Approximately 30 states have enacted some version of the Uniform Trust Code (“UTC”). New Jersey enacted its version of the UTC on January 19, 2016 and it becomes effective on July 17, 2016. N.J.S.A. 3B:31-1 et seq.
Relationship to Other Laws
Other existing laws must also be considered as the new UTC is not the sole source of guidance on trust law in New Jersey.
Broad Reach of the New UTC
The importance of this new law is broader than many might anticipate. The new UTC applies to all trusts, even those executed before the new law was enacted unless the trust instrument expressly applies to the contrary. N.J.S.A. 3B:31-84(a)(4). Thus, every trustee of an existing trust should review the application of the new law to their trust and how it will impact actions they should take prospectively. There are, as explained below, a number of significant differences from the UTC to prior law. It does not apply to actions taken prior to the effective date.
The new UTC also applies to all court cases concerning trusts following the date of enactment. Even cases in process on the effective date of the new UTC will be governed by the new law unless the court determines that its application would unfairly prejudice the parties.
Priority: UTC Versus Terms of Governing Instrument
The terms of the instrument creating the trust will generally control, not the provisions of the new UTC. N.J.S.A. 3B:31- 5(a), except for enumerated exceptions, N.J.S.A. 3B:31- 5(b):
(1) The requirements for creating a trust.
(2) The duty of a trustee to act in good faith and in accordance with the purposes of the trust.
(3) The requirement that a trust and its terms be for the benefit of its beneficiaries, and that
the trust have a purpose that is lawful, not contrary to public policy, and possible to achieve.
(4) The power of the court to modify or terminate a trust under N.J.S.3B:31-26 through
(5) The effect of a spendthrift provision and the rights of certain creditors and assignees to
reach a trust as provided in article 4 of the UTC.
(6) The power of the court under N.J.S.3B:31-47 to require, dispense with, or modify or terminate a bond.
(7) The duty under subsections a. and b. of N.J.S.3B:31-67 to respond to the request of a qualified beneficiary of an irrevocable trust who has attained the age of 35 years for a copy of the trust instrument or for other information reasonably related to the administration of the trust.
(8) The effect of an exculpatory term under N.J.S.3B:31-77.
(9) The rights under N.J.S.3B:31-79 through N.J.S.3B:31-81 of a person other than a trustee or beneficiary.
(10) Periods of limitation for commencing a judicial proceeding.
(11) The power of the court to take such action and exercise such jurisdiction as may be necessary in the interests of justice.
Validity of Trust
A trust will not be valid if created under fraud, duress or undue influence. The purposes of the trust must be lawful, not contrary to public policy, and possible to achieve. N.J.S.A. 3B:31-21. While in most instances these requirements should not cause concern, if the trust encourages criminal or tortious conduct, interferes with the freedom to marry or encourages divorce, or limits religious freedom, it may be deemed to violate public policy. This might raise concern where the settlor endeavors to restrict a beneficiary’s marriage to be within a certain faith.
Beneficiaries; Trusts Must Be For the Benefit of the Beneficiaries
The new UTC provides that trusts must be administered for the benefit of the trust beneficiaries. N.J.S.A. 3B:31- 5(b)(3) and N.J.S.A. 3B:31-21. While the law has always provided that trusts must be administered for the benefit of the beneficiaries. It is clear, however, whether this new provision will be interpreted to change the balance of that direction in terms of the deference shown to the intent of the settlor who created the trust versus the determination of what benefits the beneficiaries.
The UTC provides that a person who receives an interest in a trust by assignment or transfer is a beneficiary. N.J.S.A. 3B:31-3. Might this mean that if an interest in a trust is assigned in a divorce or lawsuit that the holder would be entitled to the reporting of a qualified beneficiary below?
The person creating a trust has been known as the grantor, trustor or settlor. The UTC now defines this person as the “settlor.”
“Settlor” is defined as a person, including a testator, who creates, or contributes property to, a trust. If more than one person creates or contributes property to a trust, each person is a settlor of the portion of the trust property attributable to that person’s contribution except to the extent another person has the power to revoke or withdraw that portion.”
This definition may also be viewed as expanding the scope of the definition to include not merely the person signing the trust instrument creating the trust but also any other person who contributes property to a trust. While this definition appears reasonable and straight forward the implications might be complex. For example, if a trust has an annual demand or Crummey power, the beneficiary of that power holds a general power and if the power is released or lapsed that beneficiary in some but not all instances is treated as a grantor of the trust for tax purposes. Will the same person be deemed a settlor under the UTC? If a family member or family entity pays an accounting or legal fee for a trust, that payment would appear to make them a settlor under the above definition. What will be the consequences of this? If wife creates an irrevocable trust prior to marriage and after the marriage funds are used from a joint checking account to pay income taxes on the trust does that make the husband a settlor of the trust? What implications might this have?
Standard for Executing a Revocable Trust
How much cognitive ability or capacity is required for someone to execute a will? Revocable trust? Other instrument? The standard for executing a will is a relatively low “testamentary capacity.” In contrast, many commentators have viewed the standard of capacity to execute a revocable trust as a higher one, analogous to the standard necessary to execute a contract. The new UTC makes it clear that the capacity for executing a revocable trust is the same as that for executing a will, N.J.S.A. 3B:31-42. The settlor must have capacity and the intent to form the trust. N.J.S.A. 3B:31-19(a)(1) to (3).
This change could have a significant impact on planning for aging clients and those living with cognitive challenges. Revocable trusts are a valuable tool for planning for these clients. Yet the risk that a higher level of capacity was required to properly execute a revocable trust as contrasted with a will served to inhibit the use of this planning mechanism in cases were capacity was in question. The new law will not make it feasible to use a revocable trust any instance that a client has capacity to execute a will.
The UTC also provides a definition of a “revocable” trust as a trust that is revocable by the settlor without the consent of the trustee or a person holding an adverse interest. N.J.S.A. 3B:31-3.
A technique used in some instances to endeavor to minimize the risks of elder financial abuse, or a client changing their intended dispositive scheme is to require the consent of another person to revoke or modify the terms of the trust. Based on the above definition, would a trust be considered revocable if the consent of a non-adverse party was required? If not, what impact might that have to the tax and legal implications of the trust?
Requirements to Provide Trust Information
The UTC changes the rules governing information that must be provided by the trustee to certain beneficiaries. These changes are significant and should be considered immediately by all trustees. If the required information has not been provided previously trustees should make an effort to provide it. Further, when the provisions governing the provision of information to beneficiaries are read in conjunction with the provisions governing challenges by beneficiaries of a trust, some trustees may wish to reevaluate the information they disseminate to intentionally try to benefit from shorter time periods when they can be challenged. See below.
The UTC does not specifically address reporting by an investment advisor so that it appears that the general trustee, not the investment advisor is charged with providing the requisite information. However, in some instances, especially with respect to tolling the period during which the trustee can be sued, in a directed trust (now permitted under the UTC) it may be the investment advisor who must provide the information necessary.
The key concept in the new reporting requirements is the phrase “qualified beneficiaries.” N.J.S.A. 3B:31-3. A qualified beneficiary is defined as a beneficiary who is then a permissible distributee of trust income or principal, would be a distributee if those interests terminated on that date, or would be such a distributee if the trust terminated on the date being evaluated. This reporting requirement does not apply to a revocable trust as the Trustee’s duties are owed exclusively to the settlor during the period in which a trust is revocable. N.J.S.A. 3B:31-44. This is a common approach under the UTC and many state laws. This could undermine the ability to use a revocable trust to protect a settlor as he or she ages as no one will have standing to sue when a trustee abuses power. An alternative approach is to add a trust protector to revocable trusts. The protector should have standing.
Since the holder of a limited power of appointment cannot appoint trust corpus to himself or herself would that preclude classification of that power holder as a qualified beneficiary? What about the holder of a general power of appointment? Would that really be tantamount to a distributee as contemplated above? Might the result be that a power holder is deemed a beneficiary but not a qualified beneficiary? A qualified beneficiary also includes a beneficiary who sent the trustee a request for notice. Might this latter provision make the classification of a power holder as a qualified beneficiary depending on whether the power holder sent such a notice?
While the reporting seems optional unless requested by a beneficiary there is a gap in this reasoning. If the beneficiary is not informed of the trust how can he or she know to request the information. That might suggest that some notification in all instances might be required. Further, the shortened 6 month statute of limitations on bringing an action against a trustee would seem to suggest that trustees should endeavor to notice all qualified beneficiaries unless there is a specific reason not to do so. It also appears that notification of beneficiaries is required if the trustee changes the principal place of administration of the trust. N.J.S.A. 3B:31-8 (d). Further, a trustee must notice qualified beneficiaries if the trustee will terminate a trust that is no longer economical to continue. N.J.S.A. 3B:31-30(a).
Virtual Representation
Virtual representation is the concept of allowing representation for another by a person who effectively stands in that other person’s shoes. For example, if a child can only inherit if his or her parent dies, that parent might reasonably be able to represent the interests of the child. The UTC reexamines and changes the law in this important area.
The UTC permits representation of a minor or incapacitated beneficiary by someone having substantially identical interests. ” N.J.S.A. 3B:31-16. A guardian may represent the interests of his or her ward. If no guardian is serving a parent can represent the interests of unborn or minor children. N.J.S.A. 3B:31-15(b) and (f).
The UTC has provisions governing trustee decisions, that while practical, may in some instances violate fundamental goals of the client. The UTC provides that co-trustees who cannot agree on a unanimous decision may act by majority decision. A dissenting trustee who joins in carrying out a decision of the majority but expresses his dissent in writing promptly to his co-trustees shall not be liable for the act of the majority. If this provision is not agreeable to the client the decision making provisions should be crafted to expressly override this.
The UTC Provides: “If a co-trustee is unavailable to perform duties because of absence, illness, disqualification under other” law, other temporary incapacity, or a vacancy remains unfilled and prompt action is necessary to achieve the purposes of the trust or to avoid injury to the trust property, the remaining co-trustee or a majority of the remaining co-trustees shall act for the trust.” Query whether this could be problematic from a tax perspective if the “unavailable” trustee is the independent trustee?
Successor Trustee
If the office of trustee lapses because no or inadequate successor trustees are named, the UTC now provides that a successor trustee may be designated by unanimous agreement of the qualified beneficiaries. N.J.S.A. 3B:31-49(c). Since this may not be the intent of the settlor additional care should be taken to designate successor trustees and to incorporate a mechanism for the designation of successors when the list of those designated fails. Will someone holding a power of appointment be consider a qualified beneficiary and thus entitled to vote on a successor?
Trustee Liability
The UTC limits the ability to exculpate a trustee. N.J.S.A. 3B:31-77. These limitations are not enforceable if it relieves the trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries; or
as inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor. An exculpatory term drafted or caused to be drafted by the trustee is invalid as an abuse of a fiduciary or confidential relationship unless the trustee proves that the exculpatory term is fair under the circumstances and that its existence and contents were adequately communicated to the settlor.
Powers of Appointment; Power Holder
A power of appointment grants a person the right to designate or appoint where trust income or corpus might be distributed. This power, depending on its terms, may be exercised during the current beneficiary’s lifetime (e.g., the spouse in a credit shelter trust) or perhaps only on the death of the current beneficiary or other named person. Powers of appointment have become much more common in light of the focus of estate tax planning in recent years on maximizing income tax basis on death in contrast to minimizing estate taxes. If the New Jersey estate tax exemption is increased the trend toward the use of such powers will likely increase. For example, when a client forms a trust it might be common to grant a power in favor of a senior family member in order to cause trust assets to be included in the estate of that senior family member on death. For example, if the client creates an insurance trust, spousal lifetime access trust or other trust an elderly parent with a non-taxable estate, especially if the elderly parent resides in a state with no estate tax, e.g., Florida, may be given a power of appointment to cause trust assets to be included in that parent’s estate thus benefiting from an income tax basis step up even during the client’s lifetime. The UTC appears to impact this planning.
The new UTC provides that the holder of a power of appointment over trust property is treated as a beneficiary. N.J.S.A. 3B:31-3(2). Thus, if an elderly family member were given a power of appointment that family member would be deemed a beneficiary which may provide rights that were not desirable. Will this power holder be deemed a qualified beneficiary for purposes of appointing a successor trustee if there is a lapse? Will this power holder be deemed a qualified beneficiary and thus entitled to receive reports about the trust?
Investment Provisions
The UTC includes directed and delegated trust provisions that provide much greater flexibility in structuring a trust to meeting client investment objectives. A delegated trust in one in which the trust permits someone other than the trustee to invest trust assets, but the trustee still has responsibilities as to the delegation process and actions of the person delegated the authority to invest trust assets. A directed trust is one which directs or mandates that the trustee must follow the direction of a designated investment advisor so that the trustee has no responsibility for the investment actions of that investment adviser. N.J.S.A. 3B:31-60 and N.J.S.A. 3B:31-62.
When a trust delegates investment authority the trustee must use reasonable care in selecting the person to whom investment management is delegated, monitor that person’s performance and inform qualified beneficiaries of the results.
When a trust has a direction provision the trustee has no liability for investment performance so long as the direction was in accordance with the terms of the trust and the trustee cannot know that the actions by the investment adviser are a breach of that adviser’s fiduciary duty. N.J.S.A. 3B:31-61 and 62. The UTC provides that except if the trustee commits willful misconduct or gross negligence, the trustee should not be liable for following the instructions of the investment adviser under a directed trust. The UTC appears to limit direction to non-publicly traded securities. N.J.S.A. 3B:31-62(d). Does that negate the protection of the statute for concentrated positions of publicly traded securities?
Thus, the liability of a trustee under a directed trust governed by the New Jersey UTC are reduced, but the requirements of the statute might leave residual obligation for action and even liability. The scope of this is unclear.
Terminating A Trust
The UTC provides that a t rustee can terminate a trust with corpus of under $100,000 without court approval after notice to the qualified beneficiaries. N.J.S.A. 3B:31-30.
Upon termination or partial termination of a trust, the trustee may mail or deliver a proposal for distribution to all persons who have a right to object to the proposed distribution. The proposal shall notify all persons who have a right to object to the proposal of their right to object and that their objection is required to be ·in writing and received by the trustee within 30 days after the mailing or delivery of the proposal. The right of any person to object to the proposed distribution on the basis of the kind or value of asset he or another beneficiary is to receive, if not waived earlier in writing, terminates if he fails to object in writing; received by the trustee within 30 days after mailing or delivery of the proposal. N.J.S.A. 3B:31-70.b.
A trust can also be terminated under the UTC a trust terminates to the extent the trust is revoked or expires pursuant to its terms, no purpose of the trust remains to be achieved, or the purposes of the trust have become unlawful, contrary to public policy of this State, or impossible to achieve. N.J.S.A. 3B:31-26.a.
Challenging a Trust
A beneficiary (and possibly another interested party) may challenge a trust during the time periods permitted under the UTC. N.J.S.A. 3B:31-45.
The UTC can preclude a beneficiary from suing a trustee who provided the required information about the administration of the trusts to that beneficiary. This information includes a report of the trust property, liabilities, receipts, and disbursements, details as to trustee compensation, a balance sheet of trust assets. Providing this information triggers a six month time period after which suit cannot be brought. Trustees should consider the benefits of affirmatively complying with this reporting provision to limit their liability. If there is a claim the disclosures must provide adequate information for the beneficiary to know of the potential claim.
If these requirements are not met the beneficiary may have a five year period in which to bring a claim. The five year period only begins with the termination of the trustee, termination of the beneficiary’s interest or the termination of the trust. Each of these time periods could be substantially after the time at which the trustee could have made disclosure. Thus, trustees should give careful consideration to meeting the disclosure requirements.
Settlement Agreements
The UTC provides a mechanism for parties to resolve issues without formal court proceedings. N.J.S.A. 3B:31-11. This requires that all parties interested in the matter must consent.
Charitable Trusts
While most charitable trusts state the charitable purpose of the trust, the UTC authorizes the court to define the charitable purposes or charitable beneficiaries if the trust instrument does not do so. N.J.S.A. 3B:31-22(b). The court’s determination should be consistent with the settlor’s intent. Consideration should be given to providing a statement of broad intent if the stated charitable purposes lapse.
The UTC has broadened the class of persons who can be enforce a charitable trust by adding the settlor. A charitable trust can be enforced by the settlor, the State’s Attorney General, the trust’s beneficiaries (presumably the charities), and any other person with standing. Will this right of the settlor possibly compromise intended tax results?
The NJ UTC has made significant changes to trust law that will affect all existing as well as new trusts.