Memorandum

To: New Jersey Law Revision Commission

From: John JA Burke

Date: February 11, 2008

Re: Uniform Trust Code

Introduction

This memorandum introduces consideration of a recommendation of the National Conference of Commissioners on Uniform State Laws (NCCUSL). The Uniform Trust Code (2000 version) [UTC 2000] was the product of several years of drafting and was motivated by the objective of providing a comprehensive Trust Code for all states, as several prominent bodies had determined that the law of trusts was thin in some states, non-uniform in certain matters, and scattered throughout statutory law. The UTC 2000 primarily was modeled upon the California Trust Code, deemed the best state codification of trust law, and the Restatement (3rd) of Trusts. Approximately 20 states have enacted UTC 2000. New Jersey has not adopted the Act. Since its promulgation in 2000, the UTC has undergone several revisions and amendments. The current version is the UTC 2005.

This document makes no pretense of presenting a deep analysis of the UTC 2005 or, if adopted, how it would alter New Jersey law. Rather, it highlights main features of the UTC 2005. Further analysis of the proposal and further research into the statutory and case law of New Jersey governing trusts is necessary to make an informed decision on this complex issue. The UTC and its commentary run 179 pages.

Select Background Issues of UTC 2000

1. Drafting Process. The drafting committee consisted of the Uniform Law Commissioners; the reporter was David M. English, the W.F. Fratcher Missouri Endowed Professor of Law at the University of Missouri-Columbia. Major groups participating in the process included: the American Bar Association; the American College of Trust and Estate Counsel; the American Bankers Association; and the California and Colorado State bars.

2. Reasons for the Code. The main reason was: (1) the growing use of trusts, not only in estate planning but also in commercial trusts, and (2) the recognition that state law, taken as a whole, was too thin to support the structure of trusts. While the primary source of trust law in most states is the Restatement of Trusts, the drafting committee found gaps in the law and failure to provide guidance on several practical issues. In addition, there are uniform related uniform acts that, if adopted, may be repealed and/or integrated, if a state were to adopt the UTC.

3. Related Uniform Acts. Examples of related Uniform Acts on trusts and related subjects are:

§  Uniform Prudent Investor Act

§  Uniform Probate Code [Article VII would be repealed]

§  Uniform Trustee Powers Act

§  Uniform Common Trust Fund Act

§  Uniform Custodial Trust Act

§  Uniform Management of Institutional Funds Act

§  Uniform Principal and Income Act

§  Uniform Statutory Rule Against Perpetuities

§  Uniform Testamentary Additions to Trusts Act

New Jersey has adopted several of the above: Uniform Prudent Investor Act, Uniform Probate Code, Uniform Management of Institutional Funds Act, Uniform Principal and Income Act, and the Uniform Statutory Rules against Perpetuities. In addition, New Jersey statutory law on trusts and related subjects is enormous. Therefore, a careful examination of how the UTC would affect New Jersey Law is a major undertaking, and will require substantial study and time.

4. Relationship to the Restatement of Trusts. The UTC 2000 was drafted in close coordination with the Restatement (3rd) of Trusts and with the revision of the restatement of Property: Wills and Donative Transfers. Consequently, the UTC 2000 may be described loosely as a codification of a majority of provisions of the Restatement. In the view of the Reporter, the uniform law process is superior to the Restatement approach, as the former, if enacted, is binding law and provides clarity to practitioners in the field. Having said this, the UTC 2000 does not displace the common law of trusts but supplements it.

Select Key Issues of UTC 2000

1. Scope. The UTC 2000 applies only to express trusts and does not apply to constructive trusts or other judicially crafted trusts that are not express trusts. An express trust is a trust created by the express intention of a settlor having the capacity to create that trust and having adequate property interests to fund it. The purpose may be charitable or noncharitable. §102. Also see §401 for methods of creating trust. An interesting question raised by the UTC, as it applies to commercial trusts, is whether a trust is a gratuitous transfer or a business deal, that is, a contract. Charitable trusts certainly are donative transfers [gifts], but the varieties of commercial trusts do not fall within that category.[1] Examples of commercial trusts are pension trusts, investment trusts [mutual funds], real estate investment trusts [REITS], oil and gas royalty trusts, and asset securitization. A 1997 estimate states that more than 90% of money held in trust in the United States is held in commercial trusts as opposed to personal trusts.[2]

2. Default Provisions. The entire UTC 2000 consists of default statutory provisions that may be overridden by the trust instrument. The only exceptions for mandatory rules are set forth in §105. They are:

§  The requirements for creating a trust

§  The rights of third parties in their dealings with the trustees

§  The power of the court to take certain actions, such as to remove a trustee

§  The trustee’s obligation act in good faith, in accordance with the purpose of the trust, and to administer the trust for the benefit of the beneficiaries

§  Limits on the settlor’s ability to waive the duty to keep beneficiaries informed of the existence and of the administration of the trust

3. Nonjudicial Settlement Agreements. The UTC 2000 encourages out of court settlement of contests. “Interested Persons” may by unanimous consent enter into binding agreements covering a range of matters that a court would have the power to approve. The list of issues set forth in §111(d) that may be resolved is non-exhaustive. For example, “interested persons” may determine the interpretation or construction of trust terms; transfer the trust’s principal place of administration; and determine the resignation or appointment of a trustee. These nonjudicial settlements raise the question of representation as sometimes beneficiaries may be incapacitated, not yet born or unascertained. To resolve this problem, the UTC 2000 has incorporated doctrines of virtual representation [a not yet born beneficiary represented by another beneficiary with a similar interest], representation by fiduciaries, and appointment of a guardian ad litem. § 303 deal with representation issues.

4. Principal Place of Administration. This issue is important as it affects which state’s income tax applies to the trust and determines which court has primary jurisdiction over the trust. The problem arises in the context of trustees, advisors, operation facilities being located in different jurisdictions. UTC § 108(a) takes the view that a provision in the trust designating the place of administration is valid provided the trustee’s principal place of business is located in the designated jurisdiction, or a trustee is a resident of the designated jurisdiction, or all or part of the trust’s administration occurs in the designated place. §108 also contains rules for determining the place of administration where the trust instrument has failed to make a designation.

5. Uneconomic Trust. A trustee without a court order may terminate a trust if the value of the trust property is insufficient to justify the cost of administration. The UTC 2000 uses a bracketed figure of $50,000, but states are free to raise the amount, for example, to $100,000. This issue is noted because the Commission approved the Uniform Prudent Management of Institutional Funds Act that contains in §6 a provision permitting a trustee to remove a restriction if the fund’s value is less than $100,000. The UTC would add the additional authority to terminate the trust and distribute the property.

6. Revocable Trust Presumption. The UTC 2000 reverses the common law assumption that trusts are irrevocable. §602(a). The reversal follows the current trend of most common trusts. The settlor may make the trust irrevocable by providing for that provision.

6. Duties and Powers of Trustee. The duties and powers are delineated in detail in §§801 through 817. As noted previously, these provisions may be overridden by specific terms in the trust, except for the duty to inform, duty to act in good faith and requirement to act in accordance with the purposes of the trust and for the benefit of the beneficiaries.

7. Remedies for Breach of Trust. These provisions are set forth in §§1001 through 1009. According to Professor English, “The measure of damages for breach of trust is designed to restore the beneficiaries to the position they would have been in had the breach not occurred. But is also serves another purpose - to prevent the trustee from profiting from the breach. Consequently, under the Code the trustee is liable for the higher of the profit made by the trustee or harm caused to the beneficiaries.”§1002(a).

8. Dealing with Third Persons. UTC 2000 follows the theory that commercial transactions between trustees and third parties [that is, persons other than trustees or beneficiaries] should be treated like any commercial transaction to lubricate the flow of commerce and advance the purposes of the fund. If stricter standards applied, third persons would not take the increased risk of dealing with a trust and take its business elsewhere.

9. Creditor’s Claims; Spendthrift and Discretionary Trusts. First, the UTC 2000 allows for spendthrift provisions provided the provision restrains the voluntary and involuntary transfer of the beneficiary’s interest. §502(a). In this circumstance, a creditor cannot reach the interest of the beneficiary until the distribution is received by the beneficiary. Exceptions to spendthrift provisions are set forth in §503, the most significant, though most obvious, is the unenforceability of a spendthrift provision against a claim of the State or federal government pursuant to law. Significantly, the UTC 2000 permits creditors of the settlor to reach assets of the trust when the settlor is designated a beneficiary of the trust. “Consequently, the drafter’s rejected the approach taken in Alaska and Delaware allowing a settlor to make a beneficial interest immune from creditor claims. NJ Law is consistent with the UTC 2000 regarding the rule of “estate recovery” based on state and federal statute. E.g., Estate of DeMartino v. Division of Medical Assistance and Health Services, 373 N.J. Super 210 (App. Div. 2004), certif. denied, 182 N.J. 485 (2005)(rejecting claim of estate trustee that assets of testamentary trust were beyond reach of state to recover Medicaid paid benefits for deceased spouse since at time of creation of trust, decedent had sufficient interest in the trust assets though that interest fell short of legal and beneficial ownership).

Conclusion

The plan to be implemented is:

§  Prepare a study of New Jersey State Law on Trusts and related subjects covered by the UTC (Revised and Amended as of 2005)

§  Use UTC and make modifications if necessary based on New Jersey law

§  Make decisions on optional provisions contained in the UTC

§  Decide whether to incorporate the UPMIFA, and perhaps other acts, in the Code to provide a complete statute governing Trusts

§  Identify jurisdiction of courts regarding various trusts and make necessary modifications to uniform law

1

[1] Excluded also from the ambit of commercial trusts are the stream of governmentally created “trusts”, the deed of trust to transfer real property, and reference to trusts in bankruptcy proceedings.

[2] John H. Langbeinn, The Secret Life of The Trust: The Trust as an Instrument of Commerce, 107 Yale L.J. 165, 166 (1997)