wildly. Some lose their vitality by
expanding too quickly and departing from the original business plan that
made them so successful in the first place. They are often resuscitated by
returning to their roots and reviving the original business plan.
Although lease negotiators aren’t prophets, they have no choice but
to take future changes in retail operations into account when they draft use
clauses. Even if a use clause doesn’t constrict the tenant’s current operations, an excessively narrow use clause will constrict its ability to refine its
operations to take advantage of future profit opportunities and meet future
competition. Similarly, an excessively broad exclusive clause will impair
the landlord’s ability to lease space in the future. For these reasons and
others, lease negotiators debating use and exclusive clause provisions that
regulate the activities of a supermarket in a shopping center and restrict
the supermarket’s competition should know what a supermarket is and
what it might become in the future.
To get there, they need to know where this industry started, and how
its business model was shaped. The supermarket industry didn’t spring
into being as a result of a business school professor’s PhD thesis. It was
spawned from a cataclysmic economic decline we call the Great Depres-
FALL 2005
Supermarket Use and Exclusive Clauses, Part Three 407
sion and shaped by the devastating shortages of World War II. The Great
Depression and World War II played such important roles in the development of this food distribution institution that the supermarket is best understood in the context of these momentous events.
Supermarkets performed splendidly during good times and bad.
They succeeded during the Great Depression despite, and to a degree
because of, the dismal economic conditions. The ideas that led to their
business model were conceived by a low level grocery chain store assistant manager named Michael Cullen in the aftermath of the 1929 stock
market crash. The crash touched off the Great Depression which provided
fertile soil for his business plan. The unemployment and the pressing need
to make food more affordable set the stage for Cullen and the other
founders of the supermarket industry. Their low price policy made it
possible for impoverished consumers to survive the economic crisis.
Supermarkets also succeeded during the economic thaw of the Defense
Mobilization Period (the period between the Nazi German invasion of
Poland on September 1, 1939 and the Japanese attack on Pearl Harbor on
December 7, 1941), even as war brought death and destruction to Europe
and Asia. Stores got much larger and more comfortable in the Defense
Mobilization Period. Important technological innovations were introduced.
When the economic climate shifted again with the advent of World War II,
the industry transcended the era of its origins and the conditions that
triggered its initial success. America’s entry into the War wrought drastic
changes to its civilian economy. The economic thaw of the Defense
Mobilization Period turned first to a rapid meltdown after the War began
and unemployment virtually disappeared. The chronic oversupply of food
morphed into a series of chronic shortages during the War. The supermarket’s broad product mix and depth of merchandise helped consumers cope
with food shortages and made shopping easier for women working long
hours in defense plants in addition to their housekeeping chores.
Supermarkets performed splendidly when food was plentiful and
when food was scarce. America’s food supply and the ability of American
consumers to pay for it were out of balance during the entire sixteen-year
period between the stock market crash and the end of World War II. Food
was plentiful during the Great Depression, but, in this era of poverty and
unemployment, a great many Americans went to bed hungry because they
didn’t have the money to buy food. Even as unemployment receded during
the Defense Mobilization Period, food surpluses grew, but many Americans still couldn’t afford to buy much of it and some none at all. The food
supply available for the civilian consumer declined significantly—in part
408
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
as a result of the diversion of a vast portion of America’s wartime resources from the civilian population to the armed services and foreign aid
programs. Paradoxically, consumer purchasing power advanced considerably during World War II. Supermarket operators met the challenge of the
new imbalance in part because of the convenience of one stop shopping
and consumer acceptance of the self-service policies promulgated by the
industry’s founding fathers. In part, supermarkets succeeded during the
War because of adjustments to store operations made necessary by the
War—adjustments that bonded with the founders’ business model and still
play a role in making the supermarket what it is today.
I provided a healthy dose of information about the supermarket’s
birth and development during the Great Depression and began my discussion of the events leading to the War in the first and second parts. Part One
concentrated on the birth of the industry, its founders, and the early years
of the Great Depression. In Part Two, I focused on the industry’s early
growth and innovative techniques incorporated in the supermarket business model in the later years of the Great Depression. Part Two also
initiated my discussion of the pre-War defense mobilization and how it
influenced the U.S. economy and the supermarket industry.
That discussion continues here in Part Three and includes a review
of the continued development of the supermarket’s business model in the
period between September 1, 1939, when Germany’s invasion of Poland
touched off World War II in Europe, and the December 7, 1941 Japanese
attack on Pearl Harbor. This is the period in which the gigantic food surpluses that had plagued the farm community for two decades dwindled and
sowed the seeds of the wartime shortages that played such an important
role in shaping the character of the supermarket business. This Part Three
traces the transition between food surpluses and food shortages, the
transition between massive unemployment and labor shortages, and the
rise of raw material shortages. It’s the link to Part Four, which will provide
details on how the supermarket business model was refined by its need to
adapt to the new wartime reality.
Wait a moment; we’re getting ahead of ourselves. Before we address
the transition between the Depression and the War in some detail, let’s
take a quick look backwards. To make life easier for those of you who
haven’t read them yet, here’s a brief summary of the Parts One and Two of
this series.
FALL 2005
A.
Supermarket Use and Exclusive Clauses, Part Three 409
The First Phase (1930 through 1936)
The business model adopted by the very earliest supermarkets in the
first phase of its development (1930 to the end of 1936) had these six
characteristics in common:
1. Store Size
The very earliest supermarkets were big stores in comparison to the
food markets they supplanted (grocery stores, butcher shops, produce markets, dairy stores, and combination stores). In 1930, when the first supermarket opened for business, America’s principal food retailers were grocery stores and combination stores. Grocery stores sold groceries (nonperishable food and beverage items including canned food and liquor
where legal) and nonfood household provisions like soap, cleaning supplies, and toilet paper. Some grocery stores also sold milk, cheese, cream,
butter, and other dairy products. The size of an average grocery was
approximately 600 square feet or about one-fourth of the size of a contemporary shopping center small store. Combination stores sold produce and
meat (including poultry) as well as groceries. On average, they contained
approximately 2,500 square feet of floor area. Although I don’t know the
exact size of the first supermarket, my research leads me to believe it
contained approximately 7,000 square feet of floor area. No 7,000 square
foot store could be considered a supermarket today, but, in 1930, that was
really big—at least in the northeast. Big was good, bigger was better, and
bigger was to come soon. Only two years later, another supermarket opened for business and that one, with 50,000 square feet of floor area, was
gigantic for its era.
2. Availability of Parking Facilities
From the outset, supermarkets offered free parking facilities to their
customers. The very first supermarket didn’t own or lease a parking lot,
but it sought and found a location where it could be virtually assured of
ample free curbside parking. After that, supermarkets tended to provide
free parking on parking facilities they owned or controlled.
3. Credit and Delivery Policy
Until supermarkets came on the scene, most American food markets
(including grocery stores and combination stores) were quite willing to extend credit to their customers. You could walk into a grocery store and
walk out with enough food to feed your family for a day or two without
parting with a penny. These very accommodating retailers were also
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
ready, willing, and able to deliver your order free of charge. If you were
generous, you’d tip the delivery boy, and, if you weren’t, you could get
away with a thank you. As you have probably come to realize, nothing
much in life is really free. Consumers paid for these services in the form of
higher prices. The new supermarkets were different. They wouldn’t let
you leave the store without paying, and they usually refused to deliver
anything. Instead, they offered free parking so that consumers could easily
take their purchases home in their own automobiles.
4. Product Mix
Although grocery stores sold nonfood items, nonfood items were a
minor part of their merchandise mix. Soap, cleaning supplies, and toilet
paper were among the most popular grocery store nonfood items. The
earliest supermarkets vastly expanded the number and quantity of nonfood
items in the store.
5. In-Store Service Policy
Grocery stores and combination stores were full service stores. Most
of the food for sale was displayed on shelves fastened to the side and rear
walls of the store. Counters were placed in front of each side wall (sometimes only one of them), and retail clerks were stationed between the
counters and the shelves. Customers couldn’t fetch what they wanted.
They needed to gain a retail clerk’s attention and present a shopping list
either orally or in writing. The retail clerk did the fetching. Then he bagged the merchandise and tallied the total purchase price. If the sale was for
cash, the customer paid him. If the sale was for credit, the clerk made a
notation in the store’s books of account. Early supermarket operators
adopted a completely different system for their grocery departments—selfservice. Retail clerks were eliminated from the grocery departments, and
the food was displayed on shelves and tables within easy reach of customers who would fetch for themselves and take the things they fetched to a
cashier at a checkout stand. The system has been so widely adapted that
many people have no idea that self-service was virtually nonexistent 100
years ago.
6. Price Policy and Cost Structure
Larger stores generated larger sales, and the larger sales volume
made it possible to buy food and household provisions at volume discounts. Although costly in their own right, the parking facilities made it
possible to dispense with the much costlier delivery services. Eliminating
FALL 2005
Supermarket Use and Exclusive Clauses, Part Three 411
credit bolstered the supermarket’s cash position and made it possible for
the merchant to buy merchandise for cash, and buying for cash lowered
the cost of the goods purchased. Another benefit of eliminating credit was
the elimination of credit losses. Obviously, some people to whom credit
was extended defaulted, and retailers suffered a great deal from the defaults. Expanding nonfood items had a positive effect on the bottom line.
Nonfood markups were higher than food markups, and the expanded stock
of food in the larger stores stimulated nonfood sales. With self-service in
place, the supermarkets needed far fewer retail clerks and reduced their
labor costs materially. Each of these policies reduced the supermarket’s
cost structure. A reduced cost structure made a reduced price structure
possible, and the supermarkets did just that. Supermarket prices were
much lower than grocery store prices, and people living near supermarkets
flocked to them. The Great Depression had begun, virtually everybody
was short of cash, and saving money on food was like getting manna from
Heaven. Sales volume zoomed.
B.
The Second Phase (January 1, 1937 through August 31, 1939)
Although the supermarket industry made great strides during the
first phase of its development, many objectives of the early industry
pioneers eluded their grasp. By 1937, the industry had progressed considerably, many new and innovative entrepreneurs had entered the field, and
a second phase of the industry’s development began. Supermarket operators wrestled with a wide array of problems and made significant progress
toward solving them. One of these problems was finding a better way of
moving groceries from the grocery department shelves to the customers’
automobiles in the parking lot, and the other was to improve the appearance and size of the stores.
1. Efficient Merchandise Movement
Early supermarket shoppers had a hard time moving the food they
bought between the grocery department and the parking lot. As they entered the store, they were issued a basket to help them carry the stuff they
bought, but the basket was not very helpful. No matter how large a basket
they got, their purchases were limited by their physique. Considering that
the vast majority of supermarket customers were women and that many of
them brought young children with them on shopping expeditions, customers tended to leave the store with a lot less than if some person or some
thing carried the merchandise for them. Sylvan Goldman solved that
problem in 1937 with his invention of the folding rollable basket carrier,
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the precursor of the contemporary nesting shopping cart. With a folding
basket carrier, essentially a basket on wheels, even the tiniest supermarket
shoppers could move heavy loads of merchandise from the store shelf to
the checkout stand and then to an automobile with ease but for one formidable problem, the need to open and close an exit door manually.
2. Store Size
Early supermarket operators were independent entrepreneurs and
didn’t have the considerable resources of the nation’s most powerful food
merchants, the national grocery store chains. Nevertheless, the independents operated supermarkets in quarters that were much bigger than the
grocery stores and other food markets they rivaled and replaced. In part,
because of their limited resources, most of the supermarkets launched by
the independents weren’t as large as they could have been. In 1937, large
grocery chain store organizations plunged into the supermarket business.
They had clung to their puny combination stores and their tiny grocery
stores in the vain hope that the supermarket would turn out to be a passing
fancy but finally saw the handwriting on the wall. The grocery chains had
the power and the money to compete head to head with the perky independent merchants who had outwitted them and doomed their outdated
business plans. They also had the power and the money to build much
larger supermarkets than most of those operated by the independents.
However, the chain store operators were too conservative to go all the
way. Most of the supermarkets they built in the industry’s second phase of
development were small when compared to those of the feisty independents. The independents were opening newer and larger stores.
3. Store Ambiance
The first supermarket opened in a converted garage and the second
in a converted factory. Many other early supermarkets of that era opened
in dilapidated buildings that had outlived their life expectancy and had
been discarded. What attracted the early supermarket entrepreneurs about
a store location was cheap rent—very cheap. Improving the appearance
and comfort of the supermarket was bound to yield greater sales per
square foot of floor area and thereby reduce the proportion of the sales
dollar allocated to rent. As the industry expanded and progressed in the
second phase, many supermarkets were getting less unattractive and less
uncomfortable, but not many of them were either attractive or comfortable.
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C.
Supermarket Use and Exclusive Clauses, Part Three 413
The Third Phase (September 1, 1939 through December 7, 1941)
Begins
1. Supermarkets Progress
a. Progress in Store Size
Supermarkets were getting bigger in the United States as World War
II started in Europe. Ralph’s Grocery Company, a southern California
chain, launched stores as large as 14,000 square feet of floor area.3 Carl
Markets’ Tamiami Trail Store boasted about its 24,050 square foot
building.4
b. Progress in Product Mix
Nonfood departments grew a bit in the short period between the
German invasion of Poland on September 1, 1939, and the Japanese attack
on Pearl Harbor on December 7, 1941. Most notable was Food Fair’s drug
departments. Drug departments were launched in nine of Food Fair’s Baltimore supermarkets in 1940. Like the full service drugstores of that era,
Food Fair drug departments sold a lot more than drugs. School supplies
were among a long list of products sold by Food Fair that were neither
food nor drugs.5
c. Progress Toward Self-Service
Although self-service has been an essential component of the
supermarket business model for most of the industry’s history, most early
supermarkets were willing to experiment with this revolutionary distribution technique only in their grocery departments. They could think of a
long list of reasons why they couldn’t apply self-service to other
departments. They resisted converting produce departments to self-service
for fear of customers squeezing tomatoes and peaches. They hesitated
introducing self-service in drug departments in the expectation that customers would steal small items. Self-service meat departments were
beyond contemplation because they assumed that women would not buy
meat unless it was cut and wrapped while they watched. They also as-
3
RICHARD LONGSTRETH, THE DRIVE-IN, THE SUPERMARKET, AND THE TRANSFORMATION OF COMMERCIAL SPACE IN LOS ANGELES, 1914-1941 118 (1999).
4
See New Miami Super Has 16,650 Sq. Ft. of Air-Conditioned Space, PROGRESSIVE
GROCER, Aug. 1940, at 80.
5
See The Industry in 1940—A Panoramic Review, SUPER MARKET MERCHANDISING,
Jan. 1941, at 8.
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
sumed that fresh baked goods would grow moldy in display cases without
a bakery clerk to fetch and slice them. On and on.
Nevertheless, as the United States mobilized in preparation for the
day it would become a World War II combatant, self-service operations
spread to drug departments at some supermarket chains. J. Weingarten
tried it and reported booming sales. Weingarten customers parted with $1
million (big bucks then) at that company’s self-service drug departments.
Self-service produce departments also gained popularity.6
d. Progress as to Ambiance
Supermarket operators were more prosperous after September 1,
1939—in part because mobilization-related sales were stimulating the U.S.
economy, and the prosperity led them to invest in more attractive and
more comfortable facilities. Sitting on a 130 by 185 foot footprint, Carl
Markets, a Florida-based regional chain, claimed its new 24,050 square
foot Tamiami unit was the largest air-conditioned supermarket in the
world. Ralph’s Grocery Company’s supers at 3635 Crenshaw Boulevard
and 8575 West Third Street in Los Angeles were smaller but also airconditioned.7 Fluorescent lighting was introduced at Handy Andy’s new
San Antonio store8 and Kash and Karry Markets’ Rock Island store.9
A significant step toward the development of efficient and attractive
supermarket buildings occurred in that period. Unlike a considerable number of 1930s supermarkets lodged in timeworn factory buildings and
garages, the first Publix supermarket that opened for business in Winter
Haven, Florida in 1940 was attractive as well as comfortable. Its very
attractive appearance heralded the beginning of a new era. With full-length
windows framed by white stucco exterior walls, customers could see what
was going on inside before they entered the store. When they entered, they
were treated to a black marbled entranceway and interior walls decorated
with pastel colors. Way ahead of its time in comfort and efficiency, it
featured air-conditioning, fluorescent lighting, customized dairy cases,
frozen food cases, and a chilled water fountain. However, its most innovative and attractive elements were its automatic doors. Most likely, they
were among the first automatic doors through which supermarket customers ever passed. As they do today in almost all supermarkets, Publix’s
6
See id.
LONGSTRETH, supra note 3, at 117, 118.
8
See The Industry in 1940, supra note 5, at 44.
9
See A Super Remodels, PROGRESSIVE GROCER, Nov. 1940, at 48.
7
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Supermarket Use and Exclusive Clauses, Part Three 415
automatic doors opened as customers approached and closed as they
passed. Supermarket customers expect them now, but then, they were
magical. They dazzled a public that had never seen or heard of such
things.
Most importantly, the automatic door allowed the supermarket industry to overcome the last obstacle that impeded the efficient flow of
merchandise from the store’s shelves to the customer’s automobile. The
invention of the foldable rolling basket carrier, the direct ancestor of the
nesting shopping cart, had eased the flow of merchandise between the
store shelves and the checkout stand. Shoppers could fetch the things they
wanted without waiting on line, roll their basket carriers comfortably to
the checkout stand, and pay for what they purchased with relative ease.
However, until the first Publix, they faced another potential obstacle as
they approached the exit door. There, they might well confront a line of
fellow shoppers waiting their turn to wrestle with a manually operated exit
door as they pushed their basket carriers and pulled their children. George
Jenkins, founder of the Publix supermarket chain, changed all of that.
II. THE THIRD PHASE (SEPTEMBER 1, 1939, THROUGH
DECEMBER 7, 1941) CONTINUES—MOBILIZATION FOR WAR
AND ITS EFFECT ON THE SUPERMARKET BUSINESS MODEL
It’s 1940, and the European phase of World War II is underway.
Czechoslovakia and Austria are now part of Greater Germany. Germany
had swallowed them without a military invasion. Nazi German warplanes,
tanks, and armored vehicles had already swept through Poland. Adolf
Hitler’s German armies had also conquered Norway, Denmark, Belgium,
and the Netherlands. France is tottering. A military clique is rapidly
gaining power in Japan which has already conquered Manchuria and large
parts of China. Benito Mussolini, Italy’s Fascist dictator, aligned with the
German Nazis and Japanese military cliques, is also on the warpath. Although we aren’t at war with any of them (not yet), the threat of war in the
imminent future is realistic.
The startling cruelty of German troops in Poland shocked the conscience of the American public but not enough to convince them that the
United States should aid the victims of aggression. Although life would
soon be very different in America, most Americans play, work, and live as
if they were hermetically shielded from the horrors of war by two impenetrable barriers, the Atlantic Ocean and the Pacific Ocean. America is
emerging from the ten-year long Great Depression, an economic downturn
of catastrophic proportions. People who were unemployed and broke for
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
years are finding jobs, earning money, and yearning to spend it. Why worry about wars in distant lands?
America is unprepared, and the President of the United States is
worried. Although vast oceans separate the United States from Europe and
Asia, he knows that warships and warplanes can bridge the oceans. He
also knows that the United States is pitifully feeble militarily. Equally
feeble is the state of America’s munitions industries. They are tiny and
cannot produce enough warplanes, warships, tanks, and other armaments
to equip a modern military force—not by far. America needs to expand its
armed forces on the double, and it needs to expand its arms industries on
the double. It can’t choose between these courses of action. It needs to do
both. President Franklin Delano Roosevelt put it this way in a July 21,
1941 radio address: “[I]n modern war men without machines are of little
value . . . machines without men are of no value at all.”10
Could America have defended itself in 1940 against attack by
Germany, Japan, or both? Not easily. Although they had grown a bit since
1933, the armed services of the United States were not very potent in
1939.11 Their size and quality had declined precipitously since America’s
triumph in World War I. Little had been done to restaff, reequip, and
resupply the armed services since the post-World War I demobilization,
and America wasn’t doing much to bolster them at the time. America’s
war production industries, the engine that could propel a serious effort to
reequip and resupply the armed forces, had dwindled after many years of
neglect. Chickens had come home to roost.
By 1940, the U.S. Army’s active duty personnel had increased by
24.44 percent from its 1933 level, but its 1940 roster numbered only
168,000 despite the increase. Although the Army could have been expanded then to as many as 500,000 men by calling up reserves, it was still
a puny force. The Polish army was larger than that when it was roundly
trounced by the Germans in less than a month. The Dutch, Spanish, and
Greek armies were also larger than the U.S. Army.12 More important, the
German Army was much larger than the U.S. Army. For months before its
June 27, 1941 invasion of the Soviet Union, the German Army was able to
deploy a gigantic force of 3.3 million men poised for action.13
10
KENNETH S. DAVIS, F.D.R. THE WAR PRESIDENT 235 (2000) (quoting Franklin D.
Roosevelt).
11
See DONALD M. NELSON, ARSENAL OF DEMOCRACY 28 (1946).
12
See id. at 28-33.
13
See WILLIAM L. O’NEILL, A DEMOCRACY AT WAR 26 (1993).
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Supermarket Use and Exclusive Clauses, Part Three 417
America’s arms industries were tiny in 1939,14 and the equipment
and supplies of its armed services were inadequate. The United States
could muster only 301 bombers that year, a lamentable number when
compared to the 3,353 medium and heavy bombers at the disposal of the
German Air Force and the 660 available to the Japanese.15 Only 2,800
military airplanes were produced in the United States in 1939, and 2,200
of them were trainers. America’s shipyards were building only about four
ships per month.16 Some of the U.S. Army’s equipment was antiquated. Of
the 2.1 million rifles stored in U.S. arsenals in 1939, 900,000 were Springfields and 1.2 million were British Enfields. The prototype for the Springfields was fresh and new in 1903,17 and the British Enfields were the same
kind of rifle the British Army used in the Boer War (1899 to 1902).18
President Franklin Delano Roosevelt cast an overly optimistic spin on
America’s military strength after personally inspecting six American Army divisions on August 17, 1940 in Ogdensberg, New York.19 He proclaimed it “the largest gathering of American troops . . . since World War
I.”20 What he saw was a scrawny collection of 94,000 soldiers. Many of
them were in poor physical condition and had never fired a real rifle.21
14
See generally FRANCIS WALTON, MIRACLE OF WORLD WAR II 23, 25 (1956). DORIS
KEARNS GOODWIN, NO ORDINARY TIME 23 (1994).
15
ELIOT JANEWAY, THE STRUGGLE FOR SURVIVAL 23 (1951).
16
WALTON, supra note 14, at 25.
17
Patrick Sweeney, Firearm, AMERICAN HERITAGE, Oct. 2004, at 29, 30. The 1903
version of the Springfield rifle was adopted by the U.S. Army in the aftermath of the
Spanish American War. During the War, the Spanish Army’s German Mauser rifles
demonstrated greater fire power than the U.S. Army’s older Springfields. The U.S. Army
sought to leapfrog the German technology with a new weapon that incorporated the
Mauser’s best features. The new 1903 Springfield looked like the Mauser and functioned
like the Mauser. It was so much like the Mauser that designer, Paul Mauser was able to
buttress his cash with royalties from the U.S. government.
18
WALTON, supra note 14, at 5.
19
GOODWIN, supra note 14, at 142, 143.
20
Two New York Times articles in the August 18, 1940 issue provided conflicting accounts of FDR’s remarks. One article stated that Roosevelt believed it was the “largest gathering since the Civil War,” and another asserted that Roosevelt referred not to the Civil War
but to a massing of the U.S. Army to thwart Napoleon III’s attempt to maintain Emperor
Maximilian in power in Mexico. See Charles Hurd, U.S.-Canada Ties Welded by President
and Premier, N.Y. TIMES, Aug. 18, 1940, at 1; Kenneth Campbell, Army is Inspected by the
President, N.Y. TIMES, Aug. 18, 1940, at 3..
21
GOODWIN, supra note 14, at 143, 144.
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
They had been trained with broomsticks and stove pipes as substitutes for
the rifles they didn’t have.22
America’s arsenals were critically short of antiaircraft guns, small
arms, field artillery, tanks, and planes in 1940.23 As huge armadas of
almost 1,800 Nazi German airplanes attacked Great Britain daily,24 the
American Army Air Corps’ war plane inventory included only 53 heavy
bombers, 91 medium bombers, 92 light bombers and 327 fighters.25 The
German invasion forces assembled on the Eastern front for their attack on
the Soviet Union in June 1941 were bolstered by 2,700 warplanes.26 The
U.S. Army’s munitions inventory included only approximately 500
tanks.27 By 1938, Germany claimed it had 10,500 tanks,28 and in the spring
of 1941, 3,300 German tanks waited for orders to attack the Soviet Union.29
Realizing that American participation in the War was inevitable and
that the nation was woefully unprepared for the inevitable, official Washington understood the urgent need to vastly expand the armed forces and
remobilize with all due haste. America would have to enlarge and redeploy its labor force. American agriculture would have to expand the food
supply to the enormous extent necessary to sustain the nation in case of
war. American industry would have to stockpile precious raw materials for
its wartime needs, convert manufacturing facilities for civilian consumer
products to large-scale defense production, and sharply curtail production
for the civilian economy.
None of this was bound to be easy. Anti-War sentiment was still
running strong, the political hurdles were formidable, and getting America’s industrialists to convert consumer product plants to war production
was a hard sell.
There was still room for optimism. Despite the setbacks it suffered
during the Great Depression, the United States was the most formidable
industrial nation in the world,30 and its human resources were considerable. If industrial prowess alone could win wars, the United States would
22
GOODWIN, supra note 14, at 143. NELSON, supra note 11, at 42.
NELSON, supra note 11, at 41.
24
FRANK FRIEDEL, FRANKLIN D. ROOSEVELT 350 (1990).
25
O’NEILL, supra note 13, at 27.
26
GOODWIN, supra note 14, at 254.
27
NELSON, supra note 11, at 41, 42.
28
NELSON, supra note 11, at 51.
29
GOODWIN, supra note 14, at 254.
30
See WALTON, supra note 14, at 24.
23
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Supermarket Use and Exclusive Clauses, Part Three 419
have been beyond challenge. In 1939, seventy percent of all the world’s
automobiles (2,888,512),31 63.5 percent of all the world’s trucks and
busses (700,377),32 53 percent of all the world’s telephones,33 and 50
percent of all the world’s radios were made in the United States.34 One
year earlier, in 1938, America manufactured 28.7 percent of everything
manufactured in the world and much more than everything manufactured
by Germany and Japan combined. The combined industrial output of
Germany and Japan that year was only 17 percent of the world’s output.35
However, America’s industrial prowess would be useless unless it
was directed to war production and quickly, and American industrialists
would not voluntarily divert their energy and capital from serving their
traditional consumers to war production. Automobiles and other consumer
products were selling briskly and profitably after many years of drought.
They were selling so briskly and profitably that most auto manufacturers
put their profitable businesses and long-term consumer relationships first
and resisted government requests to convert plants for war production.
A.
Critical Shortages with Surprising and Far-Reaching Effects on the
Supermarket Industry
American business was reviving and unemployment was shrinking
in 1940. The Publix supermarket grand opening in Winter Haven, Florida
was only one of many success stories that year. While food shoppers were
passing through George Jenkins’s automatic door in Winter Haven, demand for civilian consumer products was rising all over America. America’s armed services were rearming, and the British armed services were
spending small fortunes on American military equipment. When combined, orders for civilian goods, orders for munitions for the U.S. armed
forces, and orders for arms for export to Great Britain began to tax the
resources of American industry. The prospects of shortages of both materials and labor loomed.
Neither the U.S. government nor American business reacted appropriately to the burgeoning demand for the products of industry and agri31
See A.A. HOEHLING, HOME FRONT, U.S.A. 47 (1966); BUREAU OF THE CENSUS,
HISTORICAL STATISTICS OF THE UNITED STATES, COLONIAL TIMES TO 1957 462 (U.S. Gov’t
Printing Office 1961). According to Francis Walton, Detroit-based auto manufacturers produced 2,866,796 automobiles in 1939. WALTON, supra note 14, at 24.
32
NELSON, supra note 11, at 53; BUREAU OF THE CENSUS, supra note 31, at 462.
33
HOEHLING, supra note 31, at 47.
34
Id.
35
O’NEILL, supra note 13, at 9.
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
culture. The despair that had penetrated every layer of society during the
Great Depression had become embedded in the minds of government
officials and the business elite, and they were unable to recognize signals
that times were changing. Government officials and business executives
alike had been so traumatized that it was hard for them to imagine we’d
ever be short of labor, food, raw materials, and manufactured goods.
Neither industry nor agriculture adjusted gracefully to the dramatic
change in economic conditions. The farm community continued to campaign for price supports and production restraints in the face of growing
demand for food. Despite the mounting pressure of British, French (until
France capitulated to its Nazi German invaders), and American munitions
orders, civilian products manufacturers were reluctant to convert factories
producing goods for the civilian consumer market to defense plants. As
young men conscripted by the nation’s first peacetime draft vacated their
civilian jobs, business leaders didn’t rush to replace them with the large
pool of potential competent employees who weren’t conscripted and still
unemployed. They could have and should have turned immediately to women, older people, and members of minority groups to fill the vacancies,
but they didn’t do that—at least not right away and never wholeheartedly.
Business was not ready to come to grips with racial, religious, gender, and
age discrimination, a practice that left many employment opportunities unfilled while qualified people remained without work and without income.
With America’s ultimate entry into World War II virtually certain then,
government officials could have done a better job anticipating potential
shortages of essential raw materials (like rubber) and made better arrangements to stockpile them.
These blunders led to critical shortages of labor, food, consumer
goods, and raw materials. For a twenty-first century young adult, it’s
usually a surprise to discover that, during World War II, the American
home front was plagued by shortages. What is even more surprising is that
the shortages, although painful and anxiety-provoking when they occurred, led to momentous innovations in supermarket operations and helped shape the supermarket industry we know today.
B.
The Fear of Food Surpluses Abates, and the Fear of Food Shortages
Mounts
With a realistic assessment of the economic data available to them,
the farm community and its supporters in Congress should have realized
that increasing America’s capacity to grow food was the right move to
make and that it posed no significant danger to farm income. The resusci-
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tating economy, a military draft, and a sizzling export market would almost certainly stimulate a huge increase in the demand for food and other
farm products. All but the excessively nearsighted could foresee that Great
Britain could not grow enough food to sustain its population while resisting Nazi German aggression. The Brits were destined to import a huge
share of their food from America. Inevitably, the soon-to-be-expanded
U.S. armed services would consume enormous quantities of food, and a
resilient consumer economy in America would generate a significant
expansion of civilian food demand in its own right.36
Be that as it may, America’s farm community was still focused on
the Great Depression and the severe decline of family farm income since
the end of World War I.37 Burned by two decades of economic decline,
farmers shuddered at the thought of increasing productive capacity. They
were convinced that increased production would lead to even larger food
surpluses and even less income for farm families.38 American agriculture
and its formidable bloc of political supporters were far more interested in
liquidating the nation’s huge inventory of surplus food than stockpiling
the food the nation would almost certainly need in the next few years as its
participation in the distant wars became ever more certain.
To a degree, the farm community’s single-minded focus was understandable. In September 1939, it was still hurting. America had been
accumulating prodigious stockpiles of surplus food including a huge inventory of corn, wheat, and lard since the Depression began, and most
Americans believed that government efforts to reduce the nation’s stock of
surplus food had priority over long-range planning for a potential war.
Armchair estimates of the ability of the United States and other North
American countries to grow food fortified the farm community’s political
need to constrict food production and diminish food surpluses. Joseph F.
Davis, Director of Stamford University’s Food Research Institute, estimated unrealistically that “North America alone can readily spare twice as
much wheat as the rest of the world is likely to import in 1940–1941.”39
Chester Davis, Administrator of the Agricultural Adjustment Administration, a Depression-Era government agency charged with alleviating the
plight of America’s farmers, was oblivious of the potential need for war-
36
See WALTER W. WILCOX, THE FARMER IN THE SECOND WORLD WAR 35-36 (1947).
See id. at 36.
38
HAROLD G. VATTER, THE U.S. ECONOMY IN WORLD WAR II 48 (1985).
39
See Joseph F. Davis, Food in World at War, in INDUSTRY GOES TO WAR 29-30
(Cecil E. Fraiser & Stanley F. Teele eds., 1941).
37
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
time farm labor. He proposed shifting 5 million people from farm work to
defense industries and sought new markets to absorb America’s surplus
food.40 His absolute confidence that America’s food supply was already
sufficient to meet its wartime needs is reflected in this remark: “[W]e have
an abundance of food and fiber to meet normal civilian requirements and
any military demand that may arise. On top of that, the surpluses are piling
up which would have gone into export had there been no war in Europe. . . .”41
When they learned that a new World War had begun in Europe,
America’s food industry leaders sought to reassure food retailers and consumers that the beginning of yet another European war would not cause
food shortages here. According to Frank E. Gorrel, Secretary of the National Canners Association, canned food supplies would be “ample but not
excessive.”42 Subject to a big if, W. F. Williamson, Secretary-Manager of
the Associated Coffee Industries of America was not a bit worried about
coffee supplies for the rest of 1939 and the first few months of 1940.43
After all, coffee imports were reported to have probably broken all records
in 1939.44 However, one concern lingered in the back of his mind. Well
aware that almost all of America’s coffee supply was imported and
brought here by sea, Williamson cautioned consumers that a reduction in
merchant shipping could result in severe coffee shortages.45 Benjamin
Wood, Managing Director of the Tea Bureau was confident that the tea
supply would be OK. He announced that American tea importers had
received assurances to that effect from London’s International Tea Market
Expansion Board.46
Government officials didn’t foresee problems for America’s food
supply that would result from the dazzlingly swift subjugation of Poland
by the German army and the subsequent declaration of war by Great
Britain and France. They should have worried about the food shortages
that would inevitably follow the outbreak of a new World War, but they
40
See WILCOX, supra note 36, at 36.
VATTER, supra note 38, at 51.
42
Frank E. Gorrel, Canned Foods, in Probable Effects of the War on Food Supply and
Prices, PROGRESSIVE GROCER, Oct. 1939, at 123, 123.
43
W.F. Williamson, Coffee, in Probable Effects of the War on Food Supply and Prices, PROGRESSIVE GROCER, Oct. 1939, at 125, 125.
44
See Business Highlights, PROGRESSIVE GROCER, Feb. 1940, at 193.
45
Williamson, supra note 43, at 125.
46
Tea Supply Is Assured to United States Despite War, in News of the Month, PROGRESSIVE GROCER, Jan. 1940, at 101, 101.
41
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Supermarket Use and Exclusive Clauses, Part Three 423
weren’t worried about food shortages at all. Instead, they fretted about
food surpluses. In an effort to lift the United States from the grips of the
Great Depression, the Roosevelt administration had, at first, taken measures to discourage food production.47 The theory was that prosperity
would be achieved by producing less rather than more food. Farmers
would be compensated for their reduced production with subsidies. Reduced food production would lead to higher food prices and more purchasing power for farmers. They, in turn, would spend their increased earnings
on manufactured goods, and ultimately everybody would be better off.48
Secretary of Agriculture Henry A. Wallace reassured consumers
worrying about sugar shortages this way: “So far as this next year or two
are concerned, there is absolutely no reason for a sugar panic.”49 As to
those concerned about meat supplies, he pointed to the nation’s huge
inventory of corn. According to Wallace, the government owned or
controlled 260 million bushels of corn at the time.50 He reminded the
public that corn was an important source of cattle feed and the supply of
meat depended largely on the supply of corn. Wallace also predicted that
fresh and canned fruit and vegetables would be plentiful for the rest of
1939 and 1940.51
Congressional farm bloc legislators resisted moves to expand food
production. Even when the need for food production increases intensified,
the House of Representatives Subcommittee on Agricultural Appropriations refused to allow the Agricultural Adjustment Administration to
provide incentives for increased vegetable and oil seed crop production.52
When President Roosevelt appointed Chester Davis to represent the
agricultural sector in defense planning, Davis did not shed his Depressionera surplus-reducing slant right away. Wartime food and labor shortages
were not among his principal concerns then. While German armies were
racing through Holland and Belgium in May 1940, he took no steps to
avoid the farm labor shortages that would almost certainly follow American intervention in the War. Reducing unemployment in farm communities was first on his agenda, and he pressed the powers that be to locate
47
See 9 BROADUS MITCHELL, THE ECONOMIC HISTORY OF THE UNITED STATES, 18589 (1958).
48
Id.
49
Henry A. Wallace, Food Supply, in Probable Effect of the War on Food Supply and
Prices, PROGRESSIVE GROCER, Oct. 1939, at 60.
50
See id.
51
See id. (quoting Henry Agard Wallace).
52
See WILCOX, supra note 36, at 32-33.
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
defense plants in communities with large-scale farm worker unemployment. In June 1940, the month in which France capitulated to Nazi Germany, Milo Perkins, President of the Federal Surplus Commodities Corporation, warned of growing food surpluses.53 Perkins predicted dire consequences for America at the forty-third annual convention of the National
Association of Retail Grocers, but the dire consequences he foresaw were
reduced agricultural exports and mounting surpluses. Perkins told this to
the grocers: “The war . . . has knocked the bottom out of an $800 million
export market that American farmers depend on to move their products.
We have not felt the full force of this loss and won’t until harvest time
when the surpluses begin to pile up and prices for farm products decline.54
Government officials didn’t react alertly, and business leaders were
in denial. Food stockpiles were slipping away, and food shortages were
drawing near. Business activity in the United States was stronger, and the
pace of business activity was reported to have been “one of the most rapid
on record.”55
Food demand and the rate of food consumption were expanding, but
food reserves were dropping.56 Food manufacturers reported increased
sales,57 and food markets reported tight inventories.58 Canned food processors also reported tight inventories. Stockpiles of canned peas maintained
by canned food processors on April 1, 1940, were 49.6 percent lower than
they were on April 1, 1939.59 Their stocks of canned corn were 36.6 percent lower, canned tomatoes 4.2 percent lower, canned beans 33.5 percent
lower, canned peaches 20.2 percent lower, and canned pears 43.7 percent
lower than on April 1, 1939.60 Onions were omitted from the list of surplus
commodities maintained by the Federal Surplus Commodities Corporation
early in the year.61
By October, Great Britain had reduced its citizens’ butter rations,
and British hotels and restaurants reduced the size of their butter pats by
53
See Moulton H. Farnham, World Crisis Holds Convention Stage, PROGRESSIVE
GROCER, July 1940, at 20, 140.
54
Id.
55
Id.
56
See Business Highlights, PROGRESSIVE GROCER, Feb. 1940, at 21.
57
News of the Month, PROGRESSIVE GROCER, June 1940, at 133.
58
Business Highlights, Feb. 1940, supra note 56, at 21.
59
See Lynne M. Lamm, Labor Ruling Clarified Definition of ‘Retail,’ PROGRESSIVE
GROCER, June 1940, at 66, 115.
60
See id. at 112.
61
Id.
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75 percent.62 Cut off from a significant share of its traditional food sources
by the Nazi German occupation of Denmark, France, and other western
European countries, Great Britain was destined to increase food imports
from the United States and to place an additional burden on America’s
food supplies.
The enormous needs of the U.S. armed services were destined to
heighten the pressure on the food supply. Consumption of food by America’s expanding armed services increased enormously after October 16,
1940, when more than 16 million young men registered for the draft.63 The
Army mushroomed from a 168,000-man force at the beginning of the year
to 900,000 when the draftees were finally conscripted. They all needed to
eat, and our soldiers ate plenty.64 As the year progressed, the combined
force of civilian demand, food exports, and the burgeoning food needs of
America’s armed forces began to weigh heavily on food supplies.65
The trend continued into 1941. After decades of decline, per capita
consumption of meat in 1941 finally reverted to its average during the
period from 1900 through 1913.66
One more problem: Although most food and other agricultural
products consumed by Americans were homegrown before the War, preWorld War II America depended on imports at least partly for its supply of
garden seeds, flax, hemp, and castor oil.67 If the United States entered the
War, it would need increased domestic production of these commodities.68
Here, government agencies were more alert than with many other commodities, and they implemented programs encouraging domestic production of crops the United States had been importing until then.69
With eroding food stockpiles and spurting food demand, it became
evident that America’s food surpluses could easily slip away and yield to
62
M.M. Corpening, Food Sufficient in England, But Prices Run High, CHICAGO DAILY
TRIBUNE, Oct. 1, 1940, at 12; M.M. Corpening, Traveler Finds Rural England Escapes
Bombs, CHICAGO DAILY TRIBUNE, Oct. 4, 1940, at 1.
63
See MARTIN GILBERT, THE SECOND WORLD WAR 132 (rev. ed. 1989).
64
WILLIAM GREER, AMERICA THE BOUNTIFUL 129 (1986).
65
See M.M. ZIMMERMAN, THE SUPER MARKET, A REVOLUTION IN DISTRIBUTION 130
(1955).
66
See E.B. ALDERFER & H.E. MICHEL, ECONOMICS OF AMERICAN INDUSTRY 553
(1957).
67
See WILCOX, supra note 36, at 39.
68
Id.
69
See id. at 39-40.
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
food shortages and thereby endanger the nation’s ability to wage war.70
Ultimately, the Roosevelt administration got the message. Concerned
about the prospects of food shortages, the federal government’s food
policies were changing—albeit slowly. In December 1940, Agriculture
Secretary Wickard (Henry A. Wallace had recently become Vice President
of the United States) urged hog farmers to continue production in 1941 at
the same rate as 1940 (instead of reducing production).71 With farm
unemployment decreasing, Chester Davis’ scheme to steer defense plants
to farm communities with excessive unemployment was rescinded. The
site selection process for new defense plants would now bypass productive
farmland.72 Enactment of the Lend-Lease Act prompted a greater shift in
the President’s attitude toward food production. Less than one month after
Congress adopted the statute on March 31, 1941, Wickard called for
expanded production. He exhorted farmers to produce more pork, dairy
products, eggs, canned vegetables, and dry beans to help meet America’s
Lend-Lease commitments.73 His pleas for expanded production were
augmented by increases in price support levels for these food products.74
On September 8, 1941, committees sponsored by the Department of
Agriculture set ambitious goals to expand America’s agricultural production for 1942. Milk and egg production was to be increased by 7 percent,
chickens by 10 percent, soybeans by 37 percent, and peanuts by 78 percent.75
What was Lend-Lease all about? It was a gigantic foreign aid
program that helped sustain Great Britain and the Soviet Union through
the War. Great Britain’s capacity to resist a Nazi-German invasion was in
doubt after the fall of France on June 21, 1940. Attempting to break the
back of British resistance, Germany’s air force, the Luftwaffe, bombed
London and other British cities relentlessly. Germany invaded the Soviet
Union on June 22, 1941, and its troops advanced rapidly and destroyed
what lay in their path. The Soviet Union sustained horrific population
losses, and a great many of its farms and industrial plants were devastated.
Although the Soviet army resisted the Germans stubbornly and formidably
after overcoming the initial shock of the invasion and early staggering
70
See THOMAS C. COCHRAN, THE GREAT DEPRESSION AND WORLD WAR II 87 (1968).
WILCOX, supra note 36, at 38.
72
See NELSON, supra note 11, at 152.
73
WILCOX, supra note 36, at 38-39.
74
See id.
75
Id. at 40-41.
71
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losses, American military planners worried that the Soviet Union might
collapse altogether. President Roosevelt concluded that keeping the Soviet
Union and Great Britain afloat was in the best interest of the United States.
Without them, the United States would need to confront the combined
forces of Nazi Germany and Japan by itself someday—probably someday
soon. Crippled as they were, Great Britain and the Soviet Union could
produce some but not nearly enough of their needs themselves. They
needed more warplanes, tanks, trucks, other military equipment, and food
than they could hope to produce themselves. If Great Britain and the
Soviet Union were to survive the Nazi onslaught, the United States would
have to make up the difference by sending food, clothing, supplies, and
military equipment. Indeed it did, and American aid came in great quantities pursuant to a program devised by President Roosevelt himself and
dubbed Lend-Lease.
Great Britain received so much Lend-Lease aid that Winston Churchill paid this tribute to the helping hand from the other side of the Atlantic Ocean:
It must be remembered that our munitions effort from the
beginning of Lend-Lease in January 1941 was increased by
over one[-] fifth through the generosity of the United States.
Through the materials and weapons they gave us we were
actually able to wage war as if we were a nation of fifty-eight
million instead of forty-eight.76
Lend-Lease provided the Soviet Union with essential tools of war,
including destroyers, tanks, and aircraft; with clothing; with food supplies;
and with vehicles.77 American aid bolstered the Soviet Union’s ability to
resist the Nazi German invasion in 1941 when its very survival was in
doubt, to resuscitate its armed forces, and then to assume the initiative. In
time, American supplies and equipment shipped to the Russians pursuant
to the Lend-Lease program would be used to rebuild their railroad and
communications lines,78 and American seeds would be used to replant
76
WALTON, supra note 14, at 5.
WALTON, supra note 14, at 114, 115.
78
Aid to World Seen in Pact of Moscow, N.Y. TIMES, Nov. 7, 1943, at 47; W.H.
Lawrence, Lend-lease Help to Russia to Rise, N.Y. TIMES, June 15, 1943, at 13.
77
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
their farms.79 Russian automobiles would run on American tires80 and
would be fueled by American gasoline.81 American jeeps and trucks would
be a common sight on Russian roads.82 Russian soldiers would be wearing
American boots; sleeping under American blankets;83 and eating American
pork, flour, sugar, and beans.84
However, on this side of the Atlantic, American agriculture didn’t
completely satisfy demand in all food categories—even with government
subsidies and government encouragement. Meat, poultry, and dairy product shortages popped up here and there despite the fact that the United
States was still at peace. War was just around the corner, and the shortages
were bound to get worse.
1. Raw Material Shortages
The manufacturing sector of the U.S. economy was moving into
high gear in 1940. American manufacturers were straining to cope with
big orders.
Munitions orders were pouring in. The British and French need for
weapons that year was imminent and pressing. Although America wasn’t
in the War yet, its own rapidly expanding armed forces needed vast
quantities of munitions of all sorts. The U.S. government was spending
many millions on airplanes, tanks, and other implements of war; millions
more were spent on training facility construction. Lend-Lease quickened
the pace.
Stimulated by the military spending, the economy was straining, and
a resuscitating private sector also contributed to the strain. The robust
increase in military spending and consumer demand combined to rejuvenate American industry, but perhaps too quickly and by too much. Idle
plants, of which there had been many, were pressed into service to meet
79
F.F. Rockwell, Round about the Garden, N.Y. TIMES, Dec. 27, 1942, at D6; Seeds
for Russia Asked, N.Y. TIMES, Feb. 22, 1942, at 9.
80
Russia Receives 345,000 Trucks by Lend-Lease, CHICAGO DAILY TRIBUNE, Feb. 9,
1945, at 29.
81
J.H. Carmical, Oil Industry Here Alone at Capacity, N.Y. TIMES, Oct. 3, 1943, at S7.
82
Henry C. Cassidy, Soviet Offensive Is Speeded by American War Supplies, N.Y.
TIMES, Mar. 6, 1943, at 1; Ralph Parker, Russians Surging To Battlefields, N.Y. TIMES,
May 12, 1942, at 5.
83
Henry C. Cassidy, supra note 82, at 1. Business World, N.Y. TIMES, Nov. 20, 1942,
at 32. Aid to Soviet Put At 2,900,000 Tons, N.Y. TIMES, Feb. 20, 1943, at 2. Ship Loss
Slashed on Route to Soviet, N.Y. TIMES, Feb. 28, 1944, at 6.
84
Cassidy, supra note 82, at 3. Aid To Soviet Put At 2,900,000 Tons, supra note 83, at
2. Asserts Our Food Helps Russia Hold, N.Y. TIMES, Feb. 5, 1943, at 13.
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the gigantic increase in demand.85 Some factories, designed to produce
things for civilian use in peacetime, were converted to defense plants.86 As
the pace of war orders intensified, the demands on American industry began to exceed the capacity of existing facilities. Massive investment in
plant and equipment was needed to make it possible for America to produce enough to serve its own civilian economy at the same time as it was
coping with gigantic orders from the British and French armed services
and America’s own armed services.87
America’s industrialists weren’t up to the challenge. Still traumatized by the decade-long Great Depression, they were, for the most part,
reluctant to invest their own funds to convert their factories for defense
production. The federal government was left with no choice but to bear the
brunt of the investment burden. It authorized its anti-Depression investment arm, the Reconstruction Finance Corporation, to shift its resources
from Depression recovery to defense plant financing.88
Expanding America’s war production capacity required much more
than building new factories and converting old ones. New and renovated
factories couldn’t manufacture a thing without crucial raw materials.
Which raw materials were crucial for war production? In 1940, the Army
and Navy Munitions Board compiled a list of vital raw materials that
included abrasives, antimony, arsenic, coconut shells, copper, chromium,
diamonds, helium, manganese, manila fiber, mercury, mica, nickel, petroleum, potash, quinine, rubber, silk, tin, and tungsten.89 Although the Army
and Navy Munitions Board’s list was long, it might not have been long
enough. Such vital raw materials as steel, aluminum, and magnesium
weren’t on the list.90
Some crucial raw materials listed were neither plentiful nor scarce.
With appropriate allocation controls and conservation measures in place,
adequate supplies could be maintained but not always without difficulty.
Other raw materials on the list represented a bigger problem. America’s
need for them outstripped its ability to produce them domestically, and
adequate supplies of these materials simply could not be found in the
United States—not even in peacetime. Most peacetime supplies had been
85
See generally GREER, supra note 64, at 132.
See generally WALTON, supra note 14, at 6-122.
87
See COCHRAN, supra note 70, at 169.
88
Id.
89
WALTON, supra note 14, at 45.
90
Id. at 45, 49, 54.
86
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
routinely imported from distant lands, a doable task in peacetime. Wartime
was bound to be different. Opportunities to import them in wartime were
likely to be sharply reduced.91 Some raw-materials exporting nations
would surely be overrun by the enemy, and shipping lanes leading to the
United States from other exporting nations would surely be harassed by
enemy submarines.
While the United States was still at peace, it could have accumulated
a gigantic supply of such raw materials as rubber and tin without which it
could not have waged war. Where stockpiling was impractical, the government could have contrived ways to produce artificial substitutes.92 Some of
these steps were taken, but they were too few and far between. America’s
stockpile of raw materials essential for war production was inadequate,
and the inadequacy of its stockpiles contributed materially to severe shortages that constricted the manufacture of products needed by the consumer
economy in general and the supermarket industry in particular.
a. Aluminum Shortages
Because of its light weight and strength, aluminum was a mainstay
of America’s pre-World War II peacetime economy. It was used in a wide
range of consumer and business products in 1940. They included automobiles93 and refrigerators,94 two consumer products essential to the stability
of the supermarket industry.95 Such other products vital to the civilian
economy as electric transmission lines,96 electrical machinery,97 cooking
utensils,98 food wrapping,99 air-conditioning equipment, business machines, diesel engines, paint,100 and varnish were composed at least in part
of aluminum.101
Aluminum was also vital for modern warfare and had been regarded
as such since the end of World War I. Its reputation as a very desirable in91
See id. at 42-58.
See id. at 46.
93
DONALD H. WALLACE, MARKET CONTROL IN THE ALUMINUM INDUSTRY 19, 20, 45,
60, 61 (Harvard University Press 1937).
94
See id. at 53.
95
See generally id. at 45, 62.
96
See id. at 13, 14.
97
See id. at 17.
98
See id. at 11.
99
See id. at 18.
100
See generally WALLACE, supra note 93.
101
SURPLUS PROP. BOARD, 79TH CONG., ALUMINUM PLANTS AND FACILITIES 75
(1945).
92
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gredient of many types of military equipment was established in the first
World War, in its own right a horrific war in which many millions of
people died before their time. Although Americans called World War I the
war to end wars, it turned out to be a springboard on the road to an even
more dreadful war, World War II.
The first World War also served as a laboratory for evaluating
potentially more efficient methods of killing. The failure or success of
armaments used in the first World War provided valuable data for the
military leaders who directed the second World War. Military planners
learned much about the relative strength and flexibility of raw materials
used in weapons. Their experiences taught them the relative virtues of
steel and aluminum for use in war machines.
Aluminum was better than steel in some circumstances and worse in
others. In particular, aluminum was far better for aircraft construction than
steel.102 Aerial warfare was in its infancy in World War I, but astute
observers recognized its enormously destructive potential. Numerous components of World War I tanks, warships, submarines, shrapnel, bullets, and
helmets were also composed in part of aluminum. In time, aluminum was
viewed as a crucial ingredient of big and small warships, submarines,
warplanes, and virtually countless other war machines, supplies, and
equipment.103
The United States was the world’s leading aluminum producer
between 1925 and 1933, but it lost its lead to Germany in the late 1930s.
At 38,600 metric tons, American production was more than twice as much
as Germany’s in 1933.104 However, Adolf Hitler, who rose to power in
Germany that year, foresaw the fearsome power of aerial warfare and the
vital role aluminum could play in building warplanes. He quickly laid the
foundation for a potent German air force and encouraged the expansion of
Germany’s aluminum industry.
German aluminum production spurted during the 1930s. In only one
year after Hitler’s ascension, Germany leapfrogged America in aluminum
manufacture. Germany’s aluminum production soared to 37,200 metric
tons in 1934 and 70,800 metric tons in 1935.105 America fell to second
place among leading aluminum producing nations with 33,600 metric tons
102
See WALLACE, supra note 93, at 47.
WALTON, supra note 14, at 49, 50.
104
See WALTON, supra note 14, at 49, 50.
105
SURPLUS PROP. BD., supra note 101, at 77.
103
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
in 1934 and 54,100 metric tons in 1935.106 The United States recaptured
the world lead in 1936 and 1937107 but lost it again to Germany between
1938 and 1940.108 In 1940, as America began the first phase of preparation
for its combat role in World War II, world aluminum production aggregated 760,000 metric tons. Of this amount, Germany produced 206,000
metric tons, America 187,000, Canada 75,200, and Japan 42,500. It was
not a pretty picture for the U.S. defense establishment.
In 1940, America was able to produce all the aluminum it needed for
peacetime use, but its aluminum production capacity was not nearly great
enough to satisfy the combined needs of its civilian population, its armed
forces in the process of remobilization, and its foreign aid program.
Staggering quantities of aluminum would be required to meet wartime
demand. To produce them, America would have to expand its aluminum
industry considerably.109
One year later in 1941 (during most of which America was still at
peace) early estimates of aluminum production were set at 600 million
pounds. It proved to be a considerable overestimation, and even 600
million pounds could not have met the nation’s wartime demand for the
lightweight metal that year.110 Demand for aluminum was bloated that year
by rapidly expanding aircraft production in the United States111 and the
urgent need to provide the Soviet Union with aluminum for its aircraft
production.112 Actual aluminum supplies didn’t come close to the 600
million pound estimate.113
America’s attempt to expand aluminum production capacity to the
scale needed to defeat Germany, Japan, and Italy in an all-out war faced
many obstacles. One was the supply of electricity, and another was the
availability of high grade bauxite, the principal ore from which aluminum
is derived.114 Our capacity for generating electric current was sufficient for
aluminum production in the pre-War years, and it was projected to be
sufficient for wartime needs. On the other hand, America was not blessed
106
Id.
Id.
108
See id. at 14.
109
See NELSON, supra note 11, at 137.
110
See generally NELSON, supra note 11, at 152.
111
See generally id.
112
See GOODWIN, supra note 14, at 258.
113
See SURPLUS PROP. BD., supra note 101, at 77.
114
See id. at 15.
107
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with generous domestic supplies of bauxite.115 Pre-War America imported
60 percent of its bauxite ore from nearby Dutch Guyana (now Surinam).116
Much of the balance was imported from Jamaica and British Guyana (now
Guyana).117 Dependent on sea transportation for such a large part of its
bauxite ore supply, defense planners were concerned about substantial
losses from attacks by German submarines and warships. Monopoly was
another barrier to a massive expansion of America’s aluminum industry.
Almost all aluminum produced in America in 1940 was produced by a
single company, Alcoa,118 which was defending a two-year-old antitrust
suit brought by the Department of Justice.119 Roosevelt advisor, Edward R.
Stettinius,120 was confident that Alcoa could and would voluntarily produce enough aluminum to meet the needs of the nation’s rapidly expanding defense industries as well as the needs of its civilian population.121
Unfortunately, Stettinius’s confidence in Alcoa was misplaced. America’s
leading and virtually only aluminum manufacturer was not even producing
enough aluminum to meet the pre-War needs of America’s defense industries, and aluminum demand was almost certain to increase considerably as defense production increased.122
b. Steel Shortages
In many ways, America’s peacetime economy revolved about its
steel production. Like aluminum, steel was a vital component of two
machines that propelled the growth of the American supermarket and the
economy itself. They were, of course, the private passenger automobile
and the household refrigerator. The supermarket industry might never
have been born and could not have attained its prominence without them.
Automobiles and refrigerators made it possible for food shoppers to shop
less often, buy more on each shopping expedition, and store more in their
homes and apartments.
The United States also needed steel for food production, food processing, and food distribution. It was an important element of supermarket
115
See ALDERFER & MICHEL, supra note 66, at 102.
See SURPLUS PROP. BD., supra note 101, at 15.
117
WALTON, supra note 14, at 50.
118
See SURPLUS PROP. BD., supra note 101, at 19.
119
See GOODWIN, supra note 14, at 259.
120
In 1940, he was a member of the National Defense Advisory Committee ( NDAC)
and his official title was Commissioner for Industrial Materials.
121
See GOODWIN, supra note 14, at 259.
122
See id.
116
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
buildings and other commercial buildings. Store fixtures, store operating
equipment, and shopping carts were composed of steel. Warehouse equipment was composed of steel. Farm machinery was composed of steel.
As the principal ingredient of tin-plate, steel was vital to the food
processing industry and the supermarket industry alike in the years leading
to World War II. Despite its name, the tin can was composed almost entirely of steel. Canned food was an extremely important product for the
supermarket and neighborhood groceries alike. Tin cans were the vessels
in which almost all preserved food was packaged in 1940. Frozen food
wasn’t widely sold in supermarkets then, and dehydrated food was not
highly regarded by the consuming public.
Of course, it’s no secret that steel was also vital to America’s
capacity to wage war. Rifles, cannons, trucks, jeeps, tanks, ships, and
thousands of other instruments of destruction were composed of steel, at
least in part.123
Despite its crucial functions in both peace and war, neither
America’s steel industry nor its senior defense planners professed concern
about a potential wartime steel shortage in the aftermath of Germany’s
invasion of Poland in 1939.124 Still at peace, the United States was the
world’s foremost steel producer in 1938125 and 1939.126 Moreover, it
maintained that status when its steel manufacturing facilities were
operating at much less than full capacity. For six of the ten years
preceding the War, America’s steel industry produced one-half or less than
one-half of the steel it could have produced.127 In 1938, despite severely
truncated demand resulting from the Great Depression, America’s steel
industry outproduced a German steel industry that was straining to
produce everything it could. Operating at only a small part of its capacity,
the American steel industry produced 26.4 million tons of steel that year
while Germany’s steel industry produced 20.7 million tons.128 With
demand for steel stimulated by the outbreak of war in Europe, American
production leaped to an annual rate of 66,983,000 net tons in early 1940.
Germany trailed far behind the United States in steel production that year
with only 28,150,000 net tons. The Soviet Union was farther behind then
123
See generally NELSON, supra note 11, at 143.
See id. at 39-40.
125
See DAVIS, supra note 10, at 142.
126
See NELSON, supra note 11, at 35.
127
WALTON, supra note 14, at 41.
128
DAVIS, supra note 10, at 142.
124
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with 21.8 million net tons, and Great Britain was still farther behind with
15 million net tons.129
Nevertheless, the potential for painful steel shortages in the United
States lurked in the background. Before entering World War II, the United
States relied on imports for the bulk of its supply of manganese, an essential component of steel manufacture. It imported manganese from the
Soviet Union, Africa, and India at the rate of approximately 700,000 tons
a year.130 The prospect of continuing manganese imports from these distant
sources during wartime was tenuous to say the least.
Defense planners were comforted by the knowledge that, if import
supply lines from the Soviet Union and India were severed, the United
States could turn to domestic sources and imports from Cuba and South
America for at least part of its manganese needs. Since alternate sources
couldn’t provide all the manganese needed for America’s steel production,
the steel industry made arrangements for stockpiling 1 million tons of
manganese.131 Would that be enough?
As 1941 began, the steel industry and defense planners were still optimistic about the industry’s ability to produce enough to meet all of
America’s needs. Insisting that it could easily produce enough steel for
wartime, the steel industry resisted pleas for expansion.132 The industry’s
position was largely supported by a February 1941 report prepared by
Gano Dunn,133 chairman of the J.G. White Corporation, and Presidential
advisor Edward R. Stettinius, Jr.134 Dunn’s report predicted only modest
potential shortages in wartime.135
They were too optimistic. Although America’s annual rate of steel
production in 1941 exceeded 1940’s production by 20 million tons,136 the
annual rate of steel orders exceeded production by approximately 10 million ingot-tons.137 Optimism about the steel industry’s ability to meet
America’s needs waned as the year progressed. Defense planners grew
increasingly troubled about steel supplies in the next few months.138 They
129
See NELSON, supra note 11, at 37.
Id. at 40.
131
See id.
132
See id. at 94.
133
Id.
134
Id. at 93.
135
See id. at 94.
136
WALTON, supra note 14, at 125.
137
NELSON, supra note 11, at 171.
138
See id. at 142-43.
130
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
knew that a steel shortage could cripple America’s ability to wage war and
that it could cripple the civilian economy as well. They probably didn’t
care about the supermarket industry, but the supermarket industry’s
expansion would be jeopardized by a severe steel shortage, and its survival
would be questionable. By July 1941, with the Japanese attack on Pearl
Harbor less than six months away, it was evident that, if America entered
the War, it would have no choice but to bolster its steel production capacity considerably.139
c. Tin Shortages
As a crucial ingredient of tin-plate and such alloys as bronze, brass,
and pewter, tin played a key role in America’s civilian economy,140 and it
was used in a diverse range of consumer and industrial products. Mirrors,141 pipes, tubing, polishing powder, and many chemicals were among
the numerous examples.142 Thin sheets of pure tin called tin foil were used
to wrap cigarettes and other tobacco products.143 On and on.
Of its many important peacetime uses, tin was widely believed to be
the metal from which tin cans and bottle caps were made.144 That was only
partially true. Tin cans weren’t made entirely or even mostly of tin, but tin
can manufacture would have been impossible without it. Tin cans were
made from tin-plate, which is principally composed of steel.145 What
transforms steel into tin-plate is a tiny coat of tin that weighs approximately 1.5 percent of the alloy.146
Reputed to be nontoxic and having “the strength of steel and the
corrosion resistance of tin”,147 tin-plate was touted as an ideal material for
food containers. It was also considered ideal for kitchen utensils, radio
components, and toys. Approximately 5 percent of all steel manufactured
in the United States was incorporated in tin-plate. U.S. production of tin-
139
Id. at 136.
See THE CANNED FOOD REFERENCE MANUAL 62 (R.W. Pilcher et al. eds., 1947).
141
J.M. CAMP & C.B. FRANCIS, THE MAKING, SHAPING AND TREATING OF STEEL 968
(United States Steel Co. 1951).
142
See THE CANNED FOOD REFERENCE MANUAL supra note 140, at 62; CAMP &
FRANCIS, supra note 141, at 968.
143
CAMP & FRANCIS, supra note 141, at 968.
144
See id.
145
See id. at 965, 968.
146
See THE CANNED FOOD REFERENCE MANUAL, supra note 140, at 37.
147
CAMP & FRANCIS, supra note 141, at 968.
140
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plate in 1940 was 2.75 million tons, more than seven times the amount
produced in 1900.148
As the relationship between Japan and the United States deteriorated
in the face of Japan’s occupation of Indo-China, the U.S. government
grew increasingly concerned about America’s tin supplies. As a result of
Mother Nature’s capricious design, the United States needed to import
virtually all the tin it used. In 1940, more than half of the world’s tin was
produced in Malaya (now Malaysia), the Dutch East Indies (now Indonesia), and Thailand.149 All three of these tin producing nations lay in
the path of the expansion plans of Japan’s powerful ultra-nationalist military leaders.
Nevertheless, America’s can manufacturers professed to be
unworried about the potential loss of America’s traditional sources of tin.
They reassured the public that the United States would have ample tin
supplies even if it were no longer possible to import tin from the East
Indies. They were confident that tin usage could be cut by one-half by the
use of known substitutes.150
Unlike the can manufacturers, American defense planners were worried—plenty. Anticipating a drastic reduction in tin imports in case of war
with Japan, they prodded the federal government to accelerate America’s
tin imports.151 They knew all too well that, without access to tin, tin-plate
production would come to a halt.
Since tin-plate was the primary use of tin during peacetime and a
very significant use during wartime, a tin shortage could have dire consequences for America’s food supply. By the 1930s, brand-labeled
prepackaged food had become the mainstay of full service grocery stores,
the leading food retailers of America. Cans, bottles, and boxes of food
filled the shelves of full service grocery stores152 and their customers’
pantries. Prepackaging, especially prepackaging in cans, prevented or at
the very least retarded spoilage for very long periods.
In an era in which frozen food had not yet gained much of a
foothold in retail stores, just about everybody relied on canned food for
long-term food storage. Without canned food, America’s civilian sector
food distribution system, its armed services, and the Lend-Lease program
148
Id.
See THE CANNED FOOD REFERENCE MANUAL, supra note 140, at 60.
150
The Tin Companies, PROGRESSIVE GROCER, Oct. 1940, at 144, 144.
151
See THE CANNED FOOD REFERENCE MANUAL, supra note 140, at 60-61.
152
JAMES M. MAYO, THE AMERICAN GROCERY STORE 65, 85 (1993).
149
438
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
would be crippled. Although frozen food was available to American
consumers by then, it had not gained extensive public acceptance—not
yet. Despite its limitations, canning preserved food indefinitely and
provided an effective way of feeding troops when fresh food and
refrigeration were unavailable. The growing ranks of the armed services
would need an enormous quantity of canned food. Canned food’s ability
to avoid spoilage without refrigeration for very long periods made it
especially valuable for the Lend-Lease program. Great Britain didn’t have
enough refrigerated cargo space to accommodate fresh food imports in
enormous quantities.153 Extensive destruction to Great Britain’s gas mains
that put home cooking out of reach for many English households
heightened the value of canned food in the Lend-Lease program.154
d. Rubber Shortages
Maintaining a modern industrial society without adequate sources of
rubber was unimaginable in the late 1930s. Countless consumer products
were composed at least partially of rubber. Such vital building blocks of
America’s transportation system as automobiles, airplanes, trucks, and
busses couldn’t move an inch without rubber.
The supermarket industry was especially dependent on passenger
automobiles. Most of its customers traveled to the store in automobiles
and brought their supermarket purchases home in automobiles which, in
turn, were especially dependent on America’s rubber supply.
Rubber was essential for war too—especially a world war.155 America’s military and industrial leaders understood that winning or losing a
war with Japan or Germany would depend largely on the degree to which
America could manufacture airplanes, tanks, trucks, and other motorized
vehicles.156 One element all these vehicles had in common is that they
were useless without tires, tires principally composed of rubber. Airplane
pilot clothing was composed of rubber; and vital equipment ranging from
life preserver rafts and gas masks to stethoscopes and adhesive tape was
composed of rubber.157
Although the United States was rich in most agricultural and mineral
resources needed to maintain a progressive and industrial society and
153
See DONALD I. ROGERS, SINCE YOU WENT AWAY 39 (1973).
See id. at 40.
155
See GOODWIN, supra note 14, at 32.
156
NELSON, supra note 11, at 9.
157
GOODWIN, supra note 14, at 32.
154
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wage war effectively, rubber was not among them. It was among the vital
raw materials for which American industry relied on imports. Almost all
the rubber consumed in America in the late 1930s was natural rubber,158
and almost all of it was imported from Malaya and the Dutch East
Indies.159 In 1941, 79.15 percent of the world’s natural rubber production
(approximately 1.53 million long tons) was derived from Malaya and the
Dutch East Indies, the traditional sources of American natural rubber
imports.160 Americans consumed 648,000 tons of rubber in 1940.161 In
1941, almost all of which was a pre-War year, American rubber consumption rose to 781,000 tons.162 On the other hand, as America prepared
to defend itself against potential Japanese and German aggression, defense
planners projected the need for much more than 781,000 tons of rubber
annually. The United States would soon need an additional 655,000 tons
of rubber annually for its defense industry and military exports.163
Because America’s strategic reserve contained only about 126,000
tons of rubber in 1940,164 a rapid and enormous increase of the rubber
stockpile was imperative. War against Japan was not an apocalyptic fantasy in 1940; Japan was in a position to disrupt the flow of rubber from
Malaya and the Dutch East Indies to the United States. One path America
could have taken toward acquiring the rubber it would need in wartime
was a massive expansion of America’s synthetic rubber industry. Another
path it could have taken to avoid a wartime rubber shortage was to buy
huge amounts of natural rubber on the open market and stockpile its
surpluses.
Unfortunately, the United States didn’t travel far on either path. Although the Roosevelt administration established a federal agency called
the Rubber Reserve Company in 1940,165 the agency’s purchasing program
was a big disappointment. By December 1941, America’s aggregate re-
158
See ALDERFER & MICHEL, supra note 66, at 304.
See NELSON, supra note 11, at 38.
160
JOHN G. GLOVER & RUDOLF L. LAGAI, THE DEVELOPMENT OF AMERICAN INDUSTRIES 38 (Simmons-Boardman Publishing Corp. 1959).
161
See WALTON, supra note 14, at 46.
162
See GLOVER & LAGAI, supra note 160, at 398.
163
See NELSON, supra note 11, at 38.
164
See id. at 39.
165
DAVID NOVICK, MELVIN ANSHEN, & W.C. TRUPPNER, WARTIME PRODUCTION
CONTROLS 225-26 (1949). See also O’NEILL, supra note 13, at 79 (functioning under the
aegis of Jesse H. Jones, Secretary of the Interior and Chairman of the Reconstruction Finance Corporation, a financing arm of the U.S. government).
159
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
serves of natural rubber had grown only to 630,356 tons. It wasn’t even
enough to serve the peacetime civilian economy for a year.166 As far as
synthetic rubber production was concerned, there was no way the United
States could go but up. Unlike Germany’s robust pre-War synthetic rubber
production,167 America’s pre-War synthetic rubber production was
pathetic. U.S. Attorney General Thurman Arnold charged that our pre-War
synthetic rubber lagged because of a market allocation scheme between
the Standard Oil Company of New Jersey and German industrial giant,
I.G. Farbenindustrie.168 According to Arnold, Standard Oil had agreed not
to move ahead with synthetic rubber production and compete with I.G.
Farbenindustrie. For its part, I.G. Farbenindustrie agreed to keep out of the
petroleum business in the United States.169 I.G. Farbenindustrie owned
patents on a highly regarded synthetic rubber manufacturing process
called Buna-S. It was from the very same Buna-S synthetic rubber that the
tires on the tanks spearheading the Nazi German invasion of Poland were
made.170
In the end, America’s civilian economy and its consumers suffered
in the early years of World War II because of anemic rubber supplies.
Gasoline was rationed in an effort to conserve rubber, and consumers were
forced to curtail their driving. Supermarket operators suffered too. Supermarket shopping was impaired because automobile use was constricted.
Unlike their rivals, the neighborhood grocery stores and combination
stores, stores with delivery services, supermarkets depended on their customers’ automobiles to transport the merchandise from the store to the
home.
2. Labor Shortages
a. Conversion to Defense Production
At approximately 9 million souls,171 the roster of unemployed Americans was still oppressively large in 1939. With a huge surplus of workers
still hovering over the job market, it was hard to imagine in January 1939
that jobs would be plentiful before long. Anyone who predicted that de-
166
See DAVIS, supra note 10, at 455.
See WALTON, supra note 14, at 46.
168
JOHN MORTON BLUM, V WAS FOR VICTORY 132 (1976).
169
See id.
170
See WALTON, supra note 14, at 46.
171
Business Highlights, PROGRESSIVE GROCER, Mar. 1940, at 11, 12.
167
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mand for labor would soon exceed the supply by far would have been
dismissed as a lunatic.
The German invasion of Poland and the war orders responding to it
didn’t change attitudes about unemployment initially. Although business
was improving, the economy was still weak, and industry was still trying
to extricate itself from the Great Depression. Industry leaders were willing
to refit idle plants and rededicate them for defense production. Why not?
The captains of American industry were lining their pockets with profits
from munitions exported to Great Britain and France. The upside was big,
and they risked losing nothing by finding a use for an otherwise useless
asset. Even so, they pressed for government aid to help finance the capital
cost of the alterations needed for conversion to defense production. However, they were ambivalent about taking defense production one big giant
step further by converting factories currently producing consumer goods
to fill British and French munitions orders.
Industrialists were in no hurry to risk losing their capital on an
expensive effort to convert plants for war production and preferred investing in the ever more prosperous consumer market. As the American
consumer gained purchasing power, business leaders were eager to recapture the civilian customers they had lost in the poverty laden years, and
they were not about to risk their capital on a European war that could be
over in less than a year. To them, war production might be profitable in
the short term, but it would be a diversion from industry’s principal mission, serving the consumer economy. If they could not rebuild their customer base before a new war began, whom would they serve after the war?
b. Conscription
Although President Roosevelt was reluctant to campaign for peacetime conscription before Election Day 1940, the Second Corps of the
Military Training Camp Association (“MTCA”) had no such inhibition.172
Alarmed by the swift triumph of the Nazi German invasion force in
Holland and Belgium, the executive committee of this society of elite
businessmen and professionals met at the Harvard Club in New York City
on May 8, 1940.173
The distinguished guest list included Henry L. Stimson (a powerful
Republican and former President Herbert Hoover’s Secretary of State),
Lewis Douglas (former Roosevelt budget director), Frank Knox (Re172
173
KENNETH S. DAVIS, F.D.R. INTO THE STORM 568 (1993).
Id.
442
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
publican Vice Presidential candidate in 1936 and then-current publisher of
the Chicago Daily News), Robert P. Patterson (U.S. Court of Appeals
Judge), William J. Donovan (prominent attorney), and Grenville Clark
(another prominent attorney).
Understanding that America was exceedingly vulnerable in an increasingly dangerous world, they campaigned aggressively for peacetime
conscription legislation. They were ready to do so with or without the
Roosevelt administration’s support.174
It would be a repeat performance for the committee members.
MTCA was the successor to the Plattsburg camp movement that had
championed the cause of American intervention in World War I on the
side of the British and French. It had taken direct action to help prepare
the United States for intervention in the first World War.175 In the
expectation that America would enter World War I sooner or later, the
Plattsburg camp movement trained prospective officers for the armed
services.176
Grenville Clark was a well-connected Wall Street lawyer with an
impeccable pedigree177 and a lifelong interest in national security.178 In his
opinion, the only conceivable path to national security in 1940 was a
massive increase in American armed services personnel, and the only conceivable way of getting there was drafting civilians into the armed
forces.179 Although he was well aware of the formidable barriers standing
in the way of this goal, Clark was endowed with impressive social and
business connections, and exceptional persuasion skills.180
Clark organized a gala dinner meeting at the Harvard Club on May
22, 1940 to enlist more support for his conscription and military training
campaign.181 One hundred wealthy and powerful bigwigs attended, including Julius Ochs Adler of the New York Times.182 Clark asked the rich
and famous crowd for their support and got it—especially from Adler.183
174
See THOMAS PARRISH, ROOSEVELT AND MARSHALL 149 (1989).
See id.
176
See O’NEILL, supra note 13, at 85-86.
177
See id.
178
See PARRISH, supra note 174, at 149.
179
O’NEILL, supra note 13, at 86.
180
Id. at 85-86.
181
See DAVIS, supra note 10, at 568.
182
PARRISH, supra note 174, at 149-50.
183
See id. at 149.
175
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Accompanied by Julius Ochs Adler, Clark called on U.S. Army
Chief of Staff George C. Marshal soon after the dinner.184 They asked
Marshall to recommend selective service legislation to President Franklin
D. Roosevelt (often referred to by his initials, FDR), but Marshall
hesitated. Although he knew conscription was both necessary and
inevitable, he wasn’t ready to back the proposal publicly.185 Roosevelt also
knew conscription was necessary, but with a Presidential election around
the corner, he was unwilling to say so publicly, and Marshall was reluctant
to buck FDR’s political instinct.186 He preferred to let MTCA and its
powerful supporters use their own formidable clout and communication
skills to influence public opinion and generate Congressional support.187
MTCA was up to the challenge. By June 3, 1940, it expanded its
corps of activists pressing for compulsory military service by establishing
a National Emergency Committee of 1,000 luminaries. They raised
money, they took their case to the public, and they cajoled Senators and
members of the House of Representatives.188
Democrats tended to favor compulsory military service in principle,
but this was also an election year for many Senators and every member of
the House of Representatives. Those who voted for the draft risked incurring the wrath of America’s mothers—potentially dangerous foes for
any politician or groups of politicians. Without bipartisan support, neither
President Roosevelt nor the Congressional Democrats were about to take
that risk.189 Most Congressional Republicans had close ties to the isolationist movement, a strident coalition that was implacably opposed to a
peacetime draft. Nevertheless, Clark and his disciples forged ahead and
earned solid support among many Republicans as well as the majority of
Democrats. A Democrat, Edward R. Burke of Nebraska, introduced the
peacetime conscription bill in the Senate on June 20, 1940 (less than three
weeks after the National Emergency Committee was established), and a
Republican, James Wadsworth of New York, introduced it in the House of
Representatives on June 21.190
184
Id. at 150.
See id.
186
DAVIS, supra note 10, at 570-71.
187
See PARRISH, supra note 174, at 150-51.
188
O’NEILL, supra note 13, at 86-87.
189
GOODWIN, supra note 14, at 140.
190
See PARRISH, supra note 174, at 151.
185
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
Political support for conscription legislation gained momentum as
public sentiment shifted away from its isolationist bent. Stunned by
horrific German air attacks on Great Britain, the American public was
ready to accept some sacrifices in the name of national defense.191 Sensing
the shift in public opinion, President Roosevelt jumped on the bandwagon.192 He endorsed the conscription legislation (called the Selective
Service bill) on August 2, 1940. Although his Republican challenger,
Wendell Wilkie, didn’t endorse the Selective Service bill, he announced
that he favored peacetime conscription in principle.193 On August 5, Chief
of Staff George C. Marshall went to bat for the Selective Service bill and
other legislation needed to increase the number of American armed services personnel. He scolded legislators for delaying the Selective Service
bill, and he urged them to approve the activation of the National Guard.194
Congress responded with two strokes of far-reaching legislation.
The first statute, authorizing the activation of the National Guard and
armed forces reserves, was passed on August 27.195 Then came the
peacetime draft (or Selective Service). With 71 percent of Americans
supporting its passage,196 the Selective Service and Training Act was
adopted on September 14.197 It became the law of the land when the
President signed it on September 16, 1940.198
The Selective Service and Training Act authorized the peacetime
conscription of 900,000 men for a one-year term.199 All men between
eighteen and thirty-five years old were required to register for a lottery
that would determine who would be drafted.200 The selection process was
scheduled to begin on October 16, and more than 16 million young men
191
CABELL PHILLIPS, THE 1940S: DECADE OF TRIUMPH AND TROUBLE 73-74 (1975).
GOODWIN, supra note 14, at 140.
193
“I cannot ask the American people to put their faith in me, without recording any
conviction that some form of selective service is the only democratic way in which to
secure the trained and competent manpower we need for national defense.” Wendell Wilkie,
I Accept the Nomination (August 17, 1940), in VI VITAL SPEECHES OF THE DAY, Sept.
1940, at 676.
194
PARRISH, supra note 174, at 152.
195
See O’NEILL, supra note 13, at 87.
196
See GEORGE H. GALLUP, THE GALLUP POLL, PUBLIC OPINION 1935-1971 238-39
(1972).
197
PARRISH, supra note 174, 152.
198
O’NEILL, supra note 13, at 87.
199
PHLLIPS, supra note 191, at 74.
200
Donald I. Rogers, The Road to War in LOUISE L. GERDES, THE 1940S 44 (2000).
See also WILCOX, supra note 36, at 84.
192
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Supermarket Use and Exclusive Clauses, Part Three 445
registered that day.201 In a radio address, General Marshall rationalized this
momentous legislation to a public still unable to cope completely with the
inevitability of American intervention202 in European, Asian, or African
wars. His spin was that America is “starting to train an army of citizensoldiers which may save us from the tragedy of war.”203
Launching Selective Service and activating the National Guardsmen
and Reservists swelled the Army’s ranks, but it didn’t do nearly enough to
prepare America’s armed forces for a confrontation with Germany, Japan,
and Italy (by then known as the Axis powers). The good news was that the
U.S. Army had grown from a scrawny force of 169,000 to a less scrawny
force of 1.25 million by May 11, 1941.204 The bad news was that the conscripts could be deployed legally in the Western Hemisphere only,205 and
their tour of active duty was exceedingly short. The National Guardsman
and Reservists had been activated for only one year, and the Selective
Service draftees had been conscripted for only one year. The tour of duty
of the earliest National Guard and Reserve units to be activated was due to
expire on September 15, 1941 (less than three months before the Japanese
attack on Pearl Harbor). The tour of duty of the earliest draftees was set to
expire soon after that date.206 When the first wave of trained inductees
shed their uniforms, raw recruits with no training would replace them.207
Moreover, the ban on deploying draftees outside of the Western
Hemisphere appeared to prevent America from occupying such strategic
outposts as Iceland and the Azores. Unless Congress did something about
it, America’s military strength would be severely compromised, and
America would be able to do little to prevent a Nazi German occupation of
Iceland and the Azores.208
Getting Congress to extend the conscripts’ and guardsmen’s term of
service would not be easy.209 Any attempt to convince Congress to do that
would face strident resistance from powerful foes. The opposition would
201
See GILBERT, supra note 63, at 132.
In a September 2 Gallup survey, 62 percent of the interviewees opposed sending
food to France, Holland, and Belgium in American ships. GALLUP, supra note 196, at 239.
203
PARRISH, supra note 174, at 152 (quoting George C. Marshall).
204
HOEHLING, supra note 31, at 121.
205
Id. at 116.
206
See PARRISH, supra note 174, at 173-75.
207
See id. at 181.
208
See id. at 176.
209
See id. at 173-74.
202
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
be sure to include some Democratic leaders of Congress,210 Colonel Robert
R. McCormack (ultraconservative publisher of the Chicago Tribune),211
the draftees themselves,212 and (last but certainly not least) countless
mothers who missed their sons and longed to see them return.213
With no reasonable choice but to seek the extension, President
Roosevelt deputized General Marshall to direct the administration’s legislative effort in support of it.214 To improve his odds of gaining a legislative victory, Roosevelt opted not to try eliminating the restriction
against deploying draftees outside the Western Hemisphere.215 Extending
the term of service would have to be enough for the time being. No matter,
President Roosevelt found an ingenious way of stationing American forces
in Iceland and the Azores later on without additional legislation. With the
kind of logic plausible only in politics, the President of the United States
got his way “by redefining the Western Hemisphere to include both
Iceland and the Azores. . . .”216
Although General Marshall handled the legislators skillfully, the
task proved to be exceedingly difficult. Once again, most Democrats
favored the measure, and most Republicans opposed it. However, that was
not the whole story; many legislators crossed party lines for one reason or
another. After passing easily in the Senate, its passage in the House of
Representatives was in doubt until the last vote was cast.217 When the
votes were finally tallied, Speaker of the House Sam Rayburn reported
203 votes in favor (182 Democrats and 21 Republicans) and 202 votes
against (133 Republicans and 65 Democrats).218 The draftees’ service
obligation was increased to eighteen months, but all who were twentyseven years old or older were exempted.219 The Roosevelt administration
breathed a sigh of relief.
Armed forces expansion sucked away some of the best workers
from the civilian labor force just as the economy was coming alive and the
demand for labor was growing. As some young men joined the armed
210
See DAVIS, supra note 10, at 252.
PARRISH, supra note 174, at 174.
212
See GOODWIN, supra note 14, at 267.
213
See PARRISH, supra note 174, at 174.
214
See id. at 173-74.
215
See DAVIS, supra note 10, at 252.
216
Id.
217
See PARRISH, supra note 174, at 171-81.
218
DAVIS, supra note 10, at 273.
219
See WILCOX, supra note 36, at 84.
211
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Supermarket Use and Exclusive Clauses, Part Three 447
forces and others were drafted, they were leaving good jobs open, but replacements became increasingly hard to find.
Unemployment, the blight that had undermined the U.S. economy
for more than a decade, receded soon after the United States declared war
on Japan on December 8, 1941, and a new problem emerged. Defense
plants were hungry for workers, and they paid good wages to attract them.
Civilian industries increased their wage scales too. Workers would soon be
hard to find even with a massive infusion of women to the work force.220
A severe labor shortage was developing.
The labor shortage had a profound impact on supermarkets, grocery
stores, combination stores, and other components of the food distribution
industry. America’s farmers and other food producers were also profoundly affected by the labor shortage. It’s easy to understand that the
hardships imposed on these sectors of the civilian economy had a considerably negative effect on the American consumer’s quality of life during the War. What’s a bit more difficult to understand is that these hardships also ignited innovative shifts in business and production methods
that improved the lot of the American consumer for sixty years after the
War ended and may continue to improve the consumer’s lot for decades to
come.
Although supermarkets used labor more efficiently than other food
distribution businesses, other food distribution businesses appeared to be
better poised for surviving a sustained labor shortage. Most neighborhood
full service grocery stores, greengrocers, butcher shops, and combination
stores were family owned. If Pop went off to war, Mom and the kids
would run the store. The fledgling supermarkets were too big for family
operation. They would be in serious trouble unless they attracted new employees to replace the young men they lost to the armed services and defense industries. They were able to attract many new employees but not
enough to keep doing business as usual. So, they turned to the unusual and
made drastic changes in store operations. These changes in store operations increased their efficiency, reduced their operation costs, and helped
make the American supermarket what it is today.
220
See ZIMMERMAN, supra note 65, at 134.
448
C.
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
Unfinished Tasks for the Supermarket Industry on the Eve of Pearl
Harbor
Despite its long list of achievements, the supermarket industry had
not fulfilled all the industry founders’ goals by December 7, 1941, and
many significant problems remained.
!
Supermarket self-service operations had spread between
September 1, 1939, and December 7, 1941. Drug and cosmetics
departments were the most significant departments converted to
self-service. Nevertheless, in most supermarkets, self-service was
still limited to the grocery department when the United States
declared war on Japan.
!
As conceived by Cullen, Otis, Dawson, and others, the supermarket
product mix included a wide range of food products and a wide
range of nonfood products. In practice, many food products we
expect to see in supermarkets today were sold only in a few
supermarkets as of December 7, 1941. Supermarkets that had not
sold nonfood products previously introduced some between
September 1, 1939, and December 7, 1941. Nevertheless, on the eve
of World War II, only a small minority of supermarkets allocated
much shelf space to nonfood products.
!
Supermarkets were supposed to be very large stores. Michael Cullen
advocated monster stores. Otis and Dawson’s Big Bear, which
opened for business in 1932 in Elizabeth, New Jersey, contained
50,000 square feet of floor area. Nevertheless, few supermarket
storerooms were larger than 10,000 square feet on September 1,
1939. Supermarkets got larger between September 1, 1939, and
December 7, 1941, but, on the eve of World War II, few
supermarkets were much larger than they were on September 1,
1939, and very few supermarkets operated by national grocery store
chains were housed in buildings with more than 10,000 square feet
of floor area.
!
Although Cullen, Dawson, and Otis espoused efficiency, they did
business from dilapidated buildings and could not figure out how to
transport merchandise from the shelves to the customer’s
automobile without relying on the customer’s brawn. Sylvan
Goldman introduced the foldable, rollable basket carrier in 1937, a
device that solved a significant part of, but not the entire, problem.
George Jenkins solved another significant part with the automatic
door in 1940. Nevertheless, on the eve of America’s entry into
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World War II, supermarkets were still far away from the models of
efficiency and comfort they were destined to become.
It would take a world war to jump start the process that would ultimately solve the problems. The War challenged the ingenuity of America’s supermarket operators, and, in many cases, supermarket operators
met the challenges well. They were confronted by shortages of food,
equipment, raw materials, and labor. Many of these shortages could have
been avoided or, at least, ameliorated by wiser public policies in the last
few years before America entered the War, but they weren’t. Wartime
food shortages were more severe than they had to be because of bizarre
Depression-era laws that led the federal government to encourage farmers
not to plant food and, in some cases, to destroy food, food that could have
been stored or donated to alleviate hunger. Some wartime raw materials
shortages could have been avoided by stockpiling. Wartime labor shortages could have been ameliorated by discontinuing racial, religious, gender, and age discrimination.
Ironically, the shortages turned out to be blessings in disguise for
the supermarket industry. Events that occurred during the War, although
seemingly irrelevant, set the stage for another round of food merchandising innovation. They forced industry leaders to adapt, and the
industry leaders found guidance by looking back to the original business
models formulated by Michael Cullen and expanded by Robert Otis and
Roy Dawson.
D.
The Last Steps on the Road to War
1. Roots of Japanese-American Hostility
Although Nazi Germany was the primary focus of America’s defense mobilization in 1941, Japanese-American relations had been tense
for decades, and big trouble was brewing between Japan and America. The
tension was rooted in decades-old Japanese grievances over America’s
restrictive immigration laws, discrimination against Japanese immigrants
in California, and American insistence that the size of the Japanese fleet be
limited to 60 percent of the size of the American fleet.221
The relationship between Japan and the United States deteriorated in
the 1930s. New and explosive tensions developed between these world
powers because of Japanese incursions into China. The United States
condemned the Japanese Army’s seizure of the Chinese province Man-
221
See HARRY A. GAILEY, THE WAR IN THE PACIFIC 13-16 (1995).
450
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
churia in 1931, and it refused to recognize Manchukuo, the puppet state
established in Manchuria by Japan.222 The United States-Japan relationship
declined further with Japanese incursions into Inner Mongolia and
northern China.
Japan’s full-scale invasion of northern China in 1937 was very unpopular in the United States when it began. It was still going strong in
1940, and it was still very unpopular in the United States in 1940. The
American public supported China’s resistance overwhelmingly.223
President Roosevelt couldn’t do much to cope with the invasion, but
he wasn’t completely powerless. He had two options. One was to authorize American loans to China, and the other was to impose an embargo on
the export of petroleum and other strategic raw materials to Japan. He exercised the first option and authorized a $25 million loan to China in
September of 1940 and another $50 million loan in November of 1940.224
However, the President was reluctant to authorize a petroleum embargo.
Although the American public was leaning toward accepting the grave
risks of offending Japan by early 1941,225 Roosevelt declined to impose a
petroleum embargo then. He believed that a petroleum embargo might
boomerang. It could precipitate a Japanese invasion of Southeast Asia and
a shooting war between the United States and Japan.226 The timing wasn’t
right for an American challenge to Japan’s aggression. Despite Roosevelt’s rearmament program, the United States wasn’t very powerful militarily at the moment, and it certainly wasn’t prepared for an all-out war
with Japan or anybody else.227 The President felt that, if war could not be
avoided, it should at least be delayed. America would be in a much better
position to fight in 1942 or 1943 than it was in 1941.228
Japan was still mired in its obsessive quest to conquer China in
1941. Despite military victories, terrorism, and collaboration by Chinese
dissidents, the Japanese invasion dragged on and on, and complete victory
was nowhere in sight.229 Japan kept conquering big chunks of China. Japan
kept winning battles—at least most of them. Japan kept advancing, and the
222
See generally SABURO IENAGA, THE PACIFIC WAR 66, 85, 60-65 (1978).
BARBARA W. TUCHMAN, STILLWELL AND THE AMERICAN EXPERIENCE IN CHINA
206-207 (1971). See also O’NEILL, supra note 13, at 56-59.
224
TUCHMAN, supra note 223, at 214-15.
225
Id. at 207.
226
Id.
227
See id.
228
LEONARD BAKER, ROOSEVELT AND PEARL HARBOR 274 (1970).
229
See TUCHMAN, supra note 223, at 211.
223
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Chinese army kept retreating. Nevertheless, China was so big and the
Chinese people so numerous that Japanese forces still had a long and perilous road to travel before they could savor the victory they craved. Japan
was willing to settle for less than total victory, but the peace terms they
offered were so harsh that China’s Premier Chiang Kai-Shek couldn’t accept them.
Japan could have extricated itself from its predicament by merely
leaving China, but that would have meant a loss of face for the military
clique in control of the Japanese government. So, it chose to continue the
invasion, and that meant starting up with the United States, Holland,
France, and Great Britain.
Japan’s military leaders were consumed by their ambition to bring
China to its knees, and they knew they couldn’t do that without an abundant supply of strategic mineral reserves of which the most important
component was petroleum. Japan’s reserves of petroleum and other strategic resources were dwindling.230 Petroleum reserves had declined from
51 million barrels in 1939 to 40 million barrels in mid-1941, and that
amount was inadequate to support the needs of a long-term struggle in
China.231
Petroleum is particularly important to a predator nation bent on conquest. To sustain a long, exhausting, and bloody war of aggression, an
aggressor must have a reliable source of fuel. The fuel is needed to power
tanks, armored vehicles, warplanes, warships, and other vehicles of death.
Although it had established a synthetic oil industry, Japan had been importing most of the petroleum it needed, and most of that came from the
United States.232 In fact, Japan had been importing more than 70 percent of
its petroleum from the United States.233 That painful reality presented the
Japanese leadership with a painful choice. To continue the war in China,
Japan needed to maintain an amicable relationship with the United States.
Paradoxically, the price it would have to pay for a good relationship with
America was withdrawal from China.234
230
IENAGA, supra note 222, at 132.
GAILEY, supra note 221, at 73.
232
DAVIS, supra note 10, at 313-14.
233
Id.
234
See IENAGA, supra note 222, at 132.
231
452
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
2. Japan and the United States Drift Closer to War
Japan’s military strategists adopted a plan for a dramatic response to
the potentially disastrous effects of an American oil embargo. It would
invade the oil-rich Dutch East Indies (now Indonesia) and take what it
needed.235 The ample petroleum reserves it would control as result of conquering the East Indies236 would make it possible for Japan to continue its
adventure in China.237 The future Indonesia was also attractive to Japan
because it produced most of the world’s rubber, another raw material essential in modern mechanized warfare.238
Conquering French Indo-China (now Vietnam, Laos, and
Cambodia), Singapore, and Thailand also looked like a mighty interesting
prospect to the Japanese general staff. Occupying all or part of French
Indo-China and Thailand might sever critical Chinese supply lines.239
Potential British intervention could be checked by conquering Singapore
too.
The U.S. government knew much more about Japan’s plans than the
Japanese government realized. A U.S. Army cryptological team led by
Colonel William Friedman cracked Japan’s top secret diplomatic code
(called B machine by the Japanese and purple by American intelligence).240 An exceedingly intricate code, purple was encrypted by an
ingenious cipher machine241 based on electrical switches.242 Friedman’s
team solved the problem after an eighteen to twenty month effort directed
by Frank Rowlett.243 Mathematical experiments convinced team member
Genevieve Grojan that purple was encrypted by a cipher machine, and
another team member, Leo Rosten, fabricated a replica of the ingenious
device.244 U.S. intelligence first used the replica successfully to decrypt
235
See id. at 131, 132.
See id. at 131.
237
See id.
238
Id.
239
Id. at 130-31.
240
JOHN PRADOS, COMBINED FEET DECODED: THE SECRET HISTORY OF AMERICAN
INTELLIGENCE AND THE JAPANESE NAVY IN WORLD WAR II 163-64 (1995).
241
The machine was all the more remarkable because it preceded the electronic computer as we know it by many years.
242
PRADOS, supra note 240, at 164.
243
Id. See also ROBERTA WOHLSTETTER, PEARL HARBOR, WARNING AND DECISION
172-173 (1962).
244
See PRADOS, supra note 240, at 165. See also EDWARD VAN DER RHOER, DEADLY
MAGIC 56 (1978).
236
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Supermarket Use and Exclusive Clauses, Part Three 453
and translate Japanese diplomatic messages in August of 1940.245 After
that, America was able to decode all messages between the Japanese government and its embassies abroad.246 It could also decode radio messages
between Japanese armed service headquarters and units in the field.247
Purple machines were complex and difficult to fabricate, but they
were worth the expense and trouble. Although the United States had only
four of them by 1941, they were very effective.248 They were so effective
that they were reputed to be better than the Japanese machines they mimicked249 Decrypted Japanese coded messages were dubbed Magic by Admiral Anderson, Chief of Naval Intelligence, and the name stuck.250
The American public was also aware that Japan might strike the
United States if the United States stopped selling petroleum to Japan. In a
May 1941 Saturday Evening Post article, Edgar Snow, a highly regarded
journalist, warned that Japan would retaliate if America imposed an oil
embargo.251
As the Japanese-American relationship grew ever more hostile, FDR
suggested252 that Secretary of State Cordell Hull and Japanese Ambassador
Kichisaburo Nomura meet personally in the hope of finding a formula to
avoid or at least delay a full-blown war.253 Hull and Nomura met in Hull’s
study on March, 8 1941. It was the first of a long series of meetings.254
They met privately approximately fifty times.255 Nomura, an admiral in the
Japanese Navy with many friends in the U.S. Navy,256 had a good
reputation among American officials.257 Americans who knew Nomura
were confident that he was dead set against war with the United States.258
245
WOHLSTETTER, supra note 243, at 75.
Id. at 172-73.
247
DAVIS, supra note 10, at 261.
248
See WOHLSTETTER, supra note 243, at 173.
249
See VAN DER RHOER, supra note 244, at 56.
250
See WOHLSTETTER, supra note 243, at 75 note 5.
251
See O’NEILL, supra note 13, at 107.
252
See BAKER, supra note 228, at 91.
253
DAVIS, supra note 10, at 261.
254
GAILEY, supra note 221, at 78.
255
BAKER, supra note 228, at 92.
256
WOHLSTETTER, supra note 243, at 112 (quoting Admiral Harold Stark).
257
Nomura was described by a State Department official as “one of the finest men that
I’ve known, a man of high character, absolutely patriotic.” BAKER, supra note 228, at 41.
258
See generally id. at 42.
246
454
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
They felt that the crisis could be resolved quickly and easily if only
Nomura had authority to make a reasonable deal.259
However, Nomura didn’t have that kind of clout in Japan. He was
only a negotiator and not his government’s ultimate decision maker.
Moreover, he was not privy to many policy decisions adopted by the Japanese government while he was negotiating on its behalf in Washington.
Because of Magic, Hull got wind of Nomura’s instructions well in
advance.260 Hull was also aware of what the Japanese government was telling its commanders in the field and not telling Nomura.261 Consequently,
in many cases, Hull knew more about Japanese policies and plans than
Nomura did. Moreover, Nomura tended to present his government’s proposals with a conciliatory tone and tried to smooth over their rough edges.
His conciliatory line frustrated Japanese policy makers in Tokyo who had
instructed him to take a more strident tone.262 Nomura protested to Hull
that Japan didn’t really want to conquer China, that it had no interest in
invading Southeast Asia, and that it had no thought of tangling with the
United States.263 Although Nomura may have sincerely believed what he
told Hull, Hull knew better.264 Nevertheless, he assured Nomura that the
relationship between Japan and the United States could be mended. All
Japan had to do was withdraw from China and refrain from invading
Southeast Asia and Pacific Island European colonies.265
In July of 1941, Japan tightened its noose around China’s neck by
occupying French air and naval bases in Indo-China.266 Although the
Vichy French government267 had at least theoretically consented to the
occupation, Japan’s new move did not sit well with the Roosevelt administration. On July 26, only a few days after the occupation, an executive
order issued by President Roosevelt froze Japanese assets in the United
States and restricted (but did not completely prohibit) sales of petroleum to
259
See WOHLSTETTER, supra note 243, at 146.
See VAN DER RHOER, supra note 244, at 58.
261
See DAVIS, supra note 10, at 261.
262
See BAKER, supra note 228, at 124-25.
263
See id. at 91.
264
See id.
265
Nomura’s bosses in Japan resented his conciliatory tone, and the U.S. government
knew that. See id. at 124-25.
266
WOHLSTETTER, supra note 243, at 99.
267
The Vichy government was the pro-Nazi regime that governed France during
World War II after that nation capitulated to the German invaders in 1940.
260
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Japan.268 However, bureaucrats charged with administering the order
applied it as if it were an embargo on petroleum sales.269 Then, on August 1, FDR imposed an embargo on the export of high octane gasoline and
crude oil to Japan.270 The Japanese military reacted negatively and made
preparations to implement its plan to attack the United States unless Washington lifted the petroleum embargo.271
The Hull-Nomura meetings continued, and the United States tried its
best to get Nomura to believe that the embargo could be lifted if the
parties reached a suitable compromise.272 Yet, compromise was highly unlikely. American public sentiment had shifted toward confrontation with
Japan. Curtailing Japanese power had become so important to the American public by September that they were willing to risk war to achieve that
goal.273
With Japan and America drifting toward war, Cordell Hull told the
President’s Cabinet on November 7 that the nation “should be on the lookout for a military attack by Japan anywhere at any time.”274 In late November, the New York Times reported that Japan and America were closer
to war than they had ever been.275
3. Japan Gets Ready to Attack the United States
On September 18, 1941, hard line pro-war fanatics tried to
assassinate Japanese Prime Minister Prince Fimimaro Konoye, but the plot
was foiled. Despite its failure, the assassination attempt cast an ominous
cloud over the future of Japan, the United States, Southeast Asia, and the
Pacific islands. Until then, American Ambassador Joseph C. Grew was
optimistic about the chance of avoiding a shooting war. Grew had been
confident that Konoye and Japanese Emporer Hirohito had enough
internal power to make a reasonable deal with the United States and to
keep any promises Japan made as a result of the negotiations.276 However,
Konoye was so shaken by the plot to kill him that he lost his nerve and a
good deal of his power. Konoye’s cabinet resigned on October 16. Two
268
See GAILEY, supra note 221, at 72.
See O’NEILL, supra note 13, at 67.
270
See GAILEY, supra note 221, at 72.
271
See IENAGA, supra note 222, at 132.
272
See DAVIS, supra note 10, at 261, 312.
273
See O’NEILL, supra note 13, at 73.
274
BAKER, supra note 228, at 281.
275
Id. at 291.
276
See DAVIS, supra note 10, at 314-15.
269
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
days later, he was succeeded as Prime Minister by Tojo Hideki, a saberrattling ultra-nationalist general.277 The appalling news of Konoye’s
downfall prompted Franklin Roosevelt to cancel a cabinet meeting
scheduled for that day and confer with his inner circle of advisors instead.
Roosevelt met with Secretary of State, Cordell Hull; Secretary of War,
Henry Stimson; Secretary of the Navy, Frank Knox; Army Chief of Staff,
George C. Marshall; Chief of Naval Operations, Harold Stark; and his
close friend and aide, Harry Hopkins. When Admiral Stark emerged from
the meeting, he transmitted an alarming message to America’s Atlantic,
Pacific, and Asiatic fleets:
The resignation of the Japanese Cabinet has created a grave
situation. If a new Cabinet is formed it will probably be
strongly nationalistic and anti-American. If the Konoye
Cabinet remains the effect will be that it will operate under a
new mandate which will not include rapprochement with the
U.S. . . . Since the U.S. and Britain are held responsible by
Japan for her present desperate situation there is also a
possibility that Japan may attack these two powers.278
When the Konoye cabinet resigned, Admiral Nomura tried resigning
his ambassadorial post. He realized his efforts to negotiate a peaceful solution had failed, and he did not know what, if anything, could be done to
prevent war.279 However, the new Japanese Premier Tojo prevailed on him
to stay the course, and Nomura stayed.
Japan was taking giant steps toward war with the United States. Admiral Yamamoto Isoruku, commander of the Japanese fleet, approved a
secret order stating that Japan expected to declare war on the United
States, Great Britain, and the Netherlands unless the United States acceded
to one of two Japanese proposals called “Plan A” and “Plan B.”280 The
memo indicated that war would be declared on a date called “X Day” to be
revealed later. Proposing Plan A or Plan B as the only alternatives to a
shooting war was not a sincere attempt to find a peaceful solution to the
dispute. When Plan A and Plan B were devised, Premier Tojo understood
that both would be rejected by the United States in all likelihood.281 Both
277
Id.
WOHLSTETTER, supra note 243, at 132.
279
See DAVIS, supra note 10, at 316.
280
Id. at 318.
281
See id. at 320-21.
278
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Supermarket Use and Exclusive Clauses, Part Three 457
plans were rehashed versions of earlier Japanese proposals and would
have provided Japan with almost all the benefits it could hope to gain as a
result of a successful war.282 Moreover, X Day was only a short time away.
November 25 was initially designated as X Day. It was soon reset to
November 29, which was also only a short time away.283
As the short time before X Day became shorter, Kurusu Saburo, a
professional Japanese diplomat arrived in Washington. Ostensibly, his
mission was to help Nomura in a serious effort to avert war, but his real
job was “to put backbone into Nomura’s virtual demands that we accept
Japan’s terms.”284 Accompanied by Nomura, Kurusu met President
Roosevelt and Secretary of State Hull on November 17, but Kurusu did
not make a favorable impression on his American hosts. Roosevelt and
Hull disliked Kurusu at first sight. Moreover, Roosevelt and Hull had read
Japanese government dispatches to Kurusu that had been intercepted and
decoded by American intelligence. They knew he was lying to them, and
they knew he knew he was lying.285
On November 22, 1941, while the diplomats continued their interminable meetings in Washington, D.C., a formidable Japanese naval task
force assembled at Hittokapu Bay in the Kurile Islands. It consisted of six
aircraft carriers full of warplanes, two battleships, two heavy cruisers, one
light cruiser, nine destroyers, three submarines, and eight tankers. Its mission was to attack American military and naval installations at Pearl Harbor on the main Hawaiian island, Oahu, and American ships moored
nearby on X Day. The Japanese flotilla received these orders: “The task
force, keeping its movements strictly secret and maintaining close guard
against submarines and aircraft, shall advance into Hawaiian waters and
upon the very opening of hostilities, shall attack the main force of the
United States fleet in Hawaii and deal it a mortal blow.”286
On November 23, the task force emerged from Hittokapu on a path
across a northerly stretch of the Pacific Ocean headed for Pearl Harbor.287
The northerly path was chosen because it was an arduous and an unlikely
route for a naval attack force. Detection was less likely and the chance of
282
See BAKER, supra note 228, at 282.
See DAVIS, supra note 10, at 318-21.
284
BAKER, supra note 228, at 282 (quoting Cordell Hull).
285
DAVIS, supra note 10, at 320.
286
BAKER, supra note 228, at 290.
287
See id.
283
458
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
surprising the American forces was heightened by the choice to travel in
these storm-prone and foreboding waters.
Back in Tokyo on November 27, four days after its task force left
Hittokapu en route to Pearl Harbor, the Japanese government set December 1 as the date for a solemn conference in the presence of Emporer
Hirohito.288 The purpose of the conference was confirmation of the government’s decision to attack Pearl Harbor and declare war on the United
States.289 The decision to attack was confirmed, and X Day was reset for
the last time.290 The Japanese task force commanders soon learned that the
new X Day was December 8 on the Japanese calendar (the same day as
December 7, 1941, on the U.S. calendar).291
4. Progress Assessment by Defense Production Executives
Donald Nelson, a presidential mobilization aide, invited a host of
Washington bigwigs involved in America’s mobilization effort to dinner
on Wednesday evening, December 3, 1941. He and approximately two
dozen guests gathered at Washington’s swanky Carlton Hotel that evening
to honor Vice President Henry Agard Wallace.292 The agenda was gossiping, eating, drinking, smoking, and healing wounds. Secretary of the
Navy Frank Knox and Presidential advisors William Knudsen, Edward R.
Stettinius, Jr., and Robert W. Horton were among the distinguished attendees.293
The evening began with cocktails and small talk, and it continued
with a meal around the dinner table. Busboys cleared the dirty dishes from
the table, Nelson’s guests lit fat cigars, and Vice President Wallace, the
honoree, rose to speak. All listened politely and were relieved when Wallace decided to tell a funny story instead of a long and tedious speech.294
(The Vice President of the United States was reputed to be ponderous, a
mystic, and an anti-business leftist.) When Wallace’s story ended with
288
See NAZLI CHOUCRI, ROBERT C. NORTH & SUSUMU YAMAKAGE, THE CHALLENGE
OF JAPAN BEFORE WORLD WAR II AND AFTER 179-180 (1992).
289
See id.
See id.
291
See BAKER, supra note 228, at 296.
292
See NELSON, supra note 11, at 183.
293
I discuss the roles played by William Knudsen, Edward R. Stettinius, Jr., and Frank
Knox above and won’t repeat the discussion here. Robert Horton was a former ScrippsHoward journalist who served as press officer for NDAC and (later) OEM. BRUCE CATTON,
THE WAR LORDS OF WASHINGTON 3-12, 51-52 (1948).
294
See id. at 3-12.
290
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some polite laughter, Nelson asked some of the guests to rise and say a
few words.
Knudsen, Director of the Office of Production Management, a
federal agency charged with overseeing the mobilization and on leave
from his civilian job as President of General Motors, insisted that
America’s mobilization effort had gone well to date and that the current
overseas wars were minor disturbances. The prominent industrialist
proclaimed that America was prepared to stop all the nonsense pretty
quickly, and then he yielded the floor to Stettinius.
Stettinius was also serving the U.S. government on a leave of
absence from his civilian job. He was Chairman of United States Steel. He
passed on his opportunity to comment on America’s state of preparedness
and used his air time for a personal announcement. This conservative titan
of industry informed his colleagues that he had just heard good news about
Harry Hopkins, a left-leaning staunch New Dealer, who was President
Roosevelt’s confidant and aide. After happily announcing that Harry Hopkins was on his way to recovery from a serious illness, Stettinius returned
to his seat.
Then came Frank Knox (Secretary of the Navy and former
newspaper publisher) who spoiled the pleasant atmosphere and injected a
heavy dose of anxiety to an otherwise lightheaded evening. Knox
predicted that war with Japan might begin “any moment. . . . while we’re
sitting here, for all we know.”295 Nelson pointed out that a war with Japan
was likely to be a naval war, and Knox agreed. Then Knox reassured his
dinner companions and tried to restore the evening’s upbeat tone by
extolling the Navy’s great state of preparedness and, by implication,
America’s mobilization effort.
When Knox was finished, Horton got the nod from Nelson. Since he was
in charge of public relations, he might have been expected to maintain the
spirit of good cheer and good fellowship by putting a pleasant spin on
Knox’s fear of imminent war. He chose not to do that. Instead, Horton
spoiled it all by looking at Knox and stating, “I don’t think your Navy is
ready.”296
Was it?
295
296
Id. at 9 (quoting Frank Knox).
Id. at 12 (quoting Robert Horton).
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
5. December 6, 1941, the Day Before X Day
On Saturday afternoon, December 6 (Hawaii time), the day before X
Day, the U.S. government was still trying to forestall the War as the Japanese task force was only 600 miles north and a bit west of the Hawaiian
island Oahu and getting ready for a day of murder and mayhem. In a tense
Washington, D.C.,297 Secretary of State Cordell Hull made a last ditch effort to avoid war by dispatching an urgent message from President Roosevelt to Japanese Emperor Hirohito.298 Roosevelt requested that Hirohito
“may, as I am doing, give thought . . . to ways of dispelling the dark
clouds.”299
On December 6, 1941 (Hawaii time), the Japanese were primed for
attack, but Americans in Hawaii and New York were relaxing. The Japanese warships were refueled that evening, and having fulfilled their
allotted task, the oil tankers slipped away. Japanese officers gave last
minute instructions for the next day’s momentous events.300 Americans in
Hawaii were taking it easy that evening. It was Saturday night, and American Army and Navy personnel on Oahu were partying. Eleven thousand
of seventy-five thousand armed service personnel stationed there were off
base on a weekend pass. Thirty-eight intoxicated soldiers were arrested by
military police. The Army and Navy’s regional commanders were also off
base attending dinner parties. That evening in New York City, the early
bird edition of the Sunday Herald-Tribune’s rotogravure section included
a feature story on America’s naval base at Pearl Harbor illustrated with
pretty pictures. The well-regarded newspaper reassured prospective
tourists who might be deterred from visiting Hawaii by its fortifications by
maintaining that the pillboxes on the base were well-concealed and barely
noticeable.301
That evening in Washington, D.C., Navy Commander Lester
Schultz handed FDR a dispatch from the Japanese government to its
envoys in Washington, Kichisaburo Nomura and Saburo Kurusu.302
Intercepted and deciphered by American intelligence with Magic, the
dispatch contained thirteen parts of a fourteen-part message to be
297
It was Saturday evening, December 6, in Washington, D.C.
See BAKER, supra note 228, at 301-02.
299
DAVIS, supra note 10, at 337.
300
See GAILEY, supra note 221, 89.
301
RICHARD R. LINGEMAN, DON’T YOU KNOW THERE’S A WAR ON? 21 (1970).
302
See BAKER, supra note 228, at 302.
298
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Supermarket Use and Exclusive Clauses, Part Three 461
delivered by Nomura and Kurusu to Cordell Hull.303 In the approximately
ten minutes it took him to read the dispatch, Roosevelt discovered that
Japan had rejected all of America’s peace proposals and that the
negotiations with Nomura and Kurusu were about to end. He concluded
that war would come very soon, but he did not know how soon.304
Around 7:00 AM, on Sunday morning, December 7 Eastern
Standard Time (1:00 AM Hawaii time) in Washington, American
intelligence finished decoding and translating the fourteenth part of the
Japanese dispatch. It ordered Nomura and Kurusu to deliver the complete
fourteen part dispatch to Cordell Hull at 1:00 PM Eastern Standard Time
that day.305 By no coincidence, that was also 7:00 AM in the morning of
December 7 in Hawaii, and the time when Japanese warplanes were
scheduled to begin the attack.306 Here was a disquieting signal that Japan
was poised to attack that very day.307 But where would the attack take
place?
6. December 7, 1941, the Day that Lives in Infamy
At 5:30 AM on the morning of December 7, 1941 (Hawaii time), the
Japanese task force was within striking distance of Oahu; it was only 220
miles north of the island.308 At 6:10 AM, Japanese fighter planes began
taking off, and they were soon followed by Japanese bombers. In ten minutes, the first contingent of Japanese warplanes with 140 bombers and 50
fighter planes was heading for Pearl Harbor.309 A second contingent of 213
Japanese war planes began their flight to Pearl Harbor at 7:05 AM.310
Japanese commander Mitsuo Fuchida fired a signal flare at 7:40
AM.311 Fuchida was elated because he realized then that the American
garrison was completely unaware of the impending doom. He later commented: “Below me lay the whole U.S. Pacific Fleet in a formation I
would not have dared to dream of in my most optimistic dreams. . . . I
303
See id.
See id. at 302-03.
305
See VAN DER RHOER, supra note 244, at 66.
306
See id.
307
See BAKER, supra note 228, at 304.
308
See GAILEY, supra note 221, at 90.
309
See id.
310
See id.
311
See id. at 92.
304
462
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
have never seen ships, even in the deepest peace, anchored at a distance
less than 500 to 1,000 yards from each other.”312
The first wave began attacking at 7:49 AM.313 The warplanes
swooped down on Wheeler Field, a U.S. Army Air Corps installation on
Oahu. They hit American war planes, they hit the hangers, and they hit the
barracks.314 Planes were destroyed, and hangers burned and exploded.315
Other airfields got much of the same. Within minutes, American military
and naval airfields at Kaneohe, Ford Island, Bellows, Hickam, and Ewa
were incapacitated.316 At 8:00 AM Hawaii time (which was early afternoon in Washington, D.C.), American Navy commander Admiral Husband Kimmel was informing the U.S. government in Washington, “Air
Raid—Pearl Harbor—this is no drill.”317
Japanese dive bombers attacked American ships anchored in the
harbor.318 Two torpedo bombs found the battleship California. Its fuel
tanks ruptured, the ship burned, and it was abandoned. Four torpedoes
struck the Oklahoma. It was sunk with 400 men aboard.319 Heavy bombs
caused the battleship Arizona’s boilers to explode.320 Although severely
impaired, the American battleship Nevada tried to escape the harbor into
open waters. It became a prime target for Japanese pilots. Sinking the
Nevada in the channel would block it. After suffering even greater damage
in its attempt, the Nevada’s commander was ordered to avoid the risk of
blocking the channel by grounding his ship.321
The second wave of Japanese war planes arrived at 8:40 AM
(Hawaii time). After delaying its attack so that the first wave could finish
its task and depart, the second wave descended on its targets at 9:00 AM.
Some Japanese warplanes battered the battleship Pennsylvania, the
destroyers Cassin and Downs, the cruiser Raleigh, and other ships.322
312
JOHN DEAN POTTER, YAMAMOTO, THE MAN WHO MENACED AMERICA 98 (The
Viking Press, Inc. 1965).
313
See JOHN TOLAND, THE UNITED STATES NAVY IN WORLD WAR II 12 (S.E. Smith
ed., William & Morrow Co., Inc. 1966).
314
See id.
315
See id. at 12-13.
316
See id. at 13.
317
Id. (emphasis in original).
318
See id. at 13-14.
319
Id. at 17.
320
POTTER, supra note 312, at 108.
321
GAILEY, supra note 221, at 95-96.
322
Id. at 95.
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Other Japanese planes bombed and strafed Hickam Field, Ford Island, and
Kaneohe air base.323
The Pearl Harbor attack was all over by 10:00 AM (Hawaii time).
The Japanese pilots returned to their aircraft carriers with the euphoric
knowledge that they had inflicted a devastating blow on the greatest
industrial nation on Earth.324 Two thousand, four hundred and three people
were killed. Two out of eight Ameican Pacific fleet battleships were sunk
and irretrievably lost. The others were beached, sunk, or damaged but
were ultimately retrieved and repaired.325 One hundred and eighty-eight
American warplanes were destroyed, and one hundred and fifty-nine were
damaged.326
Meanwhile, back in Washington, D.C. Japanese envoys Nomura and
Kurusu arrived at the State Department at 2:00 PM (Eastern Standard
Time), to deliver the entire fourteen part message after having postponed
their meeting with Hull from 1:00 PM to 2:00 PM. They couldn’t make it
by 1:00 PM because the Japanese embassy couldn’t get the messages
typed by then.327 The delay proved to be extremely embarrassing. By
2:00 PM, Nomura and Kurusu still had no news of the Pearl Harbor attack.
However, Roosevelt and Hull were well aware of it and the severe damage
inflicted on America’s Pacific fleet. Moreover, Roosevelt and Hull were
also thoroughly familiar with the message Nomura and Kurusu were about
to deliver. Cordell Hull telephoned President Roosevelt and asked whether, considering the circumstances, he should receive the Japanese envoys
at all. Roosevelt told him to go ahead with the meeting anyway and not to
say a word about the raid on Pearl Harbor.328
When Nomura and Kurusu finally entered Hull’s office, Hull acted
as if he knew nothing. He played his game by pretending to read the same
communiqué he had studied carefully earlier that day, and he did not invite his guests to be seated while he did that.329 When he finished reading,
Cordell Hull, the Secretary of State of the United States of America,
turned to Nomura and said,
323
POTTER, supra note 312, at 108-11.
See GAILEY, supra note 221, at 96.
325
DAVIS, supra note 10, at 341.
326
Id.
327
VAN DER RHOER, supra note 244, at 66.
328
DAVIS, supra note 10, at 339.
329
JAMES MACGREGOR BURNS, ROOSEVELT: THE SOLDIER OF FREEDOM 162 (1970).
324
464
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
“In all my fifty years of public life I have never seen a
document that was more crowded with infamous falsehoods
and distortions—infamous falsehoods and distortions on [a]
scale so huge that I never imagined until today that any
government on this planet was capable of uttering them.”330
News of the attack spread soon enough. It spread by radio and telephone and by word of mouth. Washington Redskin football fans learned
about it as they headed to the exits celebrating their team’s triumph over
the Philadelphia Eagles.331 People gathered outside the White House, and
by the evening, the crowd outside the White House was packed behind its
iron rail fence.332
What would America do now? Inside the White House, President
Roosevelt met with his Cabinet, Vice President Wallace, and eight Congressional leaders—Republicans as well as Democrats.333 They reviewed
the day’s events, debated America’s next moves, and discussed the speech
FDR would present to Congress the next day. America was about to declare war on Japan.334
The assault on Pearl Harbor was a brilliant tactical success for Japan
in the short-term.335 The American Navy’s role would be severely limited
until its losses were replaced. Meanwhile, Japan could fulfill its dream of
conquering Southeast Asia without the fear of American might.
However, given America’s vast resources, was the Pearl Harbor
attack in Japan’s long-term self interest? Although the Japanese public
enthusiastically applauded the attack, some Japanese notables realized that
the attack was destined to be a disaster for Japan.336 When Kiheiji
Onozuka, a former president of Tokyo Imperial University learned that
many American ships were sunk at Pearl Harbor, he rejoined, “This means
that Japan is sunk too.”337 Japanese Admiral Hara Chuichi’s comment on
330
DAVIS, supra note 10, at 339-40 (alteration in original).
GORDON W. PRANGE, DECEMBER 7, 1941: THE DAY THE JAPANESE ATTACKED
PEARL HARBOR 378 (1988).
332
BURNS, supra note 329, at 165.
333
Id. at 164.
334
DAVIS, supra note 10, at 342.
335
See generally GORDON W. PRANGE, PEARL HARBOR: THE VERDICT OF HISTORY,
498-515 (1991).
336
See IENAGA, supra note 222, at 142.
337
See id.
331
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the attack was, “We won a great tactical victory at Pearl Harbor and
thereby lost the war.”338
American historian Samuel Elliot Morrison concurred:
[T]he surprise attack on Pearl Harbor, far from being a
“strategic necessity,” as the Japanese claimed even after the
war, was a strategic imbecility. One can search military
history in vain for an operation more fatal to the aggressor.
On the tactical level, the Pearl Harbor attack was wrongly
concentrated on ships rather than permanent installations and
oil tanks. On the strategic level it was idiotic. On the high
political level it was disastrous.339
Despite Japan’s enormous advantage arising from the devastating
blow inflicted on the U.S. Navy, its superior state of readiness on December 7, 1941, and the superior size of its armed forces on that day,
defeating the United States of America in a full-scale war was an unrealistic expectation.340 Once mobilized for war, America’s human resources, industrial capacity, natural resources, and technology dwarfed
those of Japan.341
III. THE FOURTH PHASE—WORLD WAR II SHORTAGES
SHAPE THE SUPERMARKET BUSINESS MODEL
A.
America Declares War and War is Declared on America
At noon on December 8, 1941, in Washington, D.C., Franklin
Delano Roosevelt entered the Capitol.342 Speaker Sam Rayburn called the
House of Representatives to order at 12:09 PM. The House members were
soon joined first by the U.S. Senate and next by the U.S. Supreme
Court.343 When the President rose to speak, he was greeted with thunderous applause by a joint session of the U.S. Congress.344 Democrats
applauded, and Republicans applauded. Interventionists and isolationists
applauded. For the moment, political quarrels faded, personal rivalries
338
PRADOS, supra note 240, at 197 (quoting Hana Chuichi).
Samuel Elliot Morrison, The Lessons of Pearl Harbor, SATURDAY EVENING POST,
Oct. 26, 1961, at 27.
340
See PRANGE, supra note 335, at 499.
341
Id. at 498.
342
GAILEY, supra note 221, at 99.
343
PRANGE, supra note 335, at 391.
344
See GAILEY, supra note 221, at 99.
339
466
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
faded, and America’s political leaders were united with a single
purpose.345 Although FDR spoke for only six minutes,346 his speech still
resonates in times of crisis:
Yesterday, December 7, 1941—a date which will live in
infamy—the United States of America was suddenly and
deliberately attacked by naval and air forces of the Empire of
Japan.
The United States was at peace with that Nation and, at
the solicitation of Japan, was still in conversation with its
Government and its Emperor looking toward the maintenance
of peace in the Pacific. Indeed, one hour after Japanese air
squadrons had commenced bombing in the American Island
of Oahu, the Japanese Ambassador to the United States and
his colleague delivered to our Secretary of State a formal
reply to a recent American message. And while this reply
stated that it seemed useless to continue the existing
diplomatic negotiations, it contained no threat or hint of war
or of armed attack.
....
It will be recorded that the distance of Hawaii from Japan
makes it obvious that the attack was deliberately planned
many days or even weeks ago. During the intervening time
the Japanese Government has deliberately sought to deceive
the United States by false statements and expressions of hope
for continued peace.
....
With confidence in our armed forces—with the
unbounding determination of our people—we will gain the
inevitable triumph—so help us God.
I ask that the Congress declare that since the unprovoked
and dastardly attack by Japan on Sunday, December 7, 1941,
345
346
See id. See also DAVIS, supra note 10, at 342-43, 348.
GAILEY, supra note 221, at 99.
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a state of war has existed between the United States and the
Japanese Empire.347
The U.S. Congress declared war on Japan thirty-three minutes
later. The Senate voted unanimously in favor of the Declaration. Only
one dissenting vote was recorded in the House of Representatives.349 The
United States was at war with Japan but not yet with Germany and Italy.
That state of affairs didn’t last long. Adolf Hitler made his move in
Berlin on Thursday, December 11, 1941.350 He addressed members of the
Riechstag (Germany’s legislature) in the Kroll Opera House.351 After a virulent verbal assault on Franklin D. Roosevelt, Adolph Hitler announced to
an enthusiastic audience of wildly cheering Nazis that Germany “considers
herself . . . in a state of war with the United States of America.”352
Patriotic sentiment exploded all over America. Americans felt a
sense of unity353—perhaps as never before. The isolationist movement lost
its steam354 as its high profile spokesmen proclaimed support for the war
effort.355 Isolationist stalwart, former President Herbert Hoover commented, “American soil has been treacherously attacked by Japan. Our
decision is clear. It is forced upon us. We must fight with everything we
have.”356 Even Charles A. Lindbergh (isolationist idol) endorsed the war
effort with his statement that “our country has been attacked by force of
arms and by force of arms we must retaliate.”357
348
B.
America Displays Its Own Ugly Side
America’s ugly side surfaced in the aftermath of the Pearl Harbor attack. Ultranationalist sentiment proliferated.
347
BURNS, supra note 329, at 165-67.
See PRANGE, supra note 335, at 392-93.
349
DAVIS, supra note 10, at 343.
350
See BURNS, supra note 329, at 173-74.
351
See id. at 174.
352
DAVIS, supra note 10, at 352.
353
See ARCHIE SATTERFIELD, HOME FRONT 40 (1981).
354
O’NEILL, supra note 13, at 106.
355
See DAVIS, supra note 10, at 348-49. On the other hand, even the reality of the Japanese attack on Pearl Harbor couldn’t stop isolationist Senator Gerald Nye from denouncing
Franklin D. Roosevelt as a war monger at a rally on December 7, 1941. PRANGE, supra note
331, at 382.
356
DAVIS, supra note 10, at 349 (quoting Herbert Hoover).
357
Id. (quoting Charles A. Lindbergh).
348
468
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
One by-product of the nationalist wave was a surge of hate for
everything Japanese—even plants and wild animals. Sociopathic zealots
destroyed four Japanese cherry trees in Washington, D.C. New York’s
Central Park Zoo replaced the identification sign on its Japanese deer
section to confound other zealous lunatics. The new sign made it clear that
the animals were Asiatic deer. Hopefully, the world would no longer recognize them as Japanese deer and could not hold them responsible for
America’s staggering losses from the Pearl Harbor attack.358 A Yonkers
merchant’s rage was directed at every product in his store with a Made in
Japan label. He smashed every one of them and displayed their remains in
his show window.359 In New York City, Japanese restaurants were closed,
and Japanese passengers were barred from departing flights at the
airport.360 Japanese people were called yellowbellies and yellow bastards
in American newsreels.361 American Admiral William Halsey was reported
to have proclaimed that “[t]he only good Jap is a Jap who’s been dead six
months.”362 When First Lady Eleanor Roosevelt spoke out against the
hysteria, she was denounced by the Los Angeles Times with this comment:
“When she starts bemoaning the plight of the treacherous snakes we call
Japanese, with apologies to all snakes, . . . she should be forced to retire
from public life.”363
Around 1,000 patriots assembled in downtown Seattle on December
8 during an evening blackout instigated by false reports of a Japanese air
raid. First, they displayed their love of their homeland by destroying a
large neon sign they regarded as an egregious security risk. They pummeled it with rocks, bottles, cans, old shoes, and other assorted objects.
When they finished with the neon sign, they shifted their attention to retail
stores. They smashed show windows, helped themselves to the merchandise, and dispersed with their ill-gotten gains.364
358
POTTER, supra note 312, at 118.
See LINGEMAN, supra note 301, at 28.
360
See id.
361
See THOMAS FLEMING, THE NEW DEALERS’ WAR 271 (2001).
362
Id.
363
GOODWIN, supra note 14, at 297.
364
See LINGEMAN, supra note 301, at 26.
359
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Supermarket Use and Exclusive Clauses, Part Three 469
Mobilization for War Leads to Consumer Goods Shortages and
Changes in the Supermarket Business Model
1. Mobilization for All-Out War Leads to Shortages
Industry’s resistance to war production faded after December 7,
1941, when Japan attacked Pearl Harbor.365 Consumer goods
manufacturers shifted to war production in a big hurry.366 Each shift from
civilian consumer product production to war production advanced
American military prowess and reduced the supply of goods available for
the civilian consumer economy. An enterprising merry-go-round
manufacturer shifted production to gun mounts. A corset manufacturer
stopped making corsets and started making gun belts. A toy manufacturer
became a compass manufacturer, and a pinball manufacturer switched to
armor-piercing shells.367 Floor covering manufacturer Armstrong Cork
Company was stamping airplane wing sections and tail assemblies where
it had made linoleum before the War. Radio manufacturer Emerson
Electric Company produced bomber gun turrets.368
The U.S. automobile industry converted to war production.369 By
September 1942, automobile production for the civilian economy was relegated to fond memory; and the auto industry was making warplanes,
tanks, and other munitions instead of Buicks, Dodges, Fords, and Cadillacs. Seventy-five percent of America’s warplane engines and 50 percent
of America’s tanks were rolling off the auto industry’s assembly lines.
Many fewer civilian consumer products were made during the War as a
result.
Even food manufacturers shifted to war production, and some of
them ventured into arms production.370 One prominent food processing
company, General Mills, eagerly sought government contracts for a wide
range of food and nonfood products although, at first, the government was
willing to buy nothing from it but food. Initially, its only war production
contracts were for dried eggs for the Lend-Lease program. Later, General
Mills was awarded contracts for precooked food, flour, and vitamins for
the U.S. Army. Still later, this leading food manufacturer extended the
365
See generally GOODWIN, supra note 14, at 316.
Id. at 315-16.
367
Id. at 316.
368
WALTON, supra note 14, at 361.
369
GOODWIN, supra note 14, at 362.
370
See generally id. at 316.
366
470
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
breadth of its commitment to war production and filled government orders
for a wide range of nonfood products including gun sights, torpedo directors, gyroscopic control devices, smoke screen machines and more.371
New war plant construction progressed swiftly,372 and war industries
spread across the United States. Like other industrial real estate developers, war plant developers selected sites for their access to transportation
facilities, materials, parts, subassemblies, power, and labor, but they were
subject to other influences as well. War plant developers had to consider,
and were often guided by, two other factors: national security and political
feasibility. Concerned about the vulnerability of east coast plants to German attack and west coast plants to Japanese attack, the government
encouraged manufacturers to locate war plants west of the Appalachian
Mountains and east of the Rocky Mountains. Thus, the Glen Martin Company started doing business in Omaha, Nebraska; Boeing in Wichita,
Kansas, Remington Arms in Salt Lake City, Utah, Consolidated Aircraft in
Fort Worth, Texas, Alcoa in Phoenix, Arizona, U.S. Steel in Geneva,
Utah, and DuPont in Minnesota.
Politics played a big role too. After lagging in defense plant construction during the Defense Mobilization Period (September 1, 1939,
through December 6, 1941), the southern states became beneficiaries of
the Roosevelt administration’s interest in pleasing and appeasing the
Southern conservative wing of the Democratic Party.373 The administration
steered a good many new plants south of the Mason-Dixon Line, and a
disproportionate segment of the funds loaned by the Reconstruction
Finance Corporation (a federal government agency) for plant construction
were allocated to southern states.374
The urgent need for war plants led to spiraling demand for industrial
real estate. War production contractors couldn’t keep up with the torrid
pace of government procurement without acquiring new facilities. Soon,
industrial space was hard to find despite the legacy of the Great Depression. Any big industrial building looked good to war production contractors then—regardless of its location or condition. They were willing
and even eager to buy or lease poorly maintained buildings—even dilapidated buildings. Uncharacteristically, leases were drafted, reviewed, and
executed in a jiffy—sometimes overnight. Aircraft manufacturer Curtis371
WALTON, supra note 14, at 188.
GOODWIN, supra note 14, at 315.
373
WALTON, supra note 14, at 268-70, 299.
374
Id. at 268-70.
372
FALL 2005
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Wright set up shop temporarily in a cattle building at the Ohio State Fair
Grounds in Columbus. Another war production contractor filled its orders
for tanks from an abandoned Chicago plant.375
The prospect of getting good jobs lured hordes of workers from civilian employment and prompted a gigantic migration to communities in
which war production industries were located. People migrated from east
to west and vice versa; people migrated from south to north and vice versa. The east-west migration favored the west by so much that the population center of the United States had moved forty-six miles to the west
according to the 1950 census. The north-south migration was a two-way
street. During the Defense Mobilization Period and the early months following the Pearl Harbor attack, Southerners packed their bags and journeyed north en masse to find steady work. So many Kentuckians left town
that the state lost 10 percent of its population between 1940 and 1943.
Texas lost a hefty share of its population during that period too but gained
considerably when a good many new war plants were built in that state.376
The gigantic population shifts led to housing shortages and other formidable social problems. The mass of newcomers overwhelmed housing
facilities in many communities in which defense plants were located.
Bridgeport, Connecticut was an example. Migrants often lived in squalid
properties never intended as living quarters, and rental rates zoomed.377
The explosive expansion of war production in the United States in
1942 contributed to the first major defeat of Nazi Germany in World War
II, its disastrous loss to the Soviet army in Stalingrad in January 1943.378
The Soviet Union’s resistance to the Nazi invasion force was bolstered by
large shipments of equipment and supplies in the last three months of
1942. The Soviet army got 60,000 trucks and 11,000 jeeps among other
things. The Soviet air force got 250,000 tons of aviation gas. Soviet
industry received 450,000 tons of American steel.379 By the end of
November 1943, two-thirds of all Russian motor vehicles and one-half of
all Russian aircraft originated in the United States.380
Even the normally truculent Soviet dictator, Josef Stalin, was par-
375
Id. at 201.
Id. at 299.
377
Id. at 292.
378
WILLIAM L. SHIRER, THE RISE AND FALL OF THE THIRD REICH at 1104-15 (1967).
379
See GOODWIN, supra note 14, at 404.
380
Id. at 477.
376
472
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
ticularly impressed with American Jeeps381 and paid tribute to America’s
aid and its productive capacity:
The United States has proved that it can turn out from 8,000
to 10,000 airplanes per month. Russia can only turn out, at
most, 3,000 a month. England turns out 3,000 to 3,500. . . .
The United States, therefore, is the country of machines.
Without the use of these machines, through Lend-Lease, we
would lose the war.382
America’s challenge was to build and equip a potent armed force
and sustain its allies without completely devastating its own civilian population. Draftees and armed forces recruits were drawn from the ranks of
civilians and, presumably, were motivated to fight by their desire to protect the civilians back home. Civilian consumers were vital to the war effort. They had to grow the food needed to feed the armed services and
sustain the Lend-Lease program. They had to manufacture the arms
needed by the armed services of the United States and its allies. They had
to grow the food and manufacture the products they needed to sustain
themselves. With its resources limited and its needs enormous, it would
not be easy for the United States to find a harmonious balance among the
needs of the armed forces, the Lend-Lease program, and the civilian
population. However, finding that balance was imperative. Reflecting on
this challenge more than three years later, President Franklin Delano
Roosevelt explained:
There are too many people in this country . . . who are not
mature enough to realize that you can’t take a piece of paper
and draw a line down the middle of it and put the war abroad
on one side and put the home front on the other, because after
all it ties in together. When we send an expedition to Sicily,
where does it begin? Well it begins at two places practically;
it begins on the farms of this country, and in the mines of this
country. And then the next step in getting that Army into
Sicily is the processing of the food and the processing of the
raw material into steel, then the munitions plants that turn the
steel into tanks and planes or the aluminum. . . . And then, a
great many million people in this country are engaged in
381
382
WALTON, supra note 14, at 115.
GOODWIN, supra note 14, at 477 (quoting Josef Stalin).
FALL 2005
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transporting it from the plant, or from the field, or the
processing plant to the seaboard. And then it’s put on ships
that are made in this country . . . and then you have to escort
and convoy with a lot of other ships. . . . Finally, when they
get to the other side, all these men go ashore.383
When taken together, the decline in consumer product manufacturing and corresponding increase in war production, the spiraling demand for industrial real estate, the mass migration to war plant communities, the Lend-Lease program, and the draft contributed to a severe
imbalance in the supply and demand for food and other consumer products, but they weren’t the only factors causing severe shortages and stirring inflationary pressures in the American economy.
One additional factor was partly responsible for the imbalance: a
prosperous civilian economy. The U.S. economy spurted forward in 1942.
Personal income rose and continued to rise, adding to its substantial
increase during the Defense Mobilization Period ($72.9 billion in 1939,
$78.7 billion in 1940, and $96.3 billion in 1941).384
That would be good news in normal times, but with a war on, times
weren’t normal. Increased personal income stimulated demand for the
good things of life. The fear of poverty was dimming. People with jobs
and money to spend for the first time in a decade were ready and willing to
spend it, but much of what they wanted to buy was unavailable during the
War. Retail stores were low on inventory, and consumer appliances were
rapidly disappearing from the market in 1942. Consumers had purchased
enough automobiles, refrigerators, and stoves during the Defense Mobilization Period to deplete America’s inventory of these products.385
Despite America’s increased prosperity, World War II was the most
devastating war in the history of mankind to Europeans and Asians. Destructive forces, barely suppressed beneath the thin veneer of early
twentieth century morality erupted. Innocent people starved, got sick, were
injured, lost limbs, lost minds, suffered in countless other ways, and died.
Families were broken, bodies were broken, and minds were broken. Books
383
1.
384
John H. Crider, President Speaks on Radio Tonight, N.Y. TIMES, July 28, 1943, at
HISTORICAL STATISTICS OF THE UNITED STATES, COLONIAL TIMES TO 1957 139
(U.S. Government Printing Office 1961). According to William Greer, personal income
was $75.3 billion in 1940, and $149.1 billion in 1945, the year in which the War ended.
GREER, supra note 64, at 143.
385
See LINGEMAN, supra note 301, at 234.
474
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
were burned, houses were burned, and people were burned.
America was also fortunate in that the wartime shortages stimulated
constructive changes to its food distribution system. These changes were
incorporated in the supermarket business model and play a significant role
in defining the supermarket and distinguishing it from other retail institutions.
Shortages of canned food surfaced before long. Canned food was
the most popular kind of preserved food by far before the War and
maintained its dominant status throughout the War despite severe
shortages. The canned food shortages weren’t caused by a lack of food to
pack but by a lack of raw materials, of which tin and steel were the most
significant. The shortages were exacerbated by huge government orders on
behalf of the armed services and the Lend-Lease program. Exploiting
consumer frustration over wartime shortages of canned food, the door was
open for the quick-frozen food industry to become a significant rival and
gain a toehold in the American supermarket.
Many other kinds of food sold by America’s supermarkets were in
short supply during the War—in such short supply that supermarkets were
unable to acquire enough food to fill the expansive shelves of their huge
sales floors. Shortages of food products prompted supermarkets to fill their
shelves with more nonfood products than they had carried before the War
and introduce many products. The nonfood items sold very well indeed,
and, as a result, nonfood items became more firmly established as a fundamental component of the supermarket product mix. With so much of
their shelves filled with nonfood products, supermarkets took a giant step
forward along the path to the one-stop-shopping principle that, in part,
distinguishes them from other food markets to this day.
Shortages of gasoline and rubber prompted weary consumers to forsake neighborhood grocers and butchers for the one-stop-shopping they
could find in many supermarkets.
Labor was in short supply too. American employers were forced to
cope with a considerably smaller civilian labor force. Patriotic men and
women left their civilian jobs to enlist in the armed services, and many
more men left their civilian jobs because they were conscripted into the
armed service. Another large bloc of workers resigned from farm, civilian
product manufacturing, and civilian sector service jobs to get better jobs in
war plants.
Labor shortages caused far-reaching changes in the food distribution
system. Self-service retailing was extended to food market departments
that had stubbornly resisted self-service before the War. More health and
FALL 2005
Supermarket Use and Exclusive Clauses, Part Three 475
beauty aid departments were converted to self-service, produce and meat
departments were converted to self-service, and dairy and bakery departments were converted to self-service.
Taken together, the reactions of consumers and food retailers to the
War and wartime shortages refined the supermarket business model and
improved the lot of food retailers and food consumers alike. They spurred
long-term beneficial social and economic changes in the post-War era.
Food retailing got to be more efficient. The cost of storing and selling food
at the retail level was reduced, and the cost reduction kept retail food
prices much lower than they would have been otherwise.
Details on what happened during the War and how it happened will
have to wait for yet another installment of this series. I simply don’t have
the room for them here. So, I ask your indulgence and your patience.
You’ll see the next installment soon.
PLANNING WITH DOMESTIC
ASSET-PROTECTION TRUSTS: PART II
Richard W. Nenno*
Editors’ Synopsis: This is the second Installment of a two-part Article.
The first Installment** addressed issues that apply to domestic assetprotection trusts (“DAPTs”) generally. Parts II-VII of this Installment
summarize the DAPT laws, and Parts VIII-IX compare Delaware assetprotection trusts to Alaska and Nevada asset-protection trusts. This
Installment has four appendixes: Appendix A compares the Alaska,
Delaware, Rhode Island, Nevada, and Utah statutes; Appendix B summarizes some existing Delaware asset-protection trusts; Appendix C
includes a ranking of the liability systems of the eight current DAPT
states; and Appendix D provides a Delaware asset-protection trust form.
I.
II.
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480
DELAWARE QUALIFIED DISPOSITIONS IN TRUST ACT . . 480
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. How to Create a Delaware APT . . . . . . . . . . . . . . . . . . . .
C. Who May Defeat a Delaware APT . . . . . . . . . . . . . . . . . .
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. Creditors Who May Defeat a Delaware APT . . . . . . .
a.
Pre-Transfer Claims . . . . . . . . . . . . . . . . . . . . .
b.
Post-Transfer Claims . . . . . . . . . . . . . . . . . . . .
c.
Family Claims . . . . . . . . . . . . . . . . . . . . . . . . . .
d.
Tort Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. Consequences if a Delaware APT Is Defeated . . . . . . . . .
E. Moving ATPs to Delaware . . . . . . . . . . . . . . . . . . . . . . . .
F. Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*
480
480
483
483
483
483
483
484
484
484
485
486
Managing Director and Trust Counsel for Wilmington Trust Company in Wilmington, Delaware. The information in this Article is for information purposes only and is not
intended to be an offer or solicitation for the sale of any financial product or service. This
Article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice because such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional adviser should
be sought. Further, to ensure compliance with I.R.S. requirements, please be advised that
any discussion of U.S. tax matters contained in or attached to this Article is not intended or
written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the
Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any
transaction or matter discussed herein.
**
Richard W. Nenno, Planning with Domestic Asset-Protection Trusts: Part I, 40
REAL PROP. PROB. & TRUST J. 263 (2005)
478
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
III. ALASKA ASSET-PROTECTION TRUST ACT . . . . . . . . . . . 487
A.
B.
C.
D.
E.
F.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How to Create an Alaska APT . . . . . . . . . . . . . . . . . . . . . .
Who May Defeat an Alaska APT . . . . . . . . . . . . . . . . . . .
Consequences if an Alaska APT Is Defeated . . . . . . . . . .
Moving Trusts to Alaska . . . . . . . . . . . . . . . . . . . . . . . . . .
Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
487
487
488
490
490
491
IV. RHODE ISLAND QUALIFIED DISPOSITIONS IN TRUST
ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. How to Create a Rhode Island APT . . . . . . . . . . . . . . . . . .
C. Who May Defeat a Rhode Island APT . . . . . . . . . . . . . . .
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. Creditors Who May Defeat a Rhode Island APT . . . .
a.
Pre-Transfer Claims . . . . . . . . . . . . . . . . . . . . .
b.
Post-Transfer Claims . . . . . . . . . . . . . . . . . . . .
c.
Family Claims . . . . . . . . . . . . . . . . . . . . . . . . . .
d.
Tort Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. Consequences if a Rhode Island APT Is Defeated . . . . . .
E. Moving Trusts to Rhode Island . . . . . . . . . . . . . . . . . . . . .
F. Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
V.
NEVADA ASSET-PROTECTION TRUST ACT . . . . . . . . . . .
A.
B.
C.
D.
E.
F.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How to Create a Nevada APT . . . . . . . . . . . . . . . . . . . . . .
Who May Defeat a Nevada APT . . . . . . . . . . . . . . . . . . . .
Consequences if a Nevada APT Is Defeated . . . . . . . . . . .
Moving Trusts to Nevada . . . . . . . . . . . . . . . . . . . . . . . . .
Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VI. UTAH ASSET-PROTECTION TRUST ACT . . . . . . . . . . . . .
A.
B.
C.
D.
E.
F.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How to Create a Utah APT . . . . . . . . . . . . . . . . . . . . . . . .
Who May Defeat a Utah APT . . . . . . . . . . . . . . . . . . . . . .
Consequences if a Utah APT Is Defeated . . . . . . . . . . . . .
Moving Trusts to Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VII. OTHER STATUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. Oklahoma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. How to Create an Oklahoma APT . . . . . . . . . . . . . . . .
3. Who May Defeat an Oklahoma APT . . . . . . . . . . . . . .
491
491
492
492
492
492
492
493
493
493
493
493
494
494
494
494
495
495
495
495
495
496
496
498
498
499
499
499
499
499
500
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 479
4. Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Colorado . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. South Dakota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VIII. A COMPARISON OF ALASKA AND DELAWARE APTS . . .
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Advantages of Alaska APTs . . . . . . . . . . . . . . . . . . . . . . .
1. No Recognition of Constructive Fraud . . . . . . . . . . . .
2. Narrower Exception for Family Claims . . . . . . . . . . .
3. No Exception for Existing Tort Claims . . . . . . . . . . . .
4. Limits Rights of Existing Creditors . . . . . . . . . . . . . . .
C. Advantages of Delaware APTs . . . . . . . . . . . . . . . . . . . . .
1. Much Longer Tradition of Trust Leadership . . . . . . . .
2. Court System Superior . . . . . . . . . . . . . . . . . . . . . . . .
3. Harder to Prove Fraudulent Transfer . . . . . . . . . . . . .
4. Better Full Faith and Credit Defense . . . . . . . . . . . . .
5. Counsel Fee Awards Less Creditor-Friendly . . . . . . .
6. Additional Distribution Options . . . . . . . . . . . . . . . . .
7. Surviving Spouse Cannot Reach Trust . . . . . . . . . . . .
IX. A COMPARISON OF NEVADA AND DELAWARE APTS . . .
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Advantages of Nevada APTs . . . . . . . . . . . . . . . . . . . . . . .
1. Might Have Shorter Claim Periods . . . . . . . . . . . . . . .
2. No Exception for Family Claims . . . . . . . . . . . . . . . . .
3. No Exception for Existing Tort Claims . . . . . . . . . . . .
C. Advantages of Delaware APTs . . . . . . . . . . . . . . . . . . . . .
1. Much Longer Tradition of Trust Leadership . . . . . . . .
2. Court System Superior . . . . . . . . . . . . . . . . . . . . . . . .
3. Might Have Shorter Claim Periods . . . . . . . . . . . . . . .
4. Might Have Shorter Claim Periods for
Enforcement of Foreign Judgments . . . . . . . . . . . . . .
5. Better Full Faith and Credit Defense . . . . . . . . . . . . .
6. Provides Protection to Advisers and Attorneys . . . . . .
7. Addresses Consequences of Successful Attack . . . . . .
8. More Distribution Options . . . . . . . . . . . . . . . . . . . . .
APPENDIX A A COMPARISON OF FIVE DAPT ACTS . . . . . . . .
APPENDIX B DELAWARE CASE STUDIES . . . . . . . . . . . . . . . . .
APPENDIX C STATE LIABILITY SYSTEMS RANKING . . . . . . .
500
501
501
502
502
502
502
502
503
504
504
505
505
505
505
506
506
507
507
507
507
507
507
507
508
508
508
508
508
510
510
510
511
511
512
521
523
APPENDIX D DELAWARE APT FORM IRREVOCABLE TRUST
AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 524
480
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
I. INTRODUCTION
All U.S. jurisdictions have traditionally declined to extend the protection of their spendthrift trust laws to trusts in which the trustor had
retained an interest, at least to the extent of that interest. A client now may
create an irrevocable self-settled spendthrift trust that generally is effective
against claims by creditors, an asset-protection trust (“APT”), in five
domestic jurisdictions—Alaska, Delaware, Rhode Island, Nevada, and
Utah (“DAPT”). Although the client also might be able to create this type
of trust in Oklahoma, Missouri, or Colorado, this discussion will not focus
on those states because the statutes in question are either flawed, not fully
developed, or both.
II. DELAWARE QUALIFIED DISPOSITIONS IN TRUST ACT
A. Introduction
On July 9, 1997, Governor Carper signed the Delaware Qualified Dispositions in Trust Act (“Delaware Act”).1 The Delaware legislature has
amended the Delaware Act several times since its enactment,2 including in
2005.3 Because the Delaware legislature will likely amend the Delaware
Act from time to time in the future, attorneys should confirm that they are
working with the current statute in a particular case. The current Delaware
Act, including the 2005 amendments, is available online.4
B. How to Create a Delaware APT
To create an APT under the Delaware Act (“Delaware APT”), a
person must create an irrevocable trust that contains a spendthrift clause;
provides that Delaware law governs the trust’s validity, construction, and
administration; and appoints at least one Delaware trustee.5 A Delaware
1
Qualified Dispositions in Trust Act, 71 Del. Laws 159 (1997) (codified as amended
at DEL. CODE ANN. tit. 12, §§ 3570-3576 (2001 & Supp. 2004)).
2
See Qualified Dispositions in Trust Act, 71 Del. Laws 254 (1998); 71 Del. Laws 343
(1998); 72 Del. Laws 59 (1999); 72 Del. Laws 195 (1999); 72 Del. Laws 341 (2000); 73
Del. Laws 378 (2002); 74 Del. Laws 100 (2003); 75 Del. Laws 97 (2005) (codified as
amended at DEL. CODE ANN. tit. 12, §§ 3570-3576 (2001 & Supp. 2004). See also Richard
W. Nenno & John E. Sullivan, III, Delaware Asset Protection Trusts: Avoiding Fraudulent
Transfers and Attorney Liability, 32 EST. PLAN. 22 (2005).
3
See S. 150, 143rd Gen. Assem., Reg. Sess. (Del. 2005), available at www.legis.state.de.us/
lis/lis143.nsf/vwlegislation/SB+150?opendocument (last visited Oct. 16, 2005).
4
DEL. CODE ANN. tit. 12, §§ 3570-3576 (2005), available at www.delcode.state.de.us/
title12/C035/SC06/index.htm (last visited Sept. 21, 2005).
5
DEL. CODE ANN. tit. 12, § 3570(10)(a)-(c) (2001 & Supp. 2004) (amended 2005).
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 481
trustee is either an individual who resides in Delaware or a corporation
that is authorized to conduct trust business in Delaware and is regulated by
the Delaware Bank Commissioner or a federal agency.6 The Delaware
trustee or trustees must maintain or arrange for custody in Delaware of
some of the trust property, maintain records for the trust, prepare or
arrange for the preparation of fiduciary income tax returns, or otherwise
materially participate in the administration of the trust.7 If only one Delaware trustee is acting, the statute deems that the trustee has resigned if the
trustee ceases to meet these requirements.8 Similarly, a trustee of a Delaware APT automatically ceases to serve if a court declines to apply Delaware law in determining the validity, construction, or administration of the
trust, or the effect of its spendthrift clause, in a proceeding involving the
trustee.9 If a trustee ceases to act for one of these reasons, any successor
trustee designated in the trust will take its place and the Delaware Court of
Chancery may fill any vacancy.10 The trust may have non-Delaware
cotrustees11 and Delaware or non-Delaware advisers with authority to
replace advisers and Delaware trustees, participate in investment decisions, and perform other duties.12
The Delaware Act specifically permits the trustor of a Delaware APT
to have the power to do the following:
1. Consent to or direct investment changes;
2. Veto distributions;
3. Replace trustees or advisers with persons who are not related
or subordinate to the trustor within the meaning of section 672(c)
of the Internal Revenue Code of 1986 (“Code”).13
The Delaware Act also expressly authorizes the trustor to have:
1. The ability to receive income or principal pursuant to a standard that governs the distribution of principal or the discretion of
the Delaware trustees, non-Delaware trustees, and advisers;
2. The right to receive current income distributions;
3. An interest in a charitable-remainder trust (“CRT”) or a qual6
DEL. CODE ANN. tit. 12, § 3570(9)(a) (2001).
Id. § 3570(9)(b).
8
Id. § 3570(9)(e).
9
DEL. CODE ANN. tit. 12, § 3572(g) (Supp. 2004) (amended 2005).
10
Id.
11
DEL. CODE ANN. tit. 12, § 3570(9)(f) (2001).
12
Id. § 3570(9)(c).
13
DEL. CODE ANN. tit. 12, § 3570(9)(d), (10)(b) (2001 & Supp. 2004).
7
482
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
ified personal-residence trust (“QPRT”) or effective August 1,
2005, a qualified annuity interest created if a residence in a QPRT
ceases to be used as a personal residence;
4. Up to a 5% interest in a grantor-retained annuity trust
(“GRAT”), a grantor-retained unitrust (“GRUT”), or a total-return
unitrust; and
5. A non-general testamentary power of appointment.14
One of the 2005 amendments to the Delaware Act addressed Revenue
Ruling 2004-64, which held, inter alia, that the grant of discretion to a
trustee to reimburse the trustor for income taxes that the trustor must pay
on a grantor trust will not cause estate tax inclusion under Code section
2036 if applicable local law does not subject the trust assets to the claims
of the trustor’s creditors.15 Previously, this result could have been achieved
by giving the trustee, adviser, or protector under a Delaware APT discretion to distribute income, principal, or both to the trustor, and this option
still is available.16 For trustors who do not want to grant such broad discretion, the Delaware Act now permits a Delaware APT simply to grant
discretion to reimburse the trustor for income taxes attributable to the
trust.17
Under the Delaware Act, the trustor may not be a trustee and may only
have the interests and powers described above.18 Furthermore, the trustor
has only the powers and authorities conferred by the trust instrument, and
any agreement or understanding purporting to grant or permit the retention
of any greater rights or authority is void.19 To be conservative, Delaware
attorneys counsel clients not to retain powers and interests that the Delaware Act does not specifically authorize. Consequently, the trustor probably should not have the express right to get the assets back and the trustor’s estate probably should not have the express right to be reimbursed for
death taxes attributable to the trust.
Although the Delaware Act permits a variety of interests and powers,
certain provisions might be inappropriate in a particular case. For example, the use of non-Delaware cotrustees might increase a trust’s suscepti-
14
DEL. CODE ANN. tit. 12, § 3570(9)(d), (10)(b) (2001 & Supp. 2004) (amended
2005).
15
Rev. Rul. 2004-64, 2004-27 I.R.B. 7.
DEL. CODE ANN. tit. 12, § 3570(10)(b)(3), (6) (2001 & Supp. 2004).
17
DEL. CODE ANN. tit. 12, § 3570(10)(b)(9) (2001 & Supp. 2004) (amended 2005).
18
DEL. CODE ANN. tit. 12, § 3571 (2001).
19
Id.
16
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 483
bility to process in other jurisdictions and the possibility that a court might
find Delaware law not to govern the trust or, more importantly, the rights
of beneficiaries and their creditors. Under the Delaware Act, a spendthrift
clause will be deemed a restriction on the transfer of the trustor’s beneficial interest in the trust that is enforceable under applicable nonbankruptcy
law within the meaning of section 541(c)(2) of the Bankruptcy Code.20
C. Who May Defeat a Delaware APT
1. Introduction
The Delaware Act bars original actions and actions to enforce judgments, including judgments entered elsewhere, and it requires any action
involving a Delaware APT to be brought in the Delaware Court of Chancery.21 Any action to set aside this type of trust must be based on section
1304 or section 1305 of the Delaware Uniform Fraudulent Transfer Act
(“UFTA”).22
2. Creditors Who May Defeat a Delaware APT
Four categories of creditors may defeat Delaware APTs.
a. Pre-Transfer Claims
If a creditor’s claim arose before the trust was created, the creditor
must bring suit within four years after the trust’s creation or, if later, within one year after the creditor discovered, or should have discovered, the
trust23 and must prove, by clear and convincing evidence, that creation of
the trust was a fraudulent transfer. To minimize the effect of the one-year
limitation, the trustor might notify known pre-transfer creditors of the
trust’s existence within three years of its creation.
b. Post-Transfer Claims
If a creditor’s claim arose after the creation of the trust, the creditor
must bring suit within four years after the trust’s creation24 and must
prove, by clear and convincing evidence, that creation of the trust was a
fraudulent transfer. This exception is not available for a creditor who does
not exist or is not foreseeable when a Delaware APT is created.
20
Id. § 3570(10)(c).
Id. § 3572(a).
22
Id. The Uniform Fraudulent Transfer Act is codified at DEL. CODE ANN. tit. 6,
§§ 1301-1311 (1999 & Supp. 2004).
23
DEL. CODE ANN. tit. 12, § 3572(b)(1) (2001).
24
Id. § 3572(b)(2).
21
484
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
c. Family Claims
A person whose claim results from an agreement or court order providing for alimony, child support, or property division may reach the assets of a Delaware APT,25 but only a spouse who was married to the trustor of the trust before its creation may benefit from this exception.26
Another 2005 Delaware amendment addressed Revenue Procedure
2005-24, which requires spouses of trustors of certain post-June 27, 2005
inter vivos CRTs to waive rights to reach these trusts by electing against
the will.27 Although historically surviving spouses could not reach a Delaware APT to satisfy rights of election, this result now is explicit, regardless of whether the trustor lived in Delaware at death. Thus, the final sentence of the pertinent section of the Delaware Act provides that a Delaware APT may not be reached to satisfy a claim for “elective share.”28
d. Tort Claims
A person who suffers death, personal injury, or property damage before the liable trustor establishes a Delaware APT may reach the trust
assets.29
D. Consequences if a Delaware APT Is Defeated
If one of the above exceptions applies, the creditor defeats the Delaware APT only to the extent necessary to pay that creditor’s claim and related costs, including attorneys’ fees.30 If multiple creditors with the type
of claim that is permitted to be pursued confront a trustor, each creditor
must bring a separate action for avoidance.
If a trustee has not acted in bad faith in accepting and administering
the trust, that trustee may use trust assets to pay its costs of litigating the
claim before satisfying the claim.31 A trustee’s mere acceptance of the trust
does not create the presumption of bad faith. A commentator has written
that “the trustee’s lien, which is substantially similar to the lien of offshore
trustees, creates a tremendous roadblock for plaintiffs wishing to avoid a
qualified disposition.”32
25
DEL. CODE ANN. tit. 12, § 3573(1) (2001 & Supp. 2004) (amended 2005).
DEL. CODE ANN. tit. 12, § 3570(7) (2001).
27
Rev. Proc. 2005-24, 2005-16 I.R.B. 909.
28
DEL. CODE ANN. tit. 12, § 3573 (2001 & Supp. 2004) (amended 2005).
29
Id. § 3573(2).
30
DEL. CODE ANN. tit. 12, § 3574(a) (2001) (amended 2005).
31
Id. § 3574(b)(1).
32
John E. Sullivan, III, Gutting the Rule Against Self-Settled Trusts: How the New
26
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 485
A beneficiary who has received a distribution before a creditor brings
a successful suit to defeat a Delaware APT may keep the distribution unless the beneficiary acted in bad faith.33 The above commentator points
out, “The Act’s innocent beneficiary clause is . . . a potent constraint on
creditor remedies and a commensurately strong form of asset protection.”34
Of course, a trustor-beneficiary who has received a distribution may have
the actual amount attached once it is in hand, and any amount not expended will be available to any creditor.
One of the 2005 amendments revised this provision of the Delaware
Act. Previously, a trustee was authorized to pay its expenses before satisfying such a creditor’s claim unless it acted in bad faith, and a beneficiary was allowed to keep a distribution that the beneficiary had received
unless the beneficiary acted in bad faith, but the burden of proof was not
covered in either instance. A creditor now must prove this bad faith by
clear and convincing evidence unless the beneficiary was the trustor, in
which case the creditor must prove that the trustor-beneficiary acted in bad
faith by a preponderance of the evidence.35
The creation of a Delaware APT will not be treated as fraudulent or
otherwise contrary to law for purposes of any action against any trustee,
adviser, or protector acting under a trust instrument or against any attorney
or other professional adviser involved in establishing the trust.36
E. Moving ATPs to Delaware
A trustee may create a Delaware APT either by establishing a Delaware APT or by effectuating the transfer of a trust to Delaware that meets
the requirements of the Delaware Act.37 If a trustee of an irrevocable
spendthrift trust creates a Delaware APT after June 30, 1997, the time that
the trust exists before it is moved to Delaware counts toward the four-year
period for pursuing post-transfer claims against the trust.38 Thus, it might
be possible for the trustee of an onshore or offshore trust to create a Delaware APT that cannot be defeated under the Delaware Act.
Another 2005 amendment to the Delaware Act will facilitate the transfer of offshore and other self-settled trusts to Delaware. Under the Dela-
Delaware Trust Law Competes with Offshore Trusts, 23 DEL. J. CORP. L. 423, 475 (1998).
33
DEL. CODE ANN. tit. 12, § 3574(b)(2) (2001) (amended 2005).
34
Sullivan, supra note 32, at 464.
35
DEL. CODE ANN. tit. 12, § 3574(c) (2001) (amended 2005).
36
DEL. CODE ANN. tit. 12, § 3572(d)–(e) (2001 & Supp. 2004).
37
Id. § 3570(8).
38
DEL. CODE ANN. tit. 12, § 3572(c) (2001) (amended 2005), § 3575 (2001).
486
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
ware Act, a trustor may have a testamentary power to appoint to anyone
except the trustor, the trustor’s estate, the trustor’s creditors, or creditors of
the trustor’s estate.39 Some existing trusts that explored moving to Delaware did not qualify because they gave the trustor a general power of appointment. Now the existing trustee may, with the written consent of the
trustor, bring a trust into conformity with the Delaware Act by deleting the
excessive power.40
F. Infrastructure
An important factor in evaluating the effectiveness of Delaware APTs
is that Delaware has a long-standing tradition of leadership in the financial
services industry. The original version of the Delaware Act was written
and enacted over a three-month period in 1997, and amendments have
been drafted and enacted in short order.
The chancellor and vice chancellors of the Delaware Court of Chancery and the justices of the Delaware Supreme Court—the courts that
handle corporate matters and would handle challenges to APTs in Delaware—are not elected. Instead, the Delaware Constitution requires their
appointment by the Governor with the consent of a majority of the members of the senate and that all Delaware judges come as equally as possible
from the two major political parties.41 For this and other reasons, a recent
U.S. Chamber of Commerce study ranked Delaware’s liability system the
best in the country.42
The following excerpt from the opinion of then vice chancellor, now
Delaware Supreme Court justice, Berger in Gibson v. Speegle demonstrates Delaware judges’ willingness to enforce Delaware statutes in difficult cases, such as those that might arise if creditors were to challenge
Delaware APTs:
In the absence of a statute, I would not hesitate to . . . allow
Aetna’s claim. I am not at all comfortable with the fact that Virginia Barwick, by use of a spendthrift trust, assisted her son in
avoiding his obligation to pay for his crimes. [He was indicted on
eight counts of arson, burglary, and criminal mischief and pled
guilty to the lesser included offenses of criminal trespass in the
first degree, arson in the third degree, and criminal mischief.]
39
DEL. CODE ANN. tit. 12, § 3570(10)(b)(2) (2001 & Supp. 2004).
DEL. CODE ANN. tit. 12, § 3572(c) (2001) (amended 2005).
41
DEL. CONST. art. IV, § 3.
42
See infra Appendix C.
40
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 487
However, it is not the Court’s function to write the law but only to
interpret it. The statute enacted by the General Assembl[y] contains no exceptions. . . . The proposed statute, which contained an
exception for tort claimants, . . . was available to the General
Assembly in 1959 when § 3536 was amended. The fact that such
a modification was not enacted leaves me no choice but to conclude that the General Assembly intended § 3536 to [be] an “unrestrained” form of spendthrift provision. As a result, I reluctantly
conclude that Aetna is a creditor within the meaning of § 3536
and its proof of claim must be denied.43
III. ALASKA ASSET-PROTECTION TRUST ACT
A. Introduction
The Alaska Trust Act (“Alaska Act”)44 took effect on April 2, 1997.
The Alaska legislature amended and expanded the Alaska Act’s pertinent
provisions in 1998,45 2003,46 and 2004.47 The current version of the Alaska
Act is available online.48
B. How to Create an Alaska APT
To create an APT under the Alaska Act (“Alaska APT”), a settlor must
create an Alaska spendthrift trust. To do so, some or all of the trust assets
must be deposited in Alaska and administered by an Alaska trustee.49 A
trustee may be a bank with trust powers (state-chartered or nationally
chartered), a state-chartered trust company that has its principal place of
business in Alaska, or an individual who resides in Alaska.50 The Alaska
trustee must maintain records for the trust on an exclusive or nonexclusive
basis and prepare or arrange for the preparation of fiduciary income tax re43
ted).
44
No. 134, 1984 Del. Ch. LEXIS 475, at *6-7 (Del. Ch. May 30, 1984) (citation omit-
See Act of Apr. 2, 1997, 1997 Alaska Sess. Laws 6.
See 1998 Alaska Sess. Laws 105.
46
See 2003 Alaska Sess. Laws 138. See also Stephen E. Greer, 2003 Alaska Trust Act,
STEVE LEIMBERG’S ESTATE PLAN. EMAIL NEWSL. #586 (Sept. 19, 2003), available at
www.leimbergservices.com.
47
See 2004 Alaska Sess. Laws 82. See also David G. Shaftel, Recent Developments in
Alaska Trust and Estate Law, STEVE LEIMBERG’S ESTATE PLAN. EMAIL NEWSL. #677 (May
11, 2004), available at www.leimbergservices.com.
48
ALASKA STAT. §§ 34.40.110-.45.120 (2004) (Westlaw), available at
www.alaskalaw.com/aktruststat.htm (last visited Nov. 13, 2005).
49
ALASKA STAT. § 13.36.035(c)(1)-(2) (2004).
50
See id. § 13.36.390(2).
45
488
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
turns for the trust.51 Part or all of the administration of the trust must take
place in Alaska.52 If at least one Alaska trustee serves, an individual or
institution that is not an Alaska trustee also may serve.53 The settlor may
be a cotrustee or advisor if the settlor does not have a trustee power over
discretionary distributions,54 and the trust may authorize the settlor to
appoint trust protectors and trustee advisors.55
The terms of the trust instrument set the rights of the settlor in trust
property, and implied or express understandings are void.56 Before a settlor transfers assets to an Alaska APT, the settlor must sign a solvency
affidavit.57 Alaska APTs may provide for trust protectors58 and trustee advisors.59 Under the Alaska Act, a term in a trust instrument that provides
the restriction described in the Alaska Act operates as a restriction on the
transfer of the settlor’s beneficial interest in the trust that is enforceable
under applicable nonbankruptcy law under section 541(c)(2) of the Bankruptcy Code.60
C. Who May Defeat an Alaska APT
An action, including an action to enforce a judgment entered by a
court or other body having adjudicative authority, may not be brought for
an attachment or other provisional remedy against property in an Alaska
APT, unless the action is to set aside a fraudulent transfer and is brought
within the limitations period described below. Alaska courts have exclusive jurisdiction over controversies involving Alaska APTs.61
The Alaska Act does not protect the settlor from a creditor’s claim under the following conditions:
1. The transfer to the trust was intended to defraud that creditor;
2. The settlor may revoke or terminate all or a part of the trust
without the consent of a person who has a significant adverse
beneficial interest;
51
See id. § 13.36.035(c)(3).
See id. § 13.36.035(c)(4).
53
See id. § 13.36.320(a).
54
See id. § 34.40.110(f).
55
See id. § 34.40.110(h).
56
See id. § 34.40.110(i).
57
See id. § 34.40.110(j).
58
See id. § 13.36.370.
59
See id. § 13.36.375.
60
See id. § 34.40.110(a).
61
See id. § 34.40.110(k).
52
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 489
3. The trust instrument requires that all or a part of the trust income, principal, or both be distributed to the settlor; or
4. At the time of the transfer, the settlor is in default by 30 or
more days of making a payment under a child support judgment or order.62
A settlor’s power to revoke or terminate does not include:
1. A power to veto trust distributions;
2. A testamentary non-general power of appointment;
3. The right to receive:
a. A distribution from the trust in the discretion of a
person, including the trustee, other than the settlor;
b. Distributions from a CRT;
c. Distributions from a total-return trust;
d. An interest in a QPRT; or
e. Distributions from a GRAT or GRUT.63
The following rules apply to fraudulent conveyance claims under
Alaska law:
1. If the creditor’s claim arose before the transfer is made, the
claim will be extinguished unless the creditor brings an action
within four years after the transfer is made or, if later, within
one year after the creditor discovers, or reasonably could have
discovered, the transfer (to take advantage of this provision, a
creditor must prove, by a preponderance of the evidence, that
the creditor asserted a specific claim against the settlor before
the transfer or, within four years of the transfer, file another
action against the settlor that asserts a claim based on an act
or omission of the settlor that occurred before the transfer);
and
2. If the creditor’s claim arose after the transfer is made, the
claim will be extinguished unless the creditor brings an action
within four years after the transfer is made.64
Unlike the Delaware Act, the Alaska Act does not contain a separate
exception for claims by existing or former spouses and minor children, but
this does not necessarily mean that claimants will not be able to reach the
62
See id. § 34.40.110(b).
See id. § 34.40.110(b)(2)-(3).
64
See id. § 34.40.110(d).
63
490
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
assets of Alaska APTs. First, if a spouse elects against the will of the
settlor of an Alaska APT, the augmented estate includes the trust.65 This
exception is not limited to Alaska residents because, under Alaska law, the
right of a surviving spouse of a settlor who dies outside Alaska to take an
elective share in property in Alaska is governed by the law of the settlor’s
domicile at death.66 Second, a federal statute requires each state to enforce
child support orders made by courts of other states,67 and in actions to enforce arrearages in child support orders, the statute requires courts to apply
the statute of limitations of the forum state or the state of the court that
issued the order, whichever is longer.68 Third, courts will likely view
claims by destitute spouses, former spouses, and minor children sympathetically and they therefore might find ways to reach trust assets.
Unlike the Delaware Act, the Alaska Act also does not contain an exception for tort claims that existed when an APT was created.
D. Consequences if an Alaska APT Is Defeated
If one of the above exceptions applies, a creditor may reach trust assets only to the extent necessary to pay that creditor’s claim and related
costs, including attorney fees.69 Similarly, a creditor may attach the assets
of an Alaska APT only to the extent that one of the above exceptions
applies.70 If the trustee has not acted in bad faith in accepting and administering the trust, the trustee may use trust assets to pay its costs of litigating
the claim before satisfying the claim, and a beneficiary, including the
settlor, who received a proper distribution before a creditor brings a
successful suit to defeat a transfer may retain the distribution.71 The Alaska
Act offers protection to trustees and advisors who participate in the preparation and funding of an APT.72 No-contest clauses are enforceable.73
E. Moving Trusts to Alaska
A non-Alaska trust may become an Alaska APT if it satisfies the
above requirements.74 A trust that has its situs transferred to Alaska and
65
See id. § 13.12.205(2)(A).
See id. § 13.12.202(d).
67
See 28 U.S.C. § 1738B(a) (2004).
68
See id. § 1738B(h) (3).
69
ALASKA STAT. §§ 13.36.310(b), 34.40.110(c) (2004).
70
See id. § 34.40.110(c).
71
See id. § 13.36.310(c).
72
See id. § 34.40.110(e).
73
See id. § 13.36.330.
74
See id. § 13.36.043.
66
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 491
has provisions that permit payments to the settlor, allows the trust to be
perpetual, or is not expressly prohibited by the laws of Alaska is effective
and enforceable.75
F. Infrastructure
Because Alaska did not enact favorable trust laws until 1997, one cannot predict how Alaska courts and legislators will respond to difficult
cases that arise under the Alaska Act. A recent U.S. Chamber of Commerce study ranked Alaska’s liability system as the 33rd best in the country.76
A recent case was decided before the Alaska Act was enacted. The
case involved bad facts for the debtors, and the U.S. Bankruptcy Court for
the District of Alaska refused to recognize the debtors’ Belize APTs.77
IV. RHODE ISLAND QUALIFIED DISPOSITIONS IN TRUST ACT
A. Introduction
Rhode Island’s Qualified Dispositions in Trust Act (“Rhode Island
Act”), took effect on July 1, 1999.78 The Rhode Island Act is virtually
identical to the original version of the Delaware Act. The current version
of the Rhode Island Act is available online.79
B. How to Create a Rhode Island APT
To create an APT under the Rhode Island Act (“Rhode Island APT”),
a person must create an irrevocable trust that contains a spendthrift clause;
provides that Rhode Island law governs the trust’s validity, construction,
and administration; and appoints a Rhode Island trustee.80 The Rhode
Island trustee is an individual (other than the trustor) who resides in Rhode
Island or an entity authorized by the law of Rhode Island to act as a trustee
and whose activities are subject to supervision by the Rhode Island Department of Business Regulation or a federal agency.81 The Rhode Island
75
Id.
See infra Appendix C.
77
Higashi v. Brown, (In re Brown), No. 95-03072, 1996 WL 33657614, at *6.(Bankr.
D. Alaska Mar. 11, 1996).
78
Qualified Dispositions in Trust Act 1999 R.I. Pub. Laws 402 (codified at R.I. GEN.
LAWS §§ 18-9.2-1–18-9.2-7 (2003)).
79
R.I. GEN. LAWS §§ 18-9.2-1 to -7 (2003), available at www.rilin.state.ri.us/Statutes/
TITLE18/18-9.2/INDEX.HTM (last visited Sept. 21, 2005).
80
See R.I. GEN. LAWS § 18-9.2-2(9) (2003).
81
See id. § 18-9.2-2(8)(i).
76
492
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
trustee must maintain or arrange for custody in Rhode Island of some of
the trust property, maintain records for the trust, prepare or arrange for the
preparation of fiduciary income tax returns, or otherwise materially
participate in the administration of the trust.82 The Rhode Island Act does
not contemplate the appointment of Rhode Island or non-Rhode Island
cotrustees. The trust instrument will be irrevocable even if it gives the
trustor a special testamentary power of appointment, permits the trustor to
veto distributions, or authorizes the trustor to receive income or principal
distributions in the discretion of a trustee other than the trustor or someone
related or subordinate to the trustor.83
C. Who May Defeat a Rhode Island APT
1. Introduction
The Rhode Island Act bars original actions and actions to enforce
judgments, including judgments entered elsewhere.84 Any action to set
aside a Rhode Island APT must be based on the Rhode Island UFTA.85
2. Creditors Who May Defeat a Rhode Island APT
The following four categories of creditors may defeat Rhode Island
APTs:
a. Pre-Transfer Claims
If a creditor’s claim arose before the trust was created, the creditor
must bring suit within four years after the trust’s creation or, if later, within one year after the creditor discovered, or should have discovered, the
creation of the trust.86 To minimize the effect of the one-year limitation,
the trustor might notify known pre-transfer creditors of the trust’s existence within three years of its creation.
b. Post-Transfer Claims
If a creditor’s claim arose after the trust was created, the creditor must
bring suit within four years after the trust’s creation.87 This exception is
not available for a creditor who does not exist or is not foreseeable when a
Rhode Island APT is created.
82
See id. § 18-9.2-2(8)(ii).
See id. §§ 18-9.2-2(9)(ii), 18-9.2-3.
84
See id. § 18-9.2-4(a).
85
See id. §§ 6-16-1–6-16-12.
86
See id. § 18-9.2-4(b)(1).
87
See id. § 18-9.2-4(b)(2).
83
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 493
c. Family Claims
A person to whom the trustor is indebted on or before the date of a
trust’s creation on account of an agreement or court order providing for
alimony, child support, or property division may reach the assets of a
Rhode Island APT.88
d. Tort Claims
A person who suffers death, personal injury, or property damage before the liable trustor establishes a Rhode Island APT may reach the trust
assets.89
D. Consequences if a Rhode Island APT Is Defeated
If one of the above exceptions applies, the creditor defeats the Rhode
Island APT only to the extent necessary to pay that creditor’s claim and
related costs, including attorneys’ fees.90 If multiple creditors confront a
trustor with permissible claims, each creditor must bring a separate action
for avoidance.
If the trustee has not acted in bad faith in accepting and administering
the trust, the trustee may use trust assets to pay its costs of litigating the
claim before satisfying the claim.91 A trustee’s mere acceptance of the trust
does not create the presumption of bad faith.
A beneficiary who has received a distribution before a creditor brings
a successful suit to defeat a Rhode Island APT may keep the distribution
unless the beneficiary acted in bad faith.92 Of course, a trustor-beneficiary
who has received a distribution may have the actual amount attached once
it is in hand, and any amount not expended will be available to any creditor.
E. Moving Trusts to Rhode Island
The Rhode Island Act does not address this subject.
F. Infrastructure
Because Rhode Island has had favorable trust laws only since 1999,
one has difficulty assessing how Rhode Island courts will handle chal-
88
See id. § 18-9.2-5(a).
See id. § 18-9.2-5(b).
90
See id. § 18-9.2-6(a).
91
See id. § 18-9.2-6(b)(1)(i).
92
See id. § 18-9.2-6(c).
89
494
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
lenges to Rhode Island APTs. A recent U.S. Chamber of Commerce study
rated Rhode Island’s liability system as the 35th best in the United
States.93
V. NEVADA ASSET-PROTECTION TRUST ACT
A. Introduction
Nevada’s APT legislation (“Nevada Act”) became effective October 1,
1999.94 The Nevada Act, current through 2006 (the Nevada Legislature
will not reconvene until 2007), is available online.95
B. How to Create a Nevada APT96
To create an APT under the Nevada Act (“Nevada APT”), a settlor
must create in writing an irrevocable Nevada spendthrift trust.97 The trust
must appoint at least one Nevada trustee. A Nevada trustee may be a
natural person who resides and is domiciled in Nevada, a trust company
that maintains an office in Nevada, or a bank with trust powers that
maintains an office in Nevada.98 The Nevada trustee must maintain records
and prepare income tax returns for the trust, and part or all of the administration of the trust must take place in Nevada.99
C. Who May Defeat a Nevada APT
The Nevada Act does not protect the settlor from creditors’ claims if:
1. The trust is revocable;
2. The trust instrument requires that all or a part of the trust income or principal be distributed to the settlor; and
3. The transfer was intended to hinder, delay, or defraud known
creditors.100
93
See infra Appendix C.
Spendthrift Trust Act of Nevada, 1999 Nev. Stat. 299 (codified at NEV. REV. STAT.
§§ 166.010-166.170 (2003)).
95
NEV. REV. STAT. §§ 166.010–166.170 (2003), available at www.leg.state.nv.us/
NRS/NRS-166.html (last visited Sept. 21, 2005).
96
See Charles D. Fox IV & Michael J. Huft, Asset Protection and Dynasty Trusts, 37
REAL PROP. PROB. & TR. J. 287, 326–27 (2002); Jeffrey L. Burr & Mark Lee Dodds,
Feature: Nevada’s New Asset Protection Act, NEV. LAW. Apr. 2000, at 19.
97
See NEV. REV. STAT. ANN. § 166.040(1)(b)-(c) (LexisNexis 2003).
98
See id. § 166.015(2).
99
See id. § 166.015(1)(d).
100
See id. § 166.040(1)(b).
94
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 495
The settlor may keep a power to prevent trust distributions, a testamentary special power of appointment, and the ability to receive a distribution from the trust in the discretion of another person.101
Unlike the Delaware, Alaska, and Rhode Island Acts, it is not clear
that the Nevada Act requires a creditor to prove that creation of a Nevada
APT was a fraudulent transfer. Thus, with respect to a transfer to a Nevada
APT (whether or not it is a fraudulent transfer):
1. If the creditor’s claim arose before the trust is created, the creditor must bring an action within two years after the trust’s
creation or, if later, within six months after the creditor discovers, or reasonably should have discovered, the trust; and
2. If the creditor’s claim arose after the trust is created, the creditor must bring an action within two years after the trust’s
creation.102
To bring the Nevada Act into line with the other laws, it should be
amended to specify that a creditor must demonstrate that creation of the
trust was fraudulent.
D. Consequences if a Nevada APT Is Defeated
The Nevada Act does not address this subject.
E. Moving Trusts to Nevada
The Nevada Act does not address this subject.
F. Infrastructure
Because Nevada did not enact favorable trust laws until 1999, one
cannot predict how Nevada courts will respond to difficult cases that arise
under the Nevada Act. A recent U.S. Chamber of Commerce study rated
Nevada’s liability system as the 29th best in the United States.103
VI. UTAH ASSET-PROTECTION TRUST ACT
A. Introduction
The Utah Asset-Protection Trust Act (“Utah Act”)104 took effect on
101
See id. § 166.040(2).
See id. § 166.170.
103
See infra Appendix C.
104
See Act of Dec. 31, 2003, 2003 Utah Laws 301 (codified as amended at UTAH
CODE ANN. § 25-6-14 (Supp. 2005)).
102
496
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
December 31, 2003. The Utah Act, current through 2005, is available online.105
B. How to Create a Utah APT
To create an APT under the Utah Act (“Utah APT”), a settlor must
irrevocably transfer real or personal property or interests in real or personal property to a Utah trust company, as trustee of a trust that provides
that the income or principal interest of the settlor as beneficiary may not
be voluntarily or involuntarily transferred before payment or delivery to
the settlor as beneficiary.106 A Utah trust company is an institution that is
authorized to engage in the trust business under Utah law and includes
Utah depository institutions, non-Utah depository institutions authorized
to engage in business in Utah, and certain other institutions.107 The Utah
trust company must hold some assets, and some administration must occur
in Utah.108 Any real property held in a Utah APT must include in its legal
title the words “asset protection trust.”109 If at least one trustee is a Utah
trust company, individual cotrustees also may serve.110 A transfer restriction on a Utah APT is to be considered to be a restriction on the transfer of
the settlor’s beneficial interest in the trust within the meaning of section
541(c)(2) of the Bankruptcy Code.111
C. Who May Defeat a Utah APT
The Utah Act generally prevents a creditor or other claimant of the
settlor from satisfying a claim against the settlor’s interest in the trust.112
The Utah Act applies to a creditor seeking to enforce a judgment as well
as to a creditor pursuing a right to payment.113 The courts of Utah are given exclusive jurisdiction over actions brought under the Utah Act.114
Nevertheless, the Utah Act does not protect the settlor from a creditor’s claim if:
105
UTAH CODE ANN. § 25-6-14 (2005), available at www.le.state.ut.us/~code/
TITLE25/htm/25_02015.htm (last visited Oct. 20, 2005).
106
UTAH CODE ANN. § 25-6-14(1) (Supp. 2005).
107
UTAH CODE ANN. § 7-5-1(1)(d) (1995).
108
UTAH CODE ANN. §§ 25-6-14(1)(a) (Supp. 2005), 75-7-107(2) (Supp. 2005).
109
UTAH CODE ANN. § 75-7-402(7) (Supp. 2005).
110
UTAH CODE ANN. § 25-6-14(10) (Supp. 2005).
111
See id. § 25-6-14(1).
112
See id. § 25-6-14(2)(a).
113
See id. § 25-6-14(2)(b).
114
See id. § 25-6-14(7).
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Planning With Domestic Asset-Protection Trusts: Part II 497
1. The claim is a decision or ruling resulting from a judicial, arbitration, mediation, or administrative proceeding commenced
prior to or within three years after the trust is created;
2. The settlor’s transfer into trust is made with actual intent to
hinder, delay, or defraud that creditor;
3. The trust provides that the settlor may revoke or terminate all
or part of the trust without the consent of a person who has a
substantial beneficial interest in the trust and the interest
would be adversely affected by the settlor’s exercise of such
power;
4. The trust requires that all or a part of the trust’s income, principal, or both, must be distributed to the settlor as beneficiary;
5. The claim is for a payment owed by a settlor under a child
support judgment or order;
6. The transfer was made when the settlor was insolvent or renders the settlor insolvent;
7. The claim is for recovery of public assistance received by the
settlor under Utah law;
8. The claim is for taxes owed by the settlor to a governmental
entity;
9. The claim is by a spouse or former spouse of the settlor on
account of an agreement or order for the payment of support
or alimony or for a division or distribution of property;
10. The settlor transferred assets into the trust in violation of certain written representations or in breach of certain written
agreements; or
11. The claim is a judgment, award, order, sentence, fine, penalty,
or other determination of liability of the settlor for conduct of
the settlor constituting fraud, intentional infliction of harm, or
a crime.115
For exception three above, “revoke or terminate” does not include:
1. A power to veto a distribution from the trust;
2. A testamentary special power of appointment or similar power;
3. The right to receive a distribution of income, principal, or
both, in the discretion of another, including a trustee other
than the settlor;
115
See id. § 25-6-14(2)(c).
498
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
4. An interest in a CRT;
5. A right to receive principal subject to an ascertainable standard set forth in the trust; or
6. The power to appoint nonsubordinate advisers or trust protectors who can:
a. Remove and appoint trustees;
b. Direct, consent to, or disapprove distributions; or
c. Have the power to serve as an investment director or
appoint an investment director.116
For a claim brought under one or more of the above exceptions, a creditor must prove by clear and convincing evidence that an exception applies.117 The statute of limitations for an action to satisfy a claim or liability out of the settlor’s interest or the transfer under exception 2, 5, 7, 8, 9,
10 or 11 is the statute of limitations applicable to the underlying action.118
If the settlor’s surviving spouse elects against the settlor’s will, the
augmented estate includes the settlor’s interest in a Utah APT.119
D. Consequences if a Utah APT Is Defeated
If one or more of the above exceptions apply, a creditor may reach
assets of a Utah APT only to the extent necessary to satisfy that claim and
related expenses.120 If the trustee has not acted in bad faith in accepting
and administering the trust, the trustee may use trust assets to pay its costs
of litigating the claim before satisfying the claim and a beneficiary (including the settlor) who received a proper distribution before a creditor
brings a successful suit to defeat a transfer may retain the distribution.121
The Utah Act includes protections for the trustee and others who participate in the counseling, drafting, preparation, execution, or funding of the
trust.122
E. Moving Trusts to Utah
The situs of a non-Utah trust may be changed to Utah if the trust has a
Utah trust company as trustee and if administration occurs in Utah.123
116
See id. § 25-6-14(2)(e).
See id. § 25-6-14(5).
118
See id. § 25-6-14(2)(d).
119
UTAH CODE ANN. § 75-2-205(2)(a)(ii) (Supp. 2005).
120
UTAH CODE ANN. § 25-6-14(3), (8) (Supp. 2005).
121
See id. § 25-6-14(9).
122
See id. § 25-6-14(4).
123
UTAH CODE ANN. § 75-7-107(4)(a).
117
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 499
Once moved to Utah, a transfer restriction contemplated by the Utah Act is
enforceable.124
F. Infrastructure
Because Utah did not enact favorable trust laws until 2003, one cannot
predict how Utah courts and legislators will respond to difficult cases that
arise under the Utah Act. A recent U.S. Chamber of Commerce study
ranked Utah’s liability system as the 14th best in the United States.125
VII. OTHER STATUTES
A. Oklahoma
1. Introduction
The Oklahoma Family Wealth Preservation Trust Act (“Oklahoma
Act”) became effective on June 9, 2004.126 It was amended in 2005.127
2. How to Create an Oklahoma APT
To create an APT under the Oklahoma Act (“Oklahoma APT”), an
individual, Oklahoma resident or nonresident, must create an Oklahoma
trust, revocable and amendable or irrevocable, that has an Oklahoma
trustee or cotrustee—an Oklahoma-based bank or trust company—has
only a qualified beneficiary or qualified beneficiaries—lineal ancestors
and descendants of the grantor or the grantor’s spouse (including descendants adopted under 18), the grantor’s spouse, charitable organizations, or
trusts for one or more qualified beneficiaries—and recites that income
generated by the trust is subject to tax by Oklahoma.128 A majority in value
of the assets of an Oklahoma APT must be Oklahoma assets. The assets
may be securities issued by Oklahoma-based companies; bonds or obligations issued by Oklahoma, its governmental agencies, counties, municipalities, school districts, or certain public trusts; accounts in Oklahoma-based
124
Id.
See infra Appendix C.
126
See Family Wealth Preservation Trust Act, 2004 Okla. Sess. Laws 509 (codified as
amended at OKLA. STAT. ANN. tit. 31, §§ 10-18 (West 2005)). See also Jonathan E. Gopman
& Robert L. Lancaster, Oklahoma’s Family Wealth Preservation Trust Act, 29 TAX MGMT.
EST., GIFTS, & TR. J. 296 (2004); Len Cason, Oklahoma Family Wealth Preservation Trust
Act (OFWPTA), STEVE LEIMBERG’S EST. PLAN. EMAIL NEWSL. #696 (June 30, 2004),
available at www.leimbergservices.com.
127
See Family Wealth Preservation Trust Act, 2005 Okla. Sess. Laws 438, available
at www.1sb.state.ok.us/2005-06SB/Sb573_enr.rtf (last visited Sept. 19, 2005).
128
OKLA. STAT. ANN. tit. 31, §§ 11, 13 (West Supp. 2005) (amended 2005).
125
500
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
banks; real and tangible personal property located in Oklahoma and
interests therein; certain securities backed by Oklahoma real or tangible
personal property; and certain mutual funds and common trust funds.129 A
trustee is given a reasonable time to replace assets that cease or fail to
qualify as Oklahoma assets.130 A grantor may fund an Oklahoma APT with
up to $1 million, and the Oklahoma Act’s protections extend to incremental growth—including capital gains—derived from income retained by the
trustee above $1 million.131 Although the Oklahoma Act does not expressly permit the grantor to be a beneficiary of an Oklahoma APT, the
grantor may benefit from the trust by withdrawing assets if it is revocable.
A grantor may have only one Oklahoma APT, but the grantor may create
a new one if an old trust has been revoked.132
3. Who May Defeat an Oklahoma APT
Subject to the above $1 million limitation, the corpus and income of
an Oklahoma APT are exempt from attachment or execution and every
other species of forced sale, and no judgment, decree, or execution can be
a lien on the trust for the payment of debts of a grantor except a child
support judgment.133 The Oklahoma Act does not impair other exemptions
provided by Oklahoma law134 or expand the Oklahoma homestead exemption.135 No court or other judicial body may compel a person to exercise a
power to revoke an Oklahoma APT, and the provisions of the Oklahoma
Act are to be considered as a restriction on the transferability of the grantor’s beneficial interest in the Oklahoma APT that is enforceable under
applicable nonbankruptcy law within the meaning of section 541(c)(2) of
the U.S. Bankruptcy Code.136 Transfers by a grantor to an Oklahoma APT
are subject to the UFTA.137
4. Other Matters
The Oklahoma Act does not address the consequences of a successful
attack against an Oklahoma APT, the transfer of trusts to Oklahoma, or
129
See id. § 11(5)(d).
See id.
131
OKLA. STAT. ANN. tit. 31, § 12 (West Supp. 2005).
132
See id. § 18.
133
OKLA. STAT. ANN. tit. 31, § 12 (West Supp. 2005) (amended 2005).
134
OKLA. STAT. ANN. tit. 31, § 14 (West Supp. 2005).
135
See id. § 15.
136
See id. § 16.
137
See id. § 17(a).
130
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Planning With Domestic Asset-Protection Trusts: Part II 501
other matters.
The author is informed that Oklahoma lawyers are considering whether a bankruptcy trustee is able to exercise a grantor’s power to revoke or
amend an Oklahoma APT.
B. Missouri
A Missouri statute, effective in 1986, allowed a trustor to create a selfsettled trust for the benefit of a class of beneficiaries (including the trustor)
on a discretionary basis.138 The statute provided that a spendthrift clause
would prevent the trustor’s creditors from reaching trust assets unless the
creation of the trust was a fraudulent conveyance, or the trustor was the
sole beneficiary (of either income or principal), retained a power to revoke
or amend the trust, or was one of a class of beneficiaries with the right to
receive a specific portion of income or principal determined solely from
the provisions of the trust instrument.139 Missouri practitioners did not
promote the statute, and decisions by federal courts in Missouri called the
effectiveness of the statute into question.140 On July 9, 2004, however,
Missouri reaffirmed its recognition of APTs by enacting a statute, which
applies to existing and new trusts, that is virtually identical to the former
law.141
C. Colorado
An old Colorado statute still in effect provides that: “All deeds of gift,
all conveyances, and all transfers or assignments, verbal or written, of
goods, chattels, or things in action, or real property, made in trust for the
use of the person making the same shall be void as against the creditors
existing of such person.”142
Although the Tenth Circuit has held that the assets of an irrevocable
self-settled Colorado trust, the creation of which was not a fraudulent
transfer and of which the settlor was not the sole beneficiary, were immune from claims of future creditors,143 Colorado lawyers and financial
138
MO. REV. STAT. § 456.080(3) (1992) (repealed 2005).
Id.
140
See Markmueller v. Case (In re Markmueller), 51 F.3d 775, 776 n.3 (8th Cir.
1995); In re Enfield, 133 B.R. 515, 519 (Bankr. W.D. Mo. 1991).
141
See MO. REV. STAT. § 456.5-505(3) (Supp. 2005). See also James G. Blase, The
Missouri Asset Protection Trust, 61 J. MO. B. NO. 2 Mar.-Apr. 2005, available at
www.mobar.org/journal/2005/marapr/blase.htm (last visited Sept. 19, 2005).
142
COLO. REV. STAT. § 38-10-111 (2004).
143
See Connolly v. Baum ( In re Baum), 22 F.3d 1014, 1018 (10th Cir. 1994). See also
Barry S. Engel & David L. Lockwood, Domestic Asset Protection Trusts Contrasted with
139
502
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
institutions have not promoted the technique and the Colorado Supreme
Court has questioned the statute’s validity.144
D. South Dakota
South Dakota enacted an APT statute, which is virtually identical to
the Delaware Act before the 2005 amendments, on March 2, 2005.145 It
took effect on July 1, 2005.
VIII. A COMPARISON OF ALASKA AND DELAWARE APTS
A. Introduction
Many commentators have written about the Alaska and Delaware
statutes since they were enacted in 1997. Each has advantages over the
other.
B. Advantages of Alaska APTs
1. No Recognition of Constructive Fraud
Unlike the Delaware Act,146 the Alaska Act does not permit a creditor
to set aside an APT based on constructive fraud. Constructive fraud might
be found if the trustor was engaged or was about to engage in a business
or transaction for which the trustor’s remaining assets were unreasonably
small or intended to incur, or believed or reasonably should have believed
that the debtor would incur, debts beyond the debtor’s ability to pay as
they became due. A commentator explained that this difference probably
is not significant for the following reasons:
The distinction between the Alaska and Delaware remedies is potentially significant, but probably only in a handful of cases, particularly if good planning is followed. Many instances of constructive fraud are also cases of actual fraud: transfers that result
in insolvency and which also lack an exchange of reasonably
equivalent value are often exchanges that were meant to hinder,
delay, or defraud creditors. Indeed, insolvency or lack of reasonably equivalent value are often signs of fraudulent intent, thus
showing the potential for considerable overlap between the two
Foreign Trusts, 29 EST. PLAN. 288, 290 (2002).
144
In re Cohen, 8 P.3d 429, 432–34 (Colo. 1999).
145
2005 S.D. S.B. 93 (Mar. 2, 2005), available at legis.state.sd.us/sessions/2005/
bills/SB93enr.htm (last visited Oct. 20, 2005).
146
DEL. CODE ANN. tit. 6, § 1304(a)(2) (1999).
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Planning With Domestic Asset-Protection Trusts: Part II 503
species of fraud. When overlap occurs, the adverse economic effects associated with constructive fraud often arise by design.
Thus, the distinction between Alaska and Delaware is limited to
only the remaining cases of constructive fraud, i.e., those cases
that are not also instances of actual fraud. Fortunately, transferors
can avoid constructive fraud if they do not render themselves insolvent or if they receive reasonably equivalent value in exchange
for property. Note, however, that reasonably equivalent value
exists only if the interest received in exchange for the transferred
property has utility or value to the transferor’s creditors. Since the
purpose of a qualified disposition is to put assets beyond the reach
of creditors, it is highly unlikely that a settlor’s retained interest in
a Delaware trust will count as reasonably equivalent value. This
means the settlor of a qualified disposition must remain solvent in
order to avoid constructive fraud. This, however, is something the
settlor of an Alaska trust should also strive for, as staying solvent
will avoid an inference of fraudulent intent under Alaska law
whereas post-transfer insolvency would jeopardize the safety of
an Alaska structure. Thus, this difference between the Alaska and
Delaware statutes is really more theoretical than practical.147
2. Narrower Exception for Family Claims
Although the Alaska Act has no exception for spousal claims, the Delaware Act permits a person who was married to the trustor at or before the
creation of the trust148 to reach the assets of a Delaware APT at any time.149
This advantage might not be as great as first appears, however, because
the surviving spouse of the trustor of an Alaska (but not a Delaware) APT,
regardless whether or not the trustor resided in Alaska at death, can reach
trust assets if the spouse elects against the trustor’s will.150
For claims by minor children, an Alaska APT is defeated only if the
trustor was thirty or more days behind in making child support payments
when the trustor created the trust,151 whereas this type of claim may be
brought against a Delaware APT at any time.152
Commentators have suggested that federal law and court decisions
147
Sullivan, supra note 32, at 445 n.83 (citations omitted).
DEL. CODE ANN. tit. 12, § 3570(7) (2001).
149
DEL. CODE ANN. tit. 12, § 3573(1) (2001 & Supp. 2004) (amended 2005).
150
ALASKA STAT. §§ 13.12.202(d), 13.12.205(2)(A) (2004).
151
See id. § 34.40.110(b)(4).
152
DEL. CODE ANN. tit. 12, § 3573(1) (2001 & Supp. 2004) (amended 2005).
148
504
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
might override Alaska’s narrow exception for family claims for the following reasons:
Alaska’s narrow exception for child support orders that must have
been in arrears more than 30 days at the time of the transfer, and
Nevada’s even more restrictive approach, may be wishful thinking. Recently enacted federal law not only requires states to give
full faith and credit to child support orders in accordance with
federal law, but also overrides the law of the forum with respect to
any period of limitations in enforcing a child support order. Note
should also be taken of the provisions of the Child Support Recovery Act of 1992. In addition, from a policy standpoint, the
claims of spouses and children may be held enforceable against
self-settled trusts. See J.B.G., in which the Delaware courts
avoided the provisions of the spendthrift trust statute where a
spouse’s claims were concerned.153
As discussed in Part IV of the first installment of this Article,154 Delaware’s broader exception for family claims should have no bearing on the
federal transfer-tax consequences of Delaware APTs.
3. No Exception for Existing Tort Claims
Unlike Alaska, Delaware permits a person who has a tort claim against
the trustor when the trustor creates a Delaware APT to reach the assets of
the trust at any time.155 Nevertheless, creditors availing themselves of this
exception in Delaware’s law almost certainly will pursue their claims
within the time limits imposed by the Alaska and Delaware Acts for preexisting claims (within four years after the trust was created or, if later,
within one year after the creditor discovered, or should have discovered,
the trust).
4. Limits Rights of Existing Creditors
To reach the assets of an Alaska APT, a creditor whose claim existed
when the trust was created must take steps to validate the claim,156 and
must show that creation of the trust was intended to defraud—not to
153
Richard G. Bacon & John A. Terrill, II, Domestic Asset Protection Trusts Work—
Should They?, 26 TAX MGMT. EST., GIFTS, & TR. J. 123, 137 (2001) (citations omitted).
154
See Richard W. Nenno, Planning With Domestic Asset-Protection Trusts: Part I,
40 REAL PROP. PROB. & TR. J. 263, 287-92 (2005).
155
DEL. CODE ANN. tit. 12, § 3573(2) (2001 & Supp. 2004) (amended 2005).
156
See ALASKA STAT. § 34.40.110(d)(1)(B) (2004).
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Planning With Domestic Asset-Protection Trusts: Part II 505
hinder or to delay—a creditor.157
C. Advantages of Delaware APTs
1. Much Longer Tradition of Trust Leadership
Unlike Alaska, whose favorable trust laws date to 1997, Delaware has
a long tradition of leadership in the trust field.
2. Court System Superior
A U.S. Chamber of Commerce survey ranked Delaware as having the
top-rated liability system, whereas it ranked Alaska’s system 33rd.158 In
addition, the highly regarded Delaware courts have demonstrated their
willingness to enforce Delaware statutes in difficult cases, such as those
that might arise if creditors were to challenge Delaware APTs.
3. Harder to Prove Fraudulent Transfer
It might be harder to establish that the creation of an APT was a fraudulent transfer in Delaware, which has adopted the UFTA, than in Alaska,
which has not adopted it, for three reasons.
First, commentators have criticized Alaska’s failure to define “creditor” for fraudulent transfer purposes as follows:
Unlike the two uniform laws, the Alaska law makes no attempt to
define the term “creditor,” leaving the class of plaintiffs as broad
as the courts wish to make it, potentially including unknown future creditors, a class of creditors that neither the UFCA nor the
UFTA includes in its definition of “creditor.”159
In the following passage, the same commentators point out that Alaska
provides more creditor-friendly badges of fraud to establish a fraudulent
transfer than do UFTA jurisdictions, such as Delaware:
At first glance, one of the potential key advantages of Alaska’s fraudulent transfer statute seems to be that it does not acknowledge the existence of “badges of fraud,” which are circumstances surrounding the transfer that by themselves are considered
evidence of an intent to defraud, thereby easing a creditor’s burden of proof. However, the Supreme Court of Alaska has ac157
See id. § 34.40.110(b).
See infra Appendix C.
159
Duncan E. Osborne, et al., Asset-Protection and Jurisdiction Selection, 33 U.
MIAMI INST. ON EST. PLAN. ¶ 1400, ¶ 1404.7(B)(1), at 14-29–14-30 (1999).
158
506
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
knowledged repeatedly the existence of at least eight badges of
fraud in its opinions. Six of these badges are quite similar to items
on the UFTA list of badges of fraud. Two, however, are by their
language much broader than any of the UFTA badges.
First, Alaska courts consider depletion of the assets of a transferor so as to hinder or delay creditor recovery to be a badge of
fraud. Both the UFTA and UFCA consider transfers that render
the debtor “insolvent” to be suspect, but the Alaska precedent as
established by its Supreme Court would allow a creditor-friendly
court to go much further. In fact, it can be argued that the creditor
would not be in court at all unless his or her attempts at recovery
were “hindered or delayed” by a depleting transfer.
Second, the Alaska list of badges of fraud includes transfers
made when the relationship between the transferor and transferee
is such that “there are circumstances which of themselves incite
distrust and suspicion.” The UFTA recognizes “transfers made to
insiders” as a badge of fraud, but the Alaska language could include almost anyone, allowing a court to view virtually any relationship as suspicious. Specifically, the relationship between a
settlor and the trustee of the settlor’s self-settled trust would seem
by its very nature to fit within the Alaska “circumstances which of
themselves incite distrust and suspicion” language.160
Finally, the commentators note that Alaska has a lower burden of
proof, a preponderance of the evidence, for fraudulent transfers than most
other states.161 To defeat a Delaware APT, a creditor must prove that creation of the trust was fraudulent by clear and convincing evidence.162
4. Better Full Faith and Credit Defense
One danger to a DAPT is that a court that has jurisdiction over the
trustee or trust assets will decide that its law governs the trust or the effectiveness of the trust’s spendthrift provision. The Delaware Act, but not
the Alaska Act, provides that the trustee of an APT will automatically
cease to serve if a court makes this determination.163
5. Counsel Fee Awards Less Creditor-Friendly
Unlike in Delaware, the victor in a civil lawsuit in Alaska can collect
160
Id. at 14-30 (emphasis in original, footnotes omitted).
Id. at 14-31.
162
DEL. CODE ANN. tit. 12, § 3572(b) (2001).
163
DEL. CODE ANN. tit. 12, § 3572(g) (Supp. 2004) (amended 2005).
161
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Planning With Domestic Asset-Protection Trusts: Part II 507
counsel fees from the loser.164
6. Additional Distribution Options
A Delaware APT gives the trustor two additional distribution options.
First, a trustor may obtain creditor protection if the trustor creates a grantor-retained income trust (“GRIT”) or a trust from which the trustor receives current income that meets the requirements of the Delaware Act.165
Second, to address Revenue Ruling 2004-64,166 the trustor of a Delaware
APT now may keep only the ability to be reimbursed for income taxes
payable on trust income on a discretionary basis.167
7. Surviving Spouse Cannot Reach Trust
The surviving spouse of the trustor of an Alaska APT may reach trust
assets if the spouse elects against the will,168 but the surviving spouse of
the trustor of a Delaware APT cannot do so.169 In each instance, the result
is the same if the trustor was a resident or a nonresident.
IX. A COMPARISON OF NEVADA AND DELAWARE APTS
A. Introduction
Like the Alaska Act and the Delaware Act, the Nevada Act and the
Delaware Act have advantages over each other.
B. Advantages of Nevada APTs
1. Might Have Shorter Claim Periods
The Nevada Act appears to have shorter limitations periods than the
Delaware Act, but as discussed below, this might not be the case.
2. No Exception for Family Claims
Unlike the Delaware Act,170 the Nevada Act contains no specific exception for claims by spouses, former spouses, and minor children. As
mentioned in connection with the Alaska Act, however, federal law might
164
Osborne, et al., supra note 159, ¶ 1404.7(B)(3), at 14-33.
DEL. CODE ANN. tit. 12, § 3570(10)(b)(3) (2001 & Supp. 2004).
166
See Rev. Rul. 2004-64, 2004-27 I.R.B. 7.
167
See Qualified Dispositions in Trust Act, 75 Del. Laws 97 (2005) (to be codified at
DEL. CODE ANN. tit. 12, § 3570(10)(b)(9)).
168
ALASKA STAT. §§ 13.12.202(d), 13.12.205(2)(A) (2004).
169
DEL. CODE ANN. tit. 12, § 3573 (2001 & Supp. 2004) (amended 2005).
170
See id. § 3573(1).
165
508
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
enable persons with these types of claims to reach the assets of Nevada
APTs.171
3. No Exception for Existing Tort Claims
Nevada does not have Delaware’s exception for tort claims that exist
at the establishment of an APT,172 but creditors availing themselves of
Delaware’s tort-claim exception almost certainly will pursue their claims
within the time limits imposed by the Nevada Act for pre-existing claims
(within two years after the trust was created or, if later, within six months
after the creditor discovered, or should have discovered, the trust).
C. Advantages of Delaware APTs
1. Much Longer Tradition of Trust Leadership
Unlike Nevada, whose favorable trust laws date to 1999, Delaware has
a long tradition of leadership in the trust field.
2. Court System Superior
A U.S. Chamber of Commerce Survey ranks Delaware as having the
top-rated liability system whereas it ranks Nevada’s system 29th.173 The
highly regarded Delaware courts have demonstrated willingness to enforce
Delaware statutes in difficult cases, such as those that might arise if creditors challenge Delaware APTs.
3. Might Have Shorter Claim Periods
The Nevada claim periods appear to be half as long as under the Delaware statute, but creditors actually might have more time to bring claims
in Nevada than in Delaware in certain circumstances because it is not entirely clear that a creditor must prove that the creation of a Nevada APT
was a fraudulent transfer in order to reach trust assets.
Section 112.230 of the Nevada Code provides that:
Except as otherwise provided in NRS 166.170 [which provides limitation periods under the Nevada Act], a claim for relief
with respect to a fraudulent transfer or obligation under this chapter is extinguished unless action is brought:
1. Under paragraph (a) of subsection 1 of NRS 112.180,
171
See Bacon & Terrill, supra note 153, at 137.
DEL. CODE ANN. tit. 12, § 3573(2) (2001 & Supp. 2004) (amended 2005).
173
See infra Appendix C.
172
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Planning With Domestic Asset-Protection Trusts: Part II 509
within 4 years after the transfer was made or the obligation was incurred or, if later, within 1 year after the
transfer or obligation was or could reasonably have
been discovered by the claimant;
2. Under paragraph (b) of subsection 1 of NRS 112.180
or subsection 1 of NRS 112.190, within 4 years after
the transfer was made or the obligation was incurred;
or
3. Under subsection 2 of NRS 112.190, within 1 year
after the transfer was made or the obligation was incurred.174
Section 166.170 of the Nevada Code provides that:
A person may not bring an action with respect to a transfer of
property to a spendthrift trust:
1. If he is a creditor when the transfer is made, unless
the action is commenced within:
(a) Two years after the transfer is made; or
(b) Six months after he discovers or reasonably
should have discovered the transfer, whichever is later.
2. If he becomes a creditor after the transfer is made, unless the action is commenced within 2 years after the
transfer is made.175
Together, the above sections might require a creditor to bring a fraudulent-transfer claim involving the creation of a Nevada APT within half
the normal time. At the same time, Nev. Rev. Stat. section 166.170 does
not explicitly require a creditor to demonstrate that there was a fraudulent
transfer, and the demonstration might not be required at all. If the demonstration is not required, any creditor who appeared within the available
time periods (not just a creditor who could prove that there was a fraudulent transfer) could defeat the trust. To eliminate all doubt, the introduction to Nev. Rev. Stat. section 166.170 should be amended to require a
creditor to prove a fraudulent transfer. By contrast, to defeat a Delaware
APT, a creditor must prove by clear and convincing evidence that creation
174
175
NEV. REV. STAT. ANN. § 112.230 (Lexis Nexis 2004).
NEV. REV. STAT. ANN. § 166.170 (Lexis Nexis 2003).
510
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
of the trust was a fraudulent transfer.176
4. Might Have Shorter Claim Periods for Enforcement of Foreign
Judgments177
The Nevada Act also is unclear regarding the amount of time that a
creditor has to bring an action against a Nevada APT to enforce a judgment obtained outside Nevada.
Section 11.190 of the Nevada Code provides in relevant part that:
Except as otherwise provided in NRS 125B.050 [which relates to child support] and 217.007 [which relates to recovery by
crime victims], actions other than those for the recovery of real
property, unless further limited by specific statute, may only be
commenced as follows:
1. Within 6 years:
(a) An action upon a judgment or decree of any
court of the United States, or of any state or
territory within the United States, or the renewal thereof.178
Section 166.170 of the Nevada Code sets statutes of limitations under
the Nevada Act, but it does not refer specifically to actions to enforce
judgments from other jurisdictions. To clarify matters, a specific reference
to section 166.170 might be added in the introduction to section 11.190 or
a specific reference to enforcement actions might be added in the introduction to section 166.170. By contrast, the limitations periods in the Delaware Act apply to actions, including actions to enforce judgments.179
5. Better Full Faith and Credit Defense
Unlike the Nevada Act, the Delaware Act provides that the trustee of
an APT will cease to act if a court determines that Delaware law does not
govern the trust or the effect of its spendthrift clause.180
6. Provides Protection to Advisers and Attorneys
Unlike Nevada, Delaware affords protection to advisers who partici-
176
DEL. CODE ANN. tit. 12, § 3572(a)–(b) (2001).
See generally Bacon & Terrill, supra note 153, at 126.
178
NEV. REV. STAT. ANN. § 11.190 (Lexis Nexis Supp. 2003).
179
DEL. CODE ANN. tit. 12, § 3572(a) (2001).
180
DEL. CODE ANN. tit. 12, § 3572(g) (Supp. 2004) (amended 2005).
177
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 511
pate in the creation of APTs.181
7. Addresses Consequences of Successful Attack
Unlike the Nevada Act, the Delaware Act describes the implications
for the trust, the trustee, and the beneficiaries if a creditor brings a claim
that may be paid from the trust.182 The inclusion of these provisions in the
Delaware Act greatly increases its asset-protection effectiveness.183
8. More Distribution Options
Although a Delaware APT and a Nevada APT may provide for distributions to the trustor on a discretionary basis, a Delaware APT offers the
trustor several other distribution options. Thus, a trustor may obtain creditor protection if the trustor creates a self-settled trust that is a CRT, a
GRIT, a GRAT, or a QPRT, or from which he or she may be reimbursed
for income taxes attributable to the trust, which meets the requirements of
the Delaware Act.
181
DEL. CODE ANN. tit. 12, § 3572(d)-(e) (2001 & Supp. 2004).
DEL. CODE ANN. tit. 12, § 3574 (2001) (amended 2005).
183
Sullivan, supra note 32, at 464, 475.
182
Citation
RHODE ISLAND
R.I. GEN. LAWS §§
18-9.2-1– 18-9.2-7
ALASKA
ALASKA STAT.
§ 34.40.110
NEVADA
NEV. REV. STAT.
§§ 166.010—
166.170
July 1, 1997
July 1, 1999
April 2, 1997
October 1, 1999
Trust instrument
Trust instrument must: Trust instrument
Trust instrument
must: (1) be irrevo(1) be irrevocable; (2) must: (1) be irrevomust: (1) be irrevocable; (2) expressly cable; (2) expressly expressly state Alaska cable; and (2) all or
part of corpus of
state R.I. law govlaw governs validity,
state that Del. law
construction, and ad- trust must be located
governs validity, con- erns validity, conin Nev., domicile of
struction, and admin- struction, and admin- ministration of trust;
(3) contain spendthrift settlor must be in
istration of trust (un- istration of trust;(3)
contain spendthrift
clause; and (4) apNev., or trust instruless trust is being
clause; and (4) appoint Alaska trustee.
ment must appoint
transferred to Del.
Some assets must be Nev. trustee. Some
trustee from non-Del. point R.I. trustee.
trustee); (3) contain
deposited and some
administration must
spendthrift clause;
administration must
occur in Nev.
and (4) appoint Del.
occur in Alaska.
trustee.
UTAH
UTAH CODE ANN. § 25-6-14
Dec. 31, 2003
Trust instrument must: (1)
be irrevocable; (2) contain spendthrift clause;
and (3) appoint Utah trust
company that holds some
assets in Utah as trustee.
Some administration must
occur in Utah.
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
Effective Date
What requirements must trust
meet to come
within protection
of statute?
DELAWARE
DEL. CODE ANN. tit.
12, §§ 3570–3576
512
APPENDIX A
A COMPARISON OF FIVE DAPT ACTS
RHODE ISLAND
Trustor may receive
income/principal in
sole discretion of
non-related/nonsubordinate trustee.
ALASKA
Settlor may retain: (1)
distributions from
CRT; (2) interest in
total-return trust,
GRAT, or GRUT; (3)
interest in QPRT; and
(4) income/principal
in discretion of person (including
trustee) other than
settlor (statute does
not explicitly prevent
related or subordinate
person from making
distribution
decisions).
NEVADA
Settlor may receive
income/principal in
discretion of
another person
(statute does not
explicitly prevent
related or subordinate person from
making distribution
decisions).
UTAH
Settlor may retain: (1) distributions from CRT; and
(2) income/principal in
sole discretion of someone other than settlor and
principal pursuant to ascertainable standard (statute allows nonsubordinate
person to make distribution decision).
Trustor may retain:
(1) power to veto
distributions; and (2)
special testamentary power of appointment.
Settlor may retain: (1)
power to veto distributions; (2) non-general testamentary
power of
appointment; and (3)
right to appoint trust
protector or trustee
advisor.
Settlor may retain:
(1) power to veto
distributions; and
(2) special
testamentary power
of appointment.
Settlor may retain: (1)
power to veto distributions; (2) testamentary
special power of appointment; and (3) power to
appoint nonsubordinate
advisers/protectors.
Planning With Domestic Asset-Protection Trusts: Part II 513
What powers
may trustor/settlor retain?
DELAWARE
Trustor may retain:
(1) current income;
(2) distributions from
CRT; (3) up to 5%
interest in totalreturn trust, GRAT,
or GRUT; (4) income/ principal in
sole discretion or
pursuant to standard; (5) interest in
QPRT, or . qualified
annuity interest; or
(6) ability to be reimbursed for income
taxes attributable to
trust.
Trustor may retain:
(1) power to veto
distributions; (2)
non-general testamentary power of
appointment; and
(3) power to replace
trustee/adviser with
nonrelated/nonsubordinate party.
FALL 2005
What interests in
principal and income may
trustor/settlor
retain?
May trust have
distribution adviser, investment
adviser, or trust
protector?
Yes. Trust may have
one or more advisers
(other than trustor)
who may remove and
appoint qualified trustees or trust advisers or
who have authority to
direct, consent to, or
disapprove distributions from trust. Trust
may have investment
adviser, including
trustor.
RHODE ISLAND
Resident individual
or corporation
whose activities are
subject to supervision by R.I. Department of Business
Regulation, FDIC,
Comptroller of Currency, or Office of
Thrift Supervision.
ALASKA
Resident individual or
trust company or bank
that possesses trust
powers and has principal place of business
in Alaska.
NEVADA
Resident individual or
trust company or bank
that maintains office in
Nev.
Unclear.
Yes.
Yes.
Not addressed by
statute.
Yes. Trust may have
trust protector (who
must be disinterested
third party) and trustee
advisor. Settlor may be
advisor if does not
have trustee power
over discretionary distributions.
Not addressed by
statute.
UTAH
Institution authorized to engage in
trust business in
Utah, including
Utah depository
institutions, nonUtah depository
institutions authorized to do business in Utah, and
certain other institutions.
Yes. Individual
cotrustees may
serve.
Yes. Trust may
have nonsubordinate advisers/
protectors who
can remove or
appoint trustees;
direct, consent to,
or disapprove
distributions; or
serve as investment directors.
Settlor may be
investment director.
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
May nonqualified
trustees serve?
DELAWARE
Resident individual or
corporation whose
activities are subject to
supervision by Del.
Bank Commissioner,
FDIC, Comptroller of
Currency, or Office of
Thrift Supervision. Del.
trustee automatically
ceases to serve if it
fails to meet these
requirements.
Yes.
514
Who must serve as
trustee to come
within protection
of statute?
Later of four years
after transfer or one
year after transfer was
or could reasonably
have been discovered
by creditor. Creditor
must prove transfer
fraudulent by clear and
convincing evidence.
Statute bars enforcement of judgment
obtained in another
jurisdiction.
RHODE ISLAND
R.I. trustee must:
(1) have custody of
some or all of corpus; (2) maintain
trust records on exclusive or nonexclusive basis; (3) prepare or arrange for
preparation of fiduciary income tax
returns; or (4) otherwise materially participate in administration of trust.
Later of four years
after transfer or one
year after transfer
was or could reasonably have been
discovered by creditor. Creditor must
prove that transfer
was fraudulent.
Statute bars enforcement of judgment obtained in
another jurisdiction.
ALASKA
Alaska trustee must:
(1) maintain trust records on exclusive or
nonexclusive basis; (2)
prepare or arrange for
preparation of fiduciary
income tax returns on
exclusive or nonexclusive basis; and (3)
handle part or all of
administration.
NEVADA
Nev. trustee must: (1)
maintain trust records;
and (2) prepare
income tax returns.
UTAH
Utah trustee must
hold some assets
and perform
some administration in Utah.
Later of four years after transfer or one year
after transfer was or
could reasonably have
been discovered by
creditor. Requirements
set for creditor to establish claim. Creditor
must prove transfer
fraudulent by preponderance of evidence.
Statute bars enforcement of judgment
obtained in another
jurisdiction.
Later of two years after
transfer or six months
after transfer was or
could reasonably have
been discovered by
creditor. Creditor might
not have to prove
transfer was
fraudulent. Statute appears to allow action to
be brought on judgment from another
state within six years
after entry of judgment.
There is no specific provision
regarding such
claims.
Planning With Domestic Asset-Protection Trusts: Part II 515
What is statute of
limitations for
claims existing on
date of transfer?
DELAWARE
Del. trustee must: (1)
have custody of some
or all of corpus; (2)
maintain trust records
on exclusive or nonexclusive basis; (3) prepare or arrange for
preparation of fiduciary
income tax returns; or
(4) otherwise materially
participate in administration of trust.
FALL 2005
What responsibilities must qualified
trustee have?
RHODE ISLAND
Four years after
transfer. Creditor
must prove fraudulent. Statute bars
enforcement of
judgment obtained
in another jurisdiction.
ALASKA
Four years after transfer. Creditor must
prove transfer fraudulent by preponderance
of evidence. Statute
bars enforcement of
judgment obtained in
another jurisdiction.
NEVADA
Two years after transfer. Creditor might not
have to prove transfer
fraudulent. Statute appears to allow action to
be brought on judgment from another
state within six years
after entry of judgment.
UTAH
There is no specific provision
regarding such
claims.
Yes. Creditors whose
claims result from
trustor’s breach of an
agreement or court
order as to child support, alimony, or equitable distribution may
proceed against trust
but (in case of alimony
or equitable distribution) only if ex-spouse
was married to trustor
before or on date of
transfer Del. or nonDel. surviving spouse
may not reach trust by
electing against will.
Yes. Creditors to
whom trustor was
indebted on or before date of transfer
on account of
agreement or court
order as to child
support, alimony, or
equitable distribution may proceed
against trust.
Yes. Creditor due child
support may proceed
against trust if, at time
of transfer, settlor was
thirty days or more in
default of making payment under child support judgment or order;
surviving spouse might
be able to reach trust if
elects against settlor’s
will and federal law
might enable minor
children to access trust
for support.
No. Federal law might
enable minor children
to access trust for support.
Yes. Creditors
whose claims
result from
settlor’s breach of
an agreement or
court order as to
child support, alimony, or equitable distribution
may proceed
against trust.
Creditor must
prove exception
applies by clear
and convincing
evidence.
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
May spouses or
children of
trustor/settlor proceed against
trust?
DELAWARE
Four years after transfer. Creditor must
prove transfer fraudulent by clear and convincing evidence. Statute bars enforcement
of judgment obtained
in another jurisdiction.
516
What is statute of
limitations for
claims arising after
date of transfer?
RHODE ISLAND
Same as Del.
ALASKA
No. Presumably, however, tort creditor as of
date of transfer would
be able to proceed
against trust, subject to
statute of limitations
set forth above.
NEVADA
No. Presumably, however, tort creditor as of
date of transfer would
be able to proceed
against trust, subject to
statute of limitations
set forth above.
UTAH
There is no specific exception for
tort creditors, but
see answer to
next question.
No.
No.
No.
Creditor may proceed against trust
if: (1) claim is decision or ruling
resulting from judicial, arbitration,
mediation, or administrative proceeding commenced prior to
or within 3 years
after trust created; (2) settlor’s
transfer into trust
made with actual
intent to hinder,
delay, or defraud
that creditor; (3)
transfer made
when settlor is
insolvent or renders settlor insol-
Planning With Domestic Asset-Protection Trusts: Part II 517
Are there any
other circumstances under which
creditor may proceed against
trust?
DELAWARE
Yes. Creditors whose
claims arise as result
of death, personal
injury, or property damage occurring before or
on date of transfer, for
which trustor was liable either directly or
through vicarious liability, may proceed
against trust.
No.
FALL 2005
May tort creditors
proceed against
trust?
DELAWARE
RHODE ISLAND
ALASKA
NEVADA
518
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
UTAH
vent; (4) claim is
for recovery of
public assistance
received by set
tlor under Utah
law; (5) claim is
for taxes owed by
settlor to governmental entity; (6)
settlor transferred
assets into trust
in violation of certain written representations or
agreements; or
(7) claim is a
judgment, award,
order, sentence,
fine, penalty, or
other determination of liability of
settlor constituting fraud, intentional infliction of
harm, or a crime.
Except for (1),
statute of limitations is that for
underlying action.
Creditor must
prove that exception applies by
clear and con-
Yes. Trust may become subject to statute
if moved to Del., provided that trust meets
other requirements of
statute (irrevocability,
spendthrift clause, Del.
trustee), except that
trust instrument need
not state that Del. law
applies. If trust is
moved from another
jurisdiction, for purposes of statute of limitations, transfer deemed
made on date property
was originally transferred in trust, whether
before or after effective
date of Del. statute.
No.
ALASKA
Yes. Trust must meet
all other requirements
of statute, and Alaska
trustee must serve.
NEVADA
No.
UTAH
vincing evidence.
Statute bars enforcement of
judgment obtained in another
jurisdiction.
Yes. Trust must
have Utah trust
company as
trustee and have
administration in
Utah.
Planning With Domestic Asset-Protection Trusts: Part II 519
RHODE ISLAND
FALL 2005
Are there provisions for moving
trust to state and
making it subject
to statute?
DELAWARE
RHODE ISLAND
No.
Yes.
ALASKA
No.
NEVADA
Yes.
UTAH
Yes.
No.
No.
No.
No.
Yes.
No.
Yes.
No.
No.
Yes.
No.
Yes.
No.
Yes.
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
DELAWARE
Yes.
520
Does statute provide that spendthrift clause is
transfer restriction
described in section 541(c)(2) of
Bankruptcy Code?
Does statute provide that trustee
automatically
ceases to act if
court has jurisdiction and determines that law of
trust does not apply?
Does statute provide that express/
implied understandings regarding distributions to
trustor/settlor are
invalid?
Does statute provide protection for
attorneys, trustees, and others involved in creation
and administration
of trust?
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 521
APPENDIX B
DELAWARE APT CASE STUDIES
Case 1. To protect some of his assets from creditors and to exclude those
assets from his gross estate, a partner in a large New York law firm created a $1 million Delaware APT. He funded the trust in stages to take
advantage of the phase-out of the New York gift tax. He reported the contributions on timely gift tax returns and, to my knowledge, the Service has
not questioned their treatment as completed gifts.
Case 2. A Pennsylvania husband and wife, both in their nineties, refused
to make outright gifts to their son from their $7 million of assets. To preserve the ability to get funds back in the event of need, they created a Delaware APT and funded it with assets equal in value to their unified credits.
Both spouses reported the creation of the trust as a completed gift. Both
then died, and the Service issued closing letters without trying to include
the trust in the gross estates.
Case 3. A young boy received a $30 million judgment as a pretermitted
child of a U.S. citizen. The court, in an American possession, ordered that
the award be placed in a Delaware APT. The trust will protect the assets
from future spouses and creditors.
Case 4. A Florida physician created a Delaware family limited partnership,
a Delaware APT, and a Delaware dynasty trust. As the result of a sale between the trusts, the APT now holds a $10.6 million promissory note. The
physician’s brother, as adviser, directs the trustee on investment and distribution matters.
Case 5. A Texas widow created a Delaware APT to protect the $10 million
that her husband left her from the “demands” of her stepson. Although the
trustee manages investments, a Delaware attorney, as protector, directs the
trustee on distribution decisions.
Case 6. A young Alabama resident established a Delaware APT with LLC
interests to avoid claims by a soon-to-be spouse without having to negotiate an antenuptial agreement.
Case 7. A Massachusetts couple funded Uniform Transfers to Minors Act
accounts for their three children with stock in the closely held family company. Shortly after the youngest child reached 21, the parents arranged the
sale of all company stock for cash. To protect the sale proceeds from creditors each child put the $7 million of cash that he or she received for his
or her stock in a Delaware APT.
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
Case 8. A California octogenarian, who is becoming increasingly forgetful, is creating a $75 million Delaware APT. He and his son want to protect the assets from possible claims by “disgruntled girlfriends.” The trust
will be funded with limited partnership interests, and an adviser will direct
the trustee on investment matters.
Case 9. A New Jersey resident with drug and alcohol problems received a
$14 million personal injury award. Several months later, he put the $7
million that remained after counsel fees, market declines, and improvident
spending in a Delaware APT to protect these funds from designing persons
and family members. The trustee manages the investments and distributes
a specified amount to the trustor each month. An advisory committee is
primarily responsible for making discretionary distribution decisions.
Case 10. A Pennsylvania real estate developer persuaded each of his two
sons to fund a Delaware APT with partnership interests. Each son is limited to receiving $120,000 of income from his trust each year, adjusted for
inflation. Each trust has an adviser who must approve the trustee’s distribution decisions, and a family corporation manages investments. Before
discounts, each trust holds $250 million of assets.
Case 11. An Alabama resident created a Delaware APT and a Delaware
dynasty trust. Following a series of transactions, the APT held a promissory note and the dynasty trust held stock in a public company. Through
the arrangement, a 5% Alabama income tax was avoided on the $30
million gain incurred upon the sale of the stock and the assets of both
trusts are protected from creditors.
Case 12. An Alabama resident employed the same strategy as in Case 11
for a closely held company. The arrangement avoided Alabama capitalgains taxes on $42 million.
Case 13. Before a young German woman emigrated to the United States,
she placed non-income-producing assets in a Delaware APT that was designed to be a completed gift. Because she was a nonresident alien when
she created the trust and because the assets were not situated in the United
States, the trust will not be subject to gift, estate, or GST tax, but she may
receive funds in the event of need.
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 523
APPENDIX C
STATE LIABILITY SYSTEMS RANKING
Attribute
DE
RI
AK
NV
UT
OK
MO
SD
Judges’ Competence
1
31
37
32
22
35
42
21
Judges’ Impartiality
1
39
36
33
18
31
41
10
Timeliness of
Summary Judgment/
Dismissal
1
33
29
25
10
30
41
11
Discovery
1
37
31
27
16
32
40
14
Overall Treatment of
Tort and Contract
Litigation
1
39
31
30
8
29
42
9
Overall Ranking
1
35
33
29
14
32
40
8
Note: The data in the above table is taken from the 2005 State Liability Systems
Ranking Study, dated Mar. 8, 2005, conducted by Harris Interactive for the U.S.
Chamber of Commerce. The study was based on interviews with over 1400 practicing corporate attorneys and general counsels from Nov. 22, 2004–Feb. 18, 2005,
available at www.instituteforlegalreform.org/harris/index.php (last visited Sept. 21,
2005).
524
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
APPENDIX D
DELAWARE APT FORM
IRREVOCABLE TRUST AGREEMENT
THIS AGREEMENT, made this _________ day of ______________,
20____, between TRUSTOR’S NAME, of _____________ County, State
of _________, hereafter called “Trustor,” and___________________, a
Delaware corporation, hereafter called “Trustee,” WITNESSETH:
WHEREAS, Trustor desires to establish a trust of the property described in the attached “Schedule A” and other property which may be
added from time to time, all of which is hereafter called the “trust fund;”
and
WHEREAS, Trustee accepts such trust and agrees to administer it in
accordance with the terms and conditions of this agreement;
NOW, THEREFORE, Trustor hereby gives Trustee the property described in “Schedule A,” in trust, for the following purposes:
SECTION 1: DISTRIBUTION.
A.
During Trustor’s Lifetime. During Trustor’s lifetime, Trustee
may, from time to time and subject to Subsection F of this Section 1, distribute all, some, or none, of the net income and principal to Trustor,
Trustor’s husband/wife, and Trustor’s issue, as Trustee deems appropriate.
Trustee shall take into account other sources of funds available to them.
Trustee shall accumulate any net income not so distributed and add it to
principal, to be disposed of as a part of it. No such distribution shall be
deemed to be an advancement.
B. On Trustor’s Death. On Trustor’s death, Trustee shall distribute
the trust fund to such person or persons, other than Trustor, Trustor’s creditors, Trustor’s estate, and the creditors of Trustor’s estate, in such manner and amounts, and on such terms, whether in trust or otherwise, as
Trustor effectively appoints by specific reference hereto in his/her Will.
However, Trustor may, from time to time, release this special power of
appointment, in whole or in part, by a written instrument delivered to
Trustee during his/her lifetime.
On Trustor’s death, if Trustor’s husband/wife survives him/her, Trustee shall set aside, as the “Marital Trust,” so much of the trust fund, to the
extent not effectively appointed, that is includable in Trustor’s estate for
federal estate tax purposes.
The remainder of the trust fund not set aside as the Marital Trust, or
all of the trust fund if Trustor’s husband/wife predeceases Trustor, or if
none of the trust fund is includable in Trustor’s estate for federal estate tax
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 525
purposes, shall be set aside as the “Residuary Trust.”
C. Marital Trust.
(1) During Trustor’s Husband’s/Wife’s Lifetime. Commencing
with Trustor’s date of death, Trustee shall distribute the net income of the
Marital Trust to Trustor’s husband/wife at least annually for life and as
much principal as he/she requests in writing at any time or times.
In addition, Trustee may, from time to time, distribute so much, or all,
of the principal to Trustor’s husband/wife, as Trustee deems appropriate to
provide for his/her benefit. Trustee may, but need not, take into account
other sources of funds available to him/her.
(2) On the Death of Trustor’s Husband/Wife. On the death of
Trustor’s husband/wife, Trustee shall distribute the principal, free from
this trust, to such person or persons, including Trustor’s husband/wife’s
estate, in such manner and amounts, and on such terms, whether in trust or
otherwise, as Trustor’s husband/wife effectively appoints by specific reference hereto in the last written instrument which he/she executes and delivers to Trustee during his/her lifetime, or, failing any such instrument, in
his/her Will.
On the death of Trustor’s husband/wife, Trustee shall distribute the
balance of the principal, to the extent not effectively appointed, to the
Trustee of the Residuary Trust, to be added to its principal and disposed of
as though it had been a part of it immediately before the death of Trustor’s
husband/wife.
D.
Residuary Trust.
(1) During Trustor’s Husband’s/Wife’s Lifetime. Commencing
with Trustor’s date of death, Trustee shall distribute the net income of the
Residuary Trust to Trustor’s husband/wife at least annually for life.
In addition, Trustee may, from time to time, distribute so much, or all,
of the principal to Trustor’s husband/wife and Trustor’s issue, as Trustee
deems appropriate to provide for their health, maintenance, education,
and/or support, provided that no such distribution or application of principal shall be made out of the Residuary Trust for the benefit of Trustor’s
husband/wife at any time when such distribution could be made from the
Marital Trust. Trustee may, but need not, take into account other sources
of funds available to them. No such distribution shall be deemed to be an
advancement.
(2) On the Death of the Survivor of Trustor and Trustor’s Husband/Wife. On the death of Trustor’s husband/wife, if he/she survives
Trustor, Trustee shall distribute the principal, free from this trust, to such
of Trustor’s issue, in such manner and amounts, and on such terms, whether in trust or otherwise, as Trustor’s husband/wife effectively appoints by
526
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
specific reference hereto in the last written instrument which he/she
executes and delivers to Trustee during his/her lifetime, or, failing any
such instrument, in his/her Will.
On the death of the survivor of Trustor and Trustor’s husband/wife,
Trustee shall divide the principal then held in trust hereunder, to the extent
not effectively appointed, into shares for Trustor’s then living issue, per
stirpes.
(3) Shares Held for Children. Trustee shall hold each living
child’s share in further trust and distribute the net income to the child for
life.
In addition, Trustee may, from time to time, distribute so much, or all,
of the principal of a child’s share to the child, as Trustee deems appropriate to provide for the child’s health, maintenance, education, and/or
support. Trustee may, but need not, take into account other sources of
funds available to the child.
On the death of the child, Trustee shall distribute so much of the
child’s share as is then held hereunder, free from this trust, to such person
or persons, including the child’s estate, in such manner and amounts, and
on such terms, whether in trust or otherwise, as effectively appointed by
specific reference hereto in the last written instrument which the child
executes and delivers to Trustee during his or her lifetime, or, failing any
such instrument, in his or her Will.
On the death of the child, Trustee shall distribute the balance of the
share, to the extent not effectively appointed, free from trust, to the child’s
then living issue, per stirpes, but if no such issue is then living, then to
Trustor’s then living issue, per stirpes. However, any principal distributable to an issue of Trustor for whose benefit a share of the Residuary Trust
is then held in trust under the provisions of this agreement shall instead be
distributed to the Trustee of such share, to be added to its principal and
disposed of as a part of it.
(4) Shares for Remote Issue. Trustee shall distribute each share
set aside (at the time previously provided for dividing the Residuary Trust
into shares) for an issue of Trustor more remote than a child of Trustor to
such issue, free from trust.
E. Failure of Beneficiaries. If at any time Trustee holds any portion
of the principal of any trust not disposed of effectively under the previous
provisions, then at such time Trustee shall distribute such principal, free
from trust, to such then living person or persons as are then determined to
be Trustor’s distributees by the application of the intestacy laws of the
State of Delaware governing the distribution of intestate personal property
then in effect, as though Trustor had died at that particular time, intestate,
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 527
a resident of the State of Delaware and owning such property then so
distributable.
F. Distribution Adviser. Trustee shall exercise its discretionary power to distribute income and/or principal to Trustor’s husband/wife or
Trustor’s issue pursuant to Subsection A of this Section 1 only with the
written consent of the distribution adviser who shall be Trustor, so long as
he/she is willing and able to act in such capacity.
If at any time there is no distribution adviser, or if such adviser fails to
express in writing to Trustee consent or disapproval as to the exercise of
any discretionary power within fifteen (15) calendar days after Trustee has
sent a written request for such consent to such adviser’s last known address by certified mail (or by any other means for which the sender shall
have evidence of receipt by the addressee), Trustee may act in the matter
as it deems appropriate.
The distribution adviser shall act in a fiduciary capacity and conform
to the purposes of this agreement. Such adviser shall have no duty to inquire into or see to the performance by Trustee of its duties under this
agreement.
The distribution adviser shall receive no compensation and shall not
be reimbursed for expenses incurred while acting as such adviser.
SECTION 2:
MINORITY OR OTHER INCAPACITY.
If any property is otherwise required to be distributed to a beneficiary
who has not attained age twenty-five (25) or is, in Trustee’s opinion, unable to manage funds due to illness or infirmity, Trustee may:
A. Distribute such property to such beneficiary himself or herself; or
B. Apply such property for the benefit of such beneficiary; or
C. Hold the property not so distributed or applied in a separate trust
hereunder for the benefit of such beneficiary, and distribute or apply the
net income and principal thereof as provided in Subsections A and B
hereof.
Trustee shall distribute the property in such trust to the beneficiary
upon his or her attaining age twenty-five (25), or upon the termination of
his or her incapacity (as the case may be). If the beneficiary dies prior to
such distribution, Trustee shall distribute the property to the beneficiary’s
estate.
Notwithstanding the foregoing, income (including income attributable
to property held pursuant to this Section) which is required to be distributed to a beneficiary in order to qualify a trust hereunder for the marital
deduction under section 2056 of the Code, or for any other tax deduction,
exemption, or credit, shall be distributed to such beneficiary or any guard-
528
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
ian of such beneficiary’s property, if requested in writing by such beneficiary or guardian.
SECTION 3:
MERGER WITH SIMILAR TRUSTS.
If at any time a trust is set aside for any person or persons under the
terms of this agreement which is substantially the same as any other trust
established for that person or persons by Trustor or Trustor’s husband/
wife, Trustee may, in its sole discretion, merge the trust created hereunder
with the other trust for such person or persons, and the two trusts shall
thereafter be held, administered, and distributed as one.
SECTION 4:
ALTERNATIVE METHODS OF DISTRIBUTION.
Trustee may take any reasonable steps to disburse funds to or for a
beneficiary, including: (i) distribution, either by hand or mail, to the beneficiary or the guardian of the person or property (whether the guardian is
formally appointed or a natural guardian), (ii) distribution to a custodian
for the beneficiary under the Uniform Transfers to Minors Act (or similar
statute) of any state, (iii) deposit to the account of the beneficiary in any
federally insured depository, or (iv) direct application for the benefit of the
beneficiary.
SECTION 5:
SPENDTHRIFT PROVISION.
No beneficiary (including Trustor) may alienate or in any other
manner, whether voluntary or involuntary, assign, transfer, pledge, or
mortgage his or her interest in any trust hereunder, and no one (including
a spouse or former spouse) may attach or otherwise reach any interest of
any beneficiary hereunder to satisfy a claim against that beneficiary,
whether the claim is legal or equitable in origin. The provisions of this
Section shall not limit or otherwise affect any power of appointment conferred upon a beneficiary or the right of a beneficiary to disclaim or release any interest created hereunder. This Section constitutes a restriction
on the transfer of Trustor’s beneficial interest in the trust fund that is
enforceable under applicable non-bankruptcy laws within the meaning of
section 541(c)(2) of the Bankruptcy Code (11 U.S.C. section 541(c)(2)) or
any other similar or successor statute.
SECTION 6: PAYMENT OF DEATH TAXES, DEBTS, AND EXPENSES OF ADMINISTRATION.
A. Death of a Beneficiary (other than Trustor). On the death of the
beneficiary of any trust created hereunder (other than Trustor), if the principal of such trust is included in the estate of the beneficiary for transfer
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 529
tax purposes, Trustee shall, unless otherwise directed by the beneficiary’s
Will, distribute from such trust to the Personal Representative of the
beneficiary’s estate an amount equal to the sum of all additional transfer
taxes and costs of administration payable by such Personal Representative
as a result of the inclusion of the trust in the beneficiary’s estate. Certification of such Personal Representative as to the amount of such additional
taxes and costs will be determinative for all purposes.
Trustee shall make such distributions directly to the appropriate payee,
if so directed by such Personal Representative.
B. Generation-Skipping Transfer Tax. Trustee shall pay any tax
imposed under Chapter 13 of the Code as a result of a “taxable termination” attributable to any trust created hereunder from the principal of such
trust, charging such payments ratably against the property in respect of
which such termination occurred.
SECTION 7:
TRUSTEE’S POWERS.
In addition to those powers granted by law, Trustee is specifically
authorized and empowered, in its sole discretion, but subject to the provisions of Section 8:
A. To sell at public or private sale, exchange for like or unlike
property, convey, lease for terms longer or shorter than the trust, and otherwise dispose of any or all property held hereunder, for such price and
upon such terms and credits as it deems proper.
B. To invest in any kind of property, real, personal, or mixed, regardless of the laws governing investments by fiduciaries, without any duty to
diversify investments.
C. Unless otherwise directed by the investment adviser named in
Section 8 hereof, to execute securities transactions, without necessity of
providing written confirmation thereof to such adviser at the time of settlement, and to execute securities transactions through any brokerage
service, whether discount or full service, including Wilmington Brokerage
Services at its normal rates of compensation, without diminution of compensation otherwise payable to Trustee, even if Wilmington Trust Company is serving as Trustee.
D. To vote directly or by proxy at any election or stockholders’ meeting any shares of stock, excluding stock of Wilmington Trust Corporation.
E. To participate in any plan or proceeding, including any voting
trust plan for liquidating, protecting, or enforcing any interest in any property, or for reorganizing, consolidating, merging, or adjusting the finances of any corporation issuing any such interest; to accept in lieu
thereof any new or substituted stocks, bonds, notes, or securities, whether
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
of the same or a different kind or class, or with different priorities, rights,
or privileges; to pay any assessment or any expense incident thereto; and
to do any other act or thing that it deems necessary or advisable in connection therewith.
F. To deposit, or arrange for the deposit of, securities at Depository
Trust Company (DTC) and/or at any other securities depository or clearing
corporation.
G. To make any division or distribution in cash or in kind, or partly
in cash and partly in kind; to make reasonable valuations of the property
so divided or distributed, consistent with the provisions for allocating
property to the Marital Trust; and to elect to recognize taxable gain or loss
resulting from a distribution. Trustee may consider the income tax basis of
the property then available for division or distribution, as well as the
circumstances of the beneficiaries, and need not make division or distribution on a pro rata, asset-by-asset basis. Trustee shall not adjust the interest
of any beneficiary as a result of any action taken or forborne under the
provisions of this Subsection G.
H. To make loans, against adequate collateral, to any person including the Personal Representative of the estate of Trustor or any beneficiary
and/or to purchase any property at its then fair market value from any
person including such Personal Representative.
I. To borrow money from any person or corporation, including
Trustee, and to pledge or mortgage as security any real or personal property.
J. To litigate, submit to arbitration, compromise, or settle any claim
in favor of or against any trust hereunder, and to execute all agreements,
deeds, and releases necessary or proper in connection therewith.
K. To retain attorneys-at-law, accountants, investment counsel,
agents, and other advisers without diminution of compensation otherwise
payable to Trustee.
L. To pay the taxes and expenses of maintaining, repairing, improving, and insuring any real property held hereunder.
M. Except as otherwise provided, to determine whether receipts and
disbursements, including its commissions, are allocable or chargeable to
income or principal. This power shall only be exercised in a manner consistent with the right of Trustor’s husband/wife to receive all the net income of the Marital Trust under applicable state law.
N. To receipt for the proceeds of any life insurance made payable to
Trustee, to institute any suit or proceedings, and to take any action necessary to collect such proceeds. However, Trustee need not institute any suit
or proceeding unless its expenses, including counsel fees and costs, are
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 531
available in the trust fund or are advanced or guaranteed in an amount and
in a manner reasonably satisfactory to it.
O. To renounce, in whole or in part, any property or interest in property which may become payable to any trust hereunder, except to the
extent that the distribution of such property resulting from such renunciation is fundamentally inconsistent with the provisions of this agreement.
P. To divide any trust hereunder into separate trusts if the purposes
for which the trust was created are better served thereby.
Q. To consider gains from the sale of capital assets in the trust to be
part of a mandatory or discretionary distribution of principal to a beneficiary.
SECTION 8:
INVESTMENT ADVISER.
Trustee shall exercise the powers hereinbefore granted to it in Subsections A, B, D, E, and I of Section 7 with respect to each trust hereunder
only with the written consent or on the written direction of the investment
adviser of such trust, provided that: (i) Trustee shall sell any ___________
stock held by it hereunder unless specifically directed to do otherwise by
such adviser; (ii) the purchase, sale, and voting of ____________ stock
shall be solely on the direction of the investment adviser; (iii) Trustee shall
manage and invest the otherwise uninvested cash in each such trust in its
sole discretion; (iv) the investment adviser may at any time, or from time
to time, delegate to Trustee the authority to exercise in its sole discretion
the power to buy or sell any property (or, having delegated the authority to
do so, revoke such authority); and (v) if at any time during the continuance
of any such trust there shall be no investment adviser of such trust, or if
the investment adviser of such trust shall fail to communicate in writing to
Trustee his or her consent, disapproval, or direction as to the exercise of
any of the aforesaid powers for which exercise the consent or direction of
such adviser shall be necessary, within twenty (20) days after Trustee shall
have sent to such adviser, by certified mail (or by any other means for
which the sender shall have evidence of receipt by the addressee), at his or
her last known address, a written request for such consent or direction
(notwithstanding that Trustee shall be under no obligation to request any
such direction), then Trustee is hereby authorized and empowered to take
such action in the premises as it, in its sole discretion, shall deem to be for
the best interest of the beneficiaries of such trust.
The investment adviser of each trust hereunder shall be such one of
the following persons, in the order named, as is willing and able to act in
such capacity:
Trustor;
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
Trustor’s husband/wife;
The beneficiary for whom the trust was set aside, provided that he/she
has attained age twenty-five (25).
Initially, Trustee shall exercise such powers on the direction of the investment adviser, but the investment adviser may establish from time to
time whether the Trustee shall exercise such powers with the consent or on
the direction of such adviser.
To qualify, any person appointed investment adviser of a trust hereunder shall deliver a written instrument to Trustee indicating acceptance and
agreement that all powers conferred upon such adviser will be exercised in
a fiduciary capacity for the exclusive interest of the beneficiaries.
The investment adviser need not inquire into the Trustee’s performance of its duties and shall not be held liable for any loss whatsoever to
any trust hereunder, unless it results from actions taken in bad faith. The
investment adviser shall serve without compensation, but the investment
adviser (other than Trustor) may be reimbursed for out-of-pocket expenses, including investment counsel fees.
SECTION 9:
ADDITIONS TO THE TRUST FUND.
With the consent of Trustee, any person may add property to any trust
hereunder, and such property shall thereafter be held by Trustee as a part
thereof.
SECTION 10: IRREVOCABILITY.
This trust shall be irrevocable and not subject to amendment by
Trustor or any other person. However, Trustee is authorized to modify or
amend the provisions of this agreement to ensure that this agreement is a
qualified disposition under the Act. Trustee may rely upon the advice of
counsel in taking any action pursuant to the authority given to Trustee, and
Trustee shall be without liability therefor.
SECTION 11: PAYMENT OF INCOME.
Except where otherwise provided, the payment of the net income of
any trust hereunder shall be made at such times as are convenient to the
beneficiary and agreed to by Trustee.
SECTION 12: NON-ACCRUAL OF INCOME.
Except with respect to the Marital Trust, any statute or rule of law to
the contrary notwithstanding, any income accrued or on hand and not actually distributed to a beneficiary upon the termination of his or her interest shall be treated as though it had, in fact, accrued thereafter.
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 533
Any income accrued upon shares of stock or interest-bearing property
when delivered to Trustee shall be treated as though such income had, in
fact, accrued after such delivery.
SECTION 13: THIRD PARTIES NOT OBLIGED TO FOLLOW
FUNDS.
No person or corporation dealing with Trustee shall be obliged to see
to the application of money paid or property delivered to Trustee, to
inquire into the propriety of Trustee’s exercising its powers, or to determine the existence of any fact upon which Trustee’s power to perform any
act hereunder may be conditioned.
SECTION 14: TRUSTEE’S COMPENSATION.
Trustee shall receive compensation for its services hereunder from
time to time in accordance with the current rates then charged by it for
trusts of similar size and character. If Trustee renders any extraordinary
services, it may receive additional compensation therefor.
SECTION 15: RESIGNATION AND REMOVAL OF TRUSTEE.
At any time during the remainder of Trustor’s life, Trustee may resign
by written notice delivered to Trustor, and Person Not Trustor may remove Trustee by written notice delivered to it. In either case, Person Not
Trustor may appoint another bank or trust company, that is described in
Section 3570(9) of the Act, as successor Trustee by written notice delivered to Trustee. During Trustor’s lifetime, Trustee shall be deemed to have
resigned on the date on which: (i) it ceases to be a Trustee described in
Section 3570(9) of the Act; or (ii) a court takes any action whereby such
court declines to apply Delaware law in determining the validity, construction, or administration of any trust hereunder or of the effect of the spendthrift provision hereunder in any action brought against trustee.
Unless objections are filed as provided below, Trustee shall, within
ninety (90) days after it resigns or is removed, deliver any assets held
hereunder to the successor Trustee. If Person Not Trustor does not appoint
such a successor Trustee, Trustee may petition the appropriate court to
appoint such a successor Trustee.
After Trustor’s death, Trustee may resign as Trustee of a trust hereunder by written notice delivered to the beneficiary for whom the trust was
set aside, and Trustee may be removed by written notice signed by such
beneficiary, provided that he or she has attained age thirty (30). In either
case, another bank or trust company shall be appointed successor Trustee
by written notice signed by such beneficiary, provided that he or she has
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
attained age twenty-one (21).
Unless objections are filed as provided below, Trustee shall, within
ninety (90) days after it resigns or is removed, deliver the assets held in
such trust to the successor Trustee. If such beneficiary does not appoint
such a successor Trustee, Trustee may petition the appropriate court to appoint such a successor Trustee.
Upon resignation or removal, Trustee shall deliver a statement of its
activities to the date of such resignation or removal for which it has not
reported to the person to whom Trustee was directed to give notice of resignation or who was authorized to remove Trustee. Such person shall have
sixty (60) days from receipt of such statement to file with Trustee any objections to its actions as Trustee. If no such objections are filed, Trustee
shall be without any further liability or responsibility to any past, present,
or future beneficiaries.
No successor Trustee shall be required to examine into the acts of its
predecessor Trustee, and each successor Trustee shall have responsibility
only with respect to the property actually delivered to it by its predecessor
Trustee.
SECTION 16: SIMULTANEOUS DEATH.
If Trustor and Trustor’s husband/wife die under circumstances where
the order of deaths cannot be determined, and if any of the principal is includable in Trustor’s estate for transfer tax purposes, then for the purposes
of this agreement with respect to such principal, Trustor’s husband/wife
shall be deemed to have survived Trustor and died immediately thereafter.
SECTION 17: TRUST SITUS.
This agreement creates a Delaware trust, and all matters pertaining to
the validity, construction, and application of this agreement or to the administration of the trusts created by it shall be governed by Delaware law.
SECTION 18: ADOPTED PERSONS AND PERSONS BORN OUT OF
WEDLOCK.
For all purposes of this agreement, with regard to adopted persons, only a person adopted while under age twenty-one (21) shall be deemed to
be a child and an issue of the adopting person and an issue of the ascendants of the adopting person, and, furthermore, the children and issue of
the person so adopted shall be deemed to be issue of the adopting person
and his or her ascendants. A person born out of wedlock shall not be
deemed to be a child or an issue of his or her parent or an issue of the ascendants of his or her parent unless such child is acknowledged in writing
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 535
by such parent.
SECTION 19: DEFINITIONS.
A. “Trustor’s husband/wife” refers to _________. However, if Trustor’s husband/wife is divorced or separated from Trustor under a written
agreement or decree of court, he/she will be treated as if he/she predeceased Trustor.
B. “Issue” of a person means all the lineal descendants of that person
of all generations.
C. “Code” means the Internal Revenue Code of 1986, as amended, or
any corresponding federal tax statute enacted after the date of this agreement. A reference to a specific section of the Code refers not only to that
section but also to any corresponding provision of any federal tax statute
enacted after the date of this agreement, as in effect on the date of application.
D. “Transfer taxes” means all applicable federal estate taxes (except
additional estate taxes imposed under section 2032A of the IRC), state
estate or inheritance taxes, and generation-skipping transfer taxes imposed
on any “direct skip” (as defined in Chapter 13 of the Code) other than a
direct skip from a trust or resulting from a disclaimer, and any interest and
penalties thereon. The term does not include federal or state gift taxes,
generation-skipping transfer taxes imposed on a “taxable termination,” a
“taxable distribution,” or a “direct skip” from a trust or resulting from a
disclaimer, income taxes, real estate transfer taxes, or any tax or duty
imposed by a foreign country or political subdivision thereof. In addition,
the term does not include any tax imposed by section 2056A of the Code
or any corresponding provision of applicable state law.
E. “Act” means the Delaware Qualified Dispositions in Trust Act (12
Delaware Code Section 3570, et seq.), as amended, or any corresponding
Delaware statute enacted after the date of this agreement. A reference to a
specific section of the Act refers not only to that section but also to any
corresponding provision of any Delaware statute enacted after the date of
this agreement, as in effect on the date of application.
F. Use of any gender in this agreement includes the masculine, feminine and neuter genders as appropriate. Use of the singular number includes the plural and vice versa unless the context clearly requires otherwise.
G. In applying any provision of this agreement which refers to a person’s issue, “per stirpes,” the children of that person are the heads of their
respective stocks of issue, whether or not any child is then living.
H. “Personal Representative” means the executor or administrator of
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
a decedent’s estate and shall include all persons serving in such capacity
from time to time.
I. Use of the verb “shall” in this agreement indicates a mandatory direction, and use of the verb “may” indicates authorization to take action.
J. Captions, headings and sub-headings, as used herein, are for convenience only and have no legal or dispositive effect.
IN WITNESS WHEREOF, TRUSTOR’S NAME, Trustor, has set
his/her Hand and Seal the ______ day of _______________, 20____, and
__________________, Trustee, has caused this agreement to be signed in
its name by one of its Vice Presidents and its corporate seal to be affixed
by one of its Assistant Secretaries, the _____ day of _______________,
20____, all done in duplicate as of the date of execution by Trustor, which
date shall be the effective date of this instrument.
WITNESS:
______________________
_________________(SEAL)
TRUSTOR’S NAME, Trust-
or
_______________________________, Trustee
By:______________________________
Vice President
Attest:___________________________
Assistant Secretary
FALL 2005
Planning With Domestic Asset-Protection Trusts: Part II 537
“SCHEDULE A”
Consisting of One Page
of
Irrevocable Trust Agreement
Dated__________________
Between
TRUSTOR’S NAME
and
___________________________
*
*
*
CASH in the amount of One Dollar ($1.00)
*
*
*
538
STATE OF
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
_________________
COUNTY OF __________________
)
) SS.
)
The foregoing instrument was acknowledged before me this _____
day of _______________, 20____, by TRUSTOR’S NAME.
______________________________
Notary Public
STATE OF DELAWARE
)
) SS.
COUNTY OF NEW CASTLE )
The foregoing instrument was acknowledged before me this _____
day of _______________, 20____, by _______________________, a
Vice President of____________________, a Delaware corporation, on
behalf of the corporation.
______________________________
Notary Public
THE INTERRELATIONSHIP
BETWEEN THE ELECTIVE
SHARE AND THE MARITAL
DEDUCTION
Donna Litman*
Editors’ Synopsis: This Article aims to clarify the distinction between
and the interrelationship of the elective share and the federal estate tax
marital deduction. The Article focuses on two issues: (1) whether the
elective share payable to a surviving spouse qualifies for the marital
deduction, and (2) whether a marital trust will satisfy the elective share
or reduce the amount payable as part of the elective share.
I.
II.
MINIMUM SHARE FOR SURVIVING SPOUSE . . . . . . . . . . 558
MAXIMUM CREDIT SHELTER, MINIMUM
MARITAL DEDUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 559
A. Maximization of Unified Credits of Both Married
Spouses, with Outright Marital Devise for Balance . . . . .
B. Use of QTIP Marital Trust and Credit Shelter Trust . . . . .
C. Use of § 2056(b)(5) Marital Trust and Credit Shelter
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. Use of Estate Trust and Credit Shelter Trust . . . . . . . . . . .
560
562
563
563
The elective share and the federal estate tax marital deduction both
relate to the surviving spouse, but they differ in many respects. The elective share is the minimum share a surviving spouse may elect to receive
under state law, while the marital deduction affects whether the share passing to the spouse by election or otherwise will generate a federal estate
tax. Their quantitative limits are on opposite ends of the spectrum, with
the elective share prescribing the minimum and the federal estate tax having no maximum amount. They interrelate with respect to whether the
elective share payable to a surviving spouse qualifies for the marital deduction and whether a marital trust will satisfy the elective share or reduce
the amount payable as part of the elective share. This Article will focus on
*
Donna Litman is a Full Professor of Law at Nova Southeastern University Law Center where she teaches tax and estate planning courses. She also is a Florida Bar Certified
Tax Attorney and currently serves as Chair of the Tax Certification Committee for The
Florida Bar. Professor Litman has published extensively in the tax and estate planning field.
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
these interrelationships.1
Generally, the rights of a surviving spouse are governed by state law.
These rights may include the right to certain exempt personal property,
such as furniture or an automobile, and to an interest in homestead property or a homestead allowance.2 Further, these rights may include a right to
a family allowance or support amount3 and to community property,4 dower
or curtesy,5 or a statutory or elective share of the deceased spouse’s property. In some cases, federal law also may grant a surviving spouse rights
or benefits, such as rights under ERISA or Social Security.
Not all states grant a surviving spouse an elective share. Among the
states that do, elective share statutes vary considerably. 6
1
Beyond the scope of this Article are (1) discussions regarding who will bear the
burden of any increased estate taxes resulting from an election and (2) discussions regarding
the effect of a waiver of the elective share or a disclaimer of any interests of, or benefits
passing, to the spouse.
2
See, e.g.,FLA. CONST. Art. X, § 4; FLA. STAT. § 732.401 (2005) (homestead composed
of up to one-half an acre within a municipality and up to 160 acres outside the municipality,
with the surviving spouse receiving at least a life estate in the homestead and in some cases
outright ownership by devise or statute); OHIO REV. CODE ANN. § 3103.04 (West 2004)
(“right [of husband or wife] to remain in the mansion house after the death of either”).
3
See, e.g., FLA. STAT. ANN. § 732.403 (West 2005) (family allowance of up to $18,000
for surviving spouses and lineal heirs that the decedent was obligated to support and was
supporting); GA. CODE ANN. § 53-3-1(c) (1997) (“year’s support”). See also HAW. REV.
STAT. ANN. § 533-8 (LexisNexis 2000) (right of surviving wife to remain in husband’s
house, rent-free, for sixty days after his death and to “have her reasonable sustenance out of
his estate”).
4
See, e.g., ARIZ. REV. STAT. ANN. § 14-3101A (West 1995); CAL. PROB. CODE §§ 100,
21103 (West 2002) .
5
See ARK. CODE ANN. §§ 28-11-301, 28-11-305 (2004) (one-third of all lands for life
for surviving spouse, if there is a surviving child or children, plus one-third of personal estate). Id. § 28-12-103 (right to take against will and receive dower or curtesy); id. (regarding
community property). See also OHIO REV. CODE ANN. § 2103.02 (LexisNexis 2004) (dower
interest for life of surviving spouse or consort in one-third of real property).
6
See, e.g., ALA. CODE § 43-8-70 (LexisNexis 1991) (elective share is equal to lesser
of (1) all of the deceased’s estate reduced by the value of the separate estate of the surviving
spouse or (2) one-third of the deceased’s estate, and the surviving spouse’s separate estate
includes “[a]ll legal and equitable interests in property the possession or enjoyment of
which are acquired only by surviving the decedent [and all] income and other beneficial
interests . . . [u]nder a trust”); COLO REV. STAT. § 15-11-201 (2004) (an elective share of up
to one-half of the augmented estate, with a sliding scale based on the number of years of
marriage, with 5% for each full year of marriage up to ten full years, and a supplemental
minimum amount); CONN. GEN. STAT. § 45a-436 (2004) (surviving spouse may elect to
receive a life estate in one-third of the real and personal property passing under the will,
after payment of debts and charges against the estate); DEL. CODE ANN. tit.12, §§ 901-908
FALL 2005
The Interrelationship Between the Elective Share
541
Some states allow the surviving spouse to elect to receive an amount equal
to a percentage of the decedent’s net probate estate in lieu of, or payable
from, any provisions for the surviving spouse under the will or by intestate
succession.7 Others augment the probate estate and allow the surviving
(2001) (elective share equal to one-third of the elective estate—the gross estate for federal
estate tax purposes with certain modifications—less the amount of the decedent’s transfers
to the spouse, such as “[a]ny beneficial interest of the surviving spouse in a trust created by
the decedent during the decedent’s lifetime or under the decedent’s will” under id.
§ 903(1)(d); IOWA CODE ANN. §§ 633.236 -.247 (West 1964) (surviving spouse may elect
to receive all of the exempt personal property plus one-third of the legal or equitable interests in real property possessed by the decedent during lifetime that was not sold by forced
sale and one-third of all nonexempt property not needed to pay debts and charges, with
special provisions regarding the allocation and occupation of the homestead); MO. ANN.
STAT. §§ 474.160, .163 (West 1992) (surviving spouse may elect to take against the will
and receive one-half of the net estate subject to payment of claims if there are no lineal descendants or one-third if there lineal descendants; the elective share is offset by the “aggregate value of money and property so derived by the surviving spouse from the decedent
[including any] beneficial interest of the surviving spouse in a trust created by the decedent
during his lifetime” and the homestead allowance); OKLA. STAT. ANN. tit. 84, § 44 (West
1992) (surviving spouse may elect to take “an undivided one-half (½) interest in the property acquired by the joint industry of the husband and wife during coverture”).
7
See S.C. CODE ANN. § 62-2-201 (2004) (“surviving spouse has a right of election to
take an elective share of one-third of the decedent’s [probate] estate”). Id. § 62-2-202 defines the probate estate as “property passing under the decedent’s will plus the decedent’s
property passing by intestacy, reduced by funeral and administration expenses and enforceable claims”). See also 755 ILL. COMP. STAT. ANN. § 5/2-8 (West 1992) (surviving
spouse may elect to receive one-third of the estate after payment of all just claims if the
testator leaves a descendant or one-half if the testator does not leave a descendant); see also
MD. CODE ANN., EST. & TRUSTS § 3-203 (WEST 2001) (surviving spouse may elect to
receive one-third of the net estate if there is a surviving issue and one-half if there is no
surviving issue; net estate is defined as the “property . . . passing by testate succession,”
reduced by funeral and administration expenses, family allowances and enforceable claims
and debts, but not reduced for estate or inheritance taxes); N.H. REV. STAT. ANN. § 560:10
(1997) (providing that if there are any surviving children, the surviving spouse will receive
“one-third part of the personalty and one-third part of the real estate”; if there are no surviving children or issue of deceased children but there is a surviving parent or sibling, the
surviving spouse will receive the first $10,000 of personalty and $10,000 of realty, plus
one-half the balance; and if there is no surviving child, issue of deceased child, parent or
sibling, the surviving spouse is entitled to the first $10,000 of the personalty and $10,000
of the realty, plus $2,000 for each full year of marriage, plus one-half of the balance); WYO.
STAT. ANN. § 2-5-101 (2005) (surviving spouse may elect to receive a fraction of the property subject to disposition by will, reduced by funeral and administration expenses, homestead allowance, family allowances and exemption and enforceable claims—the fraction is
one-half if the decedent is not survived by any issue, or both spouses are the parents of the
surviving issue, and only one-fourth if the surviving spouse is not a parent of any of the de-
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
spouse to elect to receive an amount equal to a percentage of the probate
estate, non-probate assets, and certain inter vivos transfers payable first
from certain property passing to the spouse.8 Others consider the properties of both spouses as well as their inter vivos transfers when computing
the elective share and determining whether the surviving spouse has
received an appropriate share of all assets.9 Still other jurisdictions rely on
community property rights to protect both spouses or on rights of dower or
curtesy in personal or real property to provide for a surviving spouse.10
When formulating an estate plan for a married individual, it may be
necessary to consider the minimum share a spouse is entitled to receive as
an elective share and the interrelationship between the elective share and
the marital deduction. The value of the elective share may be difficult to
predict when basing the elective share on an augmented estate or a sliding
percentage. The extent to which the elective share affects a testator’s estate
plan depends on the applicable percentage used to compute the elective
share; the base on which the elective share is computed; and whether outright transfers, devises, and beneficial interests in trust reduce or satisfy it.
cedent’s surviving issue).
8
See, e.g., FLA. STAT. ANN. §§ 732.201-.2155 (West 2005). The applicable percentage
is 30% of the elective estate. Id. § 732.2035.
9
See, e.g., ALASKA STAT. §§ 13.12.201 – .214 (2004) (providing an elective share of
one-third of the augmented estate, including the decedent’s nonprobate transfers to the surviving spouse and others, and the surviving spouse’s property and nonprobate transfers to
others); HAW. REV. STAT. ANN. §§ 560:2-201 –:2-214 (LexisNexis 2005) (providing an
elective share for a surviving spouse or reciprocal beneficiary based on the UPC sliding percentages, with the augmented estate including property held in a trust created by the decedent, the surviving spouse, or the reciprocal beneficiary but not created by any other
person). See also id. § 560:2-208(2)(A). N.D. CENT. CODE § 30.1-05-01 (1996) (providing
an elective share of one-half of the augmented estate, with a supplemental amount to provide a minimum of $50,000); UTAH CODE ANN. §§ 75-2-201 – 214 (2004) (providing an
elective share of one-third of the augmented estate, with a supplemental amount up to
$25,000); W. VA. CODE ANN. §§ 42-3-1, 42-3-2, 42-3-6 (LexisNexis 2004) (providing an
elective share of a percentage of the augmented estate based on the Uniform Probate Code’s
sliding scale, with a supplemental amount up to $25,000).
10
Some states offer dower/curtesy and the elective share either in combination or in
the alternative. See, e.g., KY. REV. STAT. ANN. § 392.020 (LexisNexis 1999) (providing for
a statutory dower or curtesy of one-half of the decedent’s surplus real estate owned by the
decedent in fee at death, a life estate in one-third of all real property owned by the decedent
during lifetime but not at death, and one-third of the decedent’s surplus personalty). See
also id. § 392.080 (providing a surviving spouse with the right to elect statutory dower or
curtesy in lieu of the will in section 392.020 but only a one-third interest in the surplus real
estate).
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The Interrelationship Between the Elective Share
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Further, whether the right of a surviving spouse to claim an elective share
affects the estate plan depends on the extent to which the testator desires to
benefit a spouse or others, and how much control a testator is willing to
give the spouse during lifetime and after the testator’s death.
Some elective share statutes offer opportunities to minimize the elective share or to satisfy it with beneficial interests in trust. For example, a
testator who desires to minimize the elective share of the surviving spouse
can reduce its value significantly if the elective share is computed based
only on a percentage of the deceased spouse’s net probate estate. This can
be accomplished by the testator owning or transferring property so that it
will pass outside of probate to persons other than the surviving spouse.
Generally, an elective share based on the net probate estate does not include property held as joint tenants with rights of survivorship; property
passing by beneficiary designation, such as a life insurance policy; and
other will substitutes, such as revocable trusts and securities that are transferrable or payable on death to named beneficiaries (T.O.D. or P.O.D.).11
On the other hand, an elective share that considers probate and non-probate assets of both spouses as well as both of their inter vivos transfers
may result in the surviving spouse’s entitlement to an elective share that
differs considerably in amount from an elective share that only considers
the assets and transfers of the deceased spouse. In some cases, an elective
share that considers assets and transfers of both spouses may allow the
testator more flexibility to provide for other beneficiaries. By contrast, an
elective share that focuses primarily on transfers made by the deceased
testator during lifetime and by reason of death may result in a spousal
election that overrides the intent of the testator.
When formulating an estate plan to minimize estate taxes at the death
of each spouse, it may be necessary to consider any election rights of a
spouse and whether an election would disrupt that estate tax plan and
11
See Gallagher v. Evert, 577 S.E.2d 217 (S.C. Ct. App. 2002) (surviving spouse was
entitled to elective share based on one-third of the probate estate even though she received
over $219,000 in non-probate assets and even though she died prior to the determination of
the amount of her elective share so that it was payable to her estate); In re Estate of Solnik,
401 So. 2d 896 (Fla. 4th Dist. Ct. App. 1981) (holding that the probate estate did not include
a joint savings account with rights of survivorship owned by the decedent and his daughter
and was not taken into account in computing the wife’s elective share under section 732.206
of the Florida Statutes. But see Seifert v. So. Nat’l Bank, 409 S.E.2d 337 (S.C. 1991)
(holding that husband’s revocable trust was illusory and invalid, and therefore, the proceeds
of the trust were included in the husband’s estate for purposes of calculating his wife’s
elective share).
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create an estate tax liability. A spousal election also can change the timing
of distributions and decrease the overall amount passing to other intended
beneficiaries. For example, it may be desirable for each spouse to own
assets in each’s individual name equal to the applicable exclusion amount
so that both spouses can take advantage of their unified credits regardless
of which spouse dies first. In order to accomplish this, it may be necessary
to convert property held jointly with rights of survivorship into tenancies
in common or to transfer interests or assets from one spouse to the other.
Further, each spouse may choose to execute a will utilizing the minimum
marital deduction required to result in the least amount of estate taxes with
a credit shelter trust for the benefit of the surviving spouse and other
beneficiaries, such as the testator’s descendants. If the spouse who transfers assets to the other spouse dies first and the surviving spouse has the
right to elect to receive the elective share in lieu of the interests under the
will or testamentary trust, the election could disrupt the estate plan and
create an estate tax liability. Further, if the surviving spouse becomes incapacitated, the spouse’s guardian may make the election if the guardian
believes it to be in the best interest of the surviving spouse even if the surviving spouse would not have made the election if competent. Alternatively, an attorney in fact may have this power under a durable power of
attorney and may make the election.12 Thus, it may be necessary to consider elective share rights and other alternatives before giving assets to a
spouse who may elect to take the elective share. In these cases, it may be
desirable to obtain an inter vivos waiver of the elective share or to limit
any right an attorney in fact might have under a durable power of attorney
to make an election.
Many estate plans for married individuals take advantage of the marital deduction and the unified credit. This Article will review the permissible types of marital trusts as well as some of the possible estate tax plans
in light of the elective share to determine when they are compatible and
when the elective share may override them. The federal estate tax marital
deduction applies to property that passes to the surviving spouse, including property that passes by reason of dower, curtesy, or statutory interest
in lieu of dower or curtesy, such as an elective share.13 When an elective
12
See, e.g., FLA. STAT. § 732.2125(2) (2004) (“right of election may be exercised . . .
[w]ith approval of the court having jurisdiction of the probate proceeding by an attorney in
fact . . . . The court shall determine the election as the best interests of the surviving spouse,
during the spouse’s probable lifetime, require.”).
13
See I.R.C. § 2056(c)(3) (2000). See also Treas. Reg. § 20.2056(c)-1(a)(3), -2(c) (as
FALL 2005
The Interrelationship Between the Elective Share
545
share is payable in the form of an outright life estate or a life estate in
trust, it will not qualify for the marital deduction unless it qualifies for one
of the exceptions to the terminable interest rule under Internal Revenue
Code (“Code”) section 2056(b). A dower or curtesy interest in the form of
an outright life estate will qualify for the marital deduction if the personal
representative makes a QTIP election under Code section 2056(b)(7). Further, a trust will qualify for the marital deduction if the surviving spouse
has a life estate and the trust either qualifies for the marital deduction by
reason of a QTIP election, or the spouse has a general power of appointment that qualifies under Code section 2056(b)(5). Alternatively, a trust
will qualify for the marital deduction if the trust is an estate trust payable
to the surviving spouse’s probate estate at death.14 Each of these three
types of marital trusts will result in the marital trust’s inclusion in the
gross estate of the surviving spouse when that spouse dies.15
A marital trust can be designed based on one of three basic types: a
QTIP trust, a life estate/general power of appointment trust, or an estate
trust. These trusts may contain the bare minimum requirements necessary
to qualify for the marital deduction or they may contain additional provisions. These three types of trusts are discussed in the following paragraphs
and in Section II of this Article.
1. QTIP Trusts (Section 2056(b)(7))
A QTIP trust must provide the surviving spouse with the annual right to
all of the net income from the property (or the use of the property) and
may not provide for any other beneficiaries or appointees during the
surviving spouse’s lifetime. Thus, a QTIP trust that provides the surviving
spouse with the bare minimum will require the trustees to distribute all of
the income to the spouse at least annually and will not provide for any
principal distributions during the spouse’s lifetime. If the testator includes
only the minimum requirements for a QTIP trust, the surviving spouse will
not be a trustee and will not have any powers of appointment over the
trust. Upon the death of the surviving spouse, the trust principal will be
distributed outright to other beneficiaries or will be held in trust for them.
amended in 1994).
14
See Treas. Regs. § 20.2056(c)-2(b) (as amended in 1994).
15
See I.R.C. § 2033 (2000) (estate trust); id. § 2041 (general power of appointment);
id. § 2044 (QTIP election). Also, a charitable remainder annuity trust or unitrust can qualify
for the marital deduction if the surviving spouse is the only private beneficiary. See id.
§ 2056(b)(8) (charitable remainder trusts).
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If the testator wants to provide the surviving spouse with additional
benefits and powers, the QTIP trust may provide for inter vivos distributions of principal to the surviving spouse at the sole discretion of the trustee or based on a standard contained in the trust, such as for health, maintenance, support, or comfort. The standard need not be limited to an ascertainable standard relating to the surviving spouse’s health, support, maintenance, or education. Further, the testator may appoint the surviving
spouse to serve as a cotrustee if the testator wants the surviving spouse to
participate in the administration of the QTIP trust.
2. Life Estate with a General Power of Appointment (Section
2056(b)(5) Trust)
A marital trust created to qualify under section 2056(b)(5) must grant the
surviving spouse a life estate—the right to receive all of the income at
least annually or the right to the current use of the principal, plus a general
power of appointment exercisable in favor of the surviving spouse or the
surviving spouse’s estate. Thus, a 2056(b)(5) trust that provides the surviving spouse with the minimum rights required during life would provide the surviving spouse with a life estate in trust and a testamentary general power of appointment exercisable in favor of the surviving spouse’s
probate estate. The 2056(b)(5) trust would provide takers in default to the
extent the surviving spouse does not exercise the power.
In addition to these minimum requirements, the trustee could be granted the power to make discretionary distributions of principal to the surviving spouse (with or without an ascertainable standard relating to the
spouse’s health, education, support, or maintenance). Further, the surviving spouse could be given a general or limited power of appointment over
principal exercisable during the spouse’s lifetime. In addition, the surviving spouse could be given the right to withdraw principal from the trust,
which could, but need not, be limited to a five and five power. Thus, the
marital trust may be created for the primary benefit of the surviving
spouse, assuring the spouse an income stream and allowing principal distributions to beneficiaries other than the surviving spouse only at the discretion of the surviving spouse. Providing the surviving spouse with an
inter vivos limited power of appointment would enable the spouse to make
gifts of principal to a limited group of beneficiaries, such as the testator’s
descendants, if the spouse does not need the future income from all of the
principal and the spouse wants to make gifts to save estate taxes when the
spouse dies.
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The Interrelationship Between the Elective Share
547
3. Estate Trust
If an estate trust is used to qualify for the marital deduction, it must provide that any principal and any accumulated or undistributed income remaining in the trust at the death of the surviving spouse will be distributed
to the surviving spouse’s probate estate. During the surviving spouse’s
lifetime, the trustee of an estate trust may be given the discretion to accumulate the income or distribute it to the spouse. Alternatively, the trustee
may be required to accumulate the income. If the trustee has the discretion
to accumulate or distribute income, the trustee will have the flexibility to
determine whether the trust or the surviving spouse will pay the income
tax on the trust’s income. Further, the trustee can be given the power to
make distributions of income or principal in the event the spouse needs additional funds. If the testator uses an estate trust, the trust assets will be
subject to the claims of creditors of the surviving spouse’s estate, and the
surviving spouse rather than the testator will determine who receives the
trust assets after payment of the creditors. A marital estate trust may be
drafted as a pecuniary amount, a fractional share, or a residuary devise.
Historically, an estate trust was used to save estate taxes when the first
spouse died as well as to save income taxes during the life of the surviving
spouse. The present income tax laws severely limit the maximum amount
of taxes that can be saved by accumulating income in a trust, and in some
cases accumulating income rather than distributing it may result in a greater income tax liability. For taxable years beginning in 2004, trusts pay tax
at the highest income tax bracket after the first $9550 of taxable income,
and the potential savings arising from use of the trust’s graduated tax rates
for 2004 is less than $1000.16 Further, the trust’s marginal and average tax
16
Whether taxes are saved by accumulating income at the trust level or distributing
them to the spouse depends on the relative tax brackets of the trust and surviving spouse,
and whether the spouse has other income to take advantage of the 10% tax bracket, the
personal exemption, and the standard deduction, or has itemized deductions that exceed the
standard deduction. For 2006, a complex trust has a $100 specific exemption and pays
federal income tax at the rate of 15% on the first $2050 of taxable income, 25% on the next
$2800, 28% on the next $2550, 33% on the next $2650, and 35% after $10,050 of taxable
income. The tax on $10,050 of taxable income would be $2596. If the surviving spouse has
significant sources of taxable income and has a marginal tax rate of 35%, then accumulating
$10,150 at the trust level ($100 for the trust’s specific exemption) would save slightly less
than 10%. (The actual tax savings would be $956.50 or 9.42% of10,150, based on a tax of
$2596 for the trust compared to a tax of $3552.50, or 35% of $10,150, for the surviving
spouse.) For 2006, if the surviving spouse is treated as an unmarried individual, the
surviving spouse would be entitled to a standard deduction of $5150 and a personal
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brackets may be greater than the surviving spouse’s depending on the
amount of the spouse’s other taxable income. If so, accumulating income
at the trust level could result in a greater income tax than would be incurred if the income had been distributed currently to the spouse.
In addition to one of these types of marital trusts, a testator may create
a trust to shelter the applicable exclusion amount used to compute the unified credit. For 2005, the applicable exclusion amount is $1,500,000; however, it is scheduled to increase to $2,000,000 in 2006 and to $3,500,000
in 2009. The estate tax is scheduled to terminate in 2010 and then return in
2011, reverting to an applicable exclusion amount of $1,000,000, unless
Congress provides another alternative. Many testators forego full use of
the unlimited marital deduction in order to take advantage of the applicable exclusion amount first and then the optimal or minimum marital
deduction needed to result in the least estate taxes payable when the first
spouse dies. In order to take advantage of the applicable exclusion amount,
the testator may choose to create a testamentary trust that benefits the
surviving spouse without that trust’s inclusion in the surviving spouse’s
gross estate. This type of trust sometimes is referred to as a “credit shelter
trust” or a “bypass trust.” In order to take advantage of both the optimal
marital deduction and the applicable exclusion amount, the testator may
use a formula clause for a pecuniary amount or a fractional share with
either a marital lead or a credit shelter lead.
As the applicable exclusion amount increases and the optimal or minimum marital deduction, and thus the marital devise, decreases, an unintended effect may be that the amount payable as an elective share may exceed the value of the marital devise, particularly if it is a marital trust.
When drafting trusts to save estate taxes, it may be necessary to determine
whether the beneficial interests of the spouse in the trust will affect the
computation of the elective share or satisfy or reduce it. Further, it may be
necessary to consider the risk that the surviving spouse or his or her guardian (or attorney in fact) may choose the elective share over the estate plan
and the effect the election may have on the estate plan. Alternatives, such
as the use of a spousal waiver, may be considered.
In many jurisdictions, the surviving spouse’s interests in a marital trust
or a credit shelter trust are taken into account to determine if the surviving
spouse has received the statutory minimum. The spouse’s interests in a
exemption of $3300 and would pay 10% on the first $7550 of taxable income; 15% on the
next $23,100; 25% on the next $43,550; 28% on the next $80,600; 33% on the next
$181,750; and 35% over $336,550.
FALL 2005
The Interrelationship Between the Elective Share
549
marital trust may include the right to receive mandatory or discretionary
distributions of income, the right to receive discretionary distributions of
principal, the annual right to withdraw $5,000 or 5 percent of the principal, and the right to appoint the property by exercise of a general or
limited power of appointment. The appropriate method for valuing these
interests for purposes of the elective share may present an issue. Some
elective share statutes are discussed later in this Article with respect to
whether the surviving spouse’s interests in a marital trust or a credit shelter trust are taken into account under the elective share statute and, if so,
how these interests are to be valued.
The elective share under the 1993 version of the Uniform Probate
Code uses an augmented estate that takes into consideration assets and
transfers by both spouses and provides an elective share amount based on
a sliding scale from 3% to 50% of the augmented estate based on the
number of years of marriage, with a minimum amount of $50,000. The
three percent amount applies to marriages of one year and the 50% amount
applies to marriages of fifteen years or more.17 The Uniform Probate Code
also provides that the elective share amount is to be satisfied by the
“amounts included in the augmented estate . . . which pass or have passed
to the surviving spouse by testate or intestate succession,” and this includes beneficial interests that pass to the spouse in trust.18 The Uniform
Probate Code does not prescribe any valuation method for determining the
amounts or beneficial interests; however, the comments refer to actuarial
valuation, cautioning, “Now, many if not most devises to the surviving
spouse are in the form of an income interest that qualifies for the marital
deduction under the QTIP provisions, and these devises require actuarial
computations that should be avoided whenever possible.”19 The actuarial
computations would depend on the age and life expectancy of the surviving spouse, the assumed interest rate, and the spouse’s beneficial interests
in the trust. The Uniform Probate Code does refer to the value of a trust
interest with respect to the value of the property included in the augmented
estate. It provides that the value of the property in the augmented estate
“includes the commuted value of any present or future interest and the
commuted value of amounts payable under any trust, life insurance settle-
17
UNIF. PROBATE CODE § 2-202(a) (amended 1993), 8 U.L.A. 102 (1998). The
fraction increases by 3% per year for the first ten years, and 4% for the next five years up
to fifteen years. Id.
18
Id. § 2-209(a)(1).
19
Id. § 2-209 cmt.
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ment option, [or] annuity contract.”20
Many states that consider beneficial interests either as part of the augmented estate or part of the base on which the elective share is computed,
or as property that passes to the spouse that satisfies or reduces the elective
share do not provide a specific statutory valuation method. Oregon requires the elective share to be reduced by the present value of a right to
income or an annuity in trust or a right of withdrawal from a trust, without
specifying a valuation method.21
Pennsylvania’s elective share is calculated based on one-third of the
decedent’s property passing by will or intestacy plus one-third of certain
conveyances by the decedent, including one-third of the income for the
surviving spouse’s life from “property conveyed by the decedent during
the marriage to the extent that the decedent at the time of his death had the
use of the property or an interest in or power to withdraw the income
thereof.”22 An election by the surviving spouse operates as a disclaimer of
any beneficial interests of the surviving spouse in “[p]roperty in any trust
created by the decedent during his lifetime.”23 However, if the interest
cannot be disclaimed, conveyed, or released, then “[t]he value at the time
of the decedent’s death of any [such] beneficial interest . . ., regardless of
its form, shall also be so charged against the elective share.”24 Thus, if a
Pennsylvania decedent transferred property during lifetime and retained a
life estate, the value of the life estate in that property for the surviving
spouse must be calculated. Further, if the surviving spouse had a beneficial
20
Id. § 2-208(b)(2).
The Oregon Revised Statutes provide:
The elective share consists of one-fourth of the value of the net estate of the
decedent . . . reduced by the value of the following property given to the surviving spouse under the will of the decedent:
....
(c) The present value of the right of the surviving spouse to income or
an annuity, or a right of withdrawal, from any property transferred in
trust by the will that is capable of valuation with reasonable certainty. . . .
OR. REV. STAT. § 114.105(1) (2003). See also id. § 114.125(2) (providing that the maximum
amount payable by reason of the election plus certain property received by the surviving
spouse cannot exceed one-half of that property and that the spouse will be treated as receiving property if “the spouse is given all the income and a general power to appoint the
principal.”).
22
20 PA. CONS. STAT. ANN. § 2203(a)(2) (West Supp. 2005).
23
Id. § 2204(a)(3).
24
Id. § 2204(c).
21
FALL 2005
The Interrelationship Between the Elective Share
551
interest in a trust created by the decedent and is unable to disclaim that interest, it also must be valued for purposes of satisfying the elective share.
Pennsylvania does not provide a statutory method for valuing income interests or nondisclaimable beneficial interests.
Tennessee addresses the valuation issues in general by providing that
the value of a life estate or trust for a spouse’s lifetime benefit will be valued actuarially.25 If a state requires actuarial valuation, issues may arise as
to what assumptions are to be used in making the actuarial computations.
Case law provides limited guidance regarding actuarial valuations for purposes of the elective share; however, some tax statutes, regulations, rulings, and tables may be helpful.
South Dakota has adopted the elective share provisions of the 1993
Uniform Probate Code,26 including the provision that the “value of property . . . [i]ncludes the commuted value of any present or future interest
and the commuted value of amounts payable under any trust.”27 In 2000,
the Supreme Court of South Dakota construed this provision, holding that
the elective share statute “clearly contemplates that a life interest is to be
valued at its present value and applied to satisfy the elective share amount,
regardless of whether the benefit is discretionary or mandatory.”28 The
court approved the use of the South Dakota Inheritance Tax 7.5% Annuity
Table, which “utilizes a unisex mortality computation rate” and “the actual
age of the surviving spouse as of the date of the decedent’s death . . . to
determine life expectancy.”29
25
See TENN. CODE ANN. § 31-4-101(a)(1) – (2) (2001) (providing for an elective share
based on a sliding scale of 10% to 40% of the net estate depending on the number of years
of the marriage). Section 31-4-101(c) provides:
After the elective-share amount has been determined . . ., the amount payable to
the surviving spouse by the estate shall be reduced by the value of all assets includable in the decedent’s gross estate which were transferred, or deemed transferred, to the surviving spouse or which were for the benefit of the surviving
spouse. For purposes hereof, the decedent’s gross estate shall be determined by
the court in the same manner as for inheritance tax purposes . . ., except that the
value of any life estate or trust for the lifetime benefit of the surviving spouse
shall be actuarially determined.
26
See, e.g., S.D. CODIFIED LAWS § 29A-2-209(a) (2004).
27
Id. § 29A-2-208(b)(2) (2004).
28
In re Estate of Karmen, 607 N.W.2d 32, 37 (S.D. 2000).
29
Id. at 38. The wife’s will provided for a QTIP trust and a Family trust to fund the
credit shelter, with discretionary distributions of income and corpus for the spouse’s health,
support, education, best interests, and welfare, with no principal distributions from the Family trust until the principal of the QTIP trust had been distributed. The QTIP trust was
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Nebraska has adopted a modified version of the Uniform Probate
Code, which provides that the augmented estate includes “any beneficial
interest of the surviving spouse in a trust created by the decedent during
his or her lifetime”30 and that “property which is part of the augmented estate which passes or has passed to the surviving spouse by testate or intestate succession or other means . . . is applied first to satisfy the elective
share.”31 In 1999, the Supreme Court of Nebraska held that the “tax valuation method” used for valuing these interests for tax purposes may be an
appropriate method for valuing the present interest of a surviving spouse’s
beneficial interest in an inter vivos trust for elective share purposes.32 The
funded with approximately $1,370,000 and the Family trust with approximately $640,000.
The husband’s elective share was equal to $1,301,095, and the husband received more than
that amount based on the computed value of the husband’s life estate in the QTIP trust,
which was $504,193, and the commuted value of his life estate in the Family trust, which
was $233,474, plus his own assets, one-half of the jointly owned property, and personal
property willed to him. The court also noted:
Our decision is supported by the fact that two other widely used present value
indicators, the federal estate tax commuted value rate (7.6%) and the ten-year
average for long term U.S. bonds (7.58%), were within .1% of the Inheritance
Tax Table rate. We see no abuse of discretion by the trial court in using [the
South Dakota Inheritance Tax Table].
Id. at 39.
30
NEB. REV. STAT. §§ 30-2314(2)(i) (2002).
31
Id. § 30-2319(a).
32
See Myers v. Myers, 594 N.W.2d 564, 566, 570 (Neb. 1999). The surviving spouse
was forty-four years old and she was entitled to an elective share equal to 50% of the augmented estate, which was stipulated to be valued at $6,578,713. The decedent’s revocable
trust was funded by a pourover devise of $6,041,713, and the trust created a marital share
and a family share. The wife was entitled to all of the income from both shares and the
trustee was empowered to invade principal of either share to provide for her support. The
county court applied the Nebraska Administrative Code, which provides that “[t]he present
value of . . . life estates . . . is determined under 26 C.F.R. 20.2031-7 (1983) . . . or as
subsequently revised” and 26 C.F.R. § 20.2031-7, which provides that the “fair market
value of . . . life estates . . . is their present value determined by use of standard or special
section 7520 actuarial factors. . . . . derived by using the appropriate section 7520 interest
rate and, if applicable, the mortality component for the valuation date of the interest that is
being valued.” Id. at 569. The court then applied an interest rate for December 1996 of
7.59%, rounded to 7.6%, and a single life remainder factor for a 44 year old person of
.13873, resulting in an actuarial factor of .86127. The actuarial value of the surviving
spouse’s life estate in both shares equaled $5,233,546, which exceeded 50% of the value of
the augmented estate. The elective surviving spouse’s interests in both trusts funded the
share in full, and the surviving spouse was not entitled to anything more. Id. In a partition
matter involving a life estate, the Colorado Court of Appeals concluded that the tax
valuation method used in Myers was “an appropriate, logical, and consistent method of
FALL 2005
The Interrelationship Between the Elective Share
553
Supreme Court of Nebraska upheld the county court’s use of “standard
mortality tables, IRS Regulations and State Inheritance Tax Regulations”
to value the present interest of the spouse in a trust, although it noted that
the tax valuation method may not be the only appropriate valuation method.33
If a testator uses a QTIP trust with the bare minimum provisions and
the elective share can be satisfied with the value of the spouse’s interest in
the QTIP trust, then it will be necessary to value that life estate. Further, if
the trust authorizes discretionary principal distributions to the spouse and
the value of the spouse’s right to receive those distributions can satisfy the
elective share amount, then those rights also need to be valued. It may help
if a standard relating to the spouse’s support based on the spouse’s present
standard of living limits the trustee’s discretion; however, actuarial valuations of the interests may vary. By contrast, if the testator chooses to use a
2056(b)(5) trust to satisfy the elective share, the spouse’s life estate, as
well as the spouse’s power of appointment, will need to be valued for purposes of satisfying or offsetting the elective share amount (unless the interests together are treated as valued at 100% of the trust property).
In a few jurisdictions, the elective share statute authorizes a statutory
method for valuing a marital trust or other trust for purposes of the elective
share. For example, South Carolina provides that the full value of a trust
that qualifies for the marital deduction (even if a QTIP election is not
made) will be treated as passing to the surviving spouse for purposes of
determining the elective share.34 Thus, a South Carolina testator could create an elective share QTIP trust, with the full value of the principal of the
determining the present value of a life estate” that should be used “[i]n the absence of more
specific direction from the General Assembly.” Beach v. Beach, 56 P.3d 1125, 1131 (Colo.
Ct. App. 2002), rev’d on other grounds, 74 P.3d 1 (Colo. 2003).
33
Myers, 594 N.W.2d at 566.
34
S.C. CODE ANN. § 62-2-201 (2003) (providing for “an elective share of one-third of
the decedent’s [probate] estate”). Section 62-2-207(a) of the South Carolina Code provides:
In the proceeding for an elective share, all property (including beneficial
interests) which passes or has passed to the surviving spouse under the decedent’s
will . . . is applied first to satisfy the elective share . . . . For purposes of this
subsection, the value of the electing spouse’s beneficial interest in any property
which would qualify for the federal estate tax marital deduction pursuant to Section 2056 of the Internal Revenue Code, as amended, shall be computed at the full
value of any such qualifying property (qualifying for these purposes to be determined without regard to whether an election has been made to treat the property as qualified terminable interest property).
id. § 62-2-207(a) (Supp. 2004).
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trust satisfying the elective share, even though the surviving spouse only
has the right to receive the income from the trust. New Jersey provides
that, for purposes of determining the elective share, the spouse’s life estate
in a trust is valued at one-half of the value of the trust, and this rule has
been applied even when the spouse’s life estate was a future interest and
was subject to a present life estate in another beneficiary.35
North Carolina provides an elective share based on a fraction (from
one-sixth to one-half)36 of total net assets, offset by the value of property
passing to the surviving spouse, including the full value of a trust held for
the exclusive benefit of the surviving spouse. Further, North Carolina law
provides that a trust is held for the exclusive benefit of the surviving
spouse if one or more nonadverse trustees control the trust and the trustees
must distribute to, or for the benefit of, the spouse either all of the net income or so much of the net income as the trustees determine is necessary
for the spouse’s health, maintenance, and support. Further, the trust also
must require the trustees to distribute so much of the principal as the trustees determine is necessary for the spouse’s health, maintenance, and support.37
Florida authorizes the use of an elective share trust to satisfy the elective share amount. For this purpose, a Florida elective share trust will be
valued based on 50, 80, or 100% of the value of the principal of the trust
35
N.J. REV. STAT. § 3B:8-1 (2004) (providing for an elective share based on one-third
of the augmented estate). Section 3B:8-17 provides:
In an action for an elective share, the electing spouse’s total or proportional
beneficial interest in any life estate in real or personal property or in any trust
shall be valued at one-half of the total value of the property or trust or of the
portion of the property or trust subject to the life estate.
The Superior Court of New Jersey valued a life estate of the surviving spouse in onehalf of the corpus of an irrevocable trust at one-half of one-half of the corpus of the trust,
even though the spouse’s life estate was subject to an intervening life estate held by her 85year-old mother and the trustee had discretion to distribute corpus for the mother’s support.
The court noted that a “salutary” purpose of the “valuation methodology” of 3B-8-17 is
“without extensive disputes over the valuation of that interest, to fix a definite time for valuation of the trust, although the eventual amount received by the electing spouse might be
more or less than the value of the electing spouse’s interest at the time of decedent’s death.”
In re Estate of Post, 659 A.2d 500, 507 (N.J. Super. Ct. App. Div. 1995).
36
Generally, the fraction is one-half or one-third, depending on whether any lineal
descendants survive the decedent and, if so, the number of surviving children or deceased
children with descendants surviving, or one-half of that percentage if any lineal descendant
from a prior marriage survives the decedent but no lineal descendants of the decedent and
the surviving spouse. See N.C. GEN. STAT. § 30-3.1(a) (2004).
37
Id. § 30-3.3(a)(7). See also id. § 30-3.2(3) (defining a nonadverse trustee).
FALL 2005
The Interrelationship Between the Elective Share
555
depending on the beneficial interests of the surviving spouse.38 Generally,
if the spouse only has a life estate in the trust, 50% of the value of the
principal will satisfy the elective share; if the trust also authorizes distributions of principal for the spouse’s health, support, and maintenance, 80%
of the value will satisfy the elective share; and if the spouse also has a general power of appointment exercisable in favor of the spouse or the
spouse’s estate, 100% will satisfy it.39 The minimum requirements for the
elective share trust parallel the requirements for a QTIP trust;40 however,
there are differences between the elective share and the federal estate tax
marital deduction rules.41 A Florida elective share trust can be drafted to
qualify for the marital deduction; however, not all Florida elective share
trusts will qualify for the marital deduction. For example, if a Florida elective share trust grants the surviving spouse a limited power during lifetime
to appoint trust principal to the lineal descendants of the testator and the
surviving spouse, the trust will not qualify for a QTIP election. Further, a
special or supplemental needs trust providing for discretionary distributions of income and principal for an ill or disabled surviving spouse can be
used to satisfy the Florida elective share, with 100% of the value of the
trust qualifying for this purpose; however, it will not qualify for the marital deduction unless it is an estate trust.42 Other trusts also can be used to
provide for the surviving spouse and qualify for the marital deduction,
with the value of the spouse’s interest being determined based on the “value the interest would have for purposes of the United States estate and gift
tax laws if it passed without consideration to an unrelated person on the
applicable valuation date” up to a maximum of 50% of the value of the
trust satisfying the elective share.43
Some statutes provide a rebuttable presumption for determining the
value of a life estate or trust interest for purposes of the elective share.
Maine provides a presumption that the value of a spouse’s beneficial interest in a life estate or in a testamentary or inter vivos trust is one-half the
value of the property subject to the life estate or the trust estate; however,
38
See FLA. STAT. §§ 732.2025(2), .2095(2)(b) (2004).
See id. § 732.2095(1)(b), (c), (2)(b).
40
The spouse must have the right to require the trustees of the elective share trust to
make the property productive or to convert it into productive property within a reasonable
time.
41
Compare FLA. STAT. § 732.2025(2)(c) (2004) with I.R.C. § 2056(b)(7)(B)(ii)(II)
(2000).
42
See FLA. STAT. §§ 732.2025(8), (11), 732.2095(2)(c) (2004).
43
Id. § 732.2025(11). See also id. § 732.2095(2)(d).
39
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
that presumption can be rebutted by proof of a higher or lower value.44
Alabama also employs this rebuttable presumption to value a trust interest
at one-half of the value of the trust estate; however, if the electing spouse
also has an inter vivos or testamentary general power of appointment, the
beneficial interest is valued at two-thirds the value of the trust estate.45 The
use of the Alabama presumption was approved by an appellate court even
though it noted that, in most cases, other valuation methods would provide
a better way to determine the value.46
44
See ME. REV. STAT. ANN. tit. 18-A, § 2-207 (2004). See Estate of Fisher, 545 A.2d
1266 (Me. 1988). In Fisher, the testator provided a residuary trust for her husband, under
which he was entitled to receive $350 per month, and the court valued this interest at
$32,156.89, based on his age at his nearest birthday, the amount of the monthly payment,
and the rate of capitalization, applying the federal estate tax rules and valuation tables in
effect at the testator’s death. The spouse valued this interest based on the federal estate tax
valuation rules. The court took judicial notice of these rules, which calculated the spouse’s
age based on his nearest birthday (sixty-one) and used the standard mortality tables and
Service regulations and tables to compute present values of annuities and life estates for
federal estate tax purposes, using a 10% rate of capitalization for persons dying after November 1983. The personal representative did not dispute the use of the 10% rate of capitalization. The spouse also had the right to receive so much of the net income and principal
of the trust as the “the Trustee, in the Trustee’s sole discretion, shall deem necessary or
advisable for the welfare and support of my husband, taking into consideration all other
means known to the Trustee, and available to my said husband.” Id. at 1272. However, the
court concluded that this power was not subject to “ascertainable external standards” and
that the spouse’s “potential interest is too remote and tenuous to place a present value upon
it” and thus, did not satisfy the elective share. Id. at 1273.
45
ALA. CODE § 43-8-75 (2004).
46
In Reynolds v. Reynolds, 837 So. 2d 847 (Ala. Civ. App. 2002), the court held that
the value of the spouse’s interest in a QTIP trust as the income beneficiary was one-half of
the value of the trust property. The QTIP trust was funded with $2,978,765 of assets, and
the spouse’s interest was valued at $1,489,378. The court affirmed the lower court’s holding
that this value had not been rebutted by expert opinions, that the value should have been
based on mortality tables and discount rates, and possibly, a factor for inflation. The children argued for a value based on the mortality tables and discount rate provided in section
7520 of the Internal Revenue Code (“Code”), based on the spouse’s age of 66, a life
expectancy of 18.4 years, and a 7.4% discount factor, which was $1,884,811. In addition,
a pension plan administrator testified he would use a lower mortality rate based on the
spouse’s occupation, a lower interest rate, and a factor for inflation. The Court of Civil
Appeals of Alabama stated:
Although we believe in most cases that determining the value of an interest in
property through methods other than the 50% valuation method set forth in §438-75, is likely to provide a better way of establishing the value of a spouse’s
interest in a life estate or trust that is not subject to a power of appointment, in
light of the evidence before the trial court, we accept the trial court’s decision to
FALL 2005
The Interrelationship Between the Elective Share
557
Some statutes do not allow the elective share to be held in a trust or
satisfied by the value of any trust interests. Current New York law provides that the elective share is reduced only by the value of interests passing absolutely to the surviving spouse, so that the spouse must choose between the outright elective share and the interests passing in trust for the
surviving spouse.47 Prior New York law, however, authorized the value of
the elective share to be placed in trust for the surviving spouse, with the
income payable for life to the spouse and with the spouse having the right
to elect to receive a minimum statutory amount from the trust principal.48
The Uniform Probate Code provides that if the surviving spouse is an
incapacitated person, the elective share amounts are held in trust, and the
trust property is used for the benefit of the incapacitated spouse for life,
and upon the incapacitated spouse’s death, the balance is paid under the
residuary clause of the first spouse’s will or to the first spouse’s heirs.49 If
a state that adopts the Uniform Probate Code’s elective share statute also
has enacted the Uniform Custodial Trust Act, then the elective share
amounts will be paid to a custodial trust with the above provisions, plus
the trustee will be authorized to make distributions for the support of
individuals whom the surviving spouse supports or is legally obligated to
support. This type of custodial trust will not qualify for the marital deduction, because the spouse is not entitled to all of the income for life and thus
does not qualify for a QTIP election, the spouse does not have a general
power of appointment and thus does not qualify under section
2056(b)(5),50 and the trust is not payable to the estate of the surviving
spouse at death and thus does not qualify as an estate trust. The Comments
to the Uniform Probate Code note that if the testator establishes a marital
trust for the incapacitated spouse, that trust would count towards satisfying
apply the one-half presumption of §43-8-75 in valuing Roberta’s interest in the
QTIP trust in the present case.
Id. at 854.
47
N.Y. EST. POWERS & TRUSTS § 5-1.1A(a)(4) (McKinney 2004). Section 5-1.1A(a)(4)(B) provides: “[A]n interest in property shall be deemed to pass other than
absolutely from the decedent to the spouse if the interest so passing consists of less than the
decedent’s entire interest in that property or consists of any interest in a trust or trust equivalent created by the decedent. . . .” Id. § 5-1.1-A(a)(4)(B).
48
Id. § 5-1.1A (a)(5) (applying section 5-1.1(c) for decedents dying before September 1, 1994, with a $50,000 minimum for decedent dying after September 1, 1992, and
a $10,000 minimum for wills executed after August 31, 1966).
49
UNIF. PROBATE CODE § 2-212(b)-(c) (amended 1993), 8 U.L.A. 126-28 (1998).
50
The trust also does not provide the spouse with a general power of appointment that
would qualify under I.R.C. § 2056(b)(5) (2000).
558
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
the elective share and would not be placed into a custodial trust.51 Thus,
whether a trust for an incapacitated spouse will satisfy or reduce the elective share and whether it will qualify for the marital deduction depends on
state law and federal tax law as well as the provisions of the will or trust
instrument.
When engaging in estate planning for a married individual, consideration should be given to the marital deduction and applicable exclusion
amount, as well as to the elective share and whether trusts benefitting the
spouse will reduce the amount the surviving spouse will receive if an election is made to take the elective share. It may be helpful to consider a
number of possible scenarios to determine when the elective share amount
might be greater than the value of the trust interests created for the surviving spouse or more beneficial to the spouse, and when the testator might
adopt a different estate plan because of the potential exercise of the election. This Article will consider several possibilities. The first is when the
testator wants the surviving spouse to receive the minimum share allowed
by state law and not to benefit from the applicable exclusion amount. The
second is when the testator wants to take advantage of the maximum applicable exclusion amount and the minimum marital deduction, and provide for either a marital devise outright or one of the following marital
trusts: a QTIP trust, a 2056(b)(5) trust, or an estate trust.
I. MINIMUM SHARE FOR SURVIVING SPOUSE
A testator may desire for his or her spouse to receive the minimum
allowed by state law or to receive the minimum benefits allowed in a marital trust, such as a QTIP trust, and to not benefit from the portion of the
51
The comment to section 2-212 of the Uniform Probate Code notes:
Amounts voluntarily transferred to the surviving spouse under the decedent’s
will, by intestacy, or by nonprobate transfer, if any, do not go into the custodial
or support trust. Thus, estate planning measures deliberately established for a
surviving spouse who is incapacitated are not disrupted. For example, the decedent’s will might establish a trust that qualifies for or that can be elected as
qualifying for the federal estate tax marital deduction. Although the value of the
surviving spouse’s interests in such a trust count toward satisfying the electiveshare amount under Section 2-209(a)(1), the trust itself is not dismantled by
virtue of Section 2-212(b) in order to force that property into the nonqualifying
custodial or support trust. . . . The purpose . . . is to assure that that part of the
elective share is devoted to the personal economic benefit and needs of the surviving spouse, but not to the economic benefit of the surviving spouse’s heirs or
devisees.
UNIF. PROBATE CODE § 2-212 cmt. (amended 1993), 8 U.L.A. 129 (1998).
FALL 2005
The Interrelationship Between the Elective Share
559
estate that will be sheltered by the applicable exclusion amount. This may
arise in certain situations, such as in the case of a second marriage or if the
spouses are separated and the elective share has not been waived. In those
cases, the applicable elective share statute should be reviewed in detail,
including consideration of what assets and transfers are included in the
computation of the elective share amount and whether the elective share
may be satisfied or reduced by beneficial interests in trust for the surviving
spouse. If trust provisions for the spouse are taken into account, consideration should be given to how these interests will be valued—whether actuarially, by statutory percentages, or by some other method. Further, consideration should be given to the testator’s intent with respect to the provisions that would be made for the spouse either outright or in trust without regard to the elective share. Comparison of the elective share and the
testator’s intent, as well as the potential estate tax consequences of both,
may help the testator arrive at a modified estate plan that will save taxes
and also provide for the surviving spouse in a manner that will be acceptable to the testator as well as the surviving spouse. In some cases, the
surviving spouse may execute a waiver of the elective share while the testator is alive, or the testator may execute a will with a marital trust or other
benefits that the spouse may accept in lieu of the elective share. In addition, some states may provide an alternative method of funding the elective share. For example, Florida law allows a term life insurance policy to
be purchased to satisfy the elective share without increasing the amount of
the elective share by the proceeds.52
II. MAXIMUM CREDIT SHELTER, MINIMUM
MARITAL DEDUCTION
Many testators have estate plans that maximize the use of both
spouses’ applicable exclusion amounts for the unified credit, resulting in
the use of the optimum or minimum marital deduction when the first
spouse dies. As the applicable exclusion amount increases, this type of
estate plan may result in a significant reduction in the marital devise that is
payable outright to the surviving spouse or held in a marital trust for the
benefit of the surviving spouse. It might be beneficial to consider whether
it is necessary to maximize the use of the applicable exclusion amount for
each spouse, if the amount continues to increase as scheduled and the
spouses’ estates do not exceed twice the value of the applicable exclusion
52
FLA. STAT. ANN. §§ 732.2035(6), 732-2045(1)(d), 732.2055(1), 732.2075(1)(a).
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
amount, particularly in view of the elective share.
In some cases, if the testator adopts an estate plan that utilizes the
minimum marital devise with the maximum credit shelter or by-pass trust,
the surviving spouse may view an elective share that is payable outright to
be more beneficial.53 In many cases, however, the surviving spouse will be
a cotrustee as well as a significant beneficiary of the credit shelter trust
and will be content to receive these benefits in addition to the marital devise or trust in lieu of the elective share. The applicable exclusion amount
can be sheltered in a trust that will not be subject to estate tax when the
second spouse dies, with the marital deduction being payable outright or in
a trust that qualifies for a QTIP election or under section 2056(b)(5) or in
an estate trust. The risk that the surviving spouse will elect the elective
share in the context of one of these types of marital trusts and whether the
testator will modify the estate plan because of that risk are discussed in
Part II.A through II.D of this Article, below.
The effect of this type of an election, and the estate tax consequences
of an election, depend on state law as to whether the spouse will be entitled to receive an amount in addition to the benefits provided under the estate plan or an amount in lieu of the will and trust provisions. It should be
noted that in each of these cases there is a risk that the surviving spouse
will become incapacitated and a guardian, or possibly an attorney in fact,
may have the power to elect for the spouse to receive the elective share
even if the spouse would not have made the election had the spouse been
competent to make the decision.
A. Maximization of Unified Credits of Both Married Spouses, with
Outright Marital Devise for Balance
Some married couples want the survivor to receive all of their assets,
but in order to save estate taxes when the second spouse dies, they agree to
create a credit shelter trust when the first spouse dies. For example, a married couple with children may want whichever spouse survives to receive
all of their property; however, they may agree that it is desirable when the
first spouse dies to create a trust to shelter the applicable exclusion amount
53
In Downes v. Downes, 857 A.2d 1155, 1156 (Md. Ct. Spec. App. 2004), the
surviving wife received all of her husband’s personal property worth approximately $66,000
and an interest in a marital trust to be funded with the “assets that exceeded the credit shelter equivalent amount” of $600,000. The wife ultimately decided that the elective share of
one-third of her husband’s $1,000,000 estate payable outright was more desirable than her
interest in the $400,000 marital trust; however, she failed to make her election timely.
FALL 2005
The Interrelationship Between the Elective Share
561
to reduce estate taxes when the second spouse dies.
In this situation, the credit shelter trust will be designed so that the
surviving spouse has as much control over, and the most benefit from, the
trust as possible without the trust being included in the gross estate of the
surviving spouse. The assets not placed in the credit shelter trust will pass
outright to the surviving spouse. Because it is unknown which spouse will
die first, each spouse will provide for the possibility of being the first to
die. Thus, the estate planning documents of each spouse will include a
marital devise payable outright, as well as a credit shelter trust, with the
surviving spouse being a cotrustee of the credit shelter trust. The credit
shelter trust can provide for all of the income to be distributed to the surviving spouse at least annually, can grant the trustees the discretion to distribute principal to the spouse based on an ascertainable standard relating
to the surviving spouse’s health, education, support, and maintenance, and
can grant the spouse a limited power of appointment at death. In addition,
a five and five power may be included.
To the extent possible, each spouse will own sufficient assets in his or
her own name to take full advantage of the applicable exclusion amount
($1,500,000 for 2005). As the applicable exclusion amount increases, the
value of the marital devise payable outright will decrease unless the value
of the testator’s estate also increases sufficiently. Further, the value of the
property passing to the surviving spouse via the marital devise or otherwise may be less than the elective share amount (depending on whether
the value of the spouse’s interests in the credit shelter trust offsets the
elective share and, if so, how the spouse’s interests in that trust are valued). Given that the surviving spouse will be a trustee and beneficiary of
the credit shelter trust as well as a power holder and that each spouse
wants a credit shelter trust created when the first dies to save overall estate
taxes, the likelihood that the surviving spouse will make the election to
receive additional assets or an elective share in lieu of the trust provisions
is small, especially if the election will increase estate taxes when the second spouse dies.
The spouses may want to retain the flexibility for the surviving spouse
to make the election as part of post-mortem planning in the unusual case
that the election is more advantageous to the surviving spouse. It is doubtful that the plan will be changed because of the possibility of an election’s
being made, especially because of the mutual reasons for creating a credit
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
shelter trust when the first spouse dies.54 Consideration, however, may be
given to changing the formula in the will for some couples whose total estates most likely will be less than twice their individual exclusion amounts
so that the credit shelter trust will not be funded to the maximum and the
marital share will exceed the minimum. In those cases, the estate plan will
change, because it will not be necessary to take full advantage of the
applicable exclusion amount when the first dies rather than because of the
risk that the surviving spouse will choose the elective share.
B. Use of QTIP Marital Trust and Credit Shelter Trust
In some marriages, one spouse may be financially dependent on the
other spouse. The spouse who controls the family wealth may want to provide for the support of the dependent spouse and minimize estate taxes
when each spouse dies. Further, the spouse who provides the support may
not feel that the dependent spouse has the necessary capacity, sophistication, or experience to manage finances and will want to avoid an outright
devise of significant funds. In that case, the testator may want to provide
for the surviving spouse as a beneficiary of the entire estate through a trust
or trusts rather than through an outright devise, with the only outright
devises being of tangible personal property, such as a car or jewelry. The
testator may choose both a marital trust and a credit shelter trust if the
spouse survives in order to provide for the spouse and save taxes when the
surviving spouse dies. Alternatively, one trust may be used for which a
partial QTIP election can be made. If two trusts are used, provisions for
the spouse may include mandatory distributions of income from the marital trust to or for the benefit of the surviving spouse with discretionary
distributions of principal from the marital trust, as well as discretionary
distributions of income and principal from the credit shelter trust. If only
one trust is used, mandatory income distributions will be required for the
QTIP election. The surviving spouse probably will not be a trustee, and a
corporate trustee or trusted advisor, friend, or relative may serve as the
trustee.
State law will determine if the elective share will be paid in lieu of the
interests in the marital trust or credit shelter trust, or will be paid only to
the extent the value of the elective share exceeds the value of the trust
interests (and the effect of any disclaimer). The testator may want to maximize the benefits under the trusts and the value of trust interests to protect
54
If the surviving spouse lacks capacity, the risk of an election by a guardian or
attorney in fact still may exist absent a waiver.
FALL 2005
The Interrelationship Between the Elective Share
563
and provide for the surviving spouse in a manner that will make the trusts
more desirable to the surviving spouse. If the elective share is paid in lieu
of the trust interests, maximizing the benefits of the trust will help reduce
the risk the spouse will perceive the elective share as more beneficial than
the trusts. Alternatively, if the elective share is paid only to the extent the
value of the trust interests are less than the elective share, maximizing the
values of the trust interests will help reduce the risk that an election could
be made. In addition, it may help to involve the dependent spouse in the
estate planning process to help the spouse become aware of the protection
and benefits that the trusts will provide. The testator probably will choose
to assume the risk, albeit small, that the surviving spouse will file an election and relinquish the extensive interests provided the surviving spouse
under the trusts. Thus, it does not appear the testator will change the estate
plan because of a possible election.
C. Use of § 2056(b)(5) Marital Trust and Credit Shelter Trust
In some cases, a married testator may want to save overall estate taxes
and protect the surviving spouse from improvidence but may want to include provisions not allowed in a QTIP trust. For example, the testator
may want the surviving spouse to have the flexibility to make gifts from
the marital trust. In that case, the testator may want to use the more traditional marital trust allowed under Code section 2056(b)(5), whereby the
surviving spouse will have the right to receive the income at least annually; can have the right to receive discretionary distributions of principal
for health, support, and maintenance; and can have both inter vivos and
testamentary powers of appointment. The spouse may be a cotrustee and
probably will have an inter vivos limited power of appointment and a general testamentary power of appointment. The testator may use a wasting
marital trust, depending on the size of the husband’s and wife’s estates,
which will require the depletion of the marital trust before invasion of the
credit shelter trust, with discretionary distributions of income and principal
from the credit shelter trust based on an ascertainable standard for health,
support, and maintenance. Because of the benefits and powers given to the
surviving spouse, the risk of the surviving spouse choosing the elective
share will be slight, and the testator may choose to assume this risk and
not change the estate plan.
D. Use of Estate Trust and Credit Shelter Trust
In some marriages, both spouses will have considerable wealth and
they may desire to save overall income and estate taxes. These spouses
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
have the option of using an estate trust for the marital deduction with the
choice of accumulating income in the estate trust or distributing it to the
surviving spouse. The problem with this choice is that under present
income tax law, it is difficult to obtain any significant income tax savings
by accumulating income in an estate trust, and in some cases, accumulating the income may increase, rather than decrease, overall income taxes.55
In the unusual case where an estate trust is used with a credit shelter trust,
the estate trust will provide for discretionary distributions of income and
principal for the spouse with the remainder payable to the survivor’s probate estate. Further, the credit shelter trust may provide for discretionary
distributions of income and principal to the surviving spouse along with
the power for the trustee to sprinkle income and principal among other
beneficiaries who may need the funds and be in lower income tax brackets. Alternatively, the testators may couple these trusts with charitable remainder interests or other charitable devises to save overall taxes. Given
the situation and the wealth of both spouses, the risk of the surviving
spouse’s filing an election is small and most likely will be made only in
the event of a change in circumstances or post-mortem planning that
would save overall income and estate taxes.
Under these three types of potential estate plans with the three types of
private marital trusts, the risk of an election is the greatest when when the
testator wants to minimize and control the benefits his or her spouse receives. If the testator utilizes a QTIP trust funded by no more than the
minimum necessary to result in the least amount of estate taxes when the
first spouse dies, the surviving spouse may elect to receive a statutory
share (whether it is a share that supplements or replaces the QTIP trust). In
addition, the risk of the election will increase as the applicable exclusion
amount increases if the marital share decreases and the surviving spouse
believes that the elective share provides more benefits or control than the
estate plan the testator chose. This risk may decrease if the surviving
spouse also is a beneficiary or trustee of the credit shelter trust. The risk
may increase if the surviving spouse becomes incompetent and the
spouse’s guardian or attorney in fact may make the decision regarding the
election.
When planning the estate of a married individual in an elective share
state, the estate plan may be affected by the interrelationship between the
marital deduction and the elective share. Factors to consider include
55
See supra note 16.
FALL 2005
The Interrelationship Between the Elective Share
565
whether the surviving spouse will receive at least the minimum elective
share amount, whether a marital trust or a credit shelter trust will qualify
for the elective share or reduce the value of it, whether a guardian or attorney in fact can exercise elective share rights for the spouse, and whether
an inter vivos waiver of elective share rights is possible. Both state law
and federal tax law affect these issues, and valuation issues may arise. In
some cases, a marital devise or trust coupled with a credit shelter trust may
be used and the increased value of the applicable exclusion amount may
result in a marital devise or marital trust that is less than the elective share
amount, resulting in the risk that the spouse may choose the elective share.
In other cases, it may be desirable to place more assets in trust for the
benefit of the surviving spouse than the spouse would be entitled to receive under the elective share in order to save estate taxes and also provide
for the surviving spouse. In those cases, a waiver of elective share rights
may be desirable. Further, a spouse may become incompetent and the
spouse’s guardian or attorney in fact may make a decision regarding the
elective share that the spouse would not have made if competent. Thus, it
may be desirable to consider the possibility that an election may be made
so that the testator can assess the risks and choices in formulating an appropriate estate plan.
SPENDTHRIFT AND DISCRETIONARY TRUSTS:
ALIVE AND WELL UNDER THE
UNIFORM TRUST CODE
Alan Newman*
Editors’ Synopsis: This Article explains how the creditors’ rights provisions in the Uniform Trust Code (“UTC”) treat issues surrounding
spendthrift and discretionary trusts. The Article asserts that criticism
directed toward the UTC’s creditors’ rights provisions is unwarranted,
particularly in light of recent amendments to those provisions that clarify
that the UTC will continue to allow the protections traditionally afforded
by spendthrift and discretionary trusts.
I.
II.
III.
IV.
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568
SPENDTHRIFT: PROTECTION AND EXCEPTIONS . . . . . . . 569
IN THE ABSENCE OF A SPENDTHRIFT PROVISION . . . . . . 582
THE INABILITY OF CREDITORS OF BENEFICIARIES
TO COMPEL DISCRETIONARY DISTRIBUTIONS
THEY CAN REACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 586
V. CREDITORS’ CLAIMS AGAINST A BENEFICIARY/
SETTLOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 590
VI. DISCRETIONARY AND SUPPORT TRUSTS UNDER
THE UTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 595
VII. SUBSECTION 814 (a): MAY THE BENEFICIARY
COMPEL DISCRETIONARY DISTRIBUTIONS? . . . . . . . . . 601
VIII. SUBSECTION 814(a): IS THERE A BETTER
*
Associate Professor of Law, the University of Akron School of Law. B. Acct., 1977,
The University of Oklahoma; J.D., with Honors, 1980, The University of Oklahoma.
Professor Newman is an Academic Fellow of the American College of Trust and Estate
Counsel and the Reporter for the Ohio Uniform Trust Code Joint Committee of the Ohio
Bankers League Legal, Legislative, and Regulatory Committee, and the Ohio State Bar
Association Estate Planning, Trust, and Probate Law Section. He practiced trusts and
estates law in Oklahoma City from 1981-1995, and is a former chair of the Estate Planning, Probate, and Trust Law Section and of the Taxation Law Section of the Oklahoma
Bar Association. This Article is based on an outline presented in a Special Sessions program on Hot Topics on the Uniform Trust Code at the 39th Annual Heckerling Institute on
Estate Planning of the University of Miami School of Law in January, 2005. The author
gratefully acknowledges the helpful comments of Richard E. Davis, Esq. to an earlier draft
of Section IX and the able research assistance of Brendan Morrissey (J.D., The University
of Akron School of Law, 2005).
568
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
ALTERNATIVE? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 614
IX. THE UTC, SPECIAL AND SUPPLEMENTAL
NEEDS TRUSTS, AND PUBLIC BENEFITS . . . . . . . . . . . . . 618
X. DIVORCE AND THE UTC . . . . . . . . . . . . . . . . . . . . . . . . . 626
XI. BANKRUPTCY AND THE UTC . . . . . . . . . . . . . . . . . . . . . . 632
XII. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 634
I. INTRODUCTION
Among the provisions of the Uniform Trust Code (“UTC” or the
“Code”) that have attracted the most attention are those of Article 5:
Creditor’s Claims; Spendthrift and Discretionary Trusts.1 Although much
of the UTC is a codification of the common law of trusts,2 there are many
differences among the states in their handling of various creditors’ rights
issues,3 and many jurisdictions have no law on some of those issues.4 As a
result, there is no well-accepted, established common law on some of the
issues addressed by Article 5. Further, while the UTC’s approach to many
creditors’ rights issues is consistent with the common law in many states,
in other respects the UTC’s approach is innovative and differs from
1
See, e.g., Mark Merric & Steven J. Oshins, How Will Asset Protection of Spendthrift
Trusts Be Affected by the UTC?, 31 EST. PLAN. 478 (Oct. 2004). For an overview of the development of the UTC and its enactments through the fall of 2005, and an analysis of criticisms of its creditors’ rights provisions, see Robert T. Danforth, Article Five of the UTC
and the Future of Creditors’ Rights in Trusts, 27 CARDOZO L. REV. (forthcoming March
2006).
2
See UNIF. TRUST CODE prefatory note (amended 2005), 7C U.L.A. 178 (Supp. 2005).
The “common law of trusts” is, of course, difficult to pin down, particularly in recent years.
As noted by Professor Halbach, during the latter part of the twentieth century, particularly
during the 1990s, trust law “experienced a period of rigorous, comprehensive reexamination.” Edward C. Halbach, Jr., Uniform Acts, Restatements, and Trends in American Trust
Law at Century’s End, 88 CAL. L. REV. 1877, 1881 (2000).
3
See, for example, 2A AUSTIN WAKEMAN SCOTT & WILLIAM FRANKLIN FRATCHER,
THE LAW OF TRUSTS § 152.1, at 98-105 (4th ed. 1987) for a discussion of the different
treatment states afford spendthrift provisions.
4
Professor Scott’s treatise notes, for example, “There is little authority on the question
whether the interest of the beneficiary of a spendthrift trust can be reached by persons
against whom he has committed a tort.” Id. at § 157.5. For two recent cases that denied tort
claimants access to criminal tortfeasors’ interests in spendthrift trusts, see Duvall v. McGee,
826 A.2d 416 (Md. 2003); Scheffel v. Krueger, 782 A.2d 410 (N.H. 2001).
FALL 2005
Spendthrift and Discretionary Trusts 569
existing law in many states.5 In some ways, Article 5 enhances the asset
protection planning traditionally afforded by trusts,6 while in others, at
least with respect to the right of a child, spouse, or former spouse of a
beneficiary of a discretionary trust to compel distributions he or she can
reach, it enhances creditors’ rights.7
This Article addresses spendthrift and discretionary trust issues under
the UTC in a question and answer format that is intended to respond to
concerns, issues, and claims that have been raised or made about the
UTC’s creditors’ rights provisions. As the Article demonstrates, much of
the criticism the UTC has received over this subject is unwarranted. Some
of the criticism, however, has been instrumental in recent revisions to creditors’ rights provisions of the Code and its comments.8 While those revisions may not have satisfied all of the concerns of the UTC’s critics, the
revisions clarify that the Code will not have the adverse effects on protections trusts have traditionally provided that the Code’s critics predict.
II. SPENDTHRIFT: PROTECTION AND EXCEPTIONS
Sections 502 and 503 of the UTC address spendthrift provisions and
the exceptions to the protection they provide. They are the best places to
start to understand the UTC’s creditors’ rights provisions.
A. What Is the Effect of a Valid Spendthrift Provision?
Under UTC section 502(c), if the terms of the trust include a valid
spendthrift provision, “except as otherwise provided in this [article], a
creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before its receipt by the beneficiary.”9 Thus, as a
general rule, most creditors of a beneficiary of a spendthrift trust may not
reach the beneficiary’s interest or the assets of the trust. Rather the creditor
must wait for a distribution to be made to the beneficiary, and then pursue
a claim against the beneficiary individually.
5
For example, the UTC does not classify trusts as “discretionary trusts” or “support
trusts” for creditors’ rights purposes. See infra Section VI.
6
For example, under the UTC, generally creditors of a beneficiary of a discretionary
trust may not compel distributions they can reach even if they have provided support to the
beneficiary and the trust is for the beneficiary’s support. See infra Section VI.
7
See infra notes 111-18 and accompanying text.
8
See infra notes 354-62 and accompanying text.
9
UNIF. TRUST CODE § 502(c) (amended 2005), 7C U.L.A. 250 (Supp. 2005) (alteration
in original).
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
1. May the Trustee Make Protected Distributions From a Spendthrift
Trust To Third Parties For the Beneficiary’s Benefit?
The UTC does not explicitly address this question. Presumably, however, the answer is “yes.” Trust instruments commonly authorize the
trustee to make distributions to third parties for the benefit of the beneficiary, as well as directly to the beneficiary.10 Section 502(c) prohibits a
beneficiary’s creditor from reaching a distribution “before its receipt by
the beneficiary.”11 Because a distribution for the benefit of a beneficiary
that is made to a third party would never be received by the beneficiary,
the beneficiary’s creditor presumably would be unable to reach it. Thus, it
appears that distributions from a spendthrift trust in the form of payments
to certain creditors of the beneficiary (for example, a credit card company
or the lessor of an automobile to the beneficiary) would not be reachable
by most creditors of the beneficiary.12 Finally, while section 501 provides
that a beneficiary’s creditors may attach distributions “to or for the benefit
of the beneficiary,” it explicitly applies only “[t]o the extent a beneficiary’s interest is not subject to a spendthrift provision.”13
Protected indirect distributions for the benefit of a spendthrift trust
beneficiary likely will also be allowed even if the instrument does not expressly authorize the trustee to make them. Presumably the beneficiary
would have acquiesced in the indirect distributions,14 and most creditors of
a beneficiary of a spendthrift trust have no claim against the trustee, the
trust assets, or the beneficiary’s interest in the trust. The Restatement
(Third) of Trusts contemplates that these distributions may be made by the
trustee, although not in the context of creditor avoidance.15 Note, however,
10
These provisions effectively define, in part, the beneficiary’s interest in the trust.
According to the Third Restatement, in determining the extent of the interest of a trust beneficiary, “The terms of the trust . . . will be respected and given effect unless contrary to public policy.” RESTATEMENT (THIRD) OF TRUSTS § 49 cmt. a (2003).
11
UNIF. TRUST CODE § 502(c) (amended 2005), 7C U.L.A. 252 (Supp. 2005).
12
Note that UTC section 503(c) contemplates distributions for the benefit of the beneficiary, instead of directly to the beneficiary, by providing that the claim of a spendthrift exception creditor may reach distributions “to or for the benefit of the beneficiary.” Id.
§ 503(c), at 253.
13
Id. § 501, at 250.
14
See id. § 1009, at 326 (protecting the trustee from liability for conduct that otherwise
would constitute a breach when there is a consent, release, or ratification by the beneficiary
of the trustee’s conduct).
15
See RESTATEMENT (THIRD) OF TRUSTS § 49 cmt. c(2) (2003) (“A trustee who
improperly applies or distributes income in good faith for the support, care, or other needs
of the beneficiary (whether or not under a legal disability) is entitled to credit in the trust
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Spendthrift and Discretionary Trusts 571
that the UTC’s explicit authorization of a trustee to make distributions for
the benefit of a beneficiary, instead of directly to the beneficiary, applies
only for incapacitated beneficiaries.16
2. Are There Limits On the Size of a Trust That May Be Protected By
a Spendthrift Provision, or On the Amount of Distributions That
May Be Made To or For the Benefit of a Beneficiary of a Spendthrift Trust?
No. Unlike the law in some states, the UTC does not limit the amount
of protected distributions that may be made from a spendthrift trust to or
for the benefit of its beneficiary to, for example, amounts necessary to
provide for the beneficiary’s support.17 Further, spendthrift protection is
not limited by the size of the trust18 or to a fixed amount of annual
income.19
B. What Constitutes a Valid Spendthrift Provision?
A spendthrift provision is valid under the UTC “only if it restrains
both voluntary and involuntary transfer of a beneficiary’s interest.”20 As a
result, a settlor may not provide spendthrift protection from the beneficiary’s creditors, while authorizing the beneficiary to transfer the beneficiary’s interest voluntarily.21 Thus, if the beneficiary may sell, encumber,
or otherwise transfer the interest, the beneficiary’s creditors may reach it.22
accounts to the extent the beneficiary would otherwise be unjustly enriched.”).
16
See UNIF. TRUST CODE § 816(21) (amended 2005), 7C U.L.A. 312 (Supp. 2005).
17
For a discussion of statutes so limiting the effect of spendthrift provisions in a number of states, see 2A SCOTT & FRATCHER, supra note 3, § 152.1.
18
Prior to its amendment in 2001, Virginia’s spendthrift statute limited its protection
to $1,000,000 of trust assets. VA. CODE ANN. § 55-19 (2003 & Supp. 2005).
19
See, e.g., OKLA. STAT. ANN. tit. 60, § 175.25(B)(2) (West Supp. 2005) (protecting
$25,000 per calendar year).
20
UNIF. TRUST CODE § 502(a) (amended 2005), 7C U.L.A. 251 (Supp. 2005). The
UTC does not address the question whether a trust provision allowing the beneficiary to
voluntarily transfer the beneficiary’s interest, but only with the consent of a third party,
sufficiently restrains the transfer to make the spendthrift provision valid.
21
In its enactment of the UTC, Missouri modified section 502(a) to validate a spendthrift provision that restrains either voluntary or involuntary transfers, or both. See MO.
REV. STAT. § 456.5-502.1 (2005).
22
Although the decision to bar the claim of a beneficiary’s creditor from reaching the
beneficiary’s interest only if the beneficiary also is barred from voluntarily transferring it
was policy based, the settlor effectively can give the beneficiary the power to assign the interest without jeopardizing spendthrift protection by giving the beneficiary a power of appointment. See David M. English, The Uniform Trust Code (2000): Significant Provisions
572
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
While spendthrift protection is available under the UTC only if there
is a valid spendthrift provision,23 it may not be necessary that the instrument itself include one. Under the Code, “spendthrift provision” is defined
as a “term of a trust,”24 and the “terms of a trust” are defined as “the
manifestation of the settlor’s intent regarding a trust’s provisions as
expressed in the trust instrument or as may be established by other evidence that would be admissible in a judicial proceeding.”25 No magic
words are required to evidence the settlor’s intent that the trust be spendthrift. Rather, for example, simply providing that the beneficiary’s interest
is held subject to a “spendthrift trust” is sufficient.26
C. What Creditors’ Claims Are not Barred By a Spendthrift Provision?
Section 503 lists three creditors (“exception creditors”) who may
reach a beneficiary’s interest in a spendthrift trust: (1) the beneficiary’s
child, spouse, or former spouse who has a judgment or court order against
the beneficiary for support or maintenance, (2) a judgment creditor who
has provided services for the protection of a beneficiary’s interest in the
trust, and (3) the state or the United States to the extent a statute of the
state or federal law so provides.27
D. Is the Exception for Claims of a Child, Spouse, or Former Spouse
Consistent With Common Law?
Yes.28 As the comment to section 503 notes, this exception has been
codified in many states and is consistent with federal bankruptcy law.29 Of
and Policy Issues, 67 MO. L. REV. 143, 181 (2002).
23
See UNIF. TRUST CODE § 502 (amended 2005), 7C U.L.A. 251 (Supp. 2005).
24
Id. § 103(16), at 192.
25
Id. § 103(18). Extrinsic evidence, if admissible in a judicial proceeding, that may establish terms of a trust includes “[o]ral statements, the situation of the beneficiaries, the purposes of the trust, the circumstances under which the trust is to be administered, and, to the
extent the settlor was otherwise silent, rules of construction. . . .” Id. § 103 cmt., at 196.
Note that the UTC allows even unambiguous trust instruments, including wills creating testamentary trusts, to be reformed to correct mistakes of fact or law, whether of expression or
inducement, if there is clear and convincing evidence of both the settlor’s intent and the
terms of the trust. See id. § 415, at 246.
26
See id. § 502(b), at 251. If the express terms of the trust impose a restraint on either
voluntary or involuntary transfers, but not both, the intent to restrain the other may be
implied. See 2A SCOTT & FRATCHER, supra note 3, § 152.4, at 118.
27
See UNIF. TRUST CODE § 503(b) (amended 2005), 7C U.L.A. 253 (Supp. 2005).
28
See, e.g., RESTATEMENT (SECOND) OF TRUSTS § 157(a) (1959).
29
UNIF. TRUST CODE § 503 cmt. (amended 2005), 7C U.L.A. 253 (Supp. 2005). Note
FALL 2005
Spendthrift and Discretionary Trusts 573
the first twelve jurisdictions to enact the UTC,30 however, eight have
modified this exception or deleted it entirely.31
E. What Kind of Creditor Might Assert a Claim Against a Spendthrift
Trust Under the Exception For the Claim of a Judgment Creditor Who
Has Provided Services For the Protection of a Beneficiary’s Interest in
the Trust?
An attorney is one example. The comment to section 503 notes, “This
exception allows a beneficiary of modest means to overcome an obstacle
preventing the beneficiary’s obtaining services essential to the protection
or enforcement of the beneficiary’s rights under the trust.”32
1. Is This Exception Consistent with Common Law?
The exception is consistent with the Restatements.33 Case law, however, is sparse and not definitive, so it is difficult to determine what the
common law on this subject is.34
also that the Employee Retirement Income Security Act requires qualified pension plans to
subject a participant’s benefits to a qualified domestic relations order. See 29 U.S.C.
§ 1056(d)(3) (2000).
30
Arkansas (see 2005 Ark. Acts §§ 28-73-101 to 28-73-1105); the District of Columbia (see D.C. CODE ANN. §§ 19-1301 to 19-1311.03 (LexisNexis 2005)); Kansas (see
KAN. STAT. ANN. §§ 58a-101 to 58a-1107 (Supp. 2004)); Maine (see ME. REV. STAT. ANN.
tit. 18B, §§ 101-1104 (Supp. 2004); Missouri (see MO. ANN. STAT. §§ 456.1-101 to 456.111106 (West Supp. 2005)); Nebraska (see NEB. REV. STAT. ANN. §§ 30-3801 to 30-38,110
(Supp. 2004)); New Hampshire (see N.H. REV. STAT. ANN. §§ 564-B:1-101 to 564-B:111104 (Supp. 2004)); New Mexico (see N.M. STAT. ANN. §§ 46A-1-101 to 46A-11-1104
(LexisNexis 2004)); Tennessee (see TENN. CODE ANN. §§ 35-15-101 to 35-15-1103 (Supp.
2004)); Utah (see UTAH CODE ANN. §§ 75-7-101 to 75-7-1103 (Supp. 2005)); Virginia (see
2005 Va. Acts ch. 31, §§ 55-541.01 to 55-551.06); Wyoming (see WYO. STAT. ANN. §§ 410-101 to 4-10-1103 (2005)).
31
Arkansas, Kansas, Maine, and Tennessee do not protect children or spouses. See
2005 Ark. Acts § 28-73-503; KAN. STAT. ANN. § 58a-503 (Supp. 2004); ME. REV. STAT.
ANN. tit. 18B, § 503 (Supp. 2004); TENN. CODE ANN. § 35-15-503 (Supp. 2004). The
District of Columbia, Virginia, and Wyoming protect children but not spouses. See D.C.
CODE ANN. § 19-1305.03 (LexisNexis 2005); 2005 Va. Acts ch. 31, § 55-545.03.B; WYO.
STAT. ANN. § 4-10-503 (2005). New Hampshire limits a spouse’s protection by requiring
that the judgment or court order for alimony “expressly specifies the alimony amount attributable to the most basic food, shelter and medical needs of the spouse or former spouse.”
N.H. REV. STAT. ANN. § 564-B:5-503(b)(2) (Supp. 2004).
32
UNIF. TRUST CODE § 503 cmt. (amended 2005), 7C U.L.A. 254 (Supp. 2005).
33
See RESTATEMENT (SECOND) OF TRUSTS § 157(c) (1959); RESTATEMENT (THIRD) OF
TRUSTS § 59(b) (2003).
34
See RESTATEMENT (THIRD) OF TRUSTS, Reporter’s Notes on § 59 cmts. c and d, at
574
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
2. Would This Exception Apply to Allow Another Exception Creditor
of a Beneficiary (For Example, a Child Support or Alimony
Claimant) Who Successfully Asserts a Claim Against the Beneficiary’s Interest in a Spendthrift Trust to Recover His or Her
Attorneys’ Fees From the Beneficiary’s Interest in the Trust?
It should not. By its terms, this exception is for “a judgment creditor
who has provided services for the protection of a beneficiary’s interest in
the trust.”35 An exception creditor of a beneficiary who reaches his or her
interest in the trust would not have provided services for the protection of
the beneficiary’s beneficial interest in the trust. Similarly, if a beneficiary’s former spouse is awarded attorneys’ fees against the beneficiary,
the claim to recover fees should not be recoverable against the beneficiary’s interest in the trust under the exception related to services provided
for the protection of the beneficiary’s interest in the trust. Note, however,
that under section 1004, “In a judicial proceeding involving the administration of a trust, the court, as justice and equity may require, may award
costs and expenses, including reasonable attorney’s fees, to any party, to
be paid by another party or from the trust that is the subject of the controversy.”36
F. Is the Exception for Claims of the State or the United States Consistent With the Common Law?
The exception is narrower than the exception for claims of the government under the Second Restatement. The UTC excepts from spendthrift
protection claims of the state or the United States only to the extent
another state statute or federal law so provides.37 By contrast, the Second
Restatement provides that a spendthrift provision will not protect the beneficiary’s interest from a claim of a state or the United States without regard to whether another state statute or federal law so provides.38
404-05 (2003).
35
UNIF. TRUST CODE § 503(b)(2) (amended 2005), 7C U.L.A. 253 (Supp. 2005).
36
Id. § 1004, at 322. According to the comment to § 1004, the section “codifies the
court’s historic authority to award costs and fees, including reasonable attorney’s fees, in judicial proceedings grounded in equity.” Id. cmt.
37
See id. § 503(b)(3), at 253.
38
RESTATEMENT (SECOND) OF TRUSTS § 157(d) (1959).
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Spendthrift and Discretionary Trusts 575
G. Does the Exception for Claims of the State or the United States Allow
the List of Exception Creditors to Be Expanded?
If existing or new federal law allows the United States to reach the
interests of beneficiaries in spendthrift trusts (to satisfy a beneficiary’s
federal income tax obligations, for example), it will preempt a state’s version of the UTC (or any other state law).39 Further, a state always has the
prerogative of enacting new legislation, including legislation enforcing a
spendthrift provision against a claim of the state, regardless of whether it
has enacted the UTC.
1. Why Does the UTC Include a Provision Making the State a
Spendthrift Exception Creditor to the Extent Another Statute of
the State So Provides?
According to Professor English, the UTC Reporter, this exception
“leav[es] to other state law the extent to which a state can pierce a trust to
collect for the costs of institutionalized care.”40 If an enacting state had this
type of statute (or one that, for example, allowed it to reach spendthrift
trusts to collect delinquent income taxes) and it enacted the UTC’s spendthrift provisions without this exception, the newly enacted spendthrift
provisions would be inconsistent with, and arguably would effectively
repeal, the existing state statutes.
2. Why Does This Provision of the UTC Also Refer to Claims of the
United States?
Perhaps simply for transparency purposes. As mentioned, under standard preemption doctrine, if federal law (whether existing at enactment or
arising subsequent to enactment) allows the federal government to reach
spendthrift trusts, it will not matter whether a state has or does not have a
statute allowing claims of the United States.41
39
See, e.g., First Nw. Trust Co. v. I.R.S., 622 F.2d 387, 390 (8th Cir. 1980); U.S. v.
Riggs Nat’l Bank, 636 F. Supp. 172 (D.D.C. 1986); LaSalle Nat’l Bank v. U.S., 636 F.
Supp. 874 (N.D. Ill. 1986).
40
English, supra note 22, at 183.
41
Thus, deleting the reference in UTC section 503(b)(3) to claims of the United States
should have no substantive effect. For a section 503 enactment that includes an exception
for claims of the state under other state statutes, but does not reference claims of the United
States, see TENN. CODE ANN. § 35-15-503 (Supp. 2004).
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
H. Are Claims of Those Who Have Provided Necessities (For Example,
Support) to the Beneficiary Barred By a Spendthrift Provision?
Yes. Unlike under the Restatements,42 the UTC provides that a spendthrift provision will bar the claims of those who provided necessities to the
beneficiary.43 The most important consequence of the UTC’s omission of
this exception from section 503 is that a reimbursement claim of a public
benefits provider against a trust of which the recipient is a beneficiary
would be barred by a spendthrift provision. While a state’s reimbursement
claim for Medicaid benefits should be a part of its estate recovery program
that will not arise until after the death of the beneficiary and the beneficiary’s spouse,44 reimbursement claims for other state provided public benefits will be barred by a spendthrift provision. The UTC does not include
a necessities provider’s spendthrift exception to avoid making law that
would give the state a right to reimbursement from spendthrift trusts.45 If,
however, there is another state statute that gives the state the right, the
UTC will not affect the state’s right to reimbursement from the trust under
that other statute.46 Thus, the UTC drafters chose not to address this policy-oriented, public benefits issue one way or the other, leaving instead the
issue to other state law.
I.
Under the UTC, May a Tort Claimant Reach a Beneficiary’s Interest
in a Spendthrift Trust?
No. In another departure from the Restatements,47 the UTC bars a tort
claimant from reaching the interest of a beneficiary tortfeasor in a spendthrift trust, regardless of the nature of the beneficiary’s conduct that gave
rise to the tort claim. Under UTC section 502(c), creditors may not reach a
beneficiary’s interest in a spendthrift trust, “except as otherwise provided
in this [article].”48 There is no provision in Article 5 for a tort claimant
42
See RESTATEMENT (THIRD) OF TRUSTS § 59(b) (2003); RESTATEMENT (SECOND) OF
TRUSTS § 157(b) (1959).
43
See UNIF. TRUST CODE §§ 502-503 (amended 2005), 7C U.L.A. 251-53 (Supp.
2005).
44
See 42 U.S.C. § 1396p(b)(1) (2000).
45
See David M. English, Is There a Uniform Trust Act in Your Future?, PROB. &
PROP., Jan.-Feb. 2000, at 25, 31.
46
See UNIF. TRUST CODE § 503(b)(3) (amended 2005), 7C U.L.A. 253 (Supp. 2005).
47
See RESTATEMENT (THIRD) OF TRUSTS § 59 cmt. a (2003); RESTATEMENT (SECOND)
OF TRUSTS § 157 cmt. a (1959).
48
UNIF. TRUST CODE § 502(c) (amended 2005), 7C U.L.A. 252 (Supp. 2005)
[alteration in original].
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Spendthrift and Discretionary Trusts 577
exception (or for the court to recognize additional spendthrift exceptions
on policy grounds).49 Rather, the list of spendthrift exceptions in section
503 is expressly made exclusive by section 502(c).50
J.
What Rights Does the UTC Grant an Exception Creditor?
While the answer to this question under the UTC as initially promulgated was uncertain, the uncertainty has been removed by amendments
made to the UTC and its comments in 2005. Section 503(c) now provides:
“A claimant against which a spendthrift provision cannot be enforced may
obtain from a court an order attaching present or future distributions to or
for the benefit of the beneficiary.”51 While section 503(c) does not explicitly provide that attachment is the exclusive UTC provided remedy for
49
Further, the comment to section 503 specifically notes that the UTC drafters
“declined to create an exception for tort claimants.” Id. § 503 cmt., at 254. For a case with
compelling facts in which the court nevertheless refused to create a public policy, tort
claimant exception to similar statutory spendthrift protection, see Scheffel v. Krueger, 782
A.2d 410 (N.H. 2001).
50
UNIF. TRUST CODE § 502(c) (amended 2005), 7C U.L.A. 252 (Supp. 2005).
51
Id. § 503(c), at 253. Prior to its amendment in 2005, section 503 specified attachment as a remedy for two of the three spendthrift exception creditors (a child or spousal
support claimant and a judgment creditor who had provided services for the protection of
the beneficiary’s interest in the trust). See UNIF. TRUST CODE § 503(b) (2004), 7C U.L.A.
253 (Supp. 2005) (amended 2005). The remedy for the state or the United States was not
specified, perhaps on the assumption that the other state statute or federal law allowing the
state or the United States to reach a spendthrift trust would provide a remedy. See id.
§ 503(c). Compounding the problem was an inconsistency between section 501 and its comment. Section 501, which allows creditors broader remedies than attachment, provided that
it was applicable “[t]o the extent a beneficiary’s interest is not protected by a spendthrift
provision.” Id. § 501, at 250. That language arguably made the section’s broader remedies
available not only to creditors of beneficiaries of trusts without spendthrift provisions, but
also to exception creditors of trusts with spendthrift provisions. The comment to section 501, however, referred to it being applicable “[a]bsent a valid spendthrift provision.”
Id. § 501 cmt. The 2005 amendments resolve these uncertainties. First, the introductory
clause of section 501 has been revised to read: “To the extent a beneficiary’s interest is not
subject to a spendthrift provision . . . .” UNIFORM TRUST CODE § 501 (amended 2005), 7C
U.L.A. 250 (Supp. 2005) (emphasis added). Second, the comment to section 501 also was
amended in 2005. It now provides, in part:
This section applies only if the trust does not contain a spendthrift provision
or the spendthrift provision does not apply to a particular beneficiary’s interest.
A settlor may subject to spendthrift protection the interests of certain beneficiaries but not others. A settlor may also subject only a portion of the trust to spendthrift protection such as an interest in the income but not principal.
Id. § 501 cmt.
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
spendthrift exception creditors, its comment does.52
1. Would an Exception Creditor Be Able to Attach Discretionary As
Well As Mandatory Distributions?
Presumably, yes.53 Section 503(c) allows attachment of present or
future distributions without reference to distributions being mandatory or
discretionary.54 Furthermore, in the context of a claim by a beneficiary’s
child, spouse, or former spouse with a judgment or court order for support,
the comment to section 503 specifically provides that the child or spouse
may reach discretionary distributions.55
2. Is Allowing an Exception Creditor to Attach Discretionary Distributions a Change in the Common Law?
The law is not well settled on the question whether a creditor of a beneficiary of a discretionary trust may attach future discretionary distributions. This subject is discussed in Section III.D.2 below.
3. What Are the Rights of the United States Against the Beneficiary
of a Discretionary Trust Who has Unpaid Federal Income Tax
Liabilities?
First, as previously noted, a spendthrift provision would be ineffective
against this type of claim, regardless of the terms of the UTC or other state
law.56 If the terms of the trust gave the trustee the discretion to make distributions for the beneficiary’s support, the federal tax lien would attach to
the beneficiary’s interest in the trust.57 If the trust instrument did not
include a support standard and gave the trustee broad discretion in distributions, the federal tax lien would not attach to the beneficiary’s interest
in the trust,58 but the United States would be able to attach future distribu52
See id.§ 503 cmt., at 254. Note, however, that other creditor law of a jurisdiction
may provide an exception creditor with additional remedies. Id.
53
Note, though, that allowing a creditor to attach discretionary distributions the trustee
chooses to make does not mean the creditor can compel discretionary distributions it can
reach. See infra Section IV.
54
See UNIF. TRUST CODE § 503(c) (amended 2005), 7C U.L.A. 253 (Supp. 2005).
55
See id. § 503 cmt., at 253-54.
56
See supra note 39 and accompanying text.
57
See Magavern v. United States, 550 F.2d 797 (2d Cir. 1977), aff’g 415 F. Supp. 217
(W.D.N.Y. 1976). See also I.R.S. Chief Couns. Adv. 200036045 (May 16, 2000).
58
See I.R.S. Chief Couns. Adv. 200036045 (May 16, 2000). See also United States v.
O’Shaughnessy, 517 N.W.2d 574, 578 (Minn. 1994) (holding that a beneficiary’s interest
in a purely discretionary trust is not “property” or “any right to property,” within the mean-
FALL 2005
Spendthrift and Discretionary Trusts 579
tions the trustee decided to make in the exercise of its discretion.59
4. If an Exception Creditor Attaches Distributions That Otherwise
Would Be Made to the Beneficiary, Would the Beneficiary Be Able
to Benefit from the Trust Before the Creditor Was Paid in Full?
Perhaps. Section 503(c), as amended in 2005, authorizes the court to
“limit the [creditor’s] award to such relief as is appropriate under the circumstances.”60 Presumably, this authority would allow the court to consider the beneficiary’s needs, as well as the claim of the exception creditor.61
K. May a Trustee Withhold Distributions From a Beneficiary of a Spendthrift Trust to Prevent the Beneficiary’s Creditor From Reaching
Them in the Hands of the Beneficiary?
A trustee could withhold discretionary distributions.62 As previously
discussed,63 distributions presumably may be made from spendthrift trusts
to third parties for the beneficiary’s benefit to prevent creditors from
reaching them. If, however, a “mandatory distribution of income or principal, including a distribution upon termination of the trust,” is not made
“to the beneficiary within a reasonable time after the designated distribution date,” the creditor may reach it.64
ing of the federal tax lien statute, before the trustee has exercised its discretionary power of
distribution under the trust agreement).
59
See U.S. v. Cohn, 855 F. Supp. 572 (D. Conn. 1994). See also Richard W. Nenno,
Delaware Dynasty Trusts, Total Return Trusts, and Asset Protection Trusts, in ASSET
PROTECTION: DOMESTIC AND INTERNATIONAL LAW AND TACTICS (Duncan E. Osborne and
Elizabeth Morgan Schurig eds. 1995).
60
UNIF. TRUST CODE § 503(c) (amended 2005), 7C U.L.A. 253 (Supp. 2005).
61
Section 501, which addresses trusts the terms of which do not include spendthrift
provisions, similarly allows the court to limit a creditor’s award as appropriate under the
circumstances. Id. § 501, at 250. Prior to its amendment in 2005, the comment to section
501 provided that the court could consider the “support needs” of a beneficiary and the
beneficiary’s family. UNIF. TRUST CODE § 501 cmt. (2004), 7C U.L.A. 251 (Supp. 2005)
(amended 2005). Because of concerns of the potential effect of that language on a beneficiary of a supplemental needs trust who was receiving public benefits, it was amended in
2005 to refer not to the “support needs” of the beneficiary and the beneficiary’s family, but
to their “circumstances.” UNIF. TRUST CODE § 501 cmt. (amended 2005), 7C U.L.A. 251
(Supp. 2005). See infra note 81.
62
See infra Section IV (discussing the inability of most creditors of a beneficiary to
compel discretionary distributions).
63
See supra notes 10-16 and accompanying text.
64
UNIF. TRUST CODE § 506(b) (amended 2005), 7C U.L.A. 261 (Supp. 2005). Pre-
580
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
1. What is a “Mandatory Distribution”?
As originally promulgated, the UTC did not define “mandatory distribution.”65 The comment to section 506 referred to them as distributions
that are “required to be made by the express terms of the trust.”66 Thus, if
the terms of a trust require current distributions of all income, or a unitrust
amount, or all or part of the principal at specified times, those amounts
clearly would constitute mandatory distributions. In light of section
504(b), which prohibits most creditors from compelling discretionary distributions without regard to whether the trust terms include a support or
other standard,67 “mandatory distributions” arguably should not have been
construed to include distributions subject to the trustee’s discretion, regardless of whether one or more standards (for example, support) were
provided to guide the trustee in the exercise of its discretion.
Section 504(b), however, by its express terms applies to “a distribution that is subject to the trustee’s discretion.”68 As a result, terms of a trust
that do not expressly grant the trustee discretion and that mandate distributions pursuant to a support standard (for example, “the trustee shall make
distributions of income and principal to provide for the beneficiary’s support”), arguably could be construed as describing “mandatory distributions” within the meaning of section 506 that are not covered by section
504(b). Section 504, however, “eliminates the distinction between discretionary and support trusts, unifying the rules for all trusts fitting within
either of the former categories. . . . By eliminating this distinction, the
rights of a creditor are the same whether the distribution standard is discretionary, subject to a standard, or both.”69 Thus, that argument should be
unsuccessful, section 504(b) should apply to trusts that require distributions for the beneficiary’s support, and the distributions should not be
“mandatory distributions” within the meaning of section 506, as originally
promulgated.
sumably a mandatory distribution made for the benefit of a beneficiary within the requisite
reasonable time would preclude a creditor of a beneficiary from reaching the distribution
under section 506. See supra notes 10-16 and accompanying text. To avoid any question in
that regard, section 506 could be amended to instead refer to distributions made “to or for
the benefit of the beneficiary.”
65
See UNIF. TRUST CODE § 103 (2004), 7C U.L.A. 191-92 (Supp. 2005) (amended
2005); id. § 506, at 261.
66
Id. § 506 cmt., at 261.
67
See infra Section IV (discussing § 504(b)).
68
UNIF. TRUST CODE § 504(b) (amended 2005), 7C U.L.A. 256 (Supp. 2005).
69
Id. § 504 cmt.
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Spendthrift and Discretionary Trusts 581
Because of concerns that were expressed in that regard, however,
section 506 was amended in 2005 to include a definition of “mandatory
distribution.”70 Under the 2005 amendment, a mandatory distribution is:
a distribution of income or principal which the trustee is required
to make to a beneficiary under the terms of the trust, including a
distribution upon termination of the trust. The term does not include a distribution subject to the exercise of the trustee’s discretion even if (1) the discretion is expressed in the form of a standard of distribution, or (2) the terms of the trust authorizing a distribution couple language of discretion with language of direction.71
2. What is a “Reasonable Time” for the Trustee to Make a Mandatory Distribution?
The UTC does not address this question.72
3. May a Creditor of a Beneficiary Reach Distributions the Trustee
Could, in the Exercise of Its Discretion, Make To or For the
Benefit of the Beneficiary by Arguing That the Beneficiary Could
Compel the Distribution,73 and Thus That the Distribution is a
Mandatory One That is Subject to the Creditor’s Claim If not
Made Within a Reasonable Time?
No. The argument would be to compel a discretionary distribution the
creditor could reach. New section 506(a) explicitly defines “mandatory
distributions” to exclude discretionary distributions,74 and section 504(b)
expressly prohibits most creditors from compelling discretionary distribu-
70
See id. § 506(a), at 261. The amendment was intended to be clarifying: “No change
of substance is intended by this amendment.” Id. § 506 cmt., at 262.
71
Id. § 506(a), at 261. Further, the comment to section 506, also as amended in 2005,
states: “Under both sections 504 and 506, a trust is discretionary even if the discretion is
expressed in the form of a standard, such as a provision directing a trustee to pay for a
beneficiary’s support. . . .” Id. § 506 cmt., at 262.
72
See id. § 506 & cmt., at 261-62.
73
While section 504 prohibits most creditors of a beneficiary from compelling distributions, even if the trustee has abused its discretion or failed to comply with a standard
for distributions, see infra Section IV, the section “does not limit the right of a beneficiary
to maintain a judicial proceeding against a trustee for an abuse of discretion or failure to
comply with a standard for distribution.” UNIF. TRUST CODE § 504(d) (2005).
74
Id. § 506(a), at 261.
582
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
tions.75
III. IN THE ABSENCE OF A SPENDTHRIFT PROVISION
If a trust instrument does not include a spendthrift provision, the rights
of creditors of a beneficiary who is not a settlor of the trust are addressed
in section 501.
A. Is Section 501 Applicable Only to Trusts the Terms of Which Do Not
Include Spendthrift Provisions?
Yes. While the answer to that question was not clear under the Code
as originally promulgated, the 2005 amendments provided clarification.76
Section 501 is now applicable only “[t]o the extent a beneficiary’s interest
is not subject to a spendthrift provision.”77 Its comment explicitly provides
that section 501 “applies only if the trust does not contain a spendthrift
provision or the spendthrift provision does not apply to a particular beneficiary’s interest.”78
B. If the Instrument Does Not Include a Spendthrift Provision, What
Rights Does a Creditor of a Trust Beneficiary Have?
In such a case “the court may authorize a creditor or assignee of the
beneficiary to reach the beneficiary’s interest by attachment of present or
future distributions to or for the benefit of the beneficiary or other
means.”79
C. If the Instrument Does Not Include a Spendthrift Provision and a Creditor Properly Asserts a Claim Under Section 501, Would the Beneficiary Be Able to Benefit From the Trust Before the Creditor is Paid in
Full?
Perhaps. Under section 501, “The court may limit the [creditor’s]
award to such relief as is appropriate under the circumstances.”80 The comment explains, “In exercising its discretion to limit relief, the court may
appropriately consider the circumstances of a beneficiary and the ben75
See id. § 504(b), at 256 (“[A] creditor of a beneficiary may not compel a distribution
that is subject to the trustee's discretion, even if . . . the discretion is expressed in the form
of a standard of distribution . . . .”). See also infra Section IV (discussing § 504(b)).
76
See supra note 51.
77
UNIF. TRUST CODE § 501 (amended 2005), 7C U.L.A. 250 (Supp. 2005).
78
Id. § 501 cmt.
79
Id. § 501.
80
Id.
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Spendthrift and Discretionary Trusts 583
eficiary’s family.”81
D. In the Absence of a Spendthrift Provision, Do the Creditor’s Rights
Depend on Whether the Beneficiary Has a Right to Receive Mandatory Distributions or Whether Distributions Are At the Trustee’s Discretion?
Yes.
1. What If the Beneficiary Has a Right to Receive Mandatory Distributions?
If the beneficiary is entitled to receive mandatory distributions, or to
have them made for the beneficiary’s benefit (for example, all income, a
unitrust amount, or one-third of the trust assets upon reaching a designated
age), the creditor’s remedies include attaching those distribution rights.82
In that case, the trustee must pay the creditor instead of the beneficiary
part or all of the amount83 distributable to or for the benefit of the beneficiary.84
81
Id. § 501 cmt., at 251. Prior to its amendment in 2005, the comment referred not to
the “circumstances” of the beneficiary and the beneficiary’s family, but to their “support
needs.” UNIF. TRUST CODE § 501 cmt. (2004), 7C U.L.A. 251 (Supp. 2005) (amended
2005). The change was made to avoid a potential argument that a supplemental needs trust
could be treated as available for the beneficiary’s support and thus disqualify the
beneficiary from receiving public benefits.
82
See UNIF. TRUST CODE § 501 (amended 2005), 7C U.L.A. 250 (Supp. 2005).
83
See supra notes 80-1 and accompanying text.
84
The comment to section 501 notes that it
does not prescribe the procedures . . . for reaching a beneficiary’s interest or of
priority among claimants, leaving those issues to the enacting state’s laws on
creditor rights. The section does clarify, however, that an order obtained against
the trustee, whatever state procedure may have been used, may extend to future
distributions whether made directly to the beneficiary or to others for the
beneficiary's benefit. By allowing an order to extend to future payments, the need
for the creditor periodically to return to court will be reduced.
UNIF. TRUST CODE § 501 cmt. (amended 2005), 7C U.L.A. 250 (Supp. 2005). Prior to its
amendment in 2005, the comment also included a general description of the process by
which a creditor would pursue its claim, along with the statement that the creditor could, “in
theory, force a judicial sale of a beneficiary’s interest.” UNIF. TRUST CODE § 501 cmt.
(2004), 7C U.L.A. 250-51 (Supp. 2005) (amended 2005). The 2005 amendment of the
comment deleted the general description and the reference to a judicial sale. See UNIF.
TRUST CODE § 501 cmt. (amended 2005), 7C U.L.A. 250-51 (Supp. 2005).
584
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
2. What If There is No Spendthrift Provision and Distributions Are
At the Trustee’s Discretion Instead of Mandatory?
If the trustee is authorized to make discretionary distributions to or for
the benefit of the beneficiary, most creditors of the beneficiary may not
compel the trustee to exercise its discretion to make distributions they can
reach.85 If, however, the trustee decides to make a discretionary distribution to or for the benefit of the beneficiary (and the terms of the trust do
not include a spendthrift provision), part or all86 of the distribution must be
paid to the creditor. Case law in a number of states supports the UTC’s
approach of allowing a beneficiary’s creditor to attach future discretionary
distributions (in the absence of a spendthrift provision).87 On the other
hand, case law in other states denies this remedy to creditors,88 and it is
likely that some states have not yet addressed this issue.
E. If the Terms of the Trust Do Not Include a Spendthrift Provision,
Would a Creditor Be Able to Force a Judicial Sale of the Beneficiary’s
Interest?
Perhaps. Section 501 provides that in the absence of a spendthrift provision, a beneficiary’s creditor may reach the beneficiary’s interest by attachment “or other means.”89 Creditors’ remedies under section 501, however, are at the court’s discretion, as the section provides, “To the extent a
beneficiary’s interest is not subject to a spendthrift provision, the court
may authorize a creditor or assignee of the beneficiary to reach the beneficiary’s interest by attachment of present or future distributions to or for the
benefit of the beneficiary or other means.”90 The remedy a court would
85
See infra Section IV.
See supra notes 80-81 and accompanying text.
87
See RESTATEMENT (THIRD) OF TRUSTS, Reporter’s Notes on § 60 cmts. b and c, at
417-18 (2003). See also RESTATEMENT (SECOND) OF TRUSTS § 155(2) (1959) (stating that
a trustee of a discretionary trust who has notice of a creditor’s claim and who makes a
discretionary distribution to the beneficiary is liable to the creditor for the amount of the
distribution).
88
See, e.g., Samson v. Bertok, No. WD-83-3, 1986 WL 14819 (Ohio Ct. App. Dec. 19,
1986); Shelley v. Shelley, 354 P.2d 282, 289 (Or. 1960).
89
UNIF. TRUST CODE § 501 (amended 2005), 7C U.L.A. 250 (Supp. 2005).
90
Id. (emphasis added). Prior to its amendment in 2005, the comment to section 501
noted: “The creditor may also, in theory, force a judicial sale of a beneficiary’s interest.”
UNIF. TRUST CODE § 501 cmt. (2004), 7C U.L.A. 251 (Supp. 2005) (amended 2005). That
statement, along with the rest of the paragraph in which it was included, was deleted from
the comment in 2005. See UNIF. TRUST CODE § 501 cmt. (amended 2005), 7C U.L.A. 25051 (Supp. 2005).
86
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Spendthrift and Discretionary Trusts 585
authorize in a given situation likely would depend on the circumstances.91
1. What Would Guide a Court in Deciding Whether to Order a Judicial Sale of a Beneficiary’s Interest?
The UTC does not address this question. Under section 106: “The
common law of trusts and principles of equity supplement this [Code],
except to the extent modified by this [Code] or another statute of this
State.”92 Thus, if an enacting state had case law on this subject,93 a court
presumably would follow it. A court might also look to the Restatements.94
Under the Third Restatement, a beneficiary’s discretionary trust interest is
not subject to execution sale.95 Under the Second Restatement: “If the
interest of the beneficiary of a trust is so indefinite or contingent that it
cannot be sold with fairness to both the creditors and the beneficiary, it
cannot be reached by his creditors.”96
2. Is the UTC’s Allowance of a Judicial Sale of a Beneficiary’s Interest (In the Absence of a Spendthrift Provision) a Change in the
Common Law?
No. A beneficiary’s interest in a trust “is now generally recognized as
a property right and liable for the beneficiary’s debts equally with his legal
interests, unless specially exempted by statute or by direction of the settlor.”97 The general rule of the Second Restatement is that “creditors of the
beneficiary of a trust can by appropriate proceedings reach his interest and
thereby subject it to the satisfaction of their claims against him.”98 It is
91
As noted in Professor Scott’s treatise: “In a proceeding in equity to reach the interest
of the beneficiary of a trust, the court will give to the creditor such relief as is under all the
circumstances fair and reasonable.” 2A SCOTT & FRATCHER, supra note 3, § 147.2.
92
UNIF. TRUST CODE § 106 (amended 2005), 7C U.L.A. 204 (Supp. 2005) [alteration
in original].
93
See, e.g., Showalter v. G. H. Nunnelley Co., 257 S.W. 1027 (Ky. 1924) (appointing
a receiver to provide for the payment of the debt of an income beneficiary out of trust
income, rather than ordering a sale of the interest, because of concerns that a sale would
prejudice both the creditor and the debtor/beneficiary).
94
The comment to section 106 notes the Restatements as sources of the common law
of trusts and principles of equity that supplement the Code. See UNIF. TRUST CODE § 106
cmt. (amended 2005), 7C U.L.A. 204 (Supp. 2005).
95
See RESTATEMENT (THIRD) OF TRUSTS § 60 cmt. c (2003).
96
RESTATEMENT (SECOND) OF TRUSTS § 162 (1959).
97
GEORGE GLEASON BOGERT & GEORGE TAYLOR BOGERT, THE LAW OF TRUSTS AND
TRUSTEES § 193 (rev. 2d ed. 1979) (footnote omitted).
98
RESTATEMENT (SECOND) OF TRUSTS § 147 (1959). See also 2A SCOTT & FRATCHER,
586
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
clear that this rule contemplates judicial sales of beneficial interests because under the exception in the Second Restatement, such a sale is not allowed if it could not be accomplished in a fair manner to both the beneficiary and the creditor.99 Given the almost universal use of spendthrift
provisions,100 the UTC’s limitation of the remedies available to spendthrift
exception creditors to attachment,101 and the prohibition on sales of discretionary interests under the Third Restatement, judicial sales of beneficial
interests in a UTC enacting jurisdiction should continue to be very rare.
IV. THE INABILITY OF CREDITORS OF BENEFICIARIES
TO COMPEL DISCRETIONARY DISTRIBUTIONS THEY CAN REACH
Section 504 addresses whether a creditor of a beneficiary of a discretionary trust may compel distributions the creditor can reach. The section
applies regardless of whether the trust instrument includes a valid spendthrift provision.102
A. May a Creditor of a Beneficiary of a Third-party Created Trust Force
the Trustee to Make Discretionary Distributions the Creditor Can
Reach?
Generally, no. In another departure from the Third Restatement (that
may be more apparent than real103), section 504(b) provides the general
supra note 3, § 147.2; BOGERT & BOGERT, supra note 97, § 193.
99
See RESTATEMENT (SECOND) OF TRUSTS § 162 (1959).
100
See Alan Newman, The Rights of Creditors of Beneficiaries Under the Uniform
Trust Code: An Examination of the Compromise, 69 TENN. L. REV. 771, 777 n.36 (2002).
Note, however, that while spendthrift provisions provide substantial protection against
claims of beneficiaries’ creditors, they reduce beneficiaries’ flexibility in dealing with their
trust interests. See KATHRYN G. HENKEL, ESTATE PLANNING AND WEALTH PRESERVATION
¶ 4.02[2][d] (1997); JOHN R. PRICE, PRICE ON CONTEMPORARY ESTATE PLANNING 896-97
(1992); Howard M. Zaritsky, A QPRT Checklist, PROB. PRAC. REP., May 2000, at 1, 3-4.
101
See UNIF. TRUST CODE § 503(c) (amended 2005), 7C U.L.A. 253 (Supp. 2005).
102
See id. § 504(b), at 256.
103
See RESTATEMENT (THIRD) OF TRUSTS § 60 cmt. e (2003). Under comment e to section 60, a beneficiary’s creditor, as well as the beneficiary, is entitled to judicial protection
against an abuse of discretion by the trustee. Id. However, the comment also provides that
a trustee’s exercise of its discretion might not be actionable by a creditor in circumstances
when it would be actionable by the beneficiary. Id. The explanation for the difference in
treatment is that:
[T]he extent to which the designated beneficiary might actually benefit from a
distribution is relevant to the justification and reasonableness of the trustee’s decision in relation to the settlor’s purposes and the effects on other beneficiaries. Thus, the balancing process typical of discretionary issues becomes, in this
FALL 2005
Spendthrift and Discretionary Trusts 587
rule: “[W]hether or not a trust contains a spendthrift provision, a creditor
of a beneficiary may not compel a distribution that is subject to the trustee’s discretion, even if: (1) the discretion is expressed in the form of a
standard of distribution; or (2) the trustee has abused the discretion.”104
1. What If the Trust Terms Require the Trustee to Make Distributions for the Beneficiary’s Support?
Section 504(b) prohibits most creditors from compelling a distribution
“that is subject to the trustee’s discretion.”105 If the terms of the trust require distributions for support (for example, “the trustee shall make distributions of income and principal for the beneficiary’s support”), an
argument can be made that the prohibition of section 504(b) is not applicable, because the required support distributions arguably would not be
subject to the trustee’s discretion within the meaning of section 504(b).
For at least four reasons, this argument would fail. First, section 504(b)(1)
makes the general rule applicable to discretionary distributions “even
if . . . the discretion is expressed in the form of a standard of distribution.”106 Thus, the use of a standard of distribution in the terms of the trust
is treated by the statute as a grant of discretion over distributions. Second,
the comment to section 504 notes that the section does not distinguish
between support and discretionary trusts, and the comment refers to a
provision in the Third Restatement under which support trusts are treated
as discretionary trusts with support standards.107 Third, if the terms—“the
trustee shall make distributions of income and principal for the beneficiary’s support”—are not treated as providing for distributions at the
trustee’s discretion, presumably they would be treated as calling for mandatory distributions. As discussed in Section II.K.1, above, however, the
2005 amendments to the UTC explicitly define mandatory distributions to
exclude distributions pursuant to a standard. Fourth, the comment to
section 506, as amended in 2005, explicitly states that a trust is discretionary even if it includes “a provision directing a trustee to pay for a beneficiary’s support.”108
context, significantly weighted against creditors . . . .
Id.
104
UNIF. TRUST CODE § 504(b) (amended 2005), 7C U.L.A. 256 (Supp. 2005).
Id.
106
Id. § 504(b)(1).
107
See id. § 504 cmt. (citing RESTATEMENT (THIRD) OF TRUSTS, Reporter’s Notes on
§ 60 cmt. a, at 414-17 (2003)).
108
UNIF. TRUST CODE § 506 cmt. (amended 2005), 7C U.L.A. 262 (Supp. 2005).
105
588
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
2. If the Creditor’s Claim is Based On Having Provided Support to
the Beneficiary, and the Trust Terms Include a Support Standard
For Distributions, May the Creditor Compel Distributions It Can
Reach to Reimburse It For the Support It Provided To the Beneficiary?
No. Under the UTC, no creditor of a beneficiary (including the state)
may compel discretionary distributions to satisfy claims based on the creditor’s having provided support to the beneficiary.109 In this regard, the
UTC provides greater protection against creditors’ claims than does the
law in some states.110
B. Does the UTC Allow Any Creditor of a Beneficiary of a Third-party
Created Trust to Compel Distributions the Creditor Can Reach?
Yes. There is an exception to the general rule of section 504(b). Under
section 504(c)(1), in specified circumstances the court may order discretionary distributions that the beneficiary’s child, spouse, or former
spouse can reach.111
1. Under What Circumstances May Such a Creditor Compel Distributions the Creditor Can Reach?
The ability of a beneficiary’s child, spouse, or former spouse to compel discretionary distributions he or she can reach is limited in three ways.
First, the child, spouse, or former spouse must have a judgment or court
order against the beneficiary for support or maintenance.112 Second, section 504(c)(1) authorizes but does not require the court to order a distribution to satisfy such a judgment or court order.113 Third, such an order may
be entered only “[t]o the extent a trustee has not complied with a standard
109
See id. § 504(b), at 256.
See, e.g., Estate of Lackmann v. Dep’t of Menial Hygiene, 320 P.2d 186, 189 (Cal.
Ct. App. 1958); Constanza v. Verona, 137 A.2d 614, 617 (N.J. Super. Ct. Ch. Div. 1958);
Bureau of Support v. Kreitzer, 243 N.E.2d 83, 85 (Ohio 1968); Cronin’s Case, 192 A. 397,
401 (Pa. 1937); State v. Rubion, 308 S.W.2d 4, 11 (Tex. 1957). See also 2A SCOTT &
FRATCHER, supra note 3, § 157.2.
111
See UNIF. TRUST CODE § 504(c)(1) (amended 2005), 7C U.L.A. 256 (Supp. 2005).
Note that because these creditors also are exception creditors for spendthrift protection under section 503(b), they may compel distributions from discretionary spendthrift trusts. See
id. § 503(b)(1), at 253.
112
See id. § 504(c)(1), at 256.
113
See id.
110
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Spendthrift and Discretionary Trusts 589
of distribution or has abused a discretion.”114 Presumably, the burden will
be on the creditor to establish the trustee’s failure to comply with a
standard of distribution or abuse of discretion.
2. Would the Court Order the Trustee to Satisfy the Entire Amount of
the Unpaid Child or Spousal Support or Alimony?
Presumably a court often would do so, but that will not necessarily be
the case. Rather, the amount awarded to the child, spouse, or former
spouse for back support would depend on the circumstances. Under
section 504(c)(2), the court is to order payment to the child, spouse, or former spouse of “such amount as is equitable under the circumstances but
not more than the amount the trustee would have been required to distribute to or for the benefit of the beneficiary had the trustee complied with
the standard or not abused the discretion.”115 According to the comment to
the section, however, “Before fixing this amount, the court . . . should
consider that in setting the respective support award, the family court has
already considered the respective needs and assets of the family.”116
3. Under Non-UTC Trust Law, May a Beneficiary’s Child, Spouse,
or Former Spouse, With a Court Order or Judgment For Support
or Maintenance, Compel Discretionary Distributions They Can
Reach?
As noted by the Third Restatement, there is authority—in the context
of a trust for the support of the beneficiary—for this policy-oriented rule
of the UTC,117 but it likely would make new law in many jurisdictions,
particularly for trusts that do not include support standards for discretionary distributions.118
114
Id. § 504(c).
Id. § 504(c)(2).
116
Id. § 504 cmt.
117
See RESTATEMENT (THIRD) OF TRUSTS, Reporter’s Notes on § 60 cmt. e, at 419-23
(2003). See also RESTATEMENT (SECOND) OF TRUSTS § 157 cmt. b (1959). For a recent case
that upheld a lower court’s order directing the trustee of a third-party created discretionary
support trust to pay the beneficiary’s child support obligations, see Drevenik v. Nardone,
862 A.2d 635 (Pa. Super. Ct. 2004).
118
See 2A SCOTT & FRATCHER, supra note 3, § 155. See also Carolyn L. Dessin, Feed
a Trust and Starve a Child: The Effectiveness of Trust Protective Techniques Against
Claims for Support and Alimony, 10 GA. ST. U. L. REV. 691 (1994) (discussing statutory
enactments and case interpretations from numerous jurisdictions); M.L. Cross, Annotation,
Trust Income or Assets as Subject to Claim Against Beneficiary for Alimony, Maintenance,
or Child Support, 91 A.L.R.2d 262 (1963) (discussing whether, and the extent to which, the
115
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
4. Does the Inability of Creditors (Other Than a Child, Spouse, or
Former Spouse With a Judgment or Court Order for Support or
Maintenance) to Compel Discretionary Distributions Affect the
Beneficiary’s Ability to Do So?
No. Section 504(d) provides: “This section does not limit the right of
a beneficiary to maintain a judicial proceeding against a trustee for an
abuse of discretion or failure to comply with a standard for distribution.”119
V. CREDITORS’ CLAIMS AGAINST A BENEFICIARY/SETTLOR
If a beneficiary also is a settlor of a trust, the rights of the beneficiary/settlor’s creditors under the UTC are governed by section 505.
A. May the Creditors of a Settlor of a Revocable Trust Reach the Trust
Assets During the Settlor’s Lifetime?
Yes. Section 505(a) so provides, regardless of whether the terms of the
trust include a spendthrift provision.120
income or corpus of a trust is subject to a claim against the beneficiary of the trust for
alimony, maintenance, or child support). The UTC’s exception allowing a child, spouse, or
former spouse with a judgment or court order for support to compel discretionary distributions has been deleted in five of the first twelve jurisdictions that adopted a version of
the UTC: Arkansas (see 2005 Ark. Acts § 28-73-504); Kansas (see KAN. STAT. ANN. § 58a502 (Supp. 2004)); Maine (see ME. REV. STAT. ANN. tit. 18B, § 504 (Supp. 2004));
Tennessee (see TENN. CODE ANN. § 35-15-504 (Supp. 2004)); and Missouri (see MO. ANN.
STAT. § 456.5-504 (Supp. 2005)). Wyoming and Virginia provide the protection of section
504(c) to child support, but not spousal support, claimants. See WYO. STAT. ANN. § 4-10504 (2005); 2005 Va. Acts ch. 31, § 55-545.04.C. The section 504(c) exception has been
enacted in New Mexico (see N.M. Stat. Ann. § 46A-5-504 (LexisNexis 2004); Nebraska
(see NEB. REV. STAT. ANN. § 30-3849 (Supp. 2004)); Utah (see UTAH CODE ANN. § 75-7504 (Supp. 2005)); and New Hampshire (see N.H. REV. STAT. ANN. § 564-B:5-504 (Supp.
2004)). The District of Columbia’s UTC enactment does not include section 504 at all, but
reserves the appropriate section number. See D.C. CODE ANN. § 19-1305.04 (LexisNexis
2005).
119
UNIF. TRUST CODE § 504(d) (amended 2005)., 7C U.L.A. 256 (Supp. 2005).
120
See id. § 505(a)(1), at 258. While the UTC does not explicitly recognize homestead
rights and other exemptions from creditors’ claims under other state law as limitations on
creditors’ rights under section 505(a), it cites a comment to the Third Restatement that does
so. See id. § 505 cmt. (2005) (citing RESTATEMENT (THIRD) OF TRUSTS § 25 cmt. e (2003))
(explaining that property held in a revocable trust is subject to claims of the settlor’s creditors “if the same property belonging to the settlor . . . would be subject to the claims of the
creditors, taking account of homestead rights and other exemptions.”). Further, the General
Comment to section 505 explicitly states that Article 5 does not supersede state exemption
statutes (nor state fraudulent transfer acts). See UNIF. TRUST CODE Art. 5, gen. cmt.
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Spendthrift and Discretionary Trusts 591
1. Is the Holder of a Power of Withdrawal From a Third-party Created Trust Treated as the Settlor of a Revocable Trust for Creditors’ Rights Purposes?
Yes, but only during the period the power may be exercised, and only
to the extent of the property subject to the power.121
2. Does That Mean That the Creditor of a Crummey Power Holder
May Reach Property Subject to the Crummey Withdrawal Right?
Yes, but again, only during the period the power may be exercised. In
order to reach property subject to the withdrawal power, the creditor
would need “to take action prior to the expiration of the [withdrawal]
period.”122 The question of what action the creditor would need to take
during the withdrawal period is not addressed.
3. If the Power Holder Allows the Power to Lapse, or Releases or
Waives It, Will the Power Holder Thereafter Be Treated As the
Settlor of a Revocable Trust For Creditors’ Rights Purposes As to
a Portion of the Trust Determined by Reference to the Amount the
Power Holder Could Have, But Did Not, Withdraw?
The power holder will not be treated in that way if the amount subject
to withdrawal was limited to the greater of the federal gift tax annual
exclusion amount123 (determined without regard to gift splitting) or the
five or five amount124 under the Internal Revenue Code. For any excess,
such as that which would exist when a hanging power is used and is
outstanding, the power holder will be treated as the settlor of a revocable
trust for creditors’ rights purposes.125
4. Is the UTC’s Treatment of the Holder of a Power of Withdrawal
As the Settlor of a Revocable Trust For Creditors’ Rights Purposes a Change in the Common Law?
According to the Restatement (Second) of Property, this rule of the
UTC is inconsistent with the law of most states.126 Non-UTC law is not
(amended 2005), 7C U.L.A. 250 (Supp. 2005).
121
See id. § 505(b)(1), at 258.
122
Id. § 505 cmt., at 259.
123
See I.R.C. § 2503(b) (2000).
124
See id. §§ 2041(b)(2), 2514(e) (2000).
125
See UNIF. TRUST CODE § 505(b)(2) (amended 2005), 7C U.L.A. 258 (Supp. 2005).
126
See RESTATEMENT (SECOND) OF PROP.: DONATIVE TRANSFERS § 13.2, Reporter’s
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
uniform on this subject, however. The rule under the Restatement (Second) of Property is that creditors of an unexercised, presently exercisable
general power of appointment may not reach the property subject to the
power except to the extent a statute provides otherwise.127 Statutes in a
number of states include such a provision,128 although in most, creditors
may reach the appointive assets only if other property available for payment of their claims is insufficient.129 The rule under the Restatement
(Third) of Trusts,130 and under federal bankruptcy law,131 is that the power
holder’s creditors may reach property subject to a presently exercisable
general power of appointment. Case law in several states is to the
contrary,132 as are statutes in Alaska and Rhode Island that do not allow a
power holder’s creditors to reach the property subject to the power unless
it not only is a general power, but also is exercised in favor of the holder,
the holder’s estate, or the creditors of either.133 The rationale for the UTC
rule, which treats “a power of withdrawal as the equivalent of a power of
revocation [is that] the two powers are functionally equivalent.”134
5. May a Beneficiary Serve As a Trustee Of a Third-party Created
Trust (For Example, a Surviving Spouse As Trustee of a Credit
Shelter Trust) Without Being Treated As the Settlor of a Revocable Trust For Creditors’ Rights Purposes?
Section 505(b)(1) provides that the holder of a “power of withdrawal”
Note (1986).
127
See RESTATEMENT (SECOND) OF PROPERTY: DONATIVE TRANSFERS § 13.2 (1986).
128
See, e.g., N.Y. EST. POWERS & TRUSTS LAW §§ 10-7.2, 10-7.4 (McKinney 1998).
129
See CAL. CIV. CODE § 1390.3 (West 1982): MICH. COMP. LAWS ANN. § 556.123
(West 1988); MINN. STAT. ANN. § 502.70 (West 2002); OKLA. STAT. ANN. tit. 60, § 299.9
(West 1994); WIS. STAT. ANN. § 702.17 (West 2001).
130
See RESTATEMENT (THIRD) OF TRUSTS § 56 cmt. b (2003).
131
See 11 U.S.C.A. § 541(b) (West 1994).
132
See, e.g., Univ. Nat’l Bank v. Rhoadarmer, 827 P.2d. 561 (Colo. Ct. App. 1991);
Irwin Union Bank & Trust Co. v. Long, 312 N.E.2d 908 (Ind. Ct. App. 1974).
133
See ALASKA STAT. § 34.40.115 (2004); R.I. GEN. LAWS § 34-22-13 (1995).
134
UNIF. TRUST CODE § 505 cmt. (amended 2005), 7C U.L.A. 259 (Supp. 2005). For
criticisms of the traditional rule under which creditors of the holder of a presently exercisable general power of appointment may not reach property subject to the power, see
5 AMERICAN LAW OF PROPERTY § 23.17 (A.J. Casner ed. 1952); LEWIS SIMES & ALLEN F.
SMITH, FUTURE INTERESTS § 944 (2d ed. 1956); Lawrence Berger, The General Power of
Appointment as an Interest in Property, 40 NEB. L. REV. 104, 119-20 (1960); Olin L.
Browder, Jr., Future Interest Reform, 35 N.Y.U. L. REV. 1255, 1272 (1960); Roy Lee
Steers, Jr., Note, Creditors’ Ability to Reach Assets Under a General Power of Appointment, 24 VAND. L. REV. 367 (1971).
FALL 2005
Spendthrift and Discretionary Trusts 593
is treated as the settlor of a revocable trust (during the period the power
may be exercised and with respect to the property subject to the power).135
The term “power of withdrawal” initially was defined as “a presently exercisable general power of appointment other than a power exercisable
only upon consent of the trustee or a person holding an adverse interest.”136 Although the UTC does not define a “presently exercisable general
power of appointment,”137 arguably a trustee/beneficiary’s power to distribute to him or herself, even if limited by an ascertainable standard relating to health, education, maintenance, or support, would be a power that
would cause the trustee/beneficiary to be treated as the settlor of a revocable trust for creditors’ rights purposes under section 505(b)(1).138 To avoid
that result, the definition of “power of withdrawal” was amended in 2004
to exclude a power “exercisable by a trustee and limited by an ascertainable standard.”139 The 2004 amendments also defined “ascertainable
standard” as one relating to an individual’s health, education, support, or
maintenance.140 Accordingly, a beneficiary may serve as trustee of a thirdparty created trust without being treated as the settlor of a revocable trust
for creditors’ rights purposes, if the beneficiary’s power to distribute to
him or herself is limited by the requisite ascertainable standard.
135
UNIF. TRUST CODE § 505(b)(1) (amended 2005), 7C U.L.A. 258 (Supp. 2005).
UNIF. TRUST CODE § 103(10) (2000), 7C U.L.A. 192 (Supp. 2005) (amended 2005).
137
See UNIF. TRUST CODE § 103 (amended 2005), 7C U.L.A. 191-92 (Supp. 2005).
138
See RESTATEMENT (THIRD) OF TRUSTS § 56 cmt. b (2003) (referring to such a
power as one by which the property may be appointed to the donee); id. § 60 cmt. g (noting
that a trustee-beneficiary’s “rights and authority represent a limited form of ownership
equivalence analogous to certain general powers”); RESTATEMENT (SECOND) OF PROP.:
DONATIVE TRANSFERS § 11.1 cmt. a (1986) (providing that powers of appointment may be
held in a fiduciary as well as in a non-fiduciary capacity). A power of distribution held by
a fiduciary was not, however, a “power of appointment” under the Restatement (First) of
Property. RESTATEMENT OF PROP. § 318(2) (1940). Also, note that the definition of “power
of withdrawal” under section 103(11) of the UTC excludes a power if it is exercisable only
with the trustee’s consent. See UNIF. TRUST CODE § 103(11) (amended 2005), 7C U.L.A.
192 (Supp. 2005). Whether that exclusion would prevent a trustee/beneficiary from being
treated as the holder of a power of withdrawal, and thus the settlor of a revocable trust for
creditors’ rights purposes, was not clear.
139
See UNIF. TRUST CODE § 103(10) (2004), 7C U.L.A. 192 (Supp. 2005) (amended
2005).
140
See id. § 103(2), at 191.
136
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
6. If a Trustee/Beneficiary’s Power to Distribute To Him or Herself
Is Not Limited by an Ascertainable Standard, Will the Trustee/
Beneficiary Be Treated as the Settlor of a Revocable Trust For
Creditors’ Rights Purposes?
The analysis of the UTC prior to its 2004 amendments described in the
answer to the preceding question arguably leads to that conclusion. Further, an inference to that effect may be drawn from the 2004 amendment to
the definition of “power of withdrawal,” under which a power exercisable
by a trustee/beneficiary is not treated as a power of withdrawal if it is
limited by an ascertainable standard. A comment to the 2004 amendments,
however, notes: “The Code does not specifically address the extent to
which a creditor of a trustee/beneficiary may reach a beneficial interest of
a beneficiary/trustee that is not limited by an ascertainable standard.”141
B. May the Creditors of a Settlor of a Revocable Trust Reach the Trust
Assets After the Settlor’s Death?
Subject to two limitations, yes, as may creditors for (i) costs of administration of the settlor’s estate, (ii) the expenses of the settlor’s funeral
and disposal of remains, and (iii) statutory allowances to a surviving
spouse and children.142 First, the settlor may direct the source from which
such liabilities will be paid.143 Second, the trust assets are subject to such
liabilities only to the extent the settlor’s probate estate is inadequate to satisfy them.144
C. May the Creditors of a Settlor of an Irrevocable Trust Reach the Settlor’s Beneficial Interest in the Trust?
Yes, regardless of whether the terms of the trust include a spendthrift
provision.145 The UTC rejects the approach taken in recent years in some
states under which a settlor may retain a beneficial interest in a trust that is
immune from claims of the settlor’s creditors.146 Rather, following the
141
Id. § 504 cmt., at 257.
See UNIF. TRUST CODE § 505(a)(3) (amended 2005), 7C U.L.A. 258 (Supp. 2005).
143
Id.
144
Id.
145
See id. § 505(a)(2).
146
See, e.g., ALASKA STAT. § 34.40.110(a)-(b) (2004); DEL. CODE ANN. tit. 12,
§§ 3570-3576 (2001 & Supp. 2004); MO. REV. STAT. § 456.5-505(3) (West Supp. 2005);
NEV. REV. STAT. ANN. § 166.010 (LexisNexis 2003); R.I. GEN. LAWS §§ 18-9.2 (2003);
UTAH CODE ANN. § 25-6-14(a)(ii) (Supp. 2005).
142
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Spendthrift and Discretionary Trusts 595
traditional common law rule, section 505(a)(2) allows creditors of the settlor to “reach the maximum amount that can be distributed to or for the
settlor’s benefit.”147
VI. DISCRETIONARY AND SUPPORT TRUSTS UNDER THE UTC
The UTC’s creditors’ rights provisions in Article 5 do not distinguish
between trusts that traditionally would have been characterized as “discretionary trusts” and those that traditionally would have been characterized
as “support trusts.”148 This has been a source of much of its criticism.149
A. Does the UTC Eliminate the Distinction Between Discretionary and
Support Trusts?
In some ways, the UTC eliminates this distinction; in others it does
not. The distinction between the two is eliminated for creditors’ rights purposes. The comment to section 504 provides: “This section, similar to the
Restatement, eliminates the distinction between discretionary and support
trusts, unifying the rules for all trusts fitting within either of the former
categories.”150 As revised in 2005, however, the comment to section 504
explains:
By eliminating this distinction, the rights of a creditor are the
same whether the distribution standard is discretionary, subject to
a standard, or both. Other than for a claim by a child, spouse or
former spouse, a beneficiary’s creditor may not reach the beneficiary’s interest. Eliminating this distinction affects only the
rights of creditors. . . . It does not affect the rights of a beneficiary
to compel a distribution. Whether the trustee has a duty in a given
situation to make a distribution depends on factors such as the
breadth of the discretion granted and whether the terms of the trust
include a support or other standard. See Section 814 comment.151
147
UNIF. TRUST CODE § 505(a)(2) (amended 2005), 7C U.L.A. 258 (Supp. 2005).
See id. § 504 cmt., at 256.
149
See, e.g., Merric & Oshins, supra note 1, at 481-86.
150
UNIF. TRUST CODE § 504 cmt. (amended 2005), 7C U.L.A. 256 (Supp. 2005).
151
Id. The comment to section 814 cited at the end of the quote in the text provides:
[W]hether the trustee has a duty in a given situation to make a distribution depends on the exact language used, whether the standard grants discretion and its
breadth, whether this discretion is coupled with a standard, whether the beneficiary has other available resources, and, more broadly, the overriding purposes
of the trust.
Id. § 814 cmt., at 307.
148
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
Thus, while Article 5 treats discretionary trusts with and without support
standards alike, it does not address or change the traditional rules that govern the trustee’s exercise of discretion in making distributions to or for the
benefit of the beneficiary.152
1. For Creditors’ Rights Purposes, Does the UTC Treat a Trust For
the Beneficiary’s Support As a Discretionary Trust?
Yes. Under section 504, most creditors of a beneficiary (including
those who have provided for the beneficiary’s support) may not compel
discretionary distributions they can reach regardless of whether the terms
of the trust include a support standard.153 Similarly, if the terms of a trust
do not include a spendthrift provision, section 501 applies regardless of
whether the trust terms include a support standard, or whether the creditor’s claim was for having provided for the beneficiary’s support.154 The
comment to section 504 cites the Third Restatement, which provides, “The
so-called ‘support trust’ . . . is viewed here as a discretionary trust with a
support standard.”155
2. Does the UTC Treat a Discretionary Trust Without a Support
Standard As a Trust For the Beneficiary’s Support?
No. Although section 504 (prohibiting most creditors of the beneficiary from compelling discretionary distributions they can reach) and section 501 (providing creditors’ remedies when the terms of the trust do not
include a spendthrift provision) do not distinguish between discretionary
trusts with and without support standards,156 with limited exceptions the
UTC does not address the rights of beneficiaries—and the duties of trustees—with respect to distributions to be made from such trusts.157 Because
152
For a discussion of the rights and duties of the beneficiary and trustee with respect
to distributions, in the context of section 814(a), which establishes outer limits on the
trustee’s discretion, see infra Section VII.
153
See supra Section IV.
154
See UNIF. TRUST CODE § 501 (amended 2005), 7C U.L.A. 250 (amended 2005).
155
See id. § 504 cmt., at 256 (citing RESTATEMENT (THIRD) OF TRUSTS, Reporter’s
Notes on § 60 cmt. a, at 415 (2003)).
156
See UNIF. TRUST CODE § 501 (amended 2005), 7C U.L.A. 250 (Supp. 2005); id.
§ 504, at 255-56.
157
The most important exception to the statement that the UTC does not address distribution issues is section 814(a), under which the trustee must exercise its discretion in
good faith and in accordance with the terms and purposes of the trust and the interests of the
beneficiaries, regardless of how broadly the settlor defines the trustee’s discretion. See id.
§ 814(a), at 307. For a discussion of section 814(a), see infra Sections VII and VIII. Sec-
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Spendthrift and Discretionary Trusts 597
the UTC generally does not address those subjects, they would be governed by common law and principles of equity.158 Thus, a beneficiary’s
right, if any, to receive a distribution from a discretionary trust, with or
without a support standard, would be determined under the same rules
under the UTC as it would be without the UTC. Under those rules, a
discretionary trust without a support standard may not be treated as a trust
for the beneficiary’s support.159
B. To the Extent It Has Done So, Why Has the UTC Eliminated the
Distinction Between Discretionary and Support Trusts?
The comment to section 504, which states that section 504 has eliminated the distinction, refers to the Third Restatement, under which support trusts are treated as discretionary trusts with a support standard.160 The
traditional formal distinction between discretionary trusts and support
trusts161 is described in the Restatement as “arbitrary and artificial,” and
tions 814(b) and (c) also address distributions, but do so to avoid adverse transfer tax consequences that could arise if a trustee whose discretion was not limited by an ascertainable
standard related to health, education, maintenance, and support also was a beneficiary of the
trust. See UNIF. TRUST CODE §§ 814(b) and (c) (amended 2005, 7C U.L.A. 307 (Supp.
2005).
158
See UNIF. TRUST CODE § 106 (amemded 2005), 7C U.L.A. 204 (Supp. 2005).
159
For example, under the Third Restatement:
Illustrative of terms that tend to be highly restrictive are those that authorize
invasion of principal or other discretionary payments in the event of an
“emergency,” “severe hardship,” “disability,” or the like. These are construed as
authorizing distributions only when the described conditions or circumstances
arise, and then only to the extent appropriate to alleviate the emergency, hardship,
or special need.
RESTATEMENT (THIRD) OF TRUSTS § 50 cmt. d(4) (2003). If the terms of a trust do not include any standards to guide the trustee’s exercise of its discretion, “a general standard of
reasonableness, or at least of good-faith judgment, will apply to the trustee . . . , based on
the extent of the trustee’s discretion, the various beneficial interests created, the beneficiaries’ circumstances and relationships to the settlor, and the general purposes of the trust.”
Id. cmt. d.
160
See UNIF. TRUST CODE § 504 cmt. (amended 2005), 7C U.L.A. 256 (Supp. 2005)
and RESTATEMENT (THIRD) OF TRUSTS, Reporter’s Notes on § 60 cmt. a, at 414-15 (2003).
161
The Second Restatement narrowly defines “discretionary trust” and “support trust.”
A “discretionary trust” is one by the terms of which “it is provided that the trustee shall pay
to or apply for a beneficiary only so much of the income and principal or either as the trustee in his uncontrolled discretion shall see fit to pay or apply.” RESTATEMENT (SECOND) OF
TRUSTS § 155(1) (1959). A “support trust” is one under which the trustee is required to “pay
or apply only so much of the income and principal or either as is necessary for the education
or support of the beneficiary.” Id. § 154. As noted in the Third Restatement, the territory
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
rejected in part because trust instruments commonly both give the trustee
discretion and include support standards.162 The analysis of an Iowa court
in a recent case is similar:
The definitional distinctions between support and discretionary trusts are limpid. Provisions of particular trusts muddy these
clear demarcations. When the provision is equivocal or adheres to
principles common to both types of trusts, interpretative inconsistencies abound. . . .
The parties in the present case ask this court to wade into
these murky waters without even a life jacket. Each side throws
out, as an aid for interpretation, only the specific language of the
trust provision that supports their particular contention despite the
remaining language to the contrary. . . . The equivocal nature of
the provision is obvious. It blends a desire to ensure the basic
support needs of a handicapped daughter with the control mechanism of trustee discretion designed to prevent wasteful depletion
of the trust’s assets. Any attempt by this court to hammer the language of this particular trust provision into one of these rigid
categories would only breed further inconsistencies in the law.163
Further, even if the terms of a trust mandate distributions for the beneficiary’s support, the trustee nevertheless will be required to exercise discretion in deciding how to provide for the beneficiary’s support.164 Similarly, in the event of a serious support need of the beneficiary of a purely
discretionary trust, the trustee might be required to make a discretionary
between discretionary and support trusts as so defined is “vast (yet much traveled),” but not
covered by the Second Restatement. See RESTATEMENT (THIRD) OF TRUSTS, Reporter’s
Notes on § 60 cmt. a, at 415 (2003).
162
See id. See also Evelyn Ginsberg Abravanel, Discretionary Support Trusts, 68
IOWA L. REV. 273, 289 (1983). Whether such trusts should be classified as “discretionary
trusts” or “support trusts” has been the subject of much litigation in the public benefits
qualification area. For a discussion of the issues raised and many of the cases, see CLIFTON
B. KRUSE, JR., THIRD PARTY AND SELF-CREATED TRUSTS—PLANNING FOR THE ELDERLY
AND DISABLED CLIENT (3d ed. 2002).
163
Strojek v. Hardin County Bd. of Supervisors, 602 N.W.2d 566, 569 (Iowa Ct. App.
1999). See also Lang v. Dep’t. of Public Welfare, 528 A.2d 1335, 1344 (Pa. 1987) (“We believe such a rigid categorization [of trusts as support trusts or discretionary trusts] is unwarranted and ignores the intent of a settlor who includes both support and discretionary
language in his trust instrument, by substituting mechanical rules for individual facts.”).
164
See, e.g., Old Colony Trust Co. v. Rodd, 254 N.E.2d 886 (Mass. 1970); Baker v.
Brown, 15 N.E. 783 (Mass. 1888).
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Spendthrift and Discretionary Trusts 599
distribution to meet the beneficiary’s need.165 For these reasons, the Third
Restatement concludes “that there is a continuum of discretionary trusts,
with the terms of distributive powers ranging from the most objective . . .
of standards (pure ‘support’) to the most open ended (e.g., ‘happiness’) or
vague (‘benefit’) of standards, or even with no standards manifested at
all . . . .”166
C. What Effect Does the UTC’s Elimination of the Distinction Between
Discretionary and Support Trusts Have On the Protection a Spendthrift Provision Provides?
None. Spendthrift protection applies regardless of whether a trust
would have been a discretionary trust or a support trust under the Second
Restatement rules.167 Thus, most creditors of a beneficiary of a spendthrift
trust may not reach either the beneficiary’s interest or the trust assets prior
to their receipt by the beneficiary regardless of whether the trustee is given
discretion without a standard (for example, “the trustee may at its absolute
discretion make distributions of income and principal to or for the beneficiary”), directed to make distributions for the beneficiary’s support (for
example, “the trustee shall distribute income and principal to provide for
the beneficiary’s support”), or given discretion to make distributions for
the beneficiary’s support (for example, “the trustee may in its discretion
make distributions of income and principal for the beneficiary’s support”).168
D. What Effect Does the UTC’s Elimination of the Distinction Between
Discretionary and Support Trusts Have On the Protection Afforded By
the UTC’s Rule Prohibiting Most Creditors From Compelling Discretionary Distributions They Can Reach?
None. Subject to the narrow exception for a beneficiary’s child,
spouse, or former spouse with a judgment or court order for support,169 a
165
See, e.g., Morris v. Daiker, 172 N.E. 540, 542 (Ohio Ct. App. 1929).
RESTATEMENT (THIRD) OF TRUSTS, Reporter’s Notes on § 60 cmt. a, at 416 (2003).
167
See UNIF. TRUST CODE § 502(c) (amended 2005), 7C U.L.A. 252 (Supp. 2005).
168
For discussions of spendthrift exception creditors and the rights of a beneficiary’s
creditor when the trustee does not make mandatory distributions within a reasonable time
after their due date, see supra Sections II.C through H and II.K, respectively. See also infra
Section VI.E for a discussion of the effect of the elimination of the distinction between discretionary and support trusts when the trust instrument includes a spendthrift provision, but
the creditor’s claim is not barred by it.
169
See UNIF. TRUST CODE § 504(c)(1) (amended 2005), 7C U.L.A. 256 (Supp. 2005).
166
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
beneficiary’s creditor may not compel discretionary distributions it can
reach regardless of whether the trust is purely discretionary, mandatory for
the beneficiary’s support, or a hybrid of the two.170 Thus, section 504(b)
extends to support trusts the protection discretionary trusts have traditionally afforded against creditors of beneficiaries seeking to compel distributions they can reach. In this way, the UTC enhances asset protection
planning with trusts.
E. What Effect Does the UTC’s Elimination of the Distinction Between
Discretionary and Support Trusts Have On the Rights of Creditors Of
a Beneficiary If the Trust’s Terms Do Not Include a Spendthrift Provision, or If the Instrument Includes Such a Provision, But the Creditor’s Claim Is Not Barred By It?
In the rare case of a trust that is not subject to a spendthrift provision,171 section 501 allows a beneficiary’s creditor to reach the beneficiary’s interest by attachment or other means172 (but not by compelling
discretionary distributions173). If the terms of the trust include a spendthrift
provision, but the creditor’s claim is not barred by it,174 the remedy provided to the exception creditor by section 503(c) is attachment of present
or future distributions.175 Neither section 501 nor section 503 distinguishes
between trusts that are purely discretionary, mandatory for support, or a
hybrid of the two. Similarly, no distinction is made by either section
between claims of creditors that are based on having provided support to
the beneficiary and other claims. Thus, if a trust is for the beneficiary’s
support and its terms do not include a spendthrift provision (or if the
instrument includes a spendthrift provision but the creditor is an exception
creditor), a creditor of a beneficiary whose claim is not based on having
provided support to the beneficiary may attach, under section 501 or 503,
future distributions the trustee chooses to make.176 By contrast, under the
Second Restatement, creditors who provided support to the beneficiary of
170
See id. § 504(b).
See supra note 100 and accompanying text.
172
See UNIF. TRUST CODE § 501 (amended 2005), 7C U.L.A. 250 (Supp. 2005).
173
See id. § 504(b), at 256.
174
See supra Sections II.C. through II.I.
175
See UNIF. TRUST CODE § 503(c) (amended 2005), 7C U.L.A. 253 (Supp. 2005).
176
Both section 501 and section 503, however, authorize the court to limit the creditor’s award “to such relief as is appropriate under the circumstances.” See id. § 501, at
250 and 503(c), at 253.
171
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Spendthrift and Discretionary Trusts 601
a support trust may reach the beneficiary’s interest,177 but other creditors
may not.178 Consistent with its not distinguishing between discretionary
and support trusts, the Third Restatement allows creditors whose claims
are not based on having provided support to a beneficiary to reach the
beneficiary’s interest in a non-spendthrift trust, without regard to whether
the trust was for the beneficiary’s support.179
VII. SUBSECTION 814 (a): MAY THE BENEFICIARY
COMPEL DISCRETIONARY DISTRIBUTIONS?
The UTC provides little guidance about the rights of beneficiaries and
the duties of trustees for discretionary distributions.180 Rather, discretionary distribution issues are left largely to case law of the jurisdiction the
law of which governs.181
A. Does the UTC Increase the Ability of the Beneficiary of a Discretionary Trust to Compel Distributions? If So, Does That Increase the Ability of Creditors of the Beneficiary to Reach the Beneficiary’s Interest
Or the Trust’s Assets?
There are three initial points to make. First, section 504(d) provides
that section 504 (which generally prohibits a beneficiary’s creditors from
compelling discretionary distributions they can reach)182 does not limit the
beneficiary’s right to maintain an action against the trustee for abuse of
177
RESTATEMENT (SECOND) OF TRUSTS § 157(b) (1959). Generally, at common law,
if a creditor of a beneficiary of a support trust provides support to the beneficiary, the creditor may recover directly from the trust if it would have been an abuse of discretion for
the trustee not to have expended trust funds to have procured the goods or services for the
beneficiary. 2A SCOTT & FRATCHER, supra note 3, § 157.2.
178
See RESTATEMENT (SECOND) OF TRUSTS § 154 (1959). Comment e to section 154
provides:
[T]he trustee is not liable to the . . . creditor [whose claim is not based on having
provided support to the beneficiary] though the trustee pays to or applies for the
beneficiary so much of the property as is necessary for his education or support,
even though the trustee . . . has been served with process in proceedings instituted
by the creditor to reach the interest of the beneficiary.
Id. at cmt. c. See also Robert R. Young & T. Lauer, Note, Creditor’s Rights in Support
Trusts, 1956 WASH. U. L.Q. 106 (1956).
179
See RESTATEMENT (THIRD) OF TRUSTS § 60 (2003). See also Goforth v. Gee, 975
S.W.2d 448 (Ky. 1998).
180
See UNIF. TRUST CODE § 504(d) (amended 2005), 7C U.L.A. 256, § 504 cmt., at
256-57, § 814(a), at 307, § 814 cmt., at 307-09 (Supp. 2005).
181
See id. § 814(a) cmt., at 307-09.
182
See supra Section IV.
602
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
discretion or failure to comply with a standard of distribution.183 Section
504(d) does not grant the beneficiary a new right to compel distributions.
Rather, it affirms that the right a beneficiary has to compel distributions
when the trustee has abused its discretion or failed to comply with a standard of distribution184 is not affected by the inability of his or her creditors
to do so. Second, section 504(b) explicitly prohibits most creditors of a
beneficiary from compelling discretionary distributions they can reach.185
Because that prohibition applies without regard to whether the beneficiary
may compel distributions,186 the right, if any, the beneficiary may have to
compel distributions has no effect on creditors’ inability to do so. Third, if
the terms of the trust include a valid spendthrift provision, most creditors
may not reach the beneficiary’s interest or the trust assets before their
receipt by the beneficiary from a distribution by the trustee, regardless of
the beneficiary’s rights to compel discretionary distributions (or even if
the beneficiary has a mandatory right to receive distributions).187
These two questions also arise in connection with concerns that have
been expressed about the effect of the UTC in the contexts of special or
supplemental needs trusts, divorce, and bankruptcy, which are discussed in
Sections IX, X, and XI.
B. Does Subsection 814(a) Give the Beneficiary of a Discretionary Trust
an Enforceable Property Right to Compel Discretionary Distributions?188
As a threshold matter, whether a beneficiary of a trust has a property
183
See UNIF. TRUST CODE § 504(d) (amended 2005), 7C U.L.A. 256 (Supp. 2005).
As noted by the Second Restatement, for example, “if the trustee is empowered to
apply so much of the trust property as he may deem necessary for the support of the beneficiary,” the court will override the trustee’s decision if the amount the trustee applies is unreasonably high or low for the beneficiary’s support. RESTATEMENT (SECOND) OF TRUSTS
§ 187 cmt. i (1959).
185
See supra Section IV.
186
See UNIF. TRUST CODE § 504(b) (amended 2005), 7C U.L.A. 256 (Supp. 2005). For
a recent case that acknowledged differences in the rights of creditors and beneficiaries to
compel discretionary distributions, see Corcoran v. Dep’t of Soc. Servs., 859 A.2d 533, 543
(Conn. 2004) (“The right of a creditor to reach the trust is not determinative of the right of
the beneficiary to do so. It is possible for a trustee to be ordered to make payment to the
beneficiary even when the creditor cannot similarly force payment from the trust.”). See
also supra note 103 (discussing RESTATEMENT (THIRD) OF TRUSTS § 60 cmt. e (2003)).
187
See UNIF. TRUST CODE § 502 (amended 2005), 7C U.L.A. 251-52 (Supp. 2005); id.
§ 503, at 253. For a discussion, see supra Section II.
188
For an argument to that effect, see Merric & Oshins, supra note 1, at 481.
184
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Spendthrift and Discretionary Trusts 603
interest in the trust’s assets or merely a personal right against the trustee
with respect to its administration of the trust’s assets has long been the
subject of debate.189 While no consensus has developed on this question,
the prevalent view is that a trust beneficiary has a property interest in the
trust’s assets as well as rights against the trustee to enforce the proper
administration of the trust.190 Subsection 814(a) provides:
Notwithstanding the breadth of discretion granted to a trustee
in the terms of the trust, including the use of such terms as “absolute,” “sole,” or “uncontrolled,” the trustee shall exercise a discretionary power in good faith and in accordance with the terms and
purposes of the trust and the interests of the beneficiaries.191
189
See generally, BOGERT & BOGERT, supra note 97, § 183; RESTATEMENT (THIRD) OF
TRUSTS, Reporter’s Notes on § 2, at 24-29 (2003).
190
“[T]here is probably general agreement in the United States today that a trust involves a division of legal and equitable ownership . . . .” RESTATEMENT (THIRD) OF TRUSTS,
Reporter’s Notes on § 2, at 24 (2003). Similarly:
The nature of the beneficiary’s rights would seem to be summarized by the
statement that while the right of the beneficiary originally was solely in personam
against the trustee, it has become increasingly a right in rem and is now substantially equivalent to equitable ownership of the trust res. The beneficiary, of
course, also has rights in personam against the trustee.
BOGERT & BOGERT, supra note 97, § 183 (footnotes omitted). For a discussion of statutes
in a number of states under which interests in real property held in trust are held entirely by
the trustee with the beneficiary having no estate or interest in the trust’s real property, see
id. § 184 (concluding that “[m]ost of the decisions either contradict these statutes by holding that the beneficiary does have some kind of an estate or interest in the trust property, or
the cases could have been decided as they were decided without any dependence on the
statutes in question.”). In Louisiana, however, recent cases have held that a trust beneficiary
has no ownership interest in trust property. See Read v. United States, 169 F.3d 243 (5th
Cir. 1999); David v. Katz, 83 F. Supp. 2d 736 (E.D. La. 2000).
191
UNIF. TRUST CODE § 814(a) (amended 2005), 7C U.L.A. 307 (Supp. 2005). Prior
to the 2005 amendments, the UTC’s mandatory rules precluded the settlor from overriding
“the duty of a trustee to act in good faith and in accordance with the purposes of the trust.”
UNIF. TRUST CODE § 105(b)(2) (2004), 7C U.L.A 200 (Supp. 2005) (amended 2005).
Because provisions of the UTC other than its mandatory rules do not apply if the settlor
provides otherwise in the terms of the trust, section 105(b)(2) raised the question of whether
the settlor could waive the section 814(a) requirements that the trustee exercise its
discretion in accordance with the terms of the trust and the interests of the beneficiaries. See
UNIF. TRUST CODE § 105(a) (amended 2005), 7C U.L.A. 200 (Supp. 2005). The 2005
amendments addressed this question by amending section 105(b)(2), which now tracks the
language of section 814(a), making its standard of conduct for a trustee of a discretionary
trust mandatory. See id. § 105(b)(2).
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
1. At Common Law, Can a Settlor Literally Give the Trustee Unlimited Discretion?
No. As stated in the Second Restatement:
It is against public policy to permit the settlor to relieve the trustee
of all accountability. It is true that the powers conferred upon the
transferee of property may be so extensive as to indicate an intention not to create a trust but to give the beneficial interest in the
property to the transferee. If, however, a trust is created, it is
required by public policy that the trustee should be answerable to
the courts, so far at least as the honesty of his conduct is concerned.192
2. Under Non-UTC Law, If the Settlor Purports to Give the Trustee
Absolute or Uncontrolled Discretion, Under What Circumstances
Will a Court Nevertheless Review the Trustee’s Exercise of Its
Discretion?
The common law provides no single, universally accepted statement
of the minimum standard of conduct required of the trustee to avoid judicial interference when the terms of the trust purport to give the trustee
unlimited discretion.193 Rather, cases, treatises, restatements, and commentators’ analyses use different language to describe the standard the trustee
will be held to regardless of the extent of discretion the settlor grants the
trustee.194 Such different language likely does not reflect substantively
192
RESTATEMENT (SECOND) OF TRUSTS § 187 cmt. k (1959) (Citations omitted). See
also Stix v. Comm’r, 152 F.2d 562, 563 (2d Cir. 1945); Estate of Ralston, 37 P.2d 76 (Cal.
1934); McNeil v. McNeil, 798 A.2d 503, 509 (Del. 2002); Ponzelino v. Ponzelino, 26
N.W.2d 330 (Iowa 1947); Keating v. Keating, 165 N.W. 74 (Iowa 1917); John H. Langbein,
Mandatory Rules in the Law of Trusts, 98 NW. U. L. REV. 1105, 1120, 1124 (2004).
193
See generally BOGERT & BOGERT, supra note 97, § 560 (Supp. 2004). If the terms
of the trust do not include extended discretion language, such as “absolute,” “sole,” or
“uncontrolled,” under the Second Restatement the trustee’s exercise of its discretion will
not be disturbed unless the trustee “acts dishonestly, or with an improper . . . motive, or fails
to use his judgment, or acts beyond the bounds of a reasonable judgment.” RESTATEMENT
(SECOND) OF TRUSTS § 187 cmt. e (1959).
194
In Colorado, for example, the Supreme Court, en banc, citing and quoting from 2A
SCOTT & FRATCHER, supra note 3, § 128.3, found that: “If the settlor manifested an
intention that the discretion of the trustee should be uncontrolled, the court will not interfere unless he acts dishonestly or from an improper motive, or fails to use his judgment.”
In re Marriage of Jones, 812 P.2d 1152, 1156 (Colo. 1991). By contrast, according to the
court in a recent Florida case: “Although the trustee of the trust in the instant appeal has
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Spendthrift and Discretionary Trusts 605
different standards.195
For example, the same subsection of Professor Scott’s treatise describes in different ways the limits on the discretion of a trustee, who is
relieved by the settlor of the otherwise applicable requirement to exercise
its discretion reasonably.196 First, it provides that the trustee may act
“beyond the bounds of a reasonable judgment, if he acts in good faith and
does not act capriciously.”197 Second, it provides that if, “by the terms of
the trust [the trustee] is not required to act reasonably, the court will
interfere where he acts dishonestly or in bad faith, or where he acts from
an improper motive.”198 There is no mention that these standards are substantively different. Furthermore, a different passage of the treatise notes
that the trustee’s discretion can be enlarged by the use of terms such as
“absolute,” but that even then “the court will control his action where he
acts in bad faith. The real question is whether it appears that the trustee is
acting in that state of mind in which it was contemplated by the settlor that
he should act.”199 As a final illustration, the Third Restatement provides:
Even under the broadest grant of fiduciary discretion, a trustee
must act honestly and in a state of mind contemplated by the
settlor. Thus, the court will not permit the trustee to act in bad
faith or for some purpose or motive other than to accomplish the
purposes of the discretionary power.200
3. Is the Requirement of Subsection 814(a) That the Trustee Act In
Good Faith, Regardless Of the Extent of Discretion the Settlor
Grants the Trustee, a Change From the Common Law?201
No. Cases from many jurisdictions explicitly acknowledge the require-
absolute discretion to pay out income and principal to the beneficiaries, he still must exercise good faith and be judicious in the administration of the trust.” Friedman v. Friedman,
844 So. 2d 789, 792 (Fl. Dist. Ct. App. 2003).
195
As discussed infra at notes 222-31 and accompanying text, the primary issue of the
effect of extended discretion language is whether it relieves the trustee of the otherwise applicable obligation to exercise its discretion in an objectively reasonable manner.
196
See 2A SCOTT & FRATCHER, supra note 3, § 187.2.
197
Id. (emphasis added) (footnote omitted).
198
Id. (emphasis added) (footnotes omitted).
199
Id. § 187 (emphasis added) (footnote omitted). See also The Uniform Trust Code—
Part I, 2003 PRAC. DRAFTING, 7420, 7439 (observing that section 187 “preserv[es] the requirement of good faith”) (emphasis added).
200
RESTATEMENT (THIRD) OF TRUSTS § 50 cmt. c (2003) (emphasis added).
201
For an argument to that effect, see Merric & Oshins, supra note 1, at 482.
606
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
ment that trustees exercise discretion in good faith even if the trustee is
granted extended discretion.202 Many other cases, however, do not explicitly acknowledge the trustee’s duty to act in good faith, but instead
provide that the trustee’s exercise of its discretion will not be disturbed
absent one or more of factors such as bad faith, dishonesty, an improper
motive, or a failure to use the trustee’s judgment.203 The fact that these
cases do not explicitly state that trustees must act in good faith, regardless
of the breadth of their discretion, however, does not mean that the courts
that decided them do not require good faith of the trustee.204
Rather, requiring that the trustee not act in bad faith, or dishonestly, or
with an improper motive, or fail to act altogether is another way of expressing the fundamental fiduciary requirement that the trustee must act in
good faith (or implicitly includes that requirement).205 There is much
evidence that is the case. For example, a court in a 1953 California case
addressed the judicial review of a trustee’s exercise of discretion and
found that if:
the “sole discretion” vested in and exercised by the trustees in this
case . . . were exercised fraudulently, in bad faith or in an abuse of
discretion, it is subject to . . . review. Whether good faith has been
exercised, or whether fraud, bad faith or an abuse of discretion has
202
See, e.g., Friedman, 844 So. 2d 789; Jacob v. Davis, 738 A.2d 904 (Md. Ct. Spec.
App. 1999); O’Shaughnessy, 517 N.W.2d 574; In re Estate of Mayer, 672 N.Y.S.2d 998
(N.Y. Sur. Ct. 1998); In re Ternansky’s Estate, 141 N.E.2d 189 (Ohio Ct. App. 1957);
NationsBank of Virginia, N.A. v. Estate of Grandy, 450 S.E.2d 140 (Va. 1994).
203
See, e.g., Marriage of Jones, 812 P.2d 1152; Goodwine v. Goodwine, 819 N.E.2d
824 (Ind. Ct. App. 2004); Jennings v. Murdock, 553 P.2d 846 (Kan. 1976); Am. Cancer
Soc’y, St. Louis Div. v. Hammerstein, 631 S.W.2d 858 (Mo. Ct. App. 1981); In re
Goodman, 790 N.Y.S.2d 837 (N.Y. Sur. Ct. 2005); Finch v. Wachovia Bank & Trust Co.,
N.A., 577 S.E.2d 306 (N.C. Ct. App. 2003); Robinson v. Kirbie, 793 P.2d 315 (Okla. Civ.
App. 1990).
204
Professor Bogert’s treatise explains that two standards are used by courts in determining whether and to what extent they will review a trustee’s exercise of absolute and uncontrolled discretion. BOGERT & BOGERT, supra note 97, § 560 (Supp. 2004). Under the
first, judicial review occurs when the trustee acts in bad faith, dishonestly, or from a motive
other than the accomplishment of the purposes of the trust. Id. Under the second, the trustee
must also act reasonably. Id. In discussing the two standards, the treatise notes, “There is
agreement that a trustee must act in good faith . . .” Id.
205
As amended in 2005, the comment to section 814 provides: “The obligation of a
trustee to act in good faith is a fundamental concept of fiduciary law although there are different ways that it can be expressed.” UNIF. TRUST CODE § 814 cmt. (amended 2005), 7C
U.L.A. 308 (Supp. 2005).
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Spendthrift and Discretionary Trusts 607
been committed is always subject to consideration by the court
upon appropriate allegations and proof.206
More recently, California adopted a statute that provides, “If a trust instrument confers ‘absolute,’ ‘sole’ or ‘uncontrolled’ discretion on a trustee, the trustee shall act in accordance with fiduciary principles and shall
not act in bad faith or in disregard of the purposes of the trust.”207 A California court referring to that statute noted, “It is presumed that the trustee
will act in good faith to effectuate the settlor’s intent.”208 Moreover, in an
Indiana case (involving a trustee who was not granted extended discretion)
in which the court noted that “[t]he trust relationship involves the exercise
of the utmost good faith on the part of the trustees,” it also found that “[i]n
the absence of bad faith, or an abuse or unreasonable exercise of discretion
by the co-trustees,” it would not interfere with the trustee’s exercise of its
discretion.209
Further, a year after the Colorado Supreme Court found that where the
settlor gives the trustee uncontrolled discretion the court will not interfere
with its exercise unless the trustee “acts dishonestly or from an improper
motive, or fails to use his judgment,”210 a lower appellate court in Colo206
In re Ferrall’s Estate, 258 P.2d 1009, 1013 (Cal. 1953). A District of Columbia
court similarly has equated good faith with the absence of bad faith: “The transfer of the
certificate of deposit cannot be deemed self-dealing when it is done in good faith for the
benefit of the estate. Since no bad faith by Michele Hagans was shown at trial, the trial
judge did not clearly err in approving the transaction.” Jones v. Hagans, 634 A.2d 1219,
1225 (D.C. 1993) (citation omitted).
207
CAL. PROB. CODE § 16081(a) (West 1991 & Supp. 2005).
208
Ventura County Dep’t of Child Support Servs. v. Brown, 11 Cal. Rptr. 3d 489, 499
(Cal. Ct. App. 2004).
209
In re Nathan Trust, 618 N.E.2d 1343, 1346 (Ind. Ct. App. 1993), vacated, In re
Della Lustgarten Nathan Trust, 638 N.E.2d 789 (Ind. 1994). The court’s opinion in a Wisconsin case, in which extended discretion language was not used, addressed judicial review
of the trustee’s exercise of its discretion similarly:
So long as trustees act in good faith and from proper motives and within the
bounds of a reasonable judgment under the terms and conditions of the trust, the
court has no right to interfere. It is only when they act outside the bounds of a
reasonable judgment, or are guilty of an abuse of discretion, or when they act
dishonestly and improperly that the court may interfere.
In re Filzen’s Estate, 31 N.W.2d 520, 522 (Wis. 1948).
210
Marriage of Jones, 812 P.2d at 1156. Note that in Jones, the Colorado Supreme
Court did not announce a single standard to be applied in Colorado in cases involving a
challenge to the trustee’s exercise of discretion. In fact, the case did not even involve such
a challenge, but instead decided whether a wife’s interest in a discretionary trust constituted
property for purposes of division in a divorce. Id. In holding that it did not, the court de-
608
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
rado decided a case in which a trustee with sole and absolute discretion
over distributions also was a remainder beneficiary and thus had a conflict
of interest in his exercise of discretion.211 In upholding the income beneficiary’s claim for increased distributions from the trust, the Colorado court
characterized the trustee’s conduct as an abuse of discretion, arbitrary and
capricious, improperly motivated, and a “breach of his fiduciary responsibilities to act with the utmost good faith and fairness toward the beneficiary.”212
Cases from Minnesota also illustrate that use of a test focusing on
factors such as the trustee’s motive in exercising its discretion does not
mean good faith is not required. In Minnesota, the trustee’s obligation to
exercise its discretion in good faith is explicit,213 and the test of whether a
trustee has abused its discretion looks to, among other things, the trustee’s
motive and whether the trustee acted with a conflict of interest.214 Furthermore, a 1931 South Carolina case required trustees to exercise discretion
“honestly and faithfully,” and found that “[a] plainly arbitrary, unreasonable, or fraudulent exercise” would have been actionable.215 The opinion
did not explicitly require trustees to act in good faith. The following quote,
however, is from a relatively recent South Carolina case that summarized
the holding in the earlier South Carolina decision:
[W]here a trust gives a trustee discretionary authority, the trustee
cannot exercise such discretion upon a mere whim and without accountability, but the trustee is limited by the primary purpose of
the grant, and must act with good faith as to any discretion vested
scribed the circumstances under which a trustee’s exercise of discretion will be reviewed in
four different ways: (1) “the beneficiary could not force the trustee to pay income or
principal unless she could establish fraud or abuse of discretion”; (2) “[t]he beneficiary cannot obtain the assistance of the court to control the exercise of the trustee’s discretion except
to prevent an abuse by the trustee of his discretionary power,” (3) “[i]f the settlor manifested an intention that the discretion of the trustee should be uncontrolled, the court will
not interfere unless he acts dishonestly or from an improper motive, or fails to use his
judgment”; and (4) “the beneficiary of a discretionary trust has no contractual or
enforceable right to income or principal from the trust, and cannot force any action by the
trustee unless the trustee performs dishonestly or does not act at all.” Id.
211
See In re Estate of McCart, 847 P.2d 184 (Colo. Ct. App. 1992).
212
Id. at 186.
213
See, e.g., O’Shaughnessy, 517 N.W.2d 574; Norwest Bank Minn. N., N.A. v.
Beckler, 663 N.W.2d 571 (Minn. Ct. App. 2003).
214
See In re Trusts A & B of Divine, 672 N.W.2d 912 (Minn. Ct. App. 2001).
215
Lynch v. Lynch, 159 S.E. 26, 31 (S.C. 1931).
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Spendthrift and Discretionary Trusts 609
in him. Moreover, discretion vested in a trustee must be honestly
and faithfully exercised.216
Finally, in a Virginia case in which the court noted that the trustees had
“uncontrolled judgment and discretion” over distributions, it described the
circumstances under which the exercise of that discretion would be subject
to judicial review as follows:
Generally, a trustee’s discretion is broadly construed, but his
actions must be an exercise of good faith and reasonable judgment
to promote the trust’s purpose. A trustee’s exercise of discretion
should not be overruled by a court unless the trustee has clearly
abused the discretion granted him under the trust instrument or
acted arbitrarily in such a way as to destroy the trust he is to
maintain.217
4. Are There Any Cases in Which a Court Has Found That the Use
of Extended Discretion Language Waives the Trustee’s Obligation
to Act in Good Faith?
Yes, there is at least one. According to dictum from an intermediate
appellate court in Tennessee, the settlor may waive the requirement that
the trustee act in good faith, apparently by describing the trustee’s discretion with terms such as “absolute,” “unlimited,” or “uncontrolled.”218 That
dictum, however, appears to be based on the court’s mistaken treatment of
the trustee’s obligation to act in good faith as the obligation to act reasonably: “The good faith requirement may be waived by the words of the trust
but the words are interpreted narrowly. Words found to waive the reasonableness standard are ‘absolute’ or ‘unlimited’ or ‘uncontrolled’ discretion.”219 Requiring a trustee to act in good faith, however, is not the same
as requiring it to act reasonably.220 As noted in Professor Scott’s treatise, if
the settlor relieves the trustee from the duty to act reasonably, the courts
216
Sarlin v. Sarlin, 430 S.E.2d 530, 532-33 (S.C. Ct. App. 1993).
Grandy, 450 S.E.2d at 143.
218
See Krug v. Krug, 838 S.W.2d 197, 201 (Tenn. Ct. App. 1992) (dictum). In Krug,
a trustee was given the “sole discretion” to remove and replace a cotrustee; the court held
that the language was not sufficient to waive the trustee’s obligation to act in good faith. Id.
219
Id.
220
In reviewing the exercise of the trustee’s discretion in an Oregon case, the court
stated: “There is no question of the trustee’s good faith in making his decision to limit the
payments as he did. The only question presented is the reasonableness of his judgment.”
Rowe v. Rowe, 347 P.2d 968, 974 (Or. 1959).
217
610
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
will not interfere with the trustee’s exercise of discretion “if he acts in
good faith and does not act capriciously.”221
5. Does Subsection 814(a) Impose a Reasonableness Requirement
On the Trustee’s Exercise of Discretion?
Generally, if a standard by which the reasonableness of the trustee’s
exercise of discretion can be tested is included in the instrument, reasonableness is required.222 If the terms of the trust do not include a standard,
the Second Restatement implies that reasonableness therefore is not required.223 Further, under the Second Restatement, even if the terms of the
trust include a standard against which the reasonableness of the trustee’s
exercise of its discretion can be judged, the trustee will not be required to
exercise it reasonably if the settlor provides otherwise in the terms of the
trust.224 The settlor may provide otherwise by using terms such as “absolute,” “unlimited,” or “uncontrolled” in describing the trustee’s discretion.225
Whether these rules of the Second Restatement apply under the UTC
is not clear. Subsection 814(a) itself does not address the issue. As amended in 2005, the comment to section 814 provides, in part:
Subsection (a) requires a trustee exercise a discretionary power in good faith and in accordance with the terms and purposes of
the trust and the interests of the beneficiaries. Similar to Restatement (Second) of Trusts Section 187 (1959), subsection (a) does
not impose an obligation that a trustee’s decision be within the
bounds of a reasonable judgment, although such an interpretive
standard may be imposed by the courts if the document adds a
standard whereby the reasonableness of the trustee’s judgment can
be tested. Restatement (Second) of Trusts Section 187 cmt. f
(1959).226
221
2A SCOTT & FRATCHER, supra note 3, § 187.2. See also JESSE DUKEMINIER ET AL.,
WILLS, TRUSTS, AND ESTATES 540-41 (7th ed. 2005).
222
See RESTATEMENT (SECOND) OF TRUSTS § 187 cmt. i (1959).
223
See id. “In such a case, however, the court will interpose if the trustee acts dishonestly, or from some improper motive.” Id.
224
See id.
225
Id. cmt. j.
226
UNIF. TRUST CODE § 814 cmt. (amended 2005), 7C U.L.A. 308 (Supp. 2005). (Note
that the citation to comment f to section 187 of the Second Restatement apparently should
be to comment i to section 187.)
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Spendthrift and Discretionary Trusts 611
This comment, with its references to the Second Restatement, arguably indicates that the Second Restatement’s treatment of the reasonableness issue applies under subsection 814(a). However, the comment does
not address the effect of extended discretion language on the trustee’s obligation to exercise its discretion reasonably, nor does it cite the Second
Restatement provision227 that does so. Further, as discussed next, some
jurisdictions require reasonableness of the trustee in the exercise of its discretion even if the instrument uses extended discretion language. Thus, by
not addressing the issue, the UTC may be leaving its resolution to the
common law and principles of equity of enacting jurisdictions.228
6. Under Non-UTC Law, Is a Trustee Whose Discretion Is Described
With Terms Such as “Absolute,” “Sole,” or “Uncontrolled” Required to Exercise It Reasonably?
As discussed in the answer to the preceding question, under the Second Restatement the use of such language precludes a court from reviewing a discretionary decision of a trustee for reasonableness.229 After a
lengthy review of the cases on the subject, however, Professor Bogert’s
treatise concluded, “The authorities do not appear to support the Restatement position that there is no requirement of reasonableness in the exercise of a power granted in the trustee’s absolute discretion.”230 Rather:
In addition to the commonly recognized factors used to determine
whether there had been an abuse of discretion, a standard of reasonableness has been applied by the courts in judging the exercise
of a discretionary power (whether simple or absolute), a standard
implied from the settlor’s intent and the purposes expressed in the
trust instrument. With respect to court review of discretionary
powers, this standard is consistent with the standard of care and
227
See RESTATEMENT (SECOND) OF TRUSTS § 187 cmt. j (1959).
See UNIF. TRUST CODE § 106 (amended 2005), 7C U.L.A. 204 (Supp. 2005). For
a proposal that the UTC’s comment to § 814(a) be modified or clarified and that trustees be
required to exercise discretion reasonably, without regard to the breadth of their discretion,
see Danforth, supra note 1.
229
The Third Restatement’s discussion of this subject notes that many cases cite the
Second Restatement rule that use of extended discretion language dispenses with the reasonableness standard, but observes: “Cases, however, are difficult to find, involving extended discretion relating to distribution of income or principal, in which courts have approved what actually appears to be unreasonable conduct.” RESTATEMENT (THIRD) OF
TRUSTS, Reporter’s Notes on § 60 cmt. c, at 288 (2003).
230
BOGERT & BOGERT, supra note 97, § 560.
228
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
skill of a prudent man and is based upon established fiduciary
standards and principles.231
7. Does the Language in Subsection 814(a) That Requires the Trustee Not Only to Act in Good Faith, But Also to Exercise Its Discretion “In Accordance With the Terms and Purposes of the Trust
and the Interests of the Beneficiaries”232 Expand the Scope of
Judicial Review of a Trustee’s Exercise of Extended Discretion?
According to a recent argument to that effect:
Section 814(a) illustrates the uncertainty that codifying the
trust law may create. What do the words “and in accordance with
the terms and purposes of the trust and the interests of the beneficiaries” mean? Do they create a stricter limit on the discretion that
may be conferred upon a trustee than the common law test set
forth in the above quotation from Scott? It seems likely that courts
will use them to do so in particular cases, yet their application to
particular facts remains as hard to predict as that of the common
law. Has anything been gained by codification?233
231
Id. at 32 (Supp. 2004) (footnotes omitted). The analysis of Professors Dukeminier,
Johanson, Lindgren, and Sitkoff reaches a similar conclusion:
What, then, are the limitations on the trustee’s freedom when the trustee has
“absolute and uncontrolled discretion”? Professor Scott argued for a subjective
standard, emphasizing the trustee’s “good faith” and proper motives and dispensing with the requirement of reasonableness. He suggested, and the Restatement for which he was the reporter adopted, a standard of whether the trustee
has acted “in that state of mind in which it was contemplated by the settlor that he
should act.” Scott, supra, at 16; Restatement (Second) of Trusts § 187, cmt. j
(1959). Some courts, relying on the Restatement’s good faith standard, declare
that the trustee must not act arbitrarily or capriciously, seemingly bringing in a
reasonableness test under the guise of other words. Other courts apply a reasonableness test even when the discretion is “absolute.”
In the final analysis, it appears that the difference between simple discretion
and “absolute” discretion is one of degree and that the trustee’s action must not
only be in good faith but also to some extent reasonable, with more elasticity in
the concept of reasonableness the greater the discretion given.
DUKEMINIER ET AL., supra note 221, at 540-41.
232
Note that “interests of the beneficiaries” is a defined term under the UTC. See
UNIF. TRUST CODE § 103(8) (amended 2005), 7C U.L.A. 192 (Supp. 2005). It does not
mean what the beneficiaries assert or the court determines to be in the beneficiaries’ best
interests. Rather, “interests of the beneficiaries” means “the beneficial interests provided in
the terms of the trust.” Id.
233
The Uniform Trust Code—Part I, supra note 199, at 7440 (footnote added). The
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Spendthrift and Discretionary Trusts 613
Subsection 814(a)’s requirement that the trustee exercise even extended
discretion in accordance with the terms and purposes of the trust and the
interests of the beneficiaries, however, is not new. Rather, it simply reflects the trustee’s basic obligation with respect to the administration of
the trust.234
The Second Restatement expressly addresses the trustee’s obligation
to exercise its discretion in administering a trust in accordance with the
purposes of the trust: even a trustee with “absolute,” “unlimited,” or “uncontrolled” discretion may not exercise it “from some motive other than
the accomplishment of the purposes of the trust.”235 In a New York case, a
testator who made substantial pre-residuary charitable gifts left the residue
of his estate in trust for his wife’s benefit, and referred to his “‘paramount
intention and wish that (my) wife shall have anything that she requires or
may desire for her personal welfare and comfort.’”236 The testator named
his wife as the primary income beneficiary of the trust and authorized the
trustee to invade principal for her benefit “‘in its sole, absolute, and
unimpeachable discretion.’”237 In rejecting the widow’s request for a
principal distribution to make a charitable gift in memory of the testator,
which the trustee was willing to grant, the court found that allowing the
“above quotation from Scott” referred to is:
The extent of the discretion may be enlarged by the use of qualifying adjectives
or phrases such as “absolute” or “uncontrolled.” Even the use of such terms, however, does not give him unlimited discretion. A good deal depends upon whether
there is any standard by which the trustee’s conduct can be judged. Thus if he is
directed to pay as much of the income and principal as is necessary for the support of a beneficiary, he can be compelled to pay at least the minimum amount
which in the opinion of a reasonable man would be necessary. If, on the other
hand, he is to pay a part of the principal to a beneficiary entitled to the income, if
in his discretion he should deem it wise, the trustee’s decision would normally be
final, although as will be seen the court will control his action where he acts in
bad faith. The real question is whether it appears that the trustee is acting in that
state of mind in which it was contemplated by the settlor that he should act.
The Uniform Trust Code—Part I, supra note 199, at 7439 (quoting 2A SCOTT & FRATCHER,
supra note 3, § 187).
234
The comment to section 814 addresses this language by noting that: “Consistent
with the trustee’s duty to administer the trust (see section 801), the trustee’s exercise must
also be in accordance with the terms and purposes of the trust and the interests of the
beneficiaries.” UNIF. TRUST CODE § 814 cmt. (amended 2005), 7C U.L.A. 307 (Supp.
2005).
235
RESTATEMENT (SECOND) OF TRUSTS § 187 cmt. j (1959).
236
In re May’s Estate, 112 N.Y.S.2d 847, 848 (N.Y. Sur. Ct. 1952).
237
Id.
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
distribution “would constitute a departure from the testamentary program
fixed by the deceased.”238 Many other cases from many jurisdictions
support subsection 814(a)’s requirement that the trustee exercise even
extended discretion in accordance with the terms and purposes of the trust
and the interests of the beneficiaries.239
C. What, Then, is the Effect of the UTC On the Rights of Trust Beneficiaries and the Duties of Trustees For Discretionary Distributions?
Subsection 814(a)’s formulation of the minimum standard of conduct
required even of a trustee that is granted extended discretion codifies the
common law and should not change the traditional analysis of whether a
beneficiary of a given trust in a given situation is entitled to receive a
distribution. After discussing subsection 814(a)’s requirement that trustees
act in good faith and in accordance with the terms and purposes of the
trust and the interests of the beneficiaries, the comment to section 814, as
amended in 2005, explicitly notes that it “does not otherwise address the
obligations of a trustee to make distributions, leaving that issue to the
caselaw.”240 Further, the UTC’s elimination of the distinction between discretionary and support trusts241 is in the context of rights of creditors of
beneficiaries and “does not affect the rights of a beneficiary to compel a
distribution.”242 Given that subsection 814(a) codifies the common law
standards applicable to trustees in the exercise of discretionary powers and
that the UTC explicitly provides that neither subsection 814(a) nor Article
5’s elimination of the distinction between discretionary and support trusts
affects distribution rights and duties, the UTC should not affect the rights
and duties of beneficiaries and trustees for discretionary distributions.
VIII. SUBSECTION 814(a): IS THERE A BETTER ALTERNATIVE?
Many of the criticisms directed at the UTC’s creditors’ rights provisions are based, to a significant extent, on the argument that beneficiaries
238
Id. at 849.
See, e.g., Conway v. Enemy, 96 A.2d 221 (Conn. 1953); Conn. Bank & Trust Co.
v. Hartford Hosp., 276 A.2d 792 (Conn. Super. Ct. 1971); In re Murray, 45 A.2d 636 (Me.
1946); Fine v. Cohen, 623 N.E.2d 1134, 1139 (Mass. App. Ct. 1993); O’Shaughnessy, 517
N.W.2d 574; Hammerstein, 631 S.W.2d 858; Taylor v. McClave, 15 A.2d 213 (N.J. Ch.
1940); In re Estate of Mayer, 672 N.Y.S.2d 998; In re Hansen’s Estate, 23 A.2d 886 (Pa.
1942). See also MONT. CODE ANN. § 72-34-130 (2005).
240
UNIF. TRUST CODE § 814 cmt. (amended 2005), 7C U.L.A. 307 (Supp. 2005).
241
See supra Section VI.
242
UNIF. TRUST CODE § 504 cmt. (amended 2005), 7C U.L.A. 256 (Supp. 2005).
239
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Spendthrift and Discretionary Trusts 615
of discretionary trusts have enforceable rights under the UTC that are
greater than they have under non-UTC trust law.243 That argument, in turn,
is largely based on the claim that the standard of conduct required of a
trustee in the exercise of its discretion under subsection 814(a) provides
beneficiaries with significantly greater rights to compel discretionary distributions than they otherwise would have.244 This Article argues that
subsection 814(a)’s statement of the standard to which trustees will be
held in their exercise of discretionary powers, regardless of the breadth of
discretion the settlor grants, does not effect a change in the common law,
but is a codification of the traditional common law standard that is expressed differently in some jurisdictions.245
If subsection 814(a) is simply one of multiple ways of expressing the
traditional, common law standard to which trustees with discretionary
powers are held, though, the question is raised whether a UTC-enacting
jurisdiction could substitute for subsection 814(a) an alternative formulation of the standard without effecting a substantive change. Again, subsection 814(a) provides:
Notwithstanding the breadth of discretion granted to a trustee
in the terms of the trust, including the use of such terms as “absolute”, “sole”, or “uncontrolled”, the trustee shall exercise a discretionary power in good faith and in accordance with the terms and
purposes of the trust and the interests of the beneficiaries.246
An alternative standard, derived from a Colorado case,247 is that if the
trustee is granted extended discretion, through the use of language such as
“sole and absolute,” the court will interfere with its exercise only if the
trustee (1) acts dishonestly, (2) acts with an improper motive, or (3) fails
to use his or her judgment.248 This standard has been described by its
proponents as a “bad faith” standard.249
243
See, e.g., Merric & Oshins, supra note 1, at 481.
Id.
245
See supra Section VII.
246
UNIF. TRUST CODE § 814(a) (amended 2005), 7C U.L.A. 307 (amended 2005).
247
Marriage of Jones, 812 P.2d at 1156 (quoting 2A SCOTT & FRATCHER, supra note
3, § 128.3). Note, however, that Jones did not even involve a challenge to a trustee’s exercise of discretion and actually expressed the circumstances under which the trustee’s exercise of its uncontrolled discretion would be reviewed in four different ways. See supra note
210.
248
See Merric & Oshins, supra note 1, at 479.
249
Id.
244
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
Fundamental to the duties of a trustee is that it administer the trust in
accordance with the trust’s terms to carry out the intention of the settlor. If
a trustee makes a discretionary distribution that is not permitted by the
terms of the trust, it has breached its duty, regardless of the breadth of its
discretion, even if it (1) did not act dishonestly, (2) was motivated by a desire to act in the best interests of the beneficiary, and (3) exercised its
judgment in making its discretionary decision. For example, if the instrument grants the trustee the “sole, absolute, and uncontrolled” discretion to
make distributions for a beneficiary’s support for life, remainder to other
beneficiaries, a trustee who makes a distribution to the current beneficiary
to meet a non-support related emergency need has breached its duty to administer the trust in accordance with its terms. (Such a breach also could
be described as a failure to administer the trust in accordance with the
interests of the beneficiaries, as defined in the instrument, because the
distribution effectively would have shifted trust benefits to the distributee
beneficiary and away from other beneficiaries. Alternatively, the breach
also could be characterized as a failure to administer the trust in accordance with the settlor’s purposes of providing for the support of the current beneficiary and otherwise preserving the trust assets for successive
beneficiaries.)
Arguably, the bad faith standard described above would cover this
type of breach through its requirement that a trustee not act with an improper motive, as the distribution would have been motivated by a desire
to further a purpose the settlor had not intended for the trust. If the trustee,
however, was motivated by the desire to benefit the beneficiary—perhaps
in a way the trustee believes the settlor would have done if the settlor were
living—labeling the conduct as improperly motivated is more problematic
than simply finding it to be impermissible as not in accordance with the
trust’s terms, its purposes, or the interests of its beneficiaries.
Again, if a trustee with absolute and uncontrolled discretion exercises
its judgment, acts honestly, and is not improperly motivated, it nevertheless will have breached its duty if it misconstrues the instrument and
makes a discretionary distribution or engages in other conduct in administering the trust that is not permitted by the trust’s terms. To further illustrate, if the trust’s beneficiaries are the settlor’s descendants and a child of
the settlor has adopted an adult, the adoptee may or may not be a “descendant” of the settlor within the meaning of the trust instrument.250 If not, a
250
In some states, an adopted individual is not treated as the child of the adopting parent, for purposes of construing another’s trust instrument, unless the adopted person lived
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Spendthrift and Discretionary Trusts 617
trustee who exercises its discretion to make distributions to the adoptee
has breached its duty without regard to the breadth of its discretion, its
honesty, its motive, or its exercise of its judgment.251 Accordingly, if a
jurisdiction prefers the bad faith standard to requiring affirmatively that
trustees must act in good faith, it should build language into the bad faith
standard similar to that of subsection 814(a), which requires trustees to
administer trusts in accordance with their terms and purposes and the interests of the beneficiaries.252
As for the issue of whether, in addition to requiring trustees to exercise discretion in accordance with the terms and purposes of the trust and
the interests of the beneficiaries, the standard is best stated as requiring
good faith or prohibiting bad faith, there is much evidence that courts (and
commentators) do not distinguish between the two, but use the terms
interchangeably.253 From that perspective, little may be lost in using a bad
faith, rather than a good faith, standard. However, because the very nature
of the fiduciary relationship between a trustee and beneficiary requires, at
a minimum, that the trustee act in good faith in administering the trust,254
while a minor as a regular member of the adopting parent’s household. See, e.g., UNIF.
PROBATE CODE § 2-705(c) (amended 1993), 8 U.L.A. 188 (1998). Similarly, even a birth
child who has not been adopted by another may not be considered as a child of the natural
parent for purposes of construing another’s trust instrument, if the child did not live while
a minor as a regular member of the natural parent’s household. See, e.g., id. § 2-705(b).
251
For cases holding that trustees with extended discretion must administer their trusts
in accordance with the settlor’s purposes and the trust’s terms, see supra notes 236, 239.
252
A Missouri case is illustrative of combining a bad faith standard with an obligation
that a trustee exercise its discretion in accordance with the terms and purposes of the trust
and the interests of the beneficiaries. The court reviewed the trustee’s exercise of discretion
to terminate a trust and found the Missouri bad faith test applies when the trust’s terms do
not include an objective standard against which the trustee’s conduct can be judged:
When a testator vests sole discretion in a matter in the trustee and supplies no objective standards by which to evaluate the reasonableness of his conduct, a court
must not interfere unless the trustee, in exercising his power, wilfully abuses his
discretion or acts arbitrarily, fraudulently, dishonestly or with an improper motive.
Hammerstein, 631 S.W.2d at 863. However, the opinion also notes, “Certainly, a grant of
absolute discretion to a trustee is not a roving commission—the trustee must be guided by
the interest of the beneficiary and must further trust purposes in the exercise of his power.”
Id. at 864.
253
See supra notes 193-217 and accompanying text.
254
Judge Cardozo’s famous description of the trustee’s duty of loyalty is instructive:
Many forms of conduct permissible in a workaday world for those acting at arm’s
length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
the preferable alternative is simply to say so.255
IX. THE UTC, SPECIAL AND SUPPLEMENTAL
NEEDS TRUSTS, AND PUBLIC BENEFITS
Some UTC critics have argued that it will have a negative impact on
beneficiaries of special and supplemental needs trusts (“SNTs”).256 This
Section discusses some of the principal reasons why that is not the case.257
A. What Is the Difference Between a “Special Needs Trust” and a “Supplemental Needs Trust”?
Both refer to trusts intended to allow their beneficiaries to receive benefits from the trust without disqualifying them from also receiving public
assistance for their support. While the terms are sometimes used interchangeably, many refer to trusts that are funded with the beneficiary’s
punctilio of an honor the most sensitive, is then the standard of behavior.
Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928). While Judge Cardozo was addressing
the duty of loyalty, rather than the trustee’s obligation to exercise extended discretion, the
principle he describes is difficult to reconcile with the position that a trustee need not act in
good faith, as long as it does not act in bad faith.
For a sampling of cases that involved fiduciary relationships other than a trustee and
beneficiary that acknowledge the fundamental obligation of a fiduciary to act in good faith,
see Burch v. Argus Props., Inc., 154 Cal. Rptr. 485, 487 (Cal. Ct. App. 1979) (real estate
broker and principal); Johnson v. Provena St. Therese Med. Ctr., 778 N.E.2d 298 (Ill. App.
Ct. 2002) (personal representative and beneficiaries of an estate); Paul v. North, 380 P.2d
421, 428 (Kan. 1963) (parties who, by their concerted action, willingly and knowingly act
for one another in a manner as to impose mutual trust and confidence); Hoopes v. Hammargren, 725 P.2d 238, 242 (Nev. 1986) (physician and patient); Gedeon v. State Farm Mut.
Auto. Ins. Co., 188 A.2d 320, 322 (Pa. 1963) (insurer defending claims against an insured);
Moore v. Moore, 599 S.E.2d 467, 472 (S.C. Ct. App. 2004) (partners). Note also that good
faith is required even in arm’s length business dealings when the parties are not in a fiduciary relationship, see, e.g., Sheltry v. Unum Life Ins. Co. of Am., 247 F. Supp. 2d 169
(D. Conn. 2003), and is referenced in at least 50 different provisions of the Uniform Commercial Code. See Tory A. Wiegand, The Duty of Good Faith and Fair Dealing in Commercial Contracts in Massachusetts, 88 MASS. L. REV. 174, 178 (2004).
255
As discussed supra at note 202 and accompanying text, many courts have expressly
done just that.
256
See, e.g., Mark Merric & Douglas W. Stein, A Threat to all SNTs, TR. & EST. Nov.
2004, at 38.
257
For more detailed analyses of the UTC and SNTs, see Richard E. Davis & Stanley
C. Kent, The Impact of the Uniform Trust Code on Special Needs Trusts, 1 NAELA J. 235
(2005); Richard E. Davis & Stanley C. Kent, The Uniform Trust Code and Supplemental
Needs Trusts, 15 PROB. L.J. OF OHIO 53, 53 (2005) [hereinafter Davis & Kent, UTC &
SNTs]. See also Richard E. Davis, UTC is No Threat to SNTs, TR. & EST. 12 (Jan. 2005).
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Spendthrift and Discretionary Trusts 619
own assets, including those to which the beneficiary is entitled under a
personal injury award, as “special needs trusts,” and to trusts that are
funded by third parties for a disabled beneficiary as “supplemental needs
trusts.”258 The eligibility rules vary considerably for SNTs funded with a
person’s own assets and for those funded with assets of a third party.
B. Will the UTC Adversely Affect the Ability of Beneficiaries of Selfsettled SNTs to Qualify for Public Benefits?
No. Generally, under the Omnibus Budget Reconciliation Act of 1993
(“OBRA 1993”), trusts that meet OBRA 1993’s requirements may be used
by disabled persons to hold their own assets for their benefit, without
disqualifying them from receiving public benefits.259 The most common
OBRA 1993 trust is the “pay-back” or “(d)(4)(A)” trust,260 the terms of
which require the state to be repaid from the remaining trust assets at the
beneficiary’s death an amount equal to the Medicaid benefits that were
paid for the beneficiary’s medical care.261 Under OBRA 1993, the assets in
a trust are “insulated . . . from consideration by the Medicaid program so
that public entitlement for medical care remains available to them.”262 The
UTC will have no effect on that federally mandated result.263
C. Will the UTC Adversely Affect the Ability of Beneficiaries of Thirdparty Created SNTs to Qualify For Public Benefits?
No. Generally, public assistance for purposes such as medical and institutionalized care is limited to the needy, with consideration in determining eligibility given both to a person’s income and resources.264 If the
258
See, e.g., Ian S. Oppenheim, Guest Editor’s Message, NAELA QUARTERLY,
Summer 2001, at 2, 3.
259
See Omnibus Budget Reconciliation Act of 1993, 42 U.S.C. § 1396p (2000). See
generally KRUSE, supra note 162, at 11-13.
260
See 42 U.S.C. § 1396p(d)(4)(A).
261
See KRUSE, supra note 162, at 12.
262
Id. at 11.
263
See Davis & Kent, UTC & SNTs, supra note 257, at 55-56.
264
For an overview of Medicaid, the most significant source of public benefits for
medical and institutionalized care of the needy, see Centers for Medicare & Medicaid
Services, United States Department of Health and Human Services, Medicaid: A Brief
Summary, http://www.cms.hhs.gov/publications/overview-medicare-medicaid/default4.asp
(last visited Nov. 2, 2005). See also Molly Mead Wood, Medicaid Eligibility for Long-Term
Care: The Basics, 16 PREVENTIVE L. REP. 8, Summer 1997, at 8 (Featuring 2003 updates);
Barbara J. Collins, Medicaid Eligibility and Coverage for Elderly and Disabled Clients:
Overview and Update, 12TH ANN. ELDER L. INST. REPRESENTING THE ELDERLY CLIENT OF
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assets of an SNT are treated as available to the beneficiary, the beneficiary
likely will not meet the resources test for public benefits qualification.265
“Available” for this purpose means “actually available.”266 Many cases
have held that whether the assets of a third-party created trust are actually
available to the beneficiary depends on whether the beneficiary may
compel distributions for support.267 While cases often explain that the
assets of support trusts are disqualifying available resources while those of
discretionary trusts are not,268 the underlying rationale for making that
classification determinative of whether the trust assets are actually available to the beneficiary is that the beneficiary may compel distributions for
support from a support trust but not from a discretionary trust.269 While the
UTC does not classify trusts as “support” or “discretionary,”270 it does not
change existing law on the question of whether a beneficiary of a thirdparty created trust may compel a distribution271 and thus does not affect
whether the trust assets will be disqualifying available resources for public
benefits eligibility purposes.
Third-party created trusts that raise public benefits qualification issues
take at least three forms: (1) the dispositive provisions specifically preclude the trustee from providing for the beneficiary’s basic support, but
instead authorize the trustee to provide for the beneficiary’s supplemental
MODEST MEANS 39, 41 (2000).
265
The limit on non-exempt assets a Medicaid recipient may have varies from state to
state, but typically is $2,000 for an individual and $3,000 for a couple. LAWRENCE A.
FROLIK & ALISON MCCHRYSTAL BARNES, ELDER LAW CASES AND MATERIALS 335 (3d ed.
2003). Exempt assets include a home, household items and personal effects, a car (subject
to limitations), a burial plot and limited burial fund, and nominal life insurance policies. Id.
266
See 42 U.S.C. § 1396a(a)(17)(B) (2000); 20 C.F.R. §§ 416.120(c)(3),
416.1201(a)(1) (2005); Department of Human Services and Programs Operation Manual
System 01120.000. See also KRUSE, supra note 162, at 52-54; Corcoran, 859 A.2d 533;
Linser v. Office of Attorney Gen., 672 N.W.2d 643, 646 (N.D. 2003).
267
See, e.g., Corcoran, 859 A.2d 533; Tidrow v. Dir., Mo. State Div. of Family Servs.,
688 S.W.2d 9 (Mo. Ct. App. 1985); Metz v. Ohio Dep’t of Human Servs., 762 N.E.2d 1032,
1039 (Ohio Ct. App. 2001). See also KRUSE, supra note 162, at 54 (“To the extent that trust
income, resources, or both are limited in terms of beneficiaries’ access to them, such
income and trust resources are unavailable to the trusts’ beneficiaries and are improperly
considered by the state agencies charged with administering public entitlement funds.”).
268
See, e.g., In re Horton, 668 N.W.2d 208 (Minn. Ct. App. 2003); Eckes v. Richland
County Soc. Servs., 621 N.W.2d 851, 855 (N.D. 2001).
269
See Eckes, 621 N.W.2d at 855; Horton, 668 N.W.2d at 214.
270
See supra Section VI.
271
See supra Section VII.
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Spendthrift and Discretionary Trusts 621
needs;272 (2) the dispositive provisions grant the trustee discretion to
provide for the beneficiary’s support;273 and (3) the dispositive provisions
grant the trustee discretion to make distributions to or for the benefit of the
beneficiary without a support or supplemental needs standard.274
For a third-party created trust with terms that explicitly allow distributions only for the beneficiary’s supplemental needs, case law is clear and
uniform that the assets of the trust will not be considered in determining
the beneficiary’s eligibility for public benefits.275 Moreover, some states
have codified that result.276 In short, “Discretionary supplemental care
trusts providing for the needs of beneficiaries not supplied by way of public benefit programs, created by nonbeneficiary settlors, appear to be legal,
appropriate, and encouraged by both state common law and statutes.”277
For these trusts, the settlor’s intent that the trust assets not be used for the
beneficiary’s support is clear, the beneficiary thus has no right to compel
distributions for the beneficiary’s support, and the trust’s assets therefore
are not available disqualifying resources of the beneficiary.278
The UTC will have no effect on that result. Its treatment of the duties
272
See, e.g., Carnahan v. Ohio Dep’t of Human Servs., 743 N.E.2d 473 (Ohio Ct. App.
2000).
273
See, e.g., Corcoran, 859 A.2d 533.
See, e.g., Simpson v. Kan. Dep’t of Soc. and Rehab. Servs., 906 P.2d 174 (Kan. Ct.
App. 1995). These trusts are often preferred by planners because they provide considerably
more flexibility than do trusts that limit distributions to providing for the beneficiary’s supplemental needs.
275
See KRUSE, supra note 162, at 70-78. An Ohio case, Young v. Ohio Department of
Human Services, 668 N.E.2d 908 (Ohio 1996), was almost the exception, as three members
of the Ohio Supreme Court dissented on the ground that these trusts violate public policy.
Contrary to the dissent in Young, most courts that have considered the public policy implications of supplemental needs trusts have expressly found that the trusts do not violate
public policy. See, e.g., In re Leona Carlisle Trust, 498 N.W.2d 260 (Minn. Ct. App. 1993);
Hecker v. Stark County Soc. Serv. Bd., 527 N.W.2d 226 (N.D. 1994); In re Will of Wright,
107 N.W.2d 146 (Wis. 1961).
276
See KRUSE, supra note 162, at 78-82.
277
Id. at 82.
278
As the Connecticut Supreme Court recently explained,
[u]nder applicable federal law, only assets actually available to a medical
assistance recipient may be considered by the state in determining eligibility for
public assistance programs such as title XIX [Medicaid] . . . . A state may not, in
administering the eligibility requirements of its public assistance program pursuant to title XIX . . . presume the availability of assets not actually available . . . .
Corcoran, 859 A.2d at 545 (quoting Zeoli v. Comm’r of Soc. Servs., 425 A.2d 553 (Conn.
1979)).
274
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and rights of the trustee and beneficiary with respect to discretionary
distributions is limited to its codification of the traditional, common law
requirement that a trustee exercise its discretion in good faith and in
accordance with the terms and purposes of the trust and the interests of the
beneficiaries.279 It does not otherwise address distribution issues, leaving
them to case law.280 More specifically, a 2005 amendment to the comment
to section 814 provides:
[W]hether the trustee has a duty in a given situation to make a
distribution depends on the exact language used, whether the standard grants discretion and its breadth, whether this discretion is
coupled with a standard, whether the beneficiary has other available resources, and, more broadly, the overriding purposes of the
trust. For example, distilling the results of scores of cases, the
Restatement (Third) of Trusts concludes that there is a presumption that the “trustee’s discretion should be exercised in a manner
that will avoid either disqualifying the beneficiary for other benefits or expending trust funds for purposes for which public funds
would otherwise be available.”281
Third-party created trusts under which the trustee is given the discretion to provide for the beneficiary’s support may or may not disqualify the
beneficiary from receiving public assistance. If the settlor directs that the
beneficiary’s support be provided from the trust, without granting the
trustee discretion in that regard, the trust assets clearly will be available
resources of the beneficiary for public benefits eligibility purposes.282 By
contrast, a third-party created trust over which the trustee has broad discretion over distributions, without a support standard, should not be an
279
See UNIF. TRUST CODE § 814(a) (amended 2005), 7C U.L.A. 307 (Supp. 2005).
See also supra Section VII.
280
See UNIF. TRUST CODE § 814 cmt. (amended 2005), 7C U.L.A. 307 (Supp. 2005).
Further, the UTC’s elimination of the common law distinction between “support trusts” and
“discretionary trusts” for creditors rights purposes
does not affect the rights of a beneficiary to compel a distribution. Whether the
trustee has a duty in a given situation to make a distribution depends on factors
such as the breadth of the discretion granted and whether the terms of the trust include a support or other standard.
Id. § 504 cmt., at 256.
281
Id. § 814 cmt., at 307-08 (quoting RESTATEMENT (THIRD) OF TRUSTS § 50 cmt. e
& Reporter’s Notes (Tentative Draft No. 2, 1999)).
282
See, e.g., Nason v. Commonwealth, 520 A.2d 1223 (Pa. Commw. Ct. 1987), vacated, 533 A.2d 435 (Pa. 1987). See also KRUSE, supra note 162, at 51-52.
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Spendthrift and Discretionary Trusts 623
available resource that will disqualify the beneficiary from public
benefits.283 Considerably more difficult are cases in which the trustee is
given discretion over distributions for the beneficiary’s support. In many
discretionary support trust cases, the trust assets have been held not
available to the beneficiary for public benefits qualification purposes (or
insulated from a state creditor seeking reimbursement for the costs of
support it provided), while in many others the trust assets were treated as
disqualifying available resources (or as subject to the state’s reimbursement claim).284
An important—indeed often determinative—factor in resolving such
cases is the court’s analysis of whether the settlor intended the trust to
provide for the beneficiary’s support, or whether the settlor intended that,
if the beneficiary otherwise qualified for public support, the trust assets
would not be available for that purpose.285 While the UTC affirms the
importance of the settlor’s intent in a variety of contexts,286 it does not
address how to interpret the terms of a trust to ascertain the settlor’s intent.
As discussed above, however, in acknowledging that the rights and duties
of the beneficiaries and trustee for discretionary distributions depend on a
variety of factors, including the purposes of the trust, the comment to
section 814 quotes the Third Restatement presumption that the trustee’s
discretion is to be exercised in a way that preserves the beneficiary’s
eligibility for public benefits and does not expend trust funds for purposes
for which public funds otherwise would be available.287 As a result, and
because (1) the UTC treats trusts for the support of beneficiaries as discretionary trusts,288 (2) the UTC does not treat discretionary trusts without
support standards as support trusts,289 and (3) the UTC does not enhance
the ability of beneficiaries of discretionary trusts to compel distributions,290 the UTC should not have an adverse effect on the uncertain
283
See, e.g., Simpson, 906 P.2d at 177-79.
A 2002 analysis of the results of 54 discretionary support trust cases reports that the
trust assets were insulated from the state in 30 cases, and not insulated in 24. See KRUSE,
supra note 162, at 117-28.
285
See KRUSE, supra note 162, at 55-58.
286
See, e.g.,UNIF. TRUST CODE prefatory note (amended 2005), 7C U.L.A. 178 (Supp.
2005). Under Section 105(a), the terms of the trust generally override conflicting provisions
of the Code. See id. § 105(a), at 200.
287
See supra note 281 and accompanying text.
288
See supra notes 153-55 and accompanying text.
289
See supra notes 156-59 and accompanying text.
290
See supra Section VII.
284
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treatment of discretionary support trusts for public benefits eligibility purposes.291
Public benefits cases involving trusts in which the trustee s given
broad discretion over distributions, without a support standard or language
limiting distributions to the beneficiary’s supplemental needs, are rare.292
In the all too common discretionary support trust cases, however, courts
have found that assets in discretionary trusts are considered as available
resources of the beneficiary only to the extent of distributions actually
made.293 Further, as previously noted, many cases in which the trustee was
granted discretion over distributions have held that trusts are not available
resources of the beneficiaries even when a support standard also is included.294 Thus, a purely discretionary trust, without a support standard (or
language limiting distributions to providing for supplemental needs), will
291
The planning lesson is clear:
[W]hen lawyers consider Medicaid eligibility, unless the settlor intends the trust
to be used for the beneficiary’s support, language that specifically authorizes the
trustee to use the entrusted funds for support purposes is inappropriately written.
Beneficiaries of such trusts who are eligible for public medical benefits may or
may not be able to continue receiving public support for basic necessities through
dispensing agencies while at the same time receiving discretionary payments
from privately endowed trusts for other purposes. The discretionary trust corpus
may be deemed available for basic living needs. The case law is not consistent.
The discretionary support trust is, therefore, an unreliable method by which
settlors can continue to provide for their beneficiaries’ additional needs beyond
basic necessities. The funds are at risk held in such trusts. The language
encourages eager state agencies and their employees to attempt its indirect
seizure. “Use it. Reapply (for public funds) when it’s gone” may be their
message.
KRUSE, supra note 162, at 69 (footnotes omitted). The problems discretionary support trusts
create for their beneficiaries who attempt to qualify or remain qualified for public assistance
are serious, but they are neither created nor exacerbated by the UTC.
292
Mr. Kruse’s 2002 comprehensive compilation and analysis of public benefits cases
that involved third-party created trusts characterizes only one—Simpson, 906 P.2d 174—as
involving a trust the terms of which grant the trustee discretion over distributions, but do not
include a support standard and do not limit distributions to the beneficiary’s supplemental
needs. See KRUSE, supra note 162, at 117-28. Perhaps the scarcity of such cases is because
the assets of the trusts clearly are not considered available for public benefits qualification
purposes and generally are not challenged by state agencies. For a case in which the trustee
was granted the “absolute and uncontrolled” discretion over distributions, but with
precatory language indicating the settlor’s “fond hope” that the trustee would provide for
the beneficiaries’ support, see Zeoli v. Comm’r of Soc. Servs., 425 A.2d 553 (Conn. 1979)
(holding that the trust assets were not disqualifying available resources).
293
See, e.g., Linser, 672 N.W.2d at 646-47.
294
See supra note 284.
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Spendthrift and Discretionary Trusts 625
clearly not be counted as an available resource of its beneficiary for public
benefits eligibility purposes. For the reasons set forth in the discussion of
discretionary support trusts, above,295 the UTC will have no effect on that
result.
D. Under the UTC, Would a Public Benefits Provider Be Able to Recover the Costs of the Support It Provided To a Beneficiary of a
Spendthrift Trust from the Trust’s Assets?
No. As previously discussed, the UTC does not include a necessities
provider exception to spendthrift protection.296
E. Under the UTC, Would a Public Benefits Provider Be Able to Recover the Costs of the Support It Provided To a Beneficiary of a Discretionary Trust by Compelling Discretionary Distributions It Could
Reach?
No. Also as previously discussed, there is no exception for claims of
the state or other necessities providers from the UTC’s general prohibition
against creditors of a beneficiary compelling discretionary distributions
they can reach.297
F. If a State Enacts a Statute Making It a Spendthrift Exception Creditor,298 Would a Beneficiary of an SNT Who Also Is Receiving Medicaid Benefits Be Able to Continue Receiving Benefits from the SNT?
Yes. Generally, the state’s claim for Medicaid reimbursement, which
does not arise until after the death of the survivor of the Medicaid recipient and his or her spouse, is to recover its costs from the recipient’s
estate.299 Accordingly, the state would not be a creditor of the Medicaid
recipient during his or her life, and would thus not be able to attach
distributions from the SNT, or otherwise reach it, regardless of whether
the trust terms include a spendthrift provision or the state is a spendthrift
295
See supra notes 282-91 and accompanying text.
See supra notes 42-46 and accompanying text.
297
See supra note 109 and accompanying text.
298
See, e.g., KY. REV. STAT. ANN. § 381.180(6)(c) (LexisNexis 2002).
299
See 42 U.S.C. § 1396p(b)(1) (1993). See also Davis & Kent, UTC & SNTs, supra
note 257, at 58-59. For a case in which the “estate” subject to repayment of the state’s claim
was held to include the assets of a testamentary trust established for the recipient with the
amount that he otherwise would have been entitled to receive as an elective share, see
Estate of DeMartino v. Div. of Med. Assistance and Health, 861 A.2d 138 (N.J. Super. App.
Div. 2004).
296
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exception creditor.
X. DIVORCE AND THE UTC
The UTC addresses divorce only in the context of the rights of a former spouse or child (with a judgment or court order for support or maintenance) of a beneficiary of a spendthrift or discretionary trust to alimony or
child support.300 Its critics claim that it will have a variety of other adverse
consequences to a beneficiary of a third-party created trust who divorces.301
A. Under the UTC, If a Beneficiary of a Third-party Created Trust Divorces, May His or Her Ex-spouse Reach the Beneficiary’s Interest in
the Trust to Satisfy an Alimony Claim?
Yes, if certain conditions are met. As previously discussed, if the exspouse has a judgment or court order for support or maintenance, under
the UTC a spendthrift provision will not protect the beneficiary’s interest.302 The ex-spouse’s remedy is to attach present or future distributions to or for the benefit of the beneficiary, provided that the court may
limit any award “to such relief as is appropriate under the circumstances.”303 If the trust provides for distributions to be at the trustee’s
discretion, the ex-spouse may compel distributions he or she can reach, but
only if (1) he or she has a judgment or court order for support or maintenance and (2) in not making the distribution, the trustee has not complied
with a standard of distribution or has abused a discretion.304 In that case,
the UTC provides for the court to order the trustee to pay to the ex-spouse
“such amount as is equitable under the circumstances but not more than
the amount the trustee would have been required to distribute to or for the
benefit of the beneficiary had the trustee complied with the standard or not
abused the discretion.”305 Also as previously discussed, there is much
support for the UTC’s treatment of an ex-spouse as a spendthrift exception
creditor, but limited support for its allowing an ex-spouse to compel
300
See UNIF. TRUST CODE § 503(b)(1) (amended 2005), 7C U.L.A. 253 (Supp. 2005);
id. § 504(c)(1), at 256.
301
See, e.g., Mark Merric, Carl Stevens, & Jane Freeman, The Uniform Trust Code:
A Divorce Attorney’s Dream, 41 EST. PLAN. 33 (2004).
302
See UNIF. TRUST CODE § 503(b)(1) (amended 2005), 7C U.L.A. 253 (Supp. 2005).
See also supra notes 27-29 and accompanying text.
303
UNIF. TRUST CODE § 503(c) (amended 2005), 7C U.L.A. 253 (Supp. 2005).
304
See id. § 504(c)(1), at 256.
305
Id. § 504(c)(2).
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Spendthrift and Discretionary Trusts 627
discretionary distributions.306
B. Will the UTC Affect Whether a Beneficiary’s Trust Interest Will Be
Divisible in a Divorce?
The UTC does not address the division of property in a divorce. In
most states, generally only “marital property”307 is subject to division.308
Because a divorcing spouse’s interest in a third-party created trust generally will have been received by gift or inheritance, in most states it will be
separate property that is not subject to division, regardless of the extent or
nature of the beneficiary’s interest in the trust.309 In states in which separate property is divisible,310 however, or in which the income from, or
appreciation in, separate property is marital property (and thus divisible),311 part or all of a beneficiary’s interest in a trust may be divisible in a
divorce,312 regardless of whether the UTC has been enacted.
If under applicable state law part or all of a beneficiary’s interest in a
third-party created trust is not protected from division in divorce by virtue
of its being separate property, its divisibility in a given case may depend
on one or more of a multitude of factors, such as (1) whether the beneficiary’s interest is in a trust created by another that is revocable by its still
306
See supra notes 28-29, 117-18 and accompanying text.
The definition of “marital property” will vary by jurisdiction. By way of example,
the Uniform Marriage and Divorce Act, as originally promulgated, defined “marital
property” as “all property acquired by either spouse subsequent to the marriage” other than
property (1) acquired by gift or inheritance, (2) acquired in an exchange for separate
property, (3) acquired after a decree of legal separation, (4) excluded by agreement, or
(5) representing the increase in the value of property acquired before the marriage. UNIF.
MARRIAGE AND DIVORCE ACT § 307 (amended 1973), 9A U.L.A. 289 (1998).
308
See BRETT R. TURNER, EQUITABLE DISTRIBUTION OF PROPERTY § 2.08 (2d ed.
1994).
309
See id. § 6.28.
310
In some states, all of a couple’s assets, without regard to when or how acquired, are
subject to division at divorce. See id. § 2.07. Further, in some of the states in which separate
property generally is not divisible, it may be awarded to the other spouse if, for example,
failure to make an award will result in undue hardship. See id. § 8.12.
311
See id. §§ 5.21-5.22.
312
See, e.g., Davidson v. Davidson, 474 N.E.2d 1137 (Mass. App. Ct. 1985).
307
628
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
living settlor;313 (2) whether the beneficiary’s interest is vested;314
(3) whether the beneficiary’s interest may be defeated by another’s exercise of a power of appointment;315 (4) whether the beneficiary’s interest
may be eliminated by discretionary distributions to another beneficiary, or
by another beneficiary’s power to invade principal;316 (5) whether the beneficiary’s interest is a remainder;317 (6) whether the beneficiary’s interest is
an income interest;318 or (7) whether the beneficiary’s interest is subject to
313
See, e.g., In re Marriage of Gorman, 36 P.3d 211 (Colo. Ct. App. 2001) (holding
that the beneficiary’s vested interest in the trust, though subject to divestment by the settlor’s revocation or amendment, was property subject to division), superseded by statute,
COLO. REV. STAT. § 14-10-113(7)(b) (2004). The new legislation effectively overruled Gorman shortly after it was decided.
314
For a case holding that only vested interests in trust are divisible, see In re Marriage
of Beadle, 968 P.2d 698, 705 (Mont. 1998). See also McGinley v. McGinley, 565 A.2d
1220 (Pa. Super. Ct. 1989). Whether an interest is vested in the traditional property law
sense, however, should not be determinative of its divisibility in divorce. For example, a
gift “to my spouse, S, for life, remainder to my child, C, if C survives my spouse; if not to
X” creates a contingent remainder in C, while a gift “to my spouse, S, for life, remainder to
my child, C, provided that if C does not survive S, remainder to X” creates a vested
remainder, subject to divestment, in C. See DUKEMINIER ET AL., supra note 221, at 627-28.
Because C’s interest in the two examples is not substantively different, they should not be
treated differently in a divorce. See also Stern v. Stern, 331 A.2d 257, 262 (N.J. 1975)
(“[T]he concept of vesting should probably find no significant place in the developing law
of equitable distribution.”); S.L. v. R.L., 774 N.E.2d 1179, 1182 (Mass. App. Ct. 2002)
(treating beneficiary’s remainder interest as divisible property despite being contingent on
the beneficiary surviving her mother); TURNER, supra note 308, § 6.28; Marc A. Chorney,
Interests in Trusts as Property in Dissolution of Marriage: Identification and Valuation 40
REAL PROP. PROB. & TR. J. 1, 6-11 (2005).
315
See, e.g., S.L., 774 N.E.2d at 1182 (holding that beneficiary’s parent’s power to appoint the trust estate to others precluded treating beneficiary’s interest as property subject
to division). See also Chorney, supra note 314, at 8-11.
316
See, e.g., In re Marriage of Balanson, 25 P.3d 28, 40-41 (Colo. 2001) (holding that
beneficiary’s remainder interest was property subject to division despite her father, the income beneficiary and trustee, having the power to distribute principal to himself for his
support, care, and maintenance); Davidson, 474 N.E.2d at 1143-44 (holding that beneficiary’s remainder interest in a trust created by his father was divisible despite the trustee’s
having the “uncontrolled discretion” to invade principal for his mother).
317
“The general rule is . . . that the remainder interest in a trust constitutes property
which can be divided upon divorce.” TURNER, supra note 308, § 6.28, at 448. However, “[a]
small number of decisions holds that remainder interests are not property.” Id. at n.663.
318
Compare In re Marriage of Guinn, 93 P.3d 568, 569 (Colo. Ct. App. 2004) (not
treating mandatory income interest as property subject to division), with Fox v. Fox, 626
N.W.2d 660 (N.D. 2001) (treating mandatory income interest as property subject to division). See also Marriage of Jones, 812 P.2d 1152 (holding that because beneficiary’s
interest in a discretionary trust was not property—marital or separate—income distributed
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Spendthrift and Discretionary Trusts 629
the discretion of the trustee and thus is treated as an expectancy, rather
than as divisible property.319
While the enactment of the UTC would not affect the application of
most of the factors listed in the preceding paragraph, critics argue that a
beneficiary’s discretionary interest in a trust would more likely be divisible under the UTC than under non-UTC law.320 Commentators have
observed that a Colorado case, Marriage of Jones,321 illustrates the protection the common law affords discretionary trust interests in divorce that
would be lost by enactment of the UTC.322 Jones was a divorce proceeding
involving a testamentary trust the wife’s mother had created.323 The
trustees—the testator’s husband (the wife’s father) and a bank—were
granted the “uncontrolled discretion” to make distributions of income and
principal as they determined necessary for the health, welfare, comfort,
support, maintenance and education of the testator’s husband, the wife,
and the wife’s descendants.324 Unless earlier terminated by discretionary
distributions, the trust was to terminate, at the earliest, at the wife’s
death.325 The remainder beneficiaries were the wife’s descendants, if any,
or the testator’s heirs.326 The court held that because the wife’s receipt of
distributions was subject to the “uncontrolled” discretion of the trustees,
her interest in the trust was not property subject to division.327
UTC critics argue that the UTC would change the result in cases like
to beneficiary at the trustee’s discretion was a non-divisible gift); Friebel v. Friebel, 510
N.W.2d 767 (Wis. Ct. App. 1993).
319
See, e.g., Marriage of Jones, 812 P.2d 1152; In re Rosenblum, 602 P.2d 892 (Colo.
Ct. App. 1979); Hawkins v. Hawkins, 526 A.2d 872 (Conn. Ct. App. 1987); In re Eddy, 569
N.E.2d 174 (Ill. App. Ct. 1991).
320
See Merric, Stevens, & Freeman, supra note 301, at 47.
321
812 P.2d 1152.
322
See Merric, Stevens, & Freeman, supra note 301, at 47.
323
Marriage of Jones, 812 P.2d at 1153.
324
See id.
325
See id.
326
See id.
327
See id. at 1157. In Massachusetts, a divorcing spouse’s interest in a discretionary
trust may not be excluded from division:
[W]hile a judge is not necessarily precluded from including within the marital
estate . . . a party’s beneficial interest in a discretionary trust, because of the peculiar nature of such a trust, the trust instrument and other relevant evidence must
be examined closely to determine whether that party’s interest is too remote or
speculative to be so included.
D.L. v. G.L., 811 N.E.2d 1013, 1023 (Mass. App. Ct. 2004) (citation omitted).
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
Jones.328 The argument focuses on (1) the UTC’s elimination of the distinction between discretionary and support trusts, (2) the UTC’s standard
of review of the trustee’s exercise of discretion, and (3) the UTC’s acknowledgment of the right of a beneficiary of a discretionary trust to sue
to compel distributions if the trustee abuses its discretion or fails to comply with a standard for distribution.329 The rationale for the court’s decision in Jones was that the wife had no right to receive current or future
distributions; rather, distributions were to be made at the sole discretion of
the trustee.330 The UTC’s elimination of the distinction between discretionary and support trusts for purposes of sections 501 and 504, which does
not affect the duties and rights of the trustee and the beneficiaries with
respect to discretionary distributions,331 should have no effect on that
analysis.332 Further, subsection 814(a)’s standard of judicial review for the
exercise of discretion by a trustee is not substantively different from the
four standards333 referred to in Jones,334 and thus also should not have
affected its result. Finally, a beneficiary of a discretionary trust always has
had the ability to bring an action to compel distributions for abuse of
discretion or failure to comply with a standard of distribution.335 Thus, the
UTC’s statement in section 504(d) that the remainder of section 504 does
328
See Merric, Stevens, & Freeman, supra note 301, at 47.
See id.
330
See Marriage of Jones, 812 P.2d at 1156-57.
331
See UNIF. TRUST CODE § 504 cmt. (amended 2005) 7C U.L.A. 56 (Supp. 2005). See
also supra Section VI.
332
Note, however, that the discretionary trust in Jones included a support standard,
and that in many jurisdictions, in litigation involving public benefits, discretionary support
trusts have been held to create enforceable standards for distributions for support. See supra
note 284 and accompanying text.
333
See supra note 210.
334
See supra Section VII. Subsection 814(a) requires trustees to act in good faith and
in accordance with the terms and purposes of the trust and the interests of the beneficiaries.
UNIF. TRUST CODE § 814(a) (amended 2005), 7C U.L.A. 307 (Supp. 2005). As discussed
supra at notes 201-17 and accompanying text, language like that used in Jones to describe
the minimum standard of conduct required of a trustee with discretionary powers is another
way of requiring that a trustee act in good faith. Furthermore, three of the four different formulations of the minimum standard of conduct described in Jones include requirements that
the trustee not abuse its discretion or act from an improper motive. See supra note 210. A
trustee who does not exercise its discretion in accordance with the purposes of the trust or
the interests of the beneficiaries (as described in the terms of the trust, see UNIF. TRUST
CODE § 103(8) (amended 2005), 7C U.L.A. 192 (Supp. 2005)), presumably would have
abused its discretion or acted from an improper motive.
335
See supra notes 182-84 and accompanying text.
329
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Spendthrift and Discretionary Trusts 631
not limit the beneficiary’s rights in that area also would have had no effect
on the result in Jones.
C. Will the UTC Affect Whether a Beneficiary’s Interest in a Discretionary Trust, Even if Not Divisible, Will Be Considered in Dividing the
Couple’s Property?
It should not. In making an equitable division of a divorcing couple’s
property, some states consider the spouses’ economic circumstances.336
For example, in Jones, discussed above, the court held that the wife’s discretionary interest in her mother’s trust was not property subject to division, but was an economic circumstance to be considered in equitably
dividing the couple’s marital property.337 Again based on the claim that the
UTC creates expanded rights to distributions in beneficiaries of discretionary trusts, the argument has been made that a beneficiary’s interest in a
discretionary trust under the UTC will be more valuable than it otherwise
would, thus adversely affecting the beneficiary in the division of property
when the couple’s economic circumstances are taken into consideration.338
Because the UTC does not affect the duties and rights of the trustee and
beneficiaries with respect to discretionary distributions,339 that should not
be the case.
D. Will the UTC Affect Whether a Beneficiary’s Interest in a Discretionary Trust Will Be Considered For Purposes of Awarding Spousal
Maintenance or Child Support Against the Beneficiary?
Among the factors that may affect an award of spousal maintenance or
child support in a divorce are the financial resources of the spouses.340
UTC critics also argue that a beneficiary of a discretionary trust in a UTC
jurisdiction will, by virtue of the trust interest, have income imputed to the
beneficiary for purposes of awarding spousal maintenance or child support
against him or her.341 Again, the argument is based on the claim that
336
See, e.g., COLO. REV. STAT. § 14-10-113(1)(c) (West 2004); MO. ANN. STAT.
§ 452.330.1(1) (West 2003). See also Athorne v. Athorne, 128 A.2d 910 (N.H. 1957). The
future financial needs of the spouses also is a factor that commonly is considered in equitably dividing a couple’s property. See TURNER, supra note 308, § 8.08.
337
See Marriage of Jones, 812 P.2d at 1158.
338
See Merric, Stevens, & Freeman, supra note 301, at 49.
339
See supra Section VII.
340
See, e.g., UNIF. MARRIAGE AND DIVORCE ACT § 308 (amended 1973), 9A U.L.A.
446-47 (1998); id. § 309, at 573.
341
See Merric, Stevens, & Freeman, supra note 301, at 49-50. While not based on an
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40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
beneficiaries of discretionary trusts under the UTC have expanded rights
to compel distributions, and again, the response is that they do not.342
XI. BANKRUPTCY AND THE UTC
Another concern UTC critics have expressed is that it will have an
adverse effect on trust beneficiaries who go through bankruptcy.343 Because (1) most trust instruments include spendthrift provisions,344
(2) bankruptcy law respects spendthrift trusts that are effective under state
law,345 and (3) spendthrift trusts (with limited exceptions) are effective
under the UTC,346 the UTC should have little or no effect on beneficiaries
of third-party created trusts in the bankruptcy context.
imputation of income theory, a pre-UTC case held that although the discretionary nature of
a beneficiary’s interest in the principal of a trust protected it from being reached by his
spouse, the discretionary interest could be considered in determining both alimony and the
division of property. See Athorne, 128 A.2d 910.
342
See supra Section VII. The argument is also based on a recent Massachusetts case,
Dwight v. Dwight, 756 N.E.2d 17 (Mass. App. Ct. 2001). See Merric, Stevens, & Freeman,
supra note 301, at 50. Dwight, however, does not support that argument. In Dwight, which
was not decided under the UTC, the spouses entered into a separation agreement under
which the wife was expressly authorized to bring an action for alimony if, among other
things, the husband received “a substantial inheritance which increases his income.”
Dwight, 756 N.E.2d at 18-19. Thereafter, the husband’s father died and left approximately
$435,000 to a discretionary support trust for the husband and his issue. Id. at 19-20. The
appellate court first affirmed the trial court’s determination that the gift, though left to the
discretionary support trust for the husband and his issue, constituted a substantial inheritance within the meaning of the separation agreement. Id. at 20-21. Next, the court also
affirmed the lower court’s finding that the substantial inheritance increased the husband’s
income, even though only one $7,000 distribution had been made to the husband from the
trust over a several-year period. Id. at 21. The appellate court determined that finding,
which was based on the fact that the husband had told the trustee that he did not want any
income from the trust and on the broad purposes for which discretionary payments could be
made to the husband, was not clearly erroneous. Id. The court also noted that under
Massachusetts law, if the trustee had determined that the husband needed distributions from
the trust, the trustee would have been under a duty to provide them. Id. n.5.
343
See, e.g, Merric & Oshins, supra note 1, at 484-85.
344
See supra note 100 and accompanying text.
345
See 11 U.S.C. § 541(c)(2) (2000).
346
See UNIF. TRUST CODE § 502 (amended 2005), 7C U.L.A. 251-52 (Supp. 2005); id.
§ 503, at 253.
FALL 2005
Spendthrift and Discretionary Trusts 633
A. Under the UTC, May Creditors of a Beneficiary of a Spendthrift Trust
Reach the Beneficiary’s Interest In the Trust Through a Bankruptcy
Proceeding?
Generally, no. Under the Bankruptcy Code, a trust interest that is not
alienable under applicable state law does not become a part of the bankruptcy estate.347 Under the UTC, a beneficiary’s interest in a spendthrift
trust is not alienable (except with respect to exception creditors).348
B. If the Terms of the Trust Do Not Include a Spendthrift Provision,
Would a Bankrupt Beneficiary’s Interest In a Third-party Created
Trust Governed By the UTC Become Part of the Bankruptcy Estate?
Generally, a debtor’s bankruptcy estate includes all interests in property, including equitable interests in trusts, owned by the debtor at the
time of bankruptcy filing.349 The exception that protects spendthrift trusts,
however, is not limited to trusts that include spendthrift provisions. Rather, the exception provides: “A restriction on the transfer of a beneficial
interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.”350 If a beneficiary’s interest in a third-party created trust is subject to the trustee’s
discretion, including to make distributions for the beneficiary’s support,
the interest may be protected from becoming a part of the beneficiary’s
bankruptcy estate even if the terms of the trust do not include a spendthrift
provision.351 Because decisions so holding are based on the beneficiaries
of the trusts being unable to compel distributions,352 and because the UTC
does not change the duties and rights of the trustee and beneficiaries with
347
See 11 U.S.C. § 541(c)(2) (2000). For two recent cases under which this provision
protected debtors’ interests in spendthrift trusts, see In re Wachter, 314 B.R. 365 (Bankr.
E.D. Tenn. 2004) and In re Spencer, 306 B.R. 328 (Bankr. C.D. Cal. 2004).
348
See UNIF. TRUST CODE § 502(c) (amended 2005), 7C U.L.A. 252 (Supp. 2005).
349
See 11 U.S.C. § 541(a)(1) (2000).
350
Id. § 541(c)(2).
351
See, e.g., In re Britton, 300 B.R. 155 (Bankr. D. Conn. 2003); In re Knight, 164
B.R. 372 (Bankr. S.D. Fla. 1994); In re Pechenec, 59 B.R. 899 Bankr. (D. Kan. 1986). In
dictum, however, in a case that involved the denial of discharge to a debtor who did not
meet the Bankruptcy Code’s disclosure requirements, a bankruptcy court stated that the
protection afforded by section 541(c)(2) is limited to spendthrift trusts and is not available
to discretionary trusts without spendthrift provisions. See In re Katz, 203 B.R. 227 (Bankr.
E.D. Pa. 1996).
352
See Knight, 164 B.R. at 376 n.2; Pechenec, 59 B.R. at 904-05; Britton, 300 B.R. at
158-59.
634
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
respect to discretionary distributions from third-party created trusts,353 the
same protection in bankruptcy for discretionary interests in non-spendthrift trusts should be available under the UTC as is available under nonUTC law. Clearly, though, the simplest and safest course for obtaining
protection in bankruptcy for a beneficiary’s interest in a third-party created
trust is to include a spendthrift provision in the instrument.
XII. CONCLUSION
Article 5 of the UTC, dealing with the rights of creditors of trust beneficiaries and settlors, and subsection 814(a), describing the standard to
which trustees will be held in the exercise of discretion, regardless of its
breadth, have raised a number of concerns among some trusts and estates
lawyers. A number of amendments to the UTC and its comments have
been made since its promulgation in 2000 that address many of those
concerns:
1. The definition of “power of withdrawal” in section 103(11) was
amended to avoid a beneficiary/trustee, whose power to distribute
for the beneficiary/trustee’s own benefit is limited by an ascertainable standard, from being treated as a settlor of a revocable trust
for creditors’ rights purposes under section 505(b)(1).354
2. Section 501 and its comment were amended to make it clear that
its broad remedies are available to a creditor only if the terms of
the trust do not include a spendthrift provision, or the provision
does not apply to a particular beneficiary’s interest.355
3. The comment to section 501 also was amended to (1) acknowledge that a beneficiary’s interest may be too indefinite or contingent for a creditor to reach, or may qualify for an exemption under
the jurisdiction’s general creditor exemption statutes, (2) delete a
paragraph describing creditor remedies and procedures, and
(3) delete the reference to the beneficiary’s support needs in its
discussion of the court’s ability to limit a creditor’s award as appropriate under the circumstances.356
4. Section 503 was amended to specify that the remedy under the
UTC for a spendthrift exception creditor is limited to the attach353
See supra Section VII.
See UNIF. TRUST CODE § 103(11) (amended 2005), 7C U.L.A. 192 (Supp. 2005).
355
See id. § 501 & cmt., at 250-51.
356
Compare id. § 501 cmt. with UNIF. TRUST CODE § 501 cmt. (2004), 7C U.L.A. 25051 (Supp. 2005) (amended 2005).
354
FALL 2005
5.
6.
7.
8.
Spendthrift and Discretionary Trusts 635
ment of present or future distributions to or for the benefit of the
beneficiary,357 and to authorize the court to limit a creditor’s
award as appropriate under the circumstances.358
Section 504 was amended to clarify that most creditors of a beneficiary may not compel discretionary distributions even if the
beneficiary/debtor is the trustee, if distributions for the beneficiary/trustee are limited by an ascertainable standard and the creditor otherwise may not reach the interest.359
The comment to section 504 was amended to clarify that section
504’s elimination of the distinction between discretionary and
support trusts for creditors’ rights purposes does not affect the duties and rights of the trustee and beneficiary with respect to distributions.360
Section 506 was amended to add a narrow definition of a “mandatory distribution” from a trust that a creditor may reach if it is
not made within a reasonable time after its designated distribution
date.361
The comment to section 814 was amended to acknowledge that
other than requiring trustees to exercise discretionary powers in
good faith and in accordance with the terms and purposes of the
trust and the interests of the beneficiaries, the UTC does not address the duties and rights of the trustee and beneficiaries with
respect to discretionary distributions. Rather, the comment states
that those duties and rights will continue to be governed by case
law and factors such as the precise language used in the instrument, whether and if so the extent to which discretion is granted,
whether a standard for distributions is provided, whether the
beneficiary has other resources, and the overriding purposes of the
trust.362
These amendments have improved the UTC and addressed many concerns that have been raised about its creditors’ rights provisions. Generally, for third-party created spendthrift and discretionary trusts, the UTC
provides as much or more protection to beneficiaries’ interests than does
357
See UNIF. TRUST CODE § 503(c) (amended 2005), 7C U.L.A. 253 (Supp. 2005).
See id.
359
See id. § 504(e), at 256.
360
See id. § 504 cmt., at 256-57.
361
See id. § 506(a), at 261.
362
See id. § 814 cmt., at 307-09.
358
636
40 REAL PROPERTY, PROBATE AND TRUST JOURNAL
the common law. By not recognizing an exception for the claims of necessities providers,363 narrowing the exception for government claimants,364 and codifying an exclusive list of exception creditors that bars tort
claimant and other public policy exceptions,365 the UTC has strengthened
spendthrift protection. Further, as a general rule, no creditor of a beneficiary, even one who has provided support to the beneficiary, may compel
discretionary distributions it can reach.366 The only exception to that rule is
for child and spousal support claimants, and their ability to compel discretionary distributions is dependent on (1) their having a judgment or court
order for support or maintenance and (2) the trustee’s failure to make
distributions being an abuse of discretion or a failure to comply with a
standard for distributions.367
The UTC will not increase the ability of beneficiaries of third-party
created trusts to compel discretionary distributions.368 Requiring a trustee
to act in good faith and in accordance with the terms and purposes of the
trust and the interests of the beneficiaries, as the UTC does in subsection
814(a), is a codification of the common law.369 The new comment to section 504 explicitly notes that the UTC’s elimination of the distinction between discretionary and support trusts for purposes of sections 501 and
504 has no effect on the rights and duties of the beneficiaries and the
trustee with respect to distributions.370 Similarly, the new comment to
section 814 explicitly provides that other than requiring the trustee to act
in good faith and in accordance with the terms and purposes of the trust
and the interests of the beneficiaries, subsection 814(a) does not address
distribution issues, leaving them to case law, and affirms that those issues
will continue to be dependent on factors such as whether the trustee is
granted discretion, the extent of discretion granted, and whether the
instrument includes a support or other standard.371
Qualification for public benefits of a beneficiary of a special or sup-
363
See id. § 503(b), at 253.
See supra notes 37-38 and accompanying text.
365
See UNIF. TRUST CODE § 502(c) (amended 2005), 7C U.L.A. 252 (Supp. 2005); id.
§ 503(b), at 253.
366
See id. § 504(b), at 256.
367
See id. § 504(c)(1).
368
See supra Section VII.
369
See supra notes 201-42 and accompanying text.
370
See UNIF. TRUST CODE § 504 cmt. (amended 2005), 7C U.L.A. 256-57 (Supp.
2005).
371
See id. § 814 cmt., at 307-09.
364
FALL 2005
Spendthrift and Discretionary Trusts 637
plemental needs trust will not be adversely affected by the UTC.372 While
beneficiaries of discretionary support trusts have been denied public benefits in many cases in non-UTC jurisdictions,373 the new comment to section 814 may help avoid that result by its reference to the Third Restatement’s presumption that the trustee’s discretion should not be exercised in
a way that disqualifies the beneficiary from benefits or for purposes for
which public funds otherwise are available.374 Further, from a planning
perspective, the SNT discretionary support trust problem is easily avoided
by drafting trusts either as supplemental needs trusts or as discretionary
trusts without support standards.
In the area of divorce, most or all of a beneficiary’s interest in a thirdparty created trust will be protected separate property in most states.375 Because a beneficiary has no greater rights to receive distributions under the
UTC than under non-UTC law,376 if the interest is discretionary it may also
be protected from division on that ground under the UTC to the same
extent as under non-UTC law.377 A discretionary interest may be an economic circumstance that will affect the division of a couple’s divisible
assets and whether, and if so in what amount, a spousal maintenance or
child support award will be issued.378 That is the case under existing nonUTC law, and enactment of the UTC should not affect such divisions or
awards one way or the other.
Finally, a beneficiary’s interest in a discretionary, non-spendthrift trust
may be protected in bankruptcy under the UTC to the same extent as under
non-UTC law.379 The issue will rarely arise, however, as spendthrift provisions, which are routinely used in third-party created trusts, are effective
to exclude from the beneficiary’s bankruptcy estate a beneficiary’s interest
in a third-party created trust.380
In short, the UTC does not adversely affect the protections from creditors’ claims that third-party created spendthrift and discretionary trusts
have traditionally provided to their beneficiaries.
372
See supra Section IX.
See supra note 284 and accompanying text.
374
See UNIF. TRUST CODE § 814 cmt. (amended 2005), 7C U.L.A. 307-09 (Supp.
2005).
375
See supra notes 307-12 and accompanying text.
376
See supra Section VII.
377
See supra notes 320-35 and accompanying text.
378
See supra notes 336-42 and accompanying text.
379
See supra notes 349-53 and accompanying text.
380
See 11 U.S.C. § 541(c)(2) (2000).
373
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