Effective July 15, 2014, Kentucky will join the ranks of states that have adopted the Uniform Trust Code (UTC). Although not yet codified and still only available as HB 78, Kentucky’s version of the UTC will be codified as KRS Chapter 386B. The UTC has been enacted in 26 1 States including Missouri, Ohio, Tennessee (read Rob Malin’s post regarding Tennessee’s not so uniform trust code here), Virginia and West Virginia. The purpose and intent in enacting the UTC is to codify the common law principles and standards regarding trusts and trustees including the duties of loyalty, care, notice, inform and report, and prudent investment for both corporate and individual trustees. The UTC is a comprehensive statute that fills in the gaps of current Kentucky law both statutory and common. Among the important matters the UTC addresses are the following:
Trustee Investment Standard.
Section 782 provides that the “prudent investor” rule of KRS 286.3-277 will apply to all trustees. Current law provides that the prudent investor rule applies to corporate trustees while a confusing mix of the common law “prudent man” rule and the “legal list” of KRS 386.020 applies to individual trustees. There is no discernible reason for applying different investment rules to corporate and individual trustees and Kentucky is unique in doing so. This change conforms Kentucky law with the law in the overwhelming majority of states.
Section 15 of the UTC clarifies which court has subject-matter jurisdiction over trust matters. The current law is confusing because it is unclear whether an inter vivos trust is a “probate” matter over which the district court has jurisdiction, although in many cases it is clear that the district court is the appropriate forum. Under the UTC, absent specific language in another statute, the District and Circuit Courts have concurrent jurisdiction over all trust actions. The District Court has exclusive jurisdiction over actions first filed there unless an opposing party files an action involving the same matter in Circuit Court within 20 days, in which case the district court is divested of jurisdiction. The rational of this rule is that if the matter truly is “adversarial” then the opposing party should be allowed to bring the matter before the court that is best suited to handle contested issues. However, if all parties are in agreement that the matter is best handled in District Court then the matter should be allowed to stay in District Court. This change does not affect the Circuit Court’s jurisdiction over matters specifically granted by other statutes.
Capacity to create or revoke a revocable trust.
Section 46 provides that the capacity required to create or revoke a revocable trust is the same as required to make a will.
Revocable Trusts are Subject to the Claims of the Settlor’s Creditors.
Section 43 clarifies that the assets of a revocable trust can, upon the death of the settlor, be subjected to the claims of the settlor’s creditors if the settlor’s estate has insufficient assets with which to satisfy the claims. This is an issue which has been the subject of litigation and the UTC resolves the issue by adopting a rule of fairness.
Revocation of a Revocable Trust.
Section 47 sets forth rules regarding the revocation of a revocable trust, including under what circumstances a revocable trust may be revoked by a later will of the settlor, when an attorney-in-fact may revoke a revocable trust, and when a conservator or guardian may revoke a revocable trust.
Statute of Limitations for Breach of Trust and to Contest Validity of a Revocable Trust.
The UTC clarifies the statute of limitations for breach of trust, which under current law is unclear. Section 83 provides a short one year limitations period if a Trustee adequately discloses the existence of a potential claim and informs the beneficiary of the time allowed for commencement of a proceeding. If no such disclosure is provided, Section 83 provides that limitations does not run on a claim for breach of fiduciary duty until five years after the first to occur of the trustee’s removal, death or resignation or the termination of the trust or termination of the beneficiary’s interest in the trust. Section 49 provides that an action to contest a revocable trust must be brought within two years after the settlor’s death, which is the same rule applicable to will contests.
Current law is uncertain regarding who can bind or represent unborn, minor or unascertainable beneficiaries. Sections 18-22 of the UTC set forth clear rules regarding the representation of the interest of another including when virtual representation may apply and when it does not. Section 20 lists who with a special relationship to another person may bind that other person. For example, a parent may bind a child absent a conflict of interest. Section 21 sets forth the general rule that a person with a substantially identical interest can bind an otherwise unrepresented minor, incapacitated, or unborn person or a person not reasonably ascertainable.
Notice and Duty to Inform.
Section 7 of the UTC clarifies how a Trustee must give notice and Section 72 clarifies to whom a Trustee owes a duty to inform and report and what information must be given. Section 72 requires the trustee within 60 days of its acceptance of the trust to provide the “qualified beneficiaries” (essentially those beneficiaries currently entitled to distributions, the immediate successor beneficiaries and those who would receive the trust property if the trust terminated) certain relevant information, including notice of the existence of the trust, the identity of the settlor, and the right to receive a copy of the trust instrument. Section 72 also sets forth the trustee’s duty to account to the beneficiaries. Section 72(2) specifies the extent to which the settlor may circumscribe the trustee’s duty to provide information regarding the trust.
Settlement Agreements Relating to Trusts.
In order to enhance judicial economy, Section 9 of the UTC provides for specific non-judicial settlement agreements between persons interested in a trust, including, for example, settlements relating to the meaning of the terms of a trust instrument. This provision facilitates the making of agreements by giving such agreements the same effect as if approved by the court, provided the agreement contains terms and conditions that a court could properly approve and would not be contrary to law. Section 33 codifies the common law rule that a noncharitable trust may be modified or terminated without court approval provided the settlor and all beneficiaries consent.
Section 11 of the UTC abolishes the doctrine of worthier title as applied to trusts. Abolition of this doctrine insures that certain benefits of federal law, including the right of a disabled person under the age of 65 to create a supplemental needs trust for his own benefit provided that at death any assets remaining in the trust are used to reimburse the state for Medicaid benefits provided to the settlor during his or her lifetime. All of the states which border Kentucky have abolished this doctrine with the exception of Ohio. The UTC also includes a specific statement that the creator of a first party supplemental needs trust is not a “settlor” of the trust for purposes of the spendthrift statute. Section 41(8)(a)(4) – (6). Section 73 confirms that a settlor may create a purely discretionary trust.
Distributions from Trusts.
To further promote the expeditious distribution of trust assets and address the often time consuming and costly dilemma that can arise when a trustee is reluctant to make a distribution absent beneficiary approval and the beneficiary is reluctant to approve until the assets have been distributed, the UTC has two specific sections (76 and 77) regarding trust distributions. Section 76 applies to all distributions unless the expedited distribution method in Section 77 is invoked. The expedited distribution method would only apply if all of the interested parties are in agreement and would provide for a simpler method of distributing assets when the distribution is one that is considered routine or directed by the trust document itself.
Section 30 authorizes the creation of a trust for the benefit of an animal and provides rules with respect to such trusts.
Section 27 clarifies that the court may select the charitable purpose or beneficiaries of a charitable trust if the terms of the trust do not indicate a particular beneficiary or purpose. Section 55(2)(c) provides that the trustee of a charitable trust may be removed upon the request all of the qualified beneficiaries provided notice is given to the Attorney General and the court finds that removal of the trustee best serves the interests of all of the beneficiaries.
Modifications to Advance the Purposes of the Trust.
Section 34 authorizes the court to modify a trust to meet changes in circumstances not anticipated by the settlor provided any such modification would further the purposes of the trust.
Section 66 authorizes the trustee to delegate duties and powers that a prudent person of comparable skills could properly delegate under the circumstances. Section 75(29) authorizes a trustee to employ an agent to perform any act of administration, whether or not discretionary.
Section 76 authorizes a trustee to present a proposal for distribution upon termination of the trust. If the beneficiary does not object to the proposal within 30 days the beneficiary has no right to object provided the trustee notifies the beneficiary of the right to object and the time for doing so. This provision brings the “proposed” settlement procedure applicable to estates pursuant to KRS 395.627 into the law of trusts.
1 Alabama, Arizona, Arkansas, District of Columbia, Florida, Kansas, Maine, Massachusetts, Michigan, Missouri, Montana, Nebraska, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Vermont, Virginia, West Virginia, Wyoming.
2 All references to UTC sections are as listed in HB 78