Bar Journal - Winter 2006
THE UNIFORM TRUST CODE: A New Resource for Old (and New!) Trust Law
By: Michelle M. Arruda
A part of New Hampshire law for just a little over a year, the Uniform Trust Code (the “NHUTC”)1 has become an important resource and tool for New Hampshire trustees and trust beneficiaries and for New Hampshire trusts and estate practitioners and their clients. After first providing some background about the NHUTC, including what the NHUTC does and does not cover, this article will review some of the NHUTC’s more practical, innovative, and controversial provisions.
The NHUTC originated with the National Conference of Commissioners on Uniform State Laws (NCCUSL). A body of practicing lawyers, judges, legislators and law professors appointed by states governments, NCCUSL drafts model acts concerning various areas of the law, with the goal of promoting uniformity among the states and bringing “clarity and stability to critical areas of state statutory law.”2 Each state, of course, is free to adopt the model act as is, adopt the model act with changes, or not adopt the model act at all.
NCCUSL first approved the Uniform Trust Code3 in 2000, intending it to be a comprehensive codification of the law of trusts. The primary stimulus behind its adoption was the growing use of trusts, both in estate planning and in commercial transactions, coupled with only a fragmented and sparse body of trust law in many states. The purpose of the model act, therefore, was to “provide States with precise, comprehensive, and easily accessible guidance on trust law questions.”4 NCCUSL has amended the Uniform Trust Code since 2000 (partly in response to criticism of its more controversial provisions), most recently in 2005.
Many states already have adopted the Uniform Trust Code.5 As with most model acts, states have not adopted it lock, stock and barrel, but rather have adopted it with modifications that address unique local issues, conform more closely to existing local law, or simply reflect local preferences.
New Hampshire adopted the NHUTC in 2004. Codified at RSA 564-B, the NHUTC became effective October 1, 2004. Like other states, New Hampshire adopted the model act with revisions, although the revisions were relatively few.6 In 2005, New Hampshire amended the NHUTC,7 mostly to make technical corrections, but also to respond to certain criticisms of the existing legislation, both within the New Hampshire estate planning community and nationally, and to enact other changes that NCCUSL made to the model act. The amendments became effective on September 20, 2005.8
B. Coverage and Application
1. NHUTC’s Comprehensive Coverage
The NHUTC is very comprehensive. The statute’s article headings reveal the wide range of issues it covers, including (1) the creation, validity, modification, and termination of trusts; (2) creditors’ claims, including claims against spendthrift trusts and discretionary trusts; (3) special issues with respect to revocable trusts; (4) issues relating to the office of trustee, such as resignation, removal, and compensation; (5) duties and powers of trustees; (6) trust investments, including the application of the prudent investor rule; and (7) trustee liability and the rights of third persons dealing with the trustee.
2. Other Sources of Trust Law
Despite the comprehensive nature of the NHUTC, New Hampshire practitioners and trustees should be aware of other, additional sources of New Hampshire trust law. For example, while the NHUTC replaced much of what previously was known as the Uniform Trustees’ Powers Act,9 the following provisions of that act remain codified under RSA 564-A:10
• RSA 564-A:1, which provides the definitions of “trust” and “trustee” for purposes of the rest of RSA 564-A. More importantly, however, it is RSA 564-A:1’s definition of “trust,” and not the description of trusts covered by the NHUTC contained in section 102 of the NHUTC, that governs whether the probate court has exclusive jurisdiction with respect to a matter involving a trust, or concurrent jurisdiction with the superior court.11
• RSA 564-A:3, IV, concerning limitations on a trustee who also is a beneficiary of the trust.
• RSA 564-A:3-a, concerning trustee powers and liability with respect to environmental matters.
• RSA 564-A:3-c, concerning the conversion of a trust into a “unitrust.”
• 564-A:5, I, concerning the power of the probate court to relieve a trustee from any restriction imposed by the trust or by chapter 564-A.
• RSA 564-A:7, II through V, concerning the protection of third parties who rely on a certification concerning the trustee’s power to convey real estate and personal property.
• RSA 564-A:8, 9, and 11, concerning the applicability of chapter 564-A, the uniformity of its interpretation, and the severability of its provisions.
When dealing with a trust under a will, or a so-called testamentary trust, the provisions of RSA 564 may apply in addition to, or instead of, the NHUTC. Section 710 of the NHUTC provides that the NHUTC is not intended to modify or limit the provisions of RSA 564 as they relate to testamentary trusts, and that if, with respect to a testamentary trust, there is a conflict between the NHUTC and RSA 564, RSA 564 controls.
Also, RSA 292-B, concerning the management of institutional funds, applies to charitable trusts.
Finally, the NHUTC provides that “the common law of trusts and principles of equity supplement [the NHUTC], except to the extent modified by [the NHUTC] or another statute of this state.”12
3. NHUTC’s Application
Not only is the NHUTC comprehensive, but it also has wide application, as underscored by two of its provisions. The more salient provision is section 102, concerning the statute’s scope. It states that “[t]his chapter applies to express trusts, charitable or noncharitable, and trusts created pursuant to a statute, judgment, or decree that requires the trust to be administered in the manner of an express trust.” Quite plainly, the rules of the NHUTC apply to all “express trusts,” regardless of how, why, by whom, and for whom created, including charitable trusts, business trusts, and oral trusts. The only trusts not within the statute’s purview are “resulting trusts” and “constructive trusts.” In reality, these “trusts” are not trusts at all, but are equitable remedies imposed by courts to adjust property interests and ownership. In sum, then, the rules of the NHUTC apply to all trusts other than resulting and constructive trusts.
In addition to the wide range of trusts to which the NHUTC applies, the NHUTC also generally applies to trusts that existed before its October 1, 2004 effective date. Specifically, section 1104 provides that, with certain exceptions discussed below, the NHUTC applies to trusts that were created before October 1, 2004 and to judicial proceedings concerning trusts that began before October 1, 2004. The exceptions to the statute’s retroactive application are:
• Section 602(a) provides that, unless the terms of the trust expressly provide that the trust is irrevocable, a trust may be amended or revoked by the settlor. Since this is a change in New Hampshire law — which previously had followed the majority approach prevalent in other states and presumed a trust to be irrevocable absent evidence to the contrary — section 602(a), by its own terms, does not apply to a trust created under an instrument executed prior to October 1, 2004.13
In other words, if a trust instrument executed before October 1, 2004 is silent concerning whether it is revocable, it will be presumed to be irrevocable, absent evidence to the contrary. The same trust instrument executed on or after October 1, 2004, will be amendable and revocable by the settlor under the NHUTC’s rule of construction contained in section 602(a).
• The trustee’s duties under sections 813(b),(c), and (d) to provide certain trust beneficiaries and other persons with information concerning the trust, do not apply to irrevocable trusts created before October 1, 2004, including revocable trusts that became irrevocable before October 1, 2004.
• Under section 1104,
o Any particular provision of the NHUTC will not apply to a judicial proceeding commenced prior to October 1, 2004, if the court finds that its application “would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties.”
o A rule of construction or a presumption under the NHUTC will not apply to a trust instrument executed prior to October 1, 2004, if “there is a clear indication of a contrary intent in the terms of the trust.”
o An act done before October 1, 2004, is not affected by the NHUTC.
o A “right acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute” before October 1, 2004 is not affected, and the other statute will continue to apply.
4. NHUTC as Set of Default Rules
Perhaps the most important thing to note about the NHUTC is that the majority of its provisions are “default” rules that apply only if the terms of the trust do not provide otherwise or do not sufficiently address a particular issue.14 In other words, the person who creates the trust, alternatively known as the settlor, the grantor, or the trustor, is free to override most of the NHUTC rules. Accordingly, before referring to the NHUTC, New Hampshire trustees, beneficiaries, and practitioners should refer to the terms of the trust, including the provisions of any governing instrument.15 If, however, the terms of the trust are not fully informative or if the trust is silent about an issue, the NHUTC probably provides the answer.
There are, however, several NHUTC provisions over which the terms of the trust cannot prevail. Among these “mandatory” rules, enumerated in section 105(b), is the duty of the trustee of an irrevocable trust to provide certain information to certain beneficiaries and other parties, as provided in sections 813(c) and (d).16 This particular mandatory rule has been quite controversial within and outside of New Hampshire and is discussed further below. In fact, revisions to that mandatory rule were among the more substantive changes effected by the 2005 amendment to the NHUTC.
Other mandatory rules listed in section 105(b), however, are self-evident, uncontroversial, or, like much of the NHUTC, in accordance with prior law, including the following:
• Rules concerning the very nature of a trust, such as the requirements for creating a trust; and the trustee’s duty to act in good faith, in accordance with the terms and purposes of the trust, and in accordance with the interests of the beneficiaries.17
• Powers of the court, such as the power to modify or terminate a trust; the power to require, dispense with, or modify or terminate a trustee bond; the power to adjust a trustees’ compensation; and the power to take action and exercise jurisdiction as justice may require.18
• Procedural and jurisdictional issues, such as statutes of limitation, the court’s subject-matter jurisdiction, and the venue for judicial proceedings.19
• Public policy issues, such as the fact that the trust must be for the benefit of its beneficiaries and must have a purpose that is lawful, not contrary to public policy, and possible to achieve; the rights of certain creditors and assignees to reach trust assets; the effect of certain exculpatory provisions relieving a trustee from liability; and certain rights of third parties who deal with a trustee.20
C. Some Useful and Innovative Provisions
1. Rules Concerning Representation
Among the more helpful and innovative provisions are those contained in article 3 of the NHUTC, which includes rules about when a person may represent and bind a trust beneficiary or other interested party with respect to a trust matter. These rules are the launching pad for other NHUTC provisions. They apply in the context of judicial and non-judicial settlement of disputes, they apply when notices and other information is required to be given to beneficiaries, and they apply when beneficiaries must or may consent to certain trustee actions. The representation rules ease the administration of a trust and minimize resort to the courts. Accordingly, every New Hampshire trustee and trusts and estates practitioner should be familiar with them.
As provided in section 301, the basic effect of the representation rules is this: notice to a person who, according to the rules, may represent and bind another person has the same effect as if the notice were given to the represented person; and the consent of a person who, according to the rules, may represent and bind another person, is binding on the represented person unless he, she or it makes a timely objection. There are, however, three general exceptions. First, no person may represent the settlor of a revocable trust with respect to the revocation or amendment of the trust except as specifically provided in section 602 (or, of course, as specifically provided in the terms of the trust).21 Second, a settlor of a trust may not represent and bind a beneficiary with respect to the termination or modification of the trust.22 Finally, a person may not represent another person if there is a conflict of interest between the representative and the represented person or among the represented persons.23
As you might expect, these rules provide for the representation of unborn, unascertained, or incompetent beneficiaries. For example, section 303(2) provides that a guardian of the estate of an incompetent person or minor child may represent and bind the ward. If, for example, a trustee wishes to take advantage of section 417 of the NHUTC, which authorizes the trustee to divide a trust into two or more separate trusts after notice to certain beneficiaries, and if one or more of those beneficiaries are minors, the trustee need not necessarily have to seek the court’s approval and/or the appointment of a guardian ad litem. Instead, the trustee simply may send notice of the proposed severance to the minors’ respective guardians.
The representation rules also provide for alternative representatives. For example, as indicated above, section 303(2) provides that a guardian of the estate of minor child may represent and bind the ward. If, however, there is no guardian of the estate, then under section 303(3), the guardian of the minor child’s person can represent the ward. Finally, if there is neither a guardian of the estate nor a guardian of the person, then the minor child’s parent may represent the child.
In addition to fiduciary representation of minor, unborn, and unascertained persons as described above, the NHUTC also provides for so-called virtual representation of these persons. Under section 304, unless such a person is otherwise represented, the person may be represented and bound by another person having a “substantially identical interest with respect to the particular question or dispute.”
Other persons also may be represented. For example, permissible appointees may be represented by the holder of a general testamentary power of appointment.24 Also, if a trust is a beneficiary of another trust or otherwise is an interested party with respect to such other trust, then the trustee of the first trust may represent and bind its beneficiaries with respect to any question or dispute involving the second trust.25 Similarly, if an estate is a beneficiary of a trust or otherwise is an interested party with respect to a trust, then the personal representative of the estate may represent and bind the persons interested in the estate with respect to any question or dispute involving the trust.26
Ultimately, if a beneficiary or other interested party is not represented or is not adequately represented, because of a conflict of interest or otherwise, the court may appoint a representative to act on behalf of one or more minor, incapacitated, or unascertained persons.27 Importantly, the court may appoint a representative to act on behalf of a person with respect to any matter arising under the NHUTC, whether or a not a judicial proceeding is pending.28 For example, the court may appoint a representative to receive trustee accountings on an annual basis, even though those accountings will not be filed with the court.
2. Trusts for Animals
A change from prior New Hampshire law, the NHUTC authorizes the creation of a trust to provide for the care of an animal.29 Such a trust may be created only if any animal whose care is being provided was alive (including in gestation) during the life of the settlor, and the trust must terminate upon the death of the last surviving animal designated.30 Under common law, trusts for animals were void because they were unenforceable; there was no person with an interest in the trust to enforce its terms and the trustee’s obligation. The NHUTC resolves this issue by providing that the settlor may appoint someone to enforce the trust. Otherwise, the court may appoint a person to enforce the trust, including upon the petition of a person with an interest in the animal’s welfare.31 Moreover, a person with an interest in the animal’s welfare may request the court to remove a person otherwise appointed.32 If the value of the trust exceeds the amount required to care for the animal or animals, the court may order that the excess be distributed as provided in the terms of the trust or, if the trust does not so provide, then to the settlor or, if the settlor is not living, to the settlor’s “successors in interest” (presumably the settlor’s estate).33 (See Susan Abert’s article elsewhere in this issue.)
3. Trusts without an Ascertainable Beneficiary
Like trusts for animals, a non-charitable trust without an ascertainable beneficiary previously was not recognized under New Hampshire law, again, because there was no one who could enforce the trust. Now, section 409 of the NHUTC authorizes a non-charitable trust to be created even if it has no definite or ascertainable beneficiaries, so long as the trust is created for a valid purpose.34 A typical example is a trust for the care of a cemetery plot. Such a trust is enforceable for up to 21 years.35 As with a trust for the care of an animal, the settlor may designate someone to enforce the trust; otherwise, the court may appoint a person to enforce the trust.36 Also as with a trust for the care of an animal, if the value of the trust exceeds the amount required for the non-charitable purpose, the court may order that the excess be distributed as provided in the terms of the trust or, if the trust does not so provide, then to the settlor or his or her “successors in interest.”37
D. Some Practical Provisions
1. Modification and Termination of Trusts
For the most part, sections 410 through 416 of the NHUTC, concerning the modification or termination of charitable and non-charitable trusts, codified existing New Hampshire statutory and common law, and, in fact, many statutes covering the same issues were repealed. Notably, the threshold for terminating a “small” or “uneconomic” trust was increased from $50,000 to $100,000.38 In addition, New Hampshire’s existing and broad cy pres statute remains unchanged under section 413 of the NHUTC, which is a modified version of the model act provision for that very purpose.
2. Non-Judicial Settlements
Another useful provision is section 111 of the NHUTC, which specifically provides that parties may enter into a non-judicial settlement agreement with respect to any matter involving a trust, subject to the following conditions:
• The agreement must not violate a material purpose of the trust.
• The agreement must include terms and conditions that could be properly approved by a court under the NHUTC or any other law.
• The agreement must be entered into by “interested persons,” which means those persons whose consent would be required were the settlement to be approved by the court.
Thus, under many circumstances, this provision, coupled with the representation rules described above, provides an alternative to a judicial proceeding as an avenue of relief with respect to a trust question or dispute.
3. Trustee Replacement
Occasionally, the terms of a trust do not adequately specify, or do not specify at all, whether and how a trustee may resign or be replaced. Here, too, the NHUTC provides rules that in many cases can dispense with court proceedings that otherwise would have been required in the absence of the NHUTC.39
4. Certification of Trust
When dealing with a third party, a trustee often is asked to furnish a copy of the trust instrument to the third party, usually to prove that the trustee has the authority to act with regard to the pending transaction with the third party. However, most trust settlors and beneficiaries would prefer not to have the terms of the trust revealed to outsiders. Yet, third parties dealing with the trustee want protection from liability in the event the trustee is acting beyond the scope of the trustee’s authority, and by asking for a copy of the trust instrument, a third party merely is performing its due diligence.
Under section 1012(a) of the NHUTC, third parties who act in good faith and without knowledge (as defined in section 104 of the NHUTC) have such protection, even if the trustee was acting improperly or without authority. Moreover, section 1012(b) confirms that a third party acting in good faith need not inquire whether the trustee is acting properly or about the extent of the trustee’s authority; in other words, the third party acting in good faith does not need to review the governing instrument.
In fact, section 1013 of the NHUTC provides additional protection to third parties and actually discourages requests for copies of trust documents. That section provides that, instead of furnishing a copy of the trust instrument, the trustee may provide a certification containing certain information enumerated in sections 1013(a) through (c). An example of such a certification is included at Exhibit A. Sections 1013(f) and (g) protect a person who, in good faith, acts in reliance upon the certification without knowledge (again, as defined in section 104 of the NHUTC) that the representations in the certification are incorrect. And to even further discourage requests for a copy of the trust instrument notwithstanding the certification, section 1013(h) provides that a person making a demand for a trust instrument in addition to the certification is liable for damages if the court finds that the person did not act in good faith. Of course, there are circumstances in which the request is made in good faith, such as when review of the instrument is necessary for the third party to comply with other law.
E. Controversial Provisions
1. Spendthrift Trusts and Creditors’ Rights
There has been much ado about the Uniform Trust Code’s affect on asset protection. Some have claimed that the model act reduces the protection afforded by trusts under the pre-existing law of most states.40
In speaking about trusts and asset protection, it is important to be clear about the creditors from whom we are seeking to protect the assets. In other words, for the same trust, the assets may be protected from the claims of the beneficiaries’ creditors, but may not be protected from the claims of the settlor’s creditors, and vice versa.
Turning to trust settlors first, both under the NHUTC and under prior New Hampshire law, creditors of the settlor of a trust could reach the trust assets to satisfy their claims — including the claims of the settlor’s ex-spouse for alimony and child support claims — under the following circumstances:
• If the trust is revocable by the settlor, all of the assets can be reached by the settlor’s creditors.41
• If the trust is irrevocable and the settlor also is a beneficiary of the trust, then unless the trust is a so-called “special needs trust” specifically authorized by federal statute, the settlor’s creditors can reach the trust assets to the fullest extent that the assets are available to the settlor, even if the trustee has complete discretion about whether or not to distribute them to the settlor.42 While many other states legislatively have repealed this so-called “self-settled trust principle,” New Hampshire has not yet done so.
• If the trust is irrevocable and the settlor is not a beneficiary of the trust, the settlor’s creditors cannot reach the trust assets, unless, of course, the settlor has “fraudulently conveyed” the assets to the trust43 (i.e., the settlor has transferred the assets to the trust with an intent to defraud his or her creditors).44
In sum, the NHUTC has not changed New Hampshire law with respect to whether trust assets can be reached by the settlor’s creditors.
Let us now turn to creditors of a trust beneficiary who did not create the trust. Often, one of the reasons an individual chooses to give assets to a loved one in trust rather than outright is to protect the assets from the beneficiary’s existing or potential creditors. Accordingly, individuals who are planning their estates with asset protection in mind for their beneficiaries will include a “spendthrift clause” in the trust document. A spendthrift clause is one that provides that the beneficiary cannot voluntarily or involuntarily transfer his or her interest in the trust.45 In other words, it prohibits the beneficiary from selling, pledging, or otherwise transferring his or her interest, and it provides that his or her creditors cannot reach the trust assets directly.
Before the enactment of the NHUTC, a spendthrift clause fully protected the assets from attachment by the beneficiaries’ creditors, including a spouse entitled to alimony or child support, even if the trustee was required to make a distribution to the beneficiary (for example, if the beneficiary was entitled to the income of the trust every calendar quarter).46 The only exception was for government claims to the extent state or federal law so provided. Creditors simply had to wait until distributions actually were made and collect from the beneficiary.
The NHUTC affords the same protection to spendthrift trusts as was provided under prior law,47 with the following exceptions.48 First, a court may order an attachment of present and future distributions to or for the benefit of a beneficiary (if any) to satisfy court-ordered child support for the beneficiary’s child.49 Second, a court may order an attachment of present and future distributions to or for the benefit of a beneficiary (if any) to satisfy alimony to a former spouse of the beneficiary, but only if court order providing for alimony expressly specifies the amount attributable to the most basic food, shelter, and medical needs of the former spouse.50 Third, the court may order an attachment of present and future distributions to or for the benefit of a beneficiary (if any) to satisfy the claim of a judgment creditor who has provided services for the protection of the beneficiary’s interest in the trust (for example, a lawyer who has assisted the beneficiary in fending off a creditor seeking to attach the beneficiary’s interest).51 Finally, a beneficiary’s creditor may reach a required distribution if the trustee has not made the distribution to the beneficiary within a reasonable time of the required distribution.52
In other words, with a spendthrift trust, creditors, including a former spouse and children of the beneficiary, cannot reach the trust assets themselves, but only may reach distributions. Moreover, while children and former spouses may “attach” any distribution to or for the benefit of the beneficiary (meaning that any required distribution or any distribution the trustee makes in exercising its discretion in good faith must be paid directly to the child or spouse), other “regular” creditors can “attach” only a mandatory distribution and only if it is overdue; otherwise, these “regular” creditors must wait for the distribution to be in the beneficiary’s hands and seek recovery from the beneficiary (meaning that they cannot reach distributions made for the benefit of the beneficiary).
Moreover, if asset protection for their beneficiaries is a concern, then in addition to including a spendthrift clause in the trust document, the settlor will establish the trust as a “discretionary” trust, either in full or in part, and either with or without standards. A “fully” discretionary trust is one where the trustee has complete discretion whether to make any distributions; the trustee is not required to make any distributions at all or for any purpose. A partially discretionary trust is one where the trustee has discretion with respect to some, but not all, distributions. For example, the trustee may be required to distribute all of the income from the trust assets, but have complete discretion over whether to distribute the trust principal. Sometimes the trustee’s discretion is expressed in terms of a standard. For example, the trustee may be authorized, but not required, to make distributions for the beneficiary’s support and education.
The NHUTC specifically provides that a beneficiary’s creditors cannot compel a distribution that is subject to the trustee’s discretion (as opposed to a distribution that is required to be made), even if there is a standard that the trustee has ignored and even if there is no spendthrift clause.53 Nonetheless, without a spendthrift clause, a court could authorize the attachment of the present or future distributions to or even for the benefit of the beneficiary. It is not clear in this author’s mind whether this would have been true under New Hampshire law prior to the NHUTC. In addition, as with the spendthrift trust, the NHUTC has carved out exceptions for child support and a limited amount of alimony. Specifically, under the NHUTC, the court may order the trustee to make a distribution to satisfy a child support order or to a former spouse for the kind of alimony described above if and to the extent the trustee has not complied with a standard for distribution or has abused its discretion.54
In sum, while the NHUTC has tempered the asset protection afforded by trusts, it has done so on a very limited basis. For those persons for whom creditor protection is important, a spendthrift provision will do quite nicely.
2. Notices and Disclosure of Other Information to Beneficiaries
Second only to the provisions concerning creditors’ rights, the most controversial provisions of the NHUTC concern information that the trustee is required to provide to the trust beneficiaries. The crux of the controversy is this: whether a settlor should be free to provide in the terms of the trust that its administration is completely secret from its beneficiaries. Under the NHUTC, the settlor may not do so in all circumstances. Rather, certain notice and disclosure provisions of the NHUTC are not merely default rules, but are, in fact, mandatory.55
Outlined below are the trustee duties to provide information that are mandatory and those that are default rules that apply only in the absence of trust provisions to the contrary, all of which are summarized in Exhibit B, as well. Key definitions also are summarized below.
a. Required by NHUTC, Regardless of Terms of Trust
The following duties are imposed by the NHUTC, and the settlor is not free to waive them. Note that these duties apply only to irrevocable trusts.56 However, note also that these duties do not apply to irrevocable trusts created prior to, or revocable trusts that became irrevocable prior to, October 1, 2004.57
• Within 60 days of the later of accepting the trusteeship and the death of the last surviving settlor of the trust, the trustee of an irrevocable trust must notify the “qualified beneficiaries” (defined below) who are at least 21 years old and “those who have the rights of a qualified beneficiary” (defined below) of (1) the trustee’s acceptance, and (2) the trustee’s name, address, and telephone number.58
• Within 60 days of the date the trustee acquires knowledge of (i) the creation of an irrevocable trust, its initial funding, and the death of the last surviving settlor of the trust, or of (ii) a revocable trust becoming irrevocable, its initial funding, and the death of the last surviving settlor, the trustee must notify the qualified beneficiaries who are at least 21 years old and those who have the rights of a qualified beneficiary of (1) the trust’s existence, (2) the right to request a copy of the trust instrument, and (3) the right to a “trustee’s report” (defined below).59
• The trustee of an irrevocable trust must furnish a copy of the governing instrument to a qualified beneficiary who is at least 21 years old or to a person who has the rights of a qualified beneficiary, promptly upon such beneficiary’s or such person’s request.60
• At least annually and at the termination of the trust, the trustee of an irrevocable trust must send a trustee’s report to a qualified beneficiary who requests a report and to a person having the rights of a qualified beneficiary who requests a report.61
• Upon vacating office, a trustee (or his or her personal representative, guardian, or conservator) of an irrevocable trust must send a trustee’s report to the qualified beneficiaries who are at least 21 years old and to those who have the rights of a qualified beneficiary, unless a co-trustee remains in office.62
b. Required by NHUTC, Unless Terms of Trust Provide Otherwise
The following duties are imposed by the NHUTC, unless the terms of the trust provide otherwise. In other words, the settlor is free to waive these duties by the specific terms of the trust. Except for the first, these duties apply only to irrevocable trusts, and, as with the mandatory duties, they do not apply to irrevocable trusts created prior to, or revocable trusts that became irrevocable prior to, October 1, 2004.63
• After the settlor no longer has the capacity to revoke a revocable trust, the trustee must provide a trustee’s report annually to the “distributees” and “permissible distributees” of trust income or principal (defined in the discussion of “qualified beneficiaries” below).64
• The trustee of an irrevocable trust must keep the qualified beneficiaries who are at least 21 years old and those who have the rights of a qualified beneficiary reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.65
• Unless unreasonable under the circumstances, a trustee of an irrevocable trust must respond promptly to the request of a qualified beneficiary or to a person having the rights of a qualified beneficiary for information related to the administration of the trust.66
• The trustee of an irrevocable trust must notify qualified beneficiaries who are at least 21 years old and those who have the rights of a qualified beneficiary of any change in the method or rate of the trustee’s compensation no later than 60 days after that change.67
• At least annually and at the termination of the trust, the trustee of an irrevocable trust must send a trustee’s report to distributees or permissible distributees of trust income or principal and to the settlor of the trust or, if the settlor does not have the capacity described in section 601 of the NHUTC (namely, the capacity that would be necessary to make a will), to the settlor’s guardian or agent under a power of attorney.68
c. Definition of Qualified Beneficiary
A “qualified beneficiary” is a beneficiary who, on the date in question, (1) is currently a distributee or a permissible distributee of trust income or principal, (2) would be a distributee or permissible distributee if the interests of the current distributees terminated on that date, or (3) would be a distributee or permissible distributee if the trust terminated on that date.69 In general, a distributee is a person entitled to a distribution of income or principal, and a “permissible distributee” is a person eligible to receive a distribution of income or principal (in other words, a person to whom a distribution may be made in the discretion of the trustee). It is important to note that a distributee includes those persons entitled to a distribution pursuant to an exercised power of appointment, other than the (not yet effective) exercise of a testamentary power of appointment by a powerholder who still is living. In addition, a beneficiary who would be a distributee or permissible distributee upon the termination of a prior interest or upon the termination of the trust includes takers, the beneficiaries who may or will receive trust property if a power of appointment is not exercised fully or effectively.70 Remember, however, that, under the representation rules, the holder of a general testamentary power of appointment may represent (or, in the context of section 813, receive notice, reports, and information on behalf of) the takers in default, to the extent there is no conflict of interest between the powerholder and the takers in default.71
d. Persons with Rights of a Qualified Beneficiary
A charitable organization designated to receive distributions under the terms of a charitable trust has the rights of a qualified beneficiary if the charitable organization, on the date in question, (1) currently is a distributee or a permissible distributed of trust income or principal, (2) would be a distributee or permissible distributee if the interests of the current distributees terminated on that date, or (3) would be a distributee or permissible distributee if the trust terminated on that date.72 In addition, if a charitable organization is not specifically designated, the Director of Charitable Trusts at the Attorney General’s office has the rights of a qualified beneficiary with respect to a charitable trust whose principal place of administration is New Hampshire. Specifically, the Director has the rights of a qualified beneficiary if, on the date in question, trust income or principal (1) is distributable for a charitable purpose but not to one or more specified charitable organizations, (2) would be distributable for a charitable purpose, but not to one or more specified charitable organizations, if the interests of the current distributees or permissible distributees terminated on that date, or (3) would be distributable for a charitable purpose, but not to one or more specified charitable organizations, if the trust terminated on that date.73
Finally, a person appointed to enforce a trust created for the care of an animal or another non-charitable purpose has the rights of a qualified beneficiary.74
e. Definition of Trustee’s Report
A “trustee’s report” is a report of the trust property (including a listing of the trust assets and, if feasible, their respective market values), liabilities, receipts, and disbursements (including the source and amount of trustee’s compensation).75
The current “mandatory” notice and disclosure provisions of section 105(b)(8) and section 813 and “default” notice and disclosure provisions of section 813 are the result of revisions made in the 2005 “technical” amendments to the NHUTC. Under the original 2004 legislation, sections 105(b)(8) and (9) and section 813 of the NHUTC was substantially similar to the then current version of the Uniform Trust Code (as amended through 2003). For purposes of comparison, a summary of the original notice and disclosure provisions under the 2004 legislation is contained in Exhibit C.
The policy underlying the Uniform Trust Code and the original 2004 NHUTC legislation is that beneficiaries must have information about the trust in order for them to police the trustee and enforce the trust. However, during and after the drafting and enactment of the 2004 NHUTC legislation, there were those in the New Hampshire trusts and estates community — just as there were and are those participating in the national debate about this issue as the Uniform Trust Code is introduced in other states — who argued that settlors should be able to set their own terms, including deciding whether the trustee must provide information to the trust beneficiaries. Under most circumstances, the settlor likely would want information sent to beneficiaries. However, there could be circumstances under which a settlor would want the trust to be private. A very compelling example is a settlor who wishes to establish a very large irrevocable trust for the benefit of one or more young beneficiaries, yet does not want the existence trust to adversely affect the beneficiaries’ work ethic, a problem sometimes referred to as “affluenza.” Under the original legislation, the trustee was required to provide trustee reports to beneficiaries over the age of 21, and the settlor could not waive that duty.
The current provisions essentially are a compromise. So long as at least one trust settlor is living, trustee reports need not be given to the beneficiaries. The theory is that it is not necessary to keep the beneficiaries informed in order that they may enforce the trust, because the settlor can continue to police the trustee.76
While the NHUTC still has kinks to be worked out, and while not everyone will agree with its more controversial provisions, the NHUTC delivers much of what it promises: practical guidelines to trust administration and answers to many trust questions in an accessible, comprehensive package.
Exhibits (Exhibit A: Certification of Trust, Exhibit B: Duty of Trustee to Inform and Report Under Section 105(b)(8), Exhibit C: Duty of Trustee to Inform and Report Under Original 2004 NHUTC Legislation)
1. References to “NHUTC” mean the New Hampshire Uniform Trust Code codified at RSA 564-B. In the text of this article, sections of the NHUTC will be referred to as, for example, “section 410,” instead of “RSA 564-B:4-410.”
2. Uniform Trust Code, Prefatory Note (2005).
3. To differentiate from the New Hampshire Uniform Trust Code, which, as explained supra note 1, will be referred to in this article as the “NHUTC,” the model act will be referred to as the “Uniform Trust Code.”
4. Uniform Trust Code, Prefatory Note (2005).
5. According to NCCUSL’s Uniform Trust Code website at www.utcproject.org, the following 15 states have adopted the Uniform Trust Code as of the date of this article was written: Arkansas, District of Columbia, Kansas, Maine, Missouri, Nebraska, New Hampshire, New Mexico, North Carolina, Oregon, South Carolina, Tennessee, Utah, Virginia, and Wyoming.
6. At NCCUSL’s Uniform Trust Code website at www.utcproject.org, you can find a chart that contains a section-by-section comparison of each enacting state’s version of the Uniform Trust Code (including the NHUTC) to the model act.
7. An act making certain technical amendments to the uniform trust code, N.H. Laws, chapter 270.
8. Id. at § 37.
9. The 2005 amendment to the NHUTC changed the chapter heading of RSA 564-A to “Certain Provisions Regarding Trusts.” Id. at § 34.
10. Note, however, that unlike the NHUTC, RSA 564-A does not apply to all “express trusts.” Rather, RSA 564-A applies only to a subset of express trusts, defined at RSA 564-A:1.
11. RSA 564-B:2-203; RSA 547:3.
12. RSA 564-B:1-106.
13. NCCUSL sided with the minority approach because it believed that if the instrument was silent about whether it was revocable or irrevocable, it “was likely drafted by a nonprofessional, who intended the trust as a will substitute.” Uniform Trust Code, comment to section 602 (2005).
14. RSA 564-B:1-105.
15. In this regard, it should be noted that the rules of construction that apply to the interpretation of wills also apply to the interpretation of the terms of a trust. RSA 564-B:1-112.
16. RSA 564-B:1-105(b)(8).
17. RSA 564-B:1-105(b)(1) and (2).
18. RSA 564-B:1-105(b)(4), (6), (7), and (12).
19. RSA 564-B:1-105(b)(11) and (13).
20. RSA 564-B:1-105(b)(3), (5), (9), and (10).
21. RSA 564-B:3-301(c).
22. RSA 564-B:3-301(d).
23. RSA 564-B:3-302, 564-B:3-303, 564-B:3-304.
24. RSA 564-B:3-302.
25. RSA 564-B:3-303(5).
26. RSA 564-B:3-303(6).
27. RSA 564-B:3-305(a).
28. RSA 564-B:3-305(b).
29. RSA 564-B:4-408.
30. RSA 564-B:4-408(a).
31. RSA 564-B:4-408(b).
33. RSA 564-B:4-408(c).
34. RSA 564-B:4-409.
36. RSA 564-B:4-409(b).
37. RSA 564-B:4-409(c).
38. Compare RSA 564-B:4-414(a) to prior RSA 564:15-a, I.
39. See RSA 564-B:7-704(c)(2); RSA 564-B:7-704(d)(2); RSA 564-B:7-705(a).
40. See, e.g., Mark Merric and Steven J. Oshins, How Will Asset Protection of Spendthrift Trusts Be Affected by the NHUTC?, 31 Estate Planning 478 (October 2004); Mark Merric and Steven J. Oshins, NHUTC May Reduce the Asset Protection of Non-Self-Settled Trusts, 31 Estate Planning 411 (September 2004); Mark Merric and Steven J. Oshins, Effect of the NHUTC on the Asset Protection of Spendthrift Trusts, 31 Estate Planning 375 (August 2004). For a good rebuttal to these articles and a very good explanation of article 5 of the Uniform Trust Code, see Suzanne Brown Walsh et al., 32 Estate Planning 29 (February 2005). It seems clear from this debate that the structure and wording of article 5 is confusing and probably should be clarified.
41. RSA 564-B:5-505(a)(1).
42. Compare RSA 564-B:5-505(a)(2) to prior RSA 564:23, II.
43. RSA 545-A.
44. Compare RSA 564-B:5-503(d) to prior RSA 564:23, III.
45. Under the NHUTC, a spendthrift clause is effective only if it prohibits both voluntary and involuntary transfers. RSA 564-B:5-502(a).
46. See prior RSA 564:23.
47. RSA 564-B:5-502.
48. The exception for government claims continues under the NHUTC. RSA 564-B:5-503(b)(4).
49. RSA 564-B:5-503(b)(1); RSA 564-B:5-503(c).
50. RSA 564-B:5-503(b)(2); RSA 564-B:5-503(c).
51. RSA 564-B:5-503(b)(3); RSA 564-B:5-503(c).
52. RSA 564-B:5-506.
53. RSA 564-B:5-504(b).
54. RSA 564-B:5-504(c).
55. RSA 564-B:1-105(b)(8).
57. RSA 564-B:8-813(f).
58. RSA 564-B:8-813(c)(2).
59. RSA 564-B:8-813(c)(3).
60. RSA 564-B:8-813(c)(1).
61. RSA 564-B:8-813(d).
62. RSA 564-B:8-813(d).
63. RSA 564-B:8-813(f).
64. RSA 564-B:8-813(a).
65. RSA 564-B:8-813(b).
67. RSA 564-B:8-813(i).
68. RSA 564-B:8-813(b).
69. RSA 564-B:1-103(12).
70. Uniform Trust Code, comments to section 103 (2005).
71. RSA 564-B:3-302.
72. RSA 564-B:1-110(a).
73. RSA 564-B:1-110(c).
74. RSA 564-B:1-110(b).
75. RSA 564-B:8-813(d).76. For a good and interesting article about these issues, including the District of Columbia’s resolution of the competing policy concerns, see Donald D. Kozusko, In Defense of Quiet Trusts, Trusts & Estates, March 2004, at 20.
Attorney Michelle M. Arruda is a shareholder and director of the law firm of Cleveland, Waters and Bass, P.A., in Concord. She is the chair of the firm’s trust and estates practice group.