Ohio Trust Code
Report on Proposed Amendments and Recommendations
Alan Newman, Reporter for the Joint Committee
July 20, 2007
The following is a list and brief discussion of amendments to the Ohio Trust Code that have been proposed by bankers and lawyers since the OTC’s enactment last summer. The list is presented in the order of the section numbers of the Revised Code to which they apply. When a proposal involves amending more than one section, it is listed under each section. The discussion is presented once, with the other listing or listings cross referencing to the paragraph number in which it is discussed.
In May of 2007, the co-chairs of the Joint Committee, Bob Brucken and Joanne Hindel, and I met to review the list and develop a recommendation for each proposal for the Joint Committee’s consideration. That meeting resulted in an earlier version of the list, dated June 18, 2007, that was distributed to the members of the Joint Committee and to others who had submitted suggestions for amendments, and posted on the OSBA’s website. On July 11, 2007, a conference call was held to discuss the June 18 list and its recommendations. The co-chairs of the Joint Committee and I participated in the call, along with many members of the Joint Committee and others who were interested in the amendment proposals. The participants in that call decided to make changes to some of the recommendations that were included on the June 18 list. This report revises the recommendations from the June 18 list in accordance with the July 11 conference call.
Included for each proposal in the list below is the original recommendation from the June 18 list for items the conference call participants decided not to change, and the new recommendation for items the participants decided to change. Generally, recommendations to make suggested changes do not include specific, proposed statutory language. In some instances, a proposed amendment included possible statutory language provided by the person who proposed the change. Recommendations to make those changes are not meant to include recommendations to adopt the specific, proposed language. Rather, if the Joint Committee decides to make any such changes, specific statutory language to do so then will be drafted.
1. §§2109.022 and 5815.25 (power to direct).
Prior to enactment of the OTC, the Revised Code addressed the subject of a fiduciary not being liable when others had a power to direct in two statutes, §§2109.022 and 1339.43. The two statutes were identical, except that §2109.022 defined fiduciary, in part, to mean “a trustee under any testamentary or other trust,” while §1339.43 defined the term, in part, to mean, “a trustee under any testamentary, inter vivos, or other trust.” With the enactment of the OTC, §1339.43 was moved and renumbered to §5815.25, while §2109.022 was not changed. The question is whether §2109.022 should be repealed, or whether, given its location in Chapter 2109, it should be retained even though duplicative of §5815.25.
RECOMMENDATION: Repeal §2109.022.
2. §5801.01 (definitions of “discretionary distribution,” “discretionary trust,” and “mandatory distribution”).
The OTC defines “mandatory distribution” in §5801.01(M) as follows:
(M) “Mandatory distribution” means a distribution of income or principal, including a distribution upon termination of the trust, that the trustee is required to make to a beneficiary under the terms of the trust. Mandatory distributions do not include distributions that a trustee is directed or authorized to make pursuant to a support or other standard, regardless of whether the terms of the trust provide that the trustee “may” or “shall” make the distributions pursuant to a support or other standard.
The OTC does not include definitions of “discretionary distribution” or “discretionary trust.”
Under §5808.14(A), the OTC provides a standard of review for “discretionary trusts.” Generally, it requires that trustees exercise discretionary powers reasonably, in good faith, and in accordance with the terms and purposes of the trust and the interests of the beneficiaries. An exception is provided for wholly discretionary trusts (WDTs). For WDTs, a reasonableness standard is not to be applied to the exercise of discretion by the trustee. Section 5808.14(A) does not limit the WDT exception to discretionary distribution decisions.
The suggestions are to add definitions of “discretionary distribution” and “discretionary trust,” and to revise the definition of “mandatory distribution,” along the following lines:
A “discretionary distribution” is one that a Trustee is authorized to make under an ascertainable or unascertainable standard, regardless whether the word “shall” or “may” or some other wording is used in reference to the distribution, or in a Trustee’s absolute discretion without standards. A “discretionary trust” is so as to any current beneficiary if at the time of determination only discretionary distributions may be made to such beneficiary. The term has no application to any powers, authorities, or discretions of the Trustee relating to administrative or procedural matters or any other subject except distributions and the capacity of beneficiaries of distributions from time to time.
A “mandatory distribution” is one that the Trustee is currently or will be required to make upon the occurrence of some event, the lapse of time, the fulfillment of some condition, absent the occurrence of other contingencies which would prevent the distribution or render it discretionary, including distributions upon the event causing termination of a trust. The term excludes all discretionary distributions.
A copy of a February 2007 memorandum discussing this suggestion is attached as Attachment 1 (Problem 1). For an alternative suggestion to the problem of §5808.14(A) not limiting the WDT exception to the normal judicial standard of review for discretionary trusts to the trustee’s discretionary distribution decisions, see paragraph 61, below.
RECOMMENDATION: Do not make these changes.
3. §5801.01 (forfeiture and protective provisions; proposed new definition of “discretionary distribution”).
The OTC does not expressly address the question of whether trust terms (forfeiture and protective provisions) changing a beneficiary’s interest in a trust from an otherwise mandatory one to a discretionary one, or from a discretionary one pursuant to a standard to a purely discretionary one, will be effective if challenged. The argument that such provisions continue to be effective under the OTC is that (i) they were effective under pre-OTC law (see, e.g., Domo v. McCarthy, 612 N.E.2d 706 (Ohio 1993)); (ii) trust terms, rather than the OTC, apply unless they are overridden by a mandatory rule (§5801.04(B)); (iii) the OTC’s mandatory rules do not prohibit the settlor from providing for a beneficiary’s interest to change if a specified circumstance occurs that would trigger application of forfeiture and protective provisions; and (iv) the OTC is supplemented by the common law of trusts and principles of equity (§5801.05). However, the OTC does not expressly authorize forfeiture and protective provisions, and one of its mandatory rules is that trust terms may not alter “the effect of a spendthrift provision and the rights of certain creditors and assignees to reach a trust as provided in Chapter 5805. of the Revised Code.” As a result, a suggestion has been made to include in the proposed new definition of “discretionary distribution” (see paragraph 2, above), language to address this issue. For example:
Nothing in Chapters 5801 through 5811 shall prevent the conversion of mandatory distributions to matters within the discretion or absolute discretion of a Trustee, whether by reason of the occurrence of an event, any disability or vulnerability of the beneficiary, other determinations of the Trustee relating to the capacity of a beneficiary, or otherwise.
A copy of a February 2007 memorandum discussing this suggestion is attached as Attachment 1 (Problem 2).
RECOMMENDATION: Do not make this change.
4. §5801.01(Y)(1)(e) (definition of “wholly discretionary trust”).
A “wholly discretionary trust” (WDT) is defined in §5801.01(Y). Under division (Y)(1)(e), the terms of such a trust may not “provide any standards to guide the trustee in exercising its discretion to make distributions to or for the benefit of the beneficiary.” (Under division (5), however, the terms of a WDT that is a supplemental needs trust may include (i) “precatory language regarding its intended purpose of providing supplemental goods and services to or for the benefit of the beneficiary, and not to supplant benefits from public assistance programs” and (ii) “a prohibition against providing food, clothing, and shelter to the beneficiary.”) A suggestion has been made to amend (Y)(1)(e) to include language along the lines of the following bold, italicized language:
(Y)(1) “Wholly discretionary trust” means a trust to which all of the following apply:…
(e) The terms of the trust do not provide any standards to guide the trustee in exercising its discretion to make distributions to or for the benefit of the beneficiary. Precatory language and non-exclusive lists of factors or purposes to be considered in a matter do not constitute standards for the exercise of a discretion.
A copy of a February 2007 memorandum discussing this suggestion is attached as Attachment 1 (Problem 3).
RECOMMENDATION: Do not make this change.
A second suggested change to the definition of a WDT is to exclude “clothing” from the provision in division (Y)(5)(b) that allows the terms of a WDT that is a supplemental needs trust to include a “prohibition against providing food, clothing, and shelter to the beneficiary.”
RECOMMENDATION: Make this change.
5. §§5801.01(Y)(4) and 5805.06(B)(2) (powers of withdrawal).
The OTC includes provisions favorable to the use of Crummey and 5 x 5 powers in the definition of “wholly discretionary trust” (§5801.01(Y)(4)) and in its provisions that generally treat the holder of a power of withdrawal as the settlor of a revocable trust for creditors’ rights purposes (§5805.06(B)(2)). A concern has been expressed that these provisions inappropriately insulate assets of the rich. A suggestion has been made to delete them.
A copy of a February 2007 memorandum discussing this suggestion is attached as Attachment 1 (Problem 34).
RECOMMENDATION: Do not make this change.
6. §§5801.01 and 5808.13 (reporting to beneficiaries whose interests are subject to an inter vivos power of appointment).
See paragraph 58, below.
7. §5801.01(H) and (I) (guardian of person or estate).
A number of provisions of the OTC reference a guardian of the person or estate. For example, under §5803.03(A) and (B), a guardian of the person or estate may represent and bind the ward or the estate the guardian controls. The OTC does not provide that such a guardian who has been appointed by an Ohio court must act in accordance with Chapter 2111 of the Revised Code. A suggestion has been made that the OTC should include such a provision. One means for doing so might be to define the terms “guardian of the person” and “guardian of the estate” to refer to one who has been appointed under Chapter 2111 or the guardianship statutes of another jurisdiction. For example, the terms could be defined as follows:
(H) “Guardian of the estate” means a guardian appointed by a court to administer the estate of any individual or to serve as conservator of the property of an individual eighteen years of age or older under Chapter 2111 of the Revised Code or other applicable law.
(I) “Guardian of the person” means a guardian appointed by a court to make decisions regarding the support, care, education, health, and welfare of any individual or to serve as conservator of the person of an individual eighteen years of age or older under Chapter 2111 of the Revised Code or other applicable law. “Guardian of the person” does not include a guardian ad litem.
An alternative approach that would more directly require a guardian acting under the OTC to do so in accordance with its otherwise applicable duties would be to add a new section to the OTC that so provides. For example:
5801.11 Guardian of the Estate or Person.
A guardian of the estate or person shall act under Chapters 5801. to 5811. of the Revised Code in accordance with its duties under Chapter 2111. of the Revised Code or other applicable law.
RECOMMENDATION: Add a new §5801.11 to the OTC, along the following lines:
5801.11 Guardian of the Estate or Person.
A guardian of the estate or person, in acting under Chapters 5801. to 5811. of the Revised Code, shall comply with the guardian’s duties under Chapter 2111. of the Revised Code or other applicable law.
8. §5801.02 (scope of OTC).
Section 5801.02 addresses the scope of the OTC. A suggested amendment is to add the following bold, italicized language:
Except as otherwise provided in any provision of Chapters 5801. to 5811. of the Revised Code, those chapters apply to charitable and noncharitable inter vivos express trusts and to trusts created pursuant to a statute, judgment, or decree that requires the trust to be administered in the manner of an express trust. Chapters 5801. to 5811. of the Revised Code apply to charitable and noncharitable testamentary trusts to the extent provided by section 2109.69 of the Revised Code.
A copy of a February 2007 memorandum discussing this suggestion is attached as Attachment 1 (Problem 4).
RECOMMENDATION: Make this change.
9. §§5801.04(B)(8) and (9), 5801.09, 5808.13, and 5811.03(A)(1) (applicability of notice provisions to existing trusts).