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Probate & Property

May/June 2024

Uniform Laws Update - Conflict of Laws in Trusts and Estates

Benjamin Orzeske

Summary

  • A well-planned estate might have to consider the laws of multiple jurisdictions.
  • When disputes arise, litigators choose forums that have the most favorable state laws.
  • State variations in the law of wills and probate procedure also contain enough variation to potentially raise unforeseen issues for even a well planned estate.
Uniform Laws Update - Conflict of Laws in Trusts and Estates
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Uniform Laws Update provides information on uniform and model state laws in development as they apply to property, trust, and estate matters. The editors of Probate & Property welcome information and suggestions from readers.

Estate planning used to be primarily a local practice. Clients would generally work with an attorney licensed in the client’s home state to draft an estate plan based on the law of the client’s residence. There was little discussion of which state’s law applied.

In 2024, that’s not always the case for several reasons. First, people are more mobile. Families move more often than they used to, sometimes maintaining more than one residence. As children grow up, they are more likely to live in another state. A well-planned estate might have to consider the laws of multiple jurisdictions. Second, wealth is more mobile. Financial assets, rather than real property, comprise the bulk of most people’s estates. Entities like LLCs are increasingly used to hold real property, effectively transforming the asset into a form of personal property.

Finally, state laws have evolved over the last few decades. Several states have adopted legislation to attract trust assets by authorizing various types of trusts unavailable in other jurisdictions, including self-settled asset protection trusts, dynasty trusts, and silent trusts. Settlors and their attorneys now regularly create trusts designed to be administered under the law of a “trust haven” state rather than the law of the settlor’s domicile to avail themselves of these planning opportunities. In this environment, the choice of law to govern various aspects of trust administration (e.g., creation, administration, distributions) carries greater importance.

The greater range of available options also creates an additional risk that a conflict of laws could arise. When disputes arise, litigators choose forums that have the most favorable state laws. If the parties to a trust (the trustees and other fiduciaries, settlor, and beneficiaries) have a presence in multiple states, the courts of more than one state could likely exercise jurisdiction over the trust, and those courts could disagree about which state’s law applies to a particular matter under dispute.

Section 107 of the Uniform Trust Code provides some guidance for resolving conflicts:

The meaning and effect of the terms of a trust are determined by:

  1. the law of the jurisdiction designated in the terms unless the designation of that jurisdiction’s law is contrary to a strong public policy of the jurisdiction having the most significant relationship to the matter at issue; or
  2. in the absence of a controlling designation in the terms of the trust, the law of the jurisdiction having the most significant relationship to the matter at issue.

The UTC does not, however, define several key phrases in Section 107. It is left to the courts to determine what constitutes a “strong public policy” of the state and to adjudge which jurisdiction has the “most significant relationship to the matter at issue.”

The Restatement (Second) of Conflict of Laws provides more definitive rules. However, those rules often point to different jurisdictions depending on whether the trust contains real or personal property and whether the trust is inter vivos or testamentary, further complicating the analysis. Moreover, the Restatement (Second) was drafted between 1952 and 1971, well before states began enacting legislation to cause settlors and their attorneys to consider invoking the law of far-flung jurisdictions.

And the issue is not limited to trusts. Although not as diverse as trust law regimes, state variations in the law of wills and probate procedure also contain enough variation to potentially raise unforeseen issues for even a well-planned estate.

Two related projects aim to shed some light on this area of the law. First, the American Law Institute (ALI) has begun drafting the Restatement (Third) of Conflict of Laws. Second, the Uniform Law Commission (ULC) is drafting a new uniform act on conflict of laws in trusts and estates. The Reporters for the ALI Restatement are collaborating with the ULC drafting committee to ensure the two projects are coordinated and, to the extent possible, will lead to the same legal outcomes.

A lot is at stake. Billions of dollars are held in trust, assuming that a particular state’s law will govern should any disputes arise. Estate planners spend a great deal of time learning the laws of various jurisdictions to choose the most appropriate state law to govern their clients’ trusts. A greater degree of certainty would benefit everyone involved.

As with all uniform law projects involving real property or trusts and estates, the RPTE Section has appointed an advisor for the project. David Lieberman, a partner at Levin Schreder & Cary in Chicago, is the Section’s representative and has participated in every drafting committee meeting. The ABA Advisor’s role is to liaise between ABA members and the drafting committee members—keeping section members informed and representing their interests. Although the ULC will not approve the new uniform law until summer 2025, at the earliest, the draft has advanced to the point where all interested RPTE members should review the committee’s work to date and make their opinions known.

Early on, the drafting committee on conflict of laws made certain policy decisions. To the extent possible, the uniform law will respect the American tradition of allowing a donor to choose the law that governs most aspects of the donor’s estate plan. The committee will also attempt to simplify the existing law of conflicts by eradicating the distinction between real and personal property, by de-emphasizing the distinction between inter-vivos and testamentary trusts, and by eliminating, to the extent possible, the application of different laws to matters of construction and interpretation of a will or a trust. Under the current draft, it would remain possible that the laws of different states could apply to different aspects of a particular trust or estate.

Because this topic is complex and the ramifications of the project could be wide-reaching, the ALI and ULC are taking all the time necessary to ensure the final products will significantly improve today’s messy legal landscape. Although a great deal of work product is available to review, both the ALI and ULC projects are still at a point where stakeholder input can be incorporated and encouraged.

RPTE members seeking additional information on this project are encouraged to consult any of the following sources and persons:

  1. Uniform Law Commission website www.uniformlaws.org. Navigate to “Projects” → “Browse Drafting” → “Conflict of Laws in Trusts and Estates Committee” to follow the committee’s work and review current and past drafts.
  2. American Law Institute, which has published tentative drafts of the Restatement (Third) of Conflict of Laws.
  3. The series of papers presented at the Tulane University School of Law and the American College of Trust and Estate Counsel’s Symposium on Conflict of Laws in Trusts and Estates in October 2022, published in the Tulane Law Review, Vol 97 No. 5.
  4. David E. Lieberman, Levin, Schreder & Carey, ABA Advisor to the ULC Drafting Committee on Conflict of Laws in Trusts and Estates.
  5. Prof. Robert H. Sitkoff, Harvard Law School, Chair of the ULC Drafting Committee on Conflict of Laws in Trusts and Estates.
  6. Turney P. Berry, Wyatt, Tarrant & Combs, Vice Chair of ULC Drafting Committee on Conflict of Laws in Trusts and Estates.
  7. Benjamin Orzeske, ULC Legislative Counsel for Uniform Trust and Estate Acts.

Primary sources for this column are the draft Conflict of Laws in Trusts and Estates Act and the extensive comments to it by Prof. Ronald J. Scalise Jr., John Minor Wisdom Professor of Civil Law at Tulane University School of Law, who is the Reporter for the ULC Drafting Committee on Conflict of Laws in Trusts and Estates.

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