Bar News - March 16, 2012
Elder, Estate Planning and Probate Law: In Defense of Trusts: A Cautionary View of the NH Uniform Trust Code
By: Jan P. Myskowski & Marla B. Matthews
Knights returning from the Crusades often found that they could not recover land they had placed in trust during their absence because the common law had only vague notions of the division between legal and equitable title. The "trustees" in whom the knights had vested legal title could exploit this ambiguity and in some cases simply retained title for themselves. Because the common law was inadequate to redress this problem, the enactment of the Statue of Uses in 1536 commenced a tradition of using statutory law to clarify the role of a fiduciary holding legal title for the benefit of another.
The National Conference of Commissioners on Uniform State Laws carried on this ancient tradition, stating in its summary of its model Uniform Trust Code, "The Uniform Trust Code provides a first effort at true codification of trust law. There is a serious need for certainty and clearly articulated rules as to the use of trusts burgeons in the United States." The authors assert that certainty and clarity play their most important role in the protection of beneficiaries, who are at a practical and procedural disadvantage given their lack of legal title.
Compare the national commissioners’ summary to the preamble to New Hampshire’s most recent legislative amendments to its version of the Uniform Trust Code (2011 SB 50): "This act will serve to continue New Hampshire’s commitment to be the best and most attractive legal environment in the nation for trusts and fiduciary services, an environment that will continue to attract to our state good-paying jobs for trust and investment management, legal and accounting professionals, and other professionals to provide the support and infrastructure required to service this growing sector of the nation’s economy." Not much in there about the protection of beneficial interests.
The authors wholeheartedly endorse New Hampshire’s adoption of the Uniform Trust Code and its core principles of clarifying the rights of beneficiaries and duties of trustees. However, the effort to mold New Hampshire’s version of the UTC as an engine of economic development could, without pause for reflection, corrupt the concept of a fiduciary relationship inherent in the word "trust." The authors are particularly concerned about three aspects of New Hampshire’s version of the UTC.
RSA 564-B:8-813 protects beneficiaries of a trust by requiring Trustees to keep beneficiaries "reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests." However, this goal of protecting the beneficiaries of a trust was completely neutralized by the second round of amendments to New Hampshire’s version of the Uniform Trust Code (2006 SB 394).
RSA 564-B:1-105 now makes the §8-813 duty to inform and report voluntary by allowing this obligation to be completely written out of a trust document. When Trustees have no duty to keep beneficiaries reasonably informed, beneficiaries are left with a severe informational disadvantage. Beneficiaries cannot complain that they don’t have enough information and it is very difficult, if not impossible, for them to protect their rights without it.
The removal of the duty to inform and report is less of a concern with institutional trustees, such as New Hampshire banks and trust companies, because they are committed to providing timely and accurate trust accounting services regardless of what the trust document requires. The removal of the duty to inform and report may, however, become problematic when non-institutional trustees are serving since these trustees may use this as an opportunity to withhold information from beneficiaries in an effort to manipulate the trust for their own benefit.
Nonjudicial Settlement Agreements
Nonjudicial settlement agreements provide a vehicle for the beneficiaries to make changes to a trust without the consent of the grantor. RSA 564-B:1-111 permits "interested persons" (defined to exclude the grantor) to enter into nonjudicial settlement agreements with respect to any matter involving a trust. Nonjudicial settlement agreements may be used to interpret the terms of a trust, provide for the resignation or appointment of a trustee, to determine the liability of a trustee for an action relating to the trust, and, most importantly, to modify and even terminate a trust.
§1-111(c) imposes only two limitations on this broad authority – a nonjudicial settlement agreement is only valid to the extent that it (i) does not violate a material purpose of the trust, and (ii) includes terms and conditions that could be properly approved by a court.
These limitations should, in theory, be sufficient to ensure that the wishes of a grantor will be carried out. In practice, however, the lack of court oversight will almost certainly lead to cases in which the protections the grantor envisioned for his or her beneficiaries will be eviscerated. This risk is particularly concerning when the representation provisions of the Uniform Trust Code are considered (which, for example, may allow a senior generation of beneficiaries to terminate a trust to the possible detriment of junior generations).
A grantor who wants to ensure the continued viability of his or her intentions will need to use extraordinary drafting techniques, such as incorporating provisions negating the use of nonjudicial settlement agreements with respect to his or her trust. Because such drafting is unlikely to be considered in most cases, and because such drafting will probably carry undesirable side effects, New Hampshire should consider revising §1-111 to limit the types of matters that may be addressed by nonjudicial settlement agreements. In the authors’ opinion, a liberalized judicial procedure would be preferable to allowing non-judicial settlement agreements of any kind.
Directed Trusts and Excluded Fiduciaries
Many professionals have heralded the introduction of trust advisors and trust protectors into the administrative landscape of New Hampshire trusts. On its face, the concept brings the possibility of non-trustees adding a personal touch to the administrative and discretionary decision making of institutional or disinterested trustees.
However, along with trust advisors and protectors came the concepts of the "excluded fiduciary" and the "directed trust." New Hampshire’s version of the UTC now allows for a dizzying array of fiduciaries having very disparate authorities and duties with respect to a single trust. See the provisions of RSA 546-B:1-103(23) ("Directed Trusts"), (24) ("Excluded Fiduciary"), (27) ("Trust Advisor"), (28) ("Trust Protector"), and RSA 564-B:7-711, (further defining the effect of the power to direct a fiduciary). Each of these fiduciaries (trustee, trust advisor, trust protector) will have a narrow sphere of responsibility, and may be subject to taking direction from one or more other fiduciaries, or even from beneficiaries, and to the extent they are subject to such direction, may be insulated from liability for acts falling even within their scope of authority.
This presents at least two major challenges for a trust beneficiary. First, he or she must determine which fiduciary is responsible for any given action with which the beneficiary may be dissatisfied; and, second, he or she must be prepared for that fiduciary to point to another fiduciary (or perhaps even a beneficiary) as having had the power to direct the action that is the subject of the complaint. In short, a beneficiary can now count on expensive, multifaceted litigation, the outcome of which is likely to be very uncertain.
New Hampshire is very fortunate to have a healthy community of domestic banks and trust companies whose fidelity to the core principles of fiduciary relationships will not be adversely affected by the easing of trustee burdens introduced by New Hampshire’s version of the Uniform Trust Code. Attracting additional trust and investment management activity to the state is certainly a laudable goal, but our legislature and our trusts and estates attorneys should guard jealously the spirit of the trust as an ancient device for protecting the interests of beneficiaries who for one reason or another were not good candidates to receive ownership of property outright.
|Jan P. Myskowski
|Marla B. Matthews
Jan P. Myskowski is a shareholder at Gallagher, Callahan & Gartrell, where he practices trust and estate law. He can be reached at email@example.com.
Marla B. Matthews is a shareholder at Gallagher, Callahan & Gartrell. She can be reached at firstname.lastname@example.org.