Uniform Laws & Unique Features

1. Uniform Laws & Unique Features TUG XXXIV A Survey of New Developments

2. Uniform State Laws & The Fiduciary • This session will discuss some of the recent changes in Uniform State Laws and how they impact the fiduciary. We will discuss how uniform laws are created, which laws have the greatest impact on the trustee and how recent changes impact the fiduciary business model. The session will cover the Uniform Laws including Principal & Income, Prudent Investor, Trust Code, as well as state specific treatment of directed trustee, ILIT trustees, trust decanting, perpetual trusts, total return conversions, to name a few.

3. Agenda • Uniform Law Creation • Uniform Prudent Investor Act • Uniform Principal & Income Act • Uniform Trust Code • Trust Situs • Trust Protector • Trust Decanting • 14 Topics in 90 Minutes • Perpetual Trusts • ILIT/Crummey Trusts • Total Return Trusts • Directed Trust Companies • Asset Protection Trusts • Purpose Trusts • Reciprocity

4. Attachments on CD • State Decanting Statutes • Situs-at-a-Glance • Asset Protection Trust Rules • Pet (Purpose) Trust Laws • Reciprocal Corporate Fiduciary Powers • Which State Situs is Best • Read More About It

5. I. Uniform State Laws How They Are Created

6. Uniform State Laws • How They Are Created • National Conference of Commissioners on United States Laws • Created in 1892 • Non-Profit • Unincorporated Association • Comprised of Commissioners from all 50 States, D.C., Puerto Rico, and the U.S. Virgin Islands • Each Jurisdiction Determines How Commissioners Are Selected • Governor appoints • Ballot election

7. Uniform State Laws • About the Commissioners • Must be a member of the bar in the jurisdiction they represent • Serve for specific terms (2-4 years) • Receive no salary or fees • Usually a state legislator, judge or law professor

8. Uniform State Laws • Purpose of the Commission • Study & Review the law of the states to determine which areas of the law should be uniform • Draft specific statutes in areas of the law where uniformity between the states is desirable • Limitations of the Commission • Must be emphasized that the commission can only draft and propose; no Uniform law is effective until a state legislature adopts it. • Can’t prevent revision, addition or deletion

9. Uniform State Laws • Procedures for Creating Uniform Laws • Each Uniform Act is years in the making. • The process starts with scope and program committee, which initiates the agenda of the conference. • It investigates each proposed act, and then reports to the executive committee whether a subject is one in which it is desirable and feasible to draft a Uniform law. • If the executive committee approves a recommendation, a drafting committee of commissioners is appointed. • Drafting committees meet throughout the year.

10. Uniform State Laws • Procedures for Creating Uniform Laws(cont) • Tentative drafts are not submitted to the entire conference until they have received extensive committee consideration. • Drafts are then submitted for initial debate of the entire conference at an annual meeting. • Each act must be considered section by section, at no less than two annual meetings by all commissioners sitting as a committee of the whole. • With hundreds of trained eyes probing every concept and word, it is a rare draft that leaves an annual meeting in the same form it was initially presented. Once the committee of the whole approves an act, its final test is a vote by states-one vote per state • A majority of the states present, and no less than 20 states, must approve an act before it can be officially be adopted as a Uniform or Model Act.

11. Uniform State Laws • Procedures for Creating Uniform Laws (cont) • A Uniform or Model Act is officially promulgated for consideration by the states • Legislatures are urged to adopt Uniform Acts exactly as written, to “promote uniformity in the laws among the states” • Model Acts are designed to serve as guideline legislation, which states can borrow from to suit their individual needs and conditions • When drafting is complete on an act, a commissioner’s work has only begun. • They advocate adoption of Uniform and Model acts in their home jurisdictions. • Normal resistance to anything “new” makes this the hardest part of a commissioner’s job

12. Uniform State Laws • Procedures for Creating Uniform Laws (cont) • But the results can be workable modern state law that helps keep the federal system alive • The work of the conference simplifies the legal life of businesses and individuals by providing rules and procedures that are consistent from state to state • Representing both state government and the legal profession, it is a genuine confederation of state interests. • It has sought to bring uniformity to divergent legal traditions of more than 50 sovereign jurisdictions, and has done so with significant success.

13. Uniform State Laws • Trust Related Uniform Laws • Common Trust Fund (1938 & 1952) • Custodial Trust (1987) • Fiduciaries (1922) • Management of Institutional Funds(1972 & 2006) • Principal & Income (1931, 62 & 97) • Probate Code (1969, 75, 82, 87, 89, 90 & 91) • Supervision of Trustees for Charitable Trusts (1960) • Management of Public Employees Retirement Systems (1997) • Trust Code (2004) • Testamentary Additions to Trust (1960) • Statutory Rule Against Perpetuities (1986)

14. Uniform State Laws • Trust Related Uniform Laws (cont’) • Trustees Powers (1964 & 69) • Prudent Investor (1994) • Unclaimed Property (1981 & 95) • Power of Attorney (2006) • Health Care Decisions (1993) • Default Law Concept

15. Uniform State Laws • Contact Information • Website: • www.uniformlaws.org • Address: 676 North St. Clair Suite 1700 Chicago, IL 60611 • Phone: • Off: 312-915-0195 • Fax: 312-915-0187

16. II. Uniform Prudent Investor Act 1994

17. Enactment Status Map Prudent Investor Act

18. Legislative Fact Sheet - Prudent Investor Act • Origin • Completed by the Uniform Law Commission in 1994. • Description • UPIA revamps rules that now govern the actions of trustees. Trustees are required to pursue an investment strategy taking into account such factors as risk and return. • Endorsements • Approved by the American Bar Association & American Bankers Association

19. Why States Should Adopt UPruIA • The Uniform Prudent Investor Act reverses common law rules that restrict the investment powers of trustees. • The new act requires a trustee to invest as a prudent investor would, using reasonable care, skill and caution in light of the objectives and risk tolerance of the individual trust. • Diversification of assets is an obligation. • Trustees can delegate investment responsibilities to experts. Within the scope of these powers and duties, trustees can choose to invest in any kind of asset that meets the objective of the specific trust.

20. Why States Should Adopt UPruIA • What are the specific advantages of the Uniform Prudent Investor Act? • Trusts are likely to achieve a better return for beneficiaries than is the case under the common law rules. • Trustees can protect the trust corpus better through diversification of assets than is the case under the common law rules. • Trustees can invest to counter the effects of inflation, something that the common rules do not allow. • A trustee no longer is forced to rely upon his or her own knowledge and expertise, but can acquire investment services to enhance his or her own knowledge and skill.

21. Why States Should Adopt UPruIA • What are the specific advantages of the Uniform Prudent Investor Act? • Trustees can take into account the changing character and kinds of assets available for investment, free of archaic restrictions. • Trustees are judged on overall performance of the assets in a trust, rather than on the performance of specific assets. • The specific needs of each trust can be taken into account in devising investment strategy, rather than be subordinate to generic investment rules treating all trusts as the same. • The Act will provide uniformity of law, necessary in an interstate investment environment.

22. III. Uniform Principal & Income Act 1997

23. Enactment Status Map Uniform Principal & Income Act

24. Legislative Fact Sheet - Principal and Income Act • Act • Principal and Income Act • Origin • Completed by the Uniform Law Commission in 1997. • Description • This act’s purpose is to provide procedures for trustees administering trusts and personal representatives administering estates in allocating assets to principal and income, and to govern their proper distribution to beneficiaries, heirs and devisees. • Endorsements

25. Why States Should Adopt UPIA • The Uniform Principal and Income Act, originally promulgated by the Uniform Law Commissioners in 1931,revised in 1962, and adopted in 41 states, provides procedures for trustees administering an estate in separating principal from income. • The basic purpose of the new act, like the 1931 and 1962 versions, is to ensure that the intention of the trust creator is the guiding principle for trustees. • Like its predecessors, this revision distinguishes between property that is principal, which will be distributed to remainder beneficiaries (persons entitled to receive principal when an income interest ends), and property that is income, distributed to income beneficiaries.

26. Why States Should Adopt UPIA • The Uniform Act has always provided the default rules for such allocations in the event the trust instument is silent. • There are many reasons why every state should adopt the Revised Uniform Principal and Income Act (1997). • The law of trust investment has been modernized. It is now time to update the traditional income and allocation rules so that it can work with the doctrine of modern investment theory. • The new act provides a means for implementing the transition to an investment regime based on principles embodied in the Uniform Prudent Investor Act, especially the principle for investing for total return instead of for a certain level of income. • The new act better clarifies allocations of acquired assets, such as those from corporate distributions.

27. Why States Should Adopt UPIA • An “unincorporated entity” concept has been introduced to deal with businesses operated by a trustee, including farming and livestock operations, and investment activities in rental real estate, natural resources, and timber. • The new act provides for investment modalities that were not in existence in 1962, such as derivatives, options, deferred payment obligations, and synthetic financial assets. • There is a new provision which deals with the problem of disbursements made because of environmental laws. • New provisions which deal with the imbalances as a result of tax laws are also included. The act provides the power to make adjustments between principal and income to correct inequities caused by tax elections or peculiarities in the way the fiduciary income tax rules apply.

28. Why States Should Adopt UPIA • Uniformity • This act will provide uniformity of law, necessary in an interstate investment environment. • The Revised Uniform Principal and Income Act provides answers to long-standing problems in reconciling modern portfolio management with traditional rules of income allocation. • It is important that every state adopt this act as soon as possible.

29. Oil, Gas, Water & Timber • Liquidating Asset (Oil, Gas, Coal & Gravel) • Delay Rental: Income • Royalty: 90% Principal, 10% Income • Water • Renewable: Income • Non-renewable: 90% Principal, 10% Income • Timber • Annual Growth: Income • Excess: Principal

30. Trustee’s Discretion • If a trust owns an interest in above assets on [the effective date of this Act, the trustee may allocate net receipts from the sale of above assets and related products as provided in this [Act] or in the manner used by the trustee before [the effective date of this Act. • If the trust acquires an interest in above assets after [the effective date of this Act, the trustee shall allocate net receipts from the sale of timber and related products as provided in this [Act].

31. Non-Uniform States (Sample) • Texas: 72.5% Income, 27.5% Principal • Oklahoma: 85% Income, 15% Principal • Louisiana: 72.5% Income, 27.5% Principal

32. Section 406. Obligation to Pay Money. • (a) An amount received as interest, whether determined at a fixed, variable, or floating rate, on an obligation to pay money to the trustee, including an amount received as consideration for prepaying principal, must be allocated to income without any provision for amortization of premium or accretion of discount.

33. Section 408. Insubstantial Allocations Not Required. • If a trustee determines that an allocation between principal and income required is insubstantial, the trustee may allocate the entire amount to principal. • An allocation is presumed to be insubstantial if: • (1) the amount of the allocation would increase or decrease net income in an accounting period, as determined before the allocation, by less than 10 percent; or • (2) the value of the asset producing the receipt for which the allocation would be made is less than 10 percent of the total value of the trust’s assets at the beginning of the accounting

34. Section 413. Property Not Productive of Income. • Proceeds from the sale or other disposition of an asset are principal without regard to the amount of income the asset produces during any accounting period.

35. IV. Uniform Trust Code 2000

36. Enactment Status MapTrust Code

37. Legislative Fact Sheet - Trust Code • 2012 Introductions • Massachusetts • State-by State Comparison Matrix • See www.uniformlaws.org • Attempts to make parts compulsory failed

38. Legislative Fact Sheet - Trust Code • Act • Trust Code • Origin • Completed by the Uniform Law Commissioners in 2000, and amended in 2001,2003,2004 and 2005. • Description • The Uniform Trust Code provides a comprehensive model for codifying the law on trusts. • Endorsements • Approved by the American Bar Association, ABA Real Property, Probate and Trust Law Section, AARP

39. Trust Situs “The Best States”

41. X. Trust Protector

42. Trust Protector • In trust law, a protector is a person appointed under the trust instrument to direct or restrain the trustees in relation to their administration of the trust. • Historically, the concept of a protector developed in offshore jurisdictions where settlors were (perhaps understandably) concerned about appointing a trust company in a small, distant country as sole trustee of an offshore trust which is to hold a great deal of the settlor’s wealth. • However, protectors now form a part of mainstream tax planning in most jurisdictions which recognize trusts.

43. Trust Protector • There are a number of reasons that a settlor may wish to appoint a protector in relation to a trust: • protectors allow a great degree of flexibility when dealing with changes in circumstances, including both factual circumstances (death, premature divorce, previously unknown children) and legal changes (any legal changes, but most frequently changes to applicable revenue laws); • the settlor may be concerned that the trustee may not pay sufficient attention to his wishes; • the settlor wishes certain powers to be withheld from the trustees; or • the settlor wishes a third party to act as a main point of contact, between the beneficiaries and the trustees.

44. Trust Protector • The powers vested in the protector vary both according to the proper law of the trust and the terms of the trust instrument. The powers may include: • power to remove and appoint trustees; • power to approve a change of proper law; • power to approve the addition or removal of beneficiaries; • power to approve proposed trust distributions; • power to approve the appointment of an agent or adviser either generally or in relation to specific matters; • power to approve investment recommendations; • power to appoint replacement protectors; and • power to terminate the trust or approve the termination of the trust.

45. Trust Protector • Conceptually many commentators have difficulty with the idea of a protector, as this undermines the role which in law has historically been fulfilled by the trustees. • As protectors are a relatively recent innovation in trust law, case law is scant. • Is it not even clear if as a matter of law a protector would owe fiduciary duties to the beneficiaries (although in practice, many trust instruments expressly state that they shall). • It is sometimes suggested that where the protector is too close to the beneficial interest in the trust (for example, if the protectors have power to confer benefits upon themselves, directly or indirectly) this may destroy the essential nature of the trust. • If the protector has power to grant beneficial interests in the trust fund to the settlor, this may have disastrous tax consequences in some jurisdictions.

46. Trust Protector • Special Needs Trusts

47. XI. Trust Decanting

48. Trust Decanting • Decanting is the term generally used to describe the distribution of trust property to another trust pursuant to the trustee’s discretionary authority to make distributions to, or for the benefit of, one or more beneficiaries. • Potentially, common law provides authority for decanting, but a state statute or the terms of the trust instrument may expressly authorize a trustee to decant trust property to another trust. • Trustees may decant to achieve a variety of favorable tax or nontax results or to address changes in state law or in other circumstances affecting management or administration of the trust after it has become irrevocable.

49. Trust Decanting • The rationale that underlies decanting is that if a trustee has the discretionary power to distribute property to, or for the benefit of, one or more current beneficiaries, then the trustee, in effect, has a special power of appointment that should enable the trustee to distribute the property to a second trust for the benefit of such beneficiaries. • The trustee, moreover, should be able to give the current beneficiaries a special or general power of appointment under the terms of the second trust, the latter of which would be the functional equivalent of distributing the property outright to the beneficiaries. 

50. Trust Decanting • This view is in accord with the treatment of a trustee’s discretionary power to distribute as a special power of appointment under the Restatement (Second) of Property: • Donative Transfers (the Second Restatement) and the Restatement (Third) of Property: • Wills & Other Donative Transfers (the Third Restatement), although the Third Restatement additionally highlights the fact that, unlike a run-of-the-mill special power of appointment, fiduciary standards are imposed on a trustee’s discretionary distribution power.