P R O B A T E & P R O P E R T Y
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Except for those few states that have comprehensive trust codes, statutory law in the United States pays little attention to the rights of beneficiaries, other than as the implied reciprocal of the duties of trustees. As a result, attorneys rarely have a comprehensive view of the status of beneficiaries in relation to the trust, the trustee, and the settlor. Except for those who regularly represent beneficiaries in disputes with trustees, few attorneys have a clear idea of certain fundamental concepts of trust law, particularly the concept that the trust must be administered solely for the benefit of the beneficiaries.Fundamental Statement in the Uniform Trust Code (UTC)
The UTC requires the trustee to administer the trust in accordance with its terms and purposes and the interests of the beneficiaries. UTC § 801. It also requires that a trust and its terms be for the benefit of its beneficiaries. UTC § 404. These requirements are mandatory and cannot be waived by the settlor. UTC § 105.
This mandatory “benefit of the beneficiaries” should perhaps be obvious, but it is often overlooked. Its articulation focuses attention on the rights and interests of beneficiaries and serves as a guide to interpretation and application of all provisions of the UTC and to the future development of trust law.
The defined “interests of the beneficiaries” are the beneficial interests provided in the terms of the trust. UTC § 103(7). The commentary points out that the purpose of this definition is to make it clear that it is the interests under the trust that are to be best served, not the best interests of the beneficiaries as they might define them for themselves; a beneficiary who wants to take a trip around the world or a chance to take a year off to “find” himself or herself will have to find those purposes within the terms of the trust.Major Changes
Modification or Termination of Noncharitable Irrevocable Trust by Consent of Beneficiaries
It is established doctrine (although not always recognized, even by some trust law practitioners) that irrevocable noncharitable trust provisions may be modified by agreement of all beneficiaries, provided no material purpose of the trust is defeated. Restatement (Third) of Trusts § 65(1) (Tent. Draft No. 3, 2001); Restatement (Second) of Trusts § 337 (1959). On the material purpose doctrine, see In re Wentworth, 129 N.E. 646 (N.Y. 1920). Even a material purpose of the trust may be overridden if the settlor joins with the beneficiaries. Restatement (Third) of Trusts § 65(2) (Tent. Draft No. 3, 2001); Restatement (Second) of Trusts § 338 (1959).
Section 411 of the UTC not only adopts this existing doctrine, but expands it and strengthens it in three respects:
1. Expanded representation provisions authorize consent on behalf of persons who are minors, incapacitated, or unborn or unascertained; to the extent there is no conflict of interest, that representation can be given by parents, persons having substantially identical interests, and fiduciaries. UTC §§ 303 and 304.
2. Under present doctrine, modification or termination is not permitted if it would defeat a material purpose of the trust. Arbitrary application of this limitation is restricted by the UTC, which provides that a spendthrift provision in the terms of the trust is not automatically presumed to constitute a material purpose. UTC § 411(e). This provision does not eliminate the material purpose doctrine itself; for example, a deferral of distribution until a specified age can be a material purpose of the trust, even in the absence of a spendthrift clause.
3. Under the UTC, a proposed modification or termination may be approved even in the absence of consent by all beneficiaries, provided a court is satisfied that, had all of the beneficiaries consented, the trust could have been modified or terminated, and that the interests of the nonconsenting beneficiary will be adequately protected. UTC§ 411(e). This permits a court to approve elimination of the holdout or holdup beneficiary with adequate provision for that beneficiary’s interest.
Court approval of modification or termination on unanimous consent, although not required, can be obtained if fiduciaries or beneficiaries wish the added protection of a court judgment, particularly on such questions as material purpose, adequate protection of interests, or adequacy of representation. UTC § 410(b).
Irrevocable charitable interestsare not subject to modification or termination under UTC § 411, but may be modified or terminated under the doctrine of cy pres. UTC § 413.
Filling Vacancy in Trusteeship
Absent a controlling provision in the terms of the trust, the UTC allows appointment of a successor trustee by unanimous agreement of the “qualified beneficiaries.” UTC § 704(c). (The concept of “qualified beneficiary” is new to the UTC and is important because many rights are restricted to “qualified beneficiaries.” Briefly, a “qualified beneficiary” is a current beneficiary, or a person who would become a beneficiary upon the immediate termination of the interests of the current beneficiaries, or a person who could receive a distribution from the trust if it terminated immediately. UTC § 103(12).) The appointment is effective without court action. If the qualified beneficiaries fail to make an appointment, the successor may be appointed by the court.
Beneficiaries’ Right to Information
The UTC restates and makes improvements to beneficiaries’ rights to information consistent with good trust administration practices. The trustee must keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. UTC § 813. In appropriate circumstances the trustee may be required to provide advance notice of transactions involving real estate, closely held business interests,and other difficult to value assets. UTC § 813 (comment); Allard v. Pacific National Bank, 663 P.2d 104 (Wash. 1983); Estate of Anderson, 196 Cal. Rptr. 782 (Cal. Ct. App. 1983).
Also, unless unreasonable under the circumstances, a trustee must respond to a beneficiary’s request for information related to the administration of the trust. UTC § 813(a). The rights of the beneficiaries under this section are mandatory and may not be waived by the settlor. UTC § 105(a)(9).
Beneficiaries who are not qualified beneficiaries are not routinely entitled to information and reports, but a nonqualified beneficiary who requests notice is thereafter entitled to receive notice. UTC § 110(a).
Subject to waiver by the settlor, a beneficiary is entitled to demand a copy of the trust instrument.UTC § 813(b)(1). The commentary makes it clear that the beneficiary is entitled to a complete copy of the trust, and not just the portion the trustee deems relevant.
The trustee is required to notify the qualified beneficiaries of the existence of the trust, of the trustee’s identity,of the settlor’s identity, and of theright to receive trustee’s reports.UTC § 813(b)(2) and (3). This provision is mandatory for qualified beneficiaries 25 years of age or over, but is a default rule, waivable by the settlor, for qualified beneficiaries under age 25. UTC § 105(a)(8).
Subject to waiver by the settlor, the qualified beneficiaries are entitled to advance notice of any change in the method or rate of trustee’s compensation. UTC § 813(b)(4). Distributees or permissible distributees of trust income or principal, and other qualified or nonqualified beneficiaries who request it, are entitled to reports from the trustee at least annually and at the termination of the trust, setting forth the trust property, liabilities, receipts and disbursements, including the trustee’s compensation, and alisting of the trust assets and, if feasible, their respective market values. UTC § 813(c). The trustee’s duty to send this information regardless of demand is a default rule that may be waived by the settlor, but the settlor may not waive the requirement that the trustee furnish reports once the trustee receives a request from abeneficiary.
While a trust is revocable and the settlor has capacity, all rights are subject to the control of the settlor,and the duties of the trustee are owed exclusively to the settlor. UTC § 603(a). But if the settlor of a revocable trust loses capacity, then the general rules for beneficiaries apply again and, unless waived by the settlor, the beneficiaries have all the rights of the beneficiaries generally, including the rights to information and reporting. (See the commentary to the 2001 amendments, which deleted the former UTC § 603(b) as unnecessary.)
The beneficiaries’ rights to information and reports are among the most important provisions in the UTC.They also are among the provisions that have attracted the most attention. The UTC provisions reflect a compromise position between opposingviewpoints.
Objections raised to beneficiaries’ rights to information include thewishes of some settlors who believe that knowledge of trust benefits would not be good for younger beneficiaries, encouraging them to take up a life of ease rather than work and be productive citizens. Sometimes trustees themselves desire secrecy and freedom from interference by beneficiaries.
The policy arguments on the other side are: that the essence of the trust relationship is accounting to the beneficiaries; that it is wise administration to account and inform beneficiaries, to avoid the greater danger of the beneficiary learning of a breach or possible breach long after the event; and that there are practical difficulties with secrecy (for example, the trustee must tell a child that he or she is not eligible for financial aid at college because the trust will pay, and must determine whether to accumulate income at high income tax rates or pay it out for inclusion in the beneficiary’s own return). Furthermore, there is the practical advantage of a one-year statute of limitations when the beneficiary is informed of the trust transactions and advised of the bar if no claim is made within the year. UTC § 1005. In the absence of notice, the trustee is exposed to liability until five years after the trustee ceases to serve, the interests of beneficiaries end, or the trust terminates. UTC § 1005(c).Statements Expressing Fundamental Rights Developed by Case Law But Rarely Codified
Duty of Loyalty
The beneficiaries’ chief protection is the trustee’s duty of loyalty, which is the duty to administer the trust solely in the interests of the beneficiary. UTC § 802(a). A beneficiary has a right to set aside any transaction entered into by the trustee for the trustee’s own personal account or that is otherwise affected by a conflict between the trustee’s fiduciary and personal interests (other than corporate trustees’ use of proprietary mutual funds), unless the transaction was authorized by the terms of the trust, approved by the court, or otherwise protected by lapse of time or by release. UTC § 802(b).
Beneficiaries are given the right to set aside a transaction between the trustee and the beneficiary, even if it does not concern trust property, if it occurs during the existence of thetrust (while the trustee retains significant influence over the beneficiary), and from which the trustee obtains an advantage, unless the trustee estab-lishes that the transaction was fair to the beneficiary. UTC § 802(d).
The trustee, in voting shares of stock or exercising powers of control over business interests, must act in the best interests of the beneficiaries and, if the trustee is the sole or controlling owner of a corporation or other form of enterprise, must elect or appoint directors or managers who will act to best serve the interests of the beneficiaries. UTC § 802(g).
Beneficiaries have additional protection from limits on the breadth of discretion that may be granted to trustees in the terms of the trust: a discretionary power, even one described as “absolute,” “sole,” or “uncontrolled,” must nevertheless be exercised in good faith, in accordance with the terms and purposes of the trust, and the interests of the beneficiaries. UTC § 814(a). This is a useful restatement of generally accepted present trust doctrine.Remedies
Beneficiaries are entitled to remedies for breach of trust, including injunctions, damages or surcharge, orders to account, removal, denial or reduction of compensation, and other appropriate equitable remedies. UTC § 1001.Damages
The measure of damages in case of breach is the greater of the amount required to restore the trust to what it would have been had the breach not occurred or the profit the trustee made by reason of the breach. UTC § 1002. This measure includes not only recovery of lost income or principal, but also capital gain or appreciation that would have resulted from proper administration. Even if there is no loss, the trustee may not benefit and must account for any profit made by the trustee by reason of the breach.Damages in Absence of Breach
Even in the absence of a breach, a trustee is accountable to an affected beneficiary for any profit made by the trustee arising from the administration, such as a receipt by the trustee of acommission or bonus from a third party for actions relating to the trust’s administration.Fees and Costs
A beneficiary may be awardedlitigation costs, including reasonable attorney fees, if the litigation is deemed beneficial to the trust. UTC § 1004.Exculpation
An exculpatory clause relieving a trustee of liability for breach is unenforceable if the breach is committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries, or if the exculpatory clause was inserted as the result of abuse by the trustee of a fiduciary or confidential relationship. UTC § 1008. An exculpatory term drafted or caused to be drafted by the trustee is invalid as an abuse unless the trustee proves that the exculpatory term is both fair under the circumstances and that its existence and contents were adequately communicated to the settlor.Release
A consent, release, or ratification may release a trustee from liability for breach of trust, unless it was induced by improper conduct of the trustee or, at the time of its execution, the beneficiary did not know of his or her rights or of the material facts relating to the breach. UTC § 1009.
Other Beneficiary Rights
A court may remove a trustee for the usual causes, including serious breach of trust, lack of cooperation among co-trustees substantially impairing administration, unfitness, unwillingness, or persistent failure to administer the trust effectively. New grounds for removal are (1) a substantial change of circumstances or (2) removal requested by all of the qualified beneficiaries. In either case the court must find that removal best serves the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust and that a suitable co-trustee or successor trustee is available. UTC § 706(b)(4).Situs Change
Any beneficiary has the right to veto a nonjudicial change of situs of administration, requiring that there be no change absent court action. UTC§ 108(e). (This is not among thenonwaivable provisions listed in UTC § 105(b) and so can be waived ormodified by the settlor.)Nonjudicial Settlements
“Interested persons,” including beneficiaries, have the right to enter into nonjudicial settlement agreements, provided the agreement does not violate a material purpose and has terms and conditions that could be properly approved by the court. UTC § 111. They may take advantage of virtual representation rules with respect to any matter involving a trust. UTC§§ 303 and 304. Matters that may be resolved by such a nonjudicial settlement agreement include interpretation or construction of the terms of the trust, approval of a trustee’s report or accounting, direction to a trustee to refrain from performing a particular act, a grant to the trustee of any necessary or desirable power, resignation or appointment of a trustee, determination of a trustee’s compensation, transfer of a trust’s principal place of administration, and liability of a trustee for an action relating to the trust.
The UTC provides a bill of rights for beneficiaries, education for trustees, guideposts for courts, and, perhaps most important of all, education for attorneys.