Wills and Trusts

Wyatt, Tarrant & Combs, LLP


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Gordon Wright to serve as panelist at University of Louisville School of Law symposium examining the U.S. Supreme Court’s Obergefell decision

Gordon Wright, member of Wyatt’s Trusts, Estates & Personal Planning Service Team, will be serving as a panelist for the University of Louisville School of Law’s symposium “Getting Inside Obergefell: Marriage Equality’s Implications for Kentucky Law” on January 23, 2016.  Mr. Wright’s panel discussion will focus on family law and related relationships with regard to trusts and estates issues.

Please click here for more information.


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Mississippi Qualified Disposition in Trust Act

By Barry K. Jones

As of July 1, 2014, Mississippi became the fifteenth state to allow the creation of a “self-settled asset protection trust.” The full text of the legislation may be found in Mississippi House Bill 846, the “Mississippi Qualified Disposition in Trust Act,” signed by Mississippi Governor Bryant on April 23, 2014. The legislation was effective July 1, 2014 and is codified as Sections 91-9-701 et seq. of the Mississippi Code of 1972. The Mississippi Qualified Disposition in Trust Act (“MQDTA”) is modeled after the Delaware Qualified Disposition in Trust Act and Tennessee Investment Services Trust Act.

MQDTA requires that a “qualified disposition” in trust be made pursuant to an irrevocable, written trust instrument that incorporates Mississippi law with respect to the validity, construction and administration of the trust. The trust instrument must contain a “spendthrift” provision that provides that the interest of the transferor or other beneficiary in trust property or income may not be transferred, assigned, pledged or mortgaged, voluntarily or involuntarily, prior to the distribution of trust property or income to the beneficiary. In addition, the transfer of property to the trust must not Continue reading


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Tennessee Tenancy by the Entirety Joint Revocable Trust

Codified as Public Chapter 829 and signed by Governor Haslam into law on April 29, 2014, a new form of joint trust is available for transfers to trusts on or after July 1, 2014. Although the trust is not named by the statute, the trust substantially resembles the common law form of property known as tenancy by the entirety. Some practitioners have appropriately referred to this trust as the “marital asset protection trust.” I previously discussed this subject here, albeit briefly.

This statute has been codified as T.C.A. § 35-15-510.

Common law tenancy by the entirety. Before I get into the finer points of the TE Trust, a refresher on how tenancy by the entirety works in general (and its benefits) is appropriate.  Tenancy by the entirety is a special form of joint tenancy Continue reading


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Gifts Must Be Delivered (Usually)

Gifts Must Be Delivered (Usually)

In Estate of Roger T. Hansen, 810 N.W.2d 358 (Wis.App., 2012), the decedent was busy changing his Will, including writing his attorney to ensure that certain notes were forgiven in the Will, but died before signing it.  The obligor argued that the forgiveness was a gift causa mortis – but the court held otherwise because nothing was delivered to the donees.

In Greene v. Greene, 938 N.Y.S.2d 629 (N.Y.A.D. 2 Dept., 2012), the issue was whether a letter directing that certain bonds were to be reregistered  in the recipient’s hands was an inter vivos gift when the envelope stated it was only to be opened after the sender died, and it was.  The court held no inter vivos gift because there was no present transfer of ownership.

In Mendenhall v. Mountain West Farm Bureau Mutual Insurance Company, 274 P.3d 407 (Wy. 2012), the issue, for accident insurance purposes, was whether a truck had been given to the driver.  The facts were:

In January 2008, Lucas told David Nelson (Nelson), the owner of Wyoming Electric, that he was looking to acquire a pickup truck. Nelson decided to give Lucas one of the old company trucks. Lucas took the keys to the 1997 Ford truck from the Wyoming Electric office, took possession of the truck, and retained possession of the truck. Lucas was responsible for all the expenses associated with the truck, and on January 29, 2008, he added the truck to his Allstate automobile insurance policy. Nelson and Wyoming Electric did not exercise any control over the truck after Lucas drove it off the company lot. However, Nelson and Lucas did not apply for a new certificate of title reflecting Lucas as the owner of the truck until April 16, 2008. Additionally, the truck’s registration and plates remained in Wyoming Electric’s name and the truck was not removed from Wyoming Electric’s Mountain West insurance policy.

The court declined to require formal transfer of title:

The parties agree that Nelson gave Lucas the truck; that Lucas removed the keys from the Wyoming Electric office and took possession of the truck; that Lucas was responsible for all expenses associated with the truck and purchased insurance; and that Nelson and Wyoming Electric did not exercise any further control over the truck. The fact that Nelson gave Lucas the truck, and allowed him to leave with possession of the truck, demonstrates that Nelson had the present intention to make an immediate gift. Additionally, the stipulated facts show that Nelson actually delivered the truck to Lucas, divesting himself of dominion and control. Finally, the facts show that Lucas accepted the truck when he drove it off Wyoming Electric’s property and took responsibility for all expenses related to the truck. The undisputed facts, as applied to the elements of a gift, clearly demonstrate that Nelson transferred ownership of the truck to Lucas through an inter vivos gift.

Turney P. Berry

Louisville, Kentucky


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Power to Amend is Not Power to Revoke

Power to Amend is Not Power to Revoke

In Nederlander v. Papiano, 2012 WL 733888 (Cal.App. 2 Dist. 2012), the settlor of a revocable trust retained a power to amend the trust unilaterally but could only revoke the trust with the consent of non-adverse trustees.  As he needed or wanted money over the years he amended the trust to take money out.  The court concluded that amendments were really revocations and held the trustee liable.  The opinion states:

But we find it unnecessary to determine whether Scott needed to obtain the trustees’ consent for amendments generally or whether the drafting error would have necessitated a modification of the express terms of the trusts. Rather, we only decide whether Scott could use the amendment provision to effectuate a revocation without the trustees’ consent. We conclude that the eight purported amendments functioned as partial revocations because the only purpose they served was to allow Scott to withdraw funds, and their only effect was on the corpus of each trust. (See Rest.3d Trusts, § 63, com. e, p. 446 [power to revoke in part allows settlor to withdraw some rather than all property from trust].) These amendments did not modify any of the terms of the trust documents and did not delete the consent requirement for full or partial revocation. Since the trust instruments expressly require that the trustees consent to revocation, it follows that amendments used solely to revoke the trusts required the trustees’ consent. Any other interpretation would render the limitation placed on the settlor’s power to revoke meaningless and would defeat the settlor’s expressed intent.

We disagree with appellant that the drafter’s chosen nomenclature determines the effect of the amendments. The trust instruments do not state that a writing is effective as an amendment or a revocation only if it is appropriately titled. Nor do we agree that exempting each withdrawal from all trust provisions to the contrary can properly be characterized as amending the trusts. The settlor has a right to borrow funds with interest or security, and he also has the right to withdraw funds by partially revoking the trusts, but only with the trustees’ consent. (Art. 4, ¶ CC; Art. 6, ¶ A) Each trust amendment purported to suspend all trust provisions, so that Scott could withdraw funds. Each then provided that, except for that withdrawal, all terms and provisions “shall remain intact and in full force and effect.” The amendments did not change the beneficiaries’ rights or the trustees’ duties. (Cf. Heifetz v. Bank of America (1957) 147 Cal.App.2d 776, 783 ( Heifetz) [settlor amended trust to eliminate all beneficiaries except her daughter and with daughter’s consent revoked trust].) Thus, by their own terms, they did not change the trusts in any way, aside from reducing the corpus.

In the petition for rehearing, appellant argues that Heifetz, supra, 147 Cal.App.2d 776 mandates a contrary result. We do not agree. The trust instrument in that case allowed the settlor to revoke the trust but did not expressly reserve a right to amend. ( Id. at p. 778.) A later amendment made irrevocable a trust corpus of up to $150,000. ( Id. at p. 779.) The appellate court implied the settlor’s power to amend from her reserved power to revoke the trust. ( Id. at p. 782.) The court held the amendment that made the trust irrevocable up to $150,000 left the settlor free to revoke the trust in other respects, such as by subsequently eliminating all beneficiaries except her daughter. ( Id. at p. 785.) She was then free to revoke the trust with the consent of the sole remaining beneficiary. ( Ibid.)

It is important to point out not only what Heifetz involved, but also what it did not. The case did not involve a conditionally revocable trust that required the trustee’s consent to revocation as a protection against the settlor’s subsequent improvident change of mind. The Heifetz court’s reasoning about the settlor’s freedom to change her mind applied to a trust revocable in all respects other than the corpus amount. ( Heifetz, supra, 147 Cal.App.2d at p. 785.) The implied power to amend was coextensive with that partial power to revoke. ( Ibid.) In contrast, Scott did not have an unfettered right to change his mind if the change would result in a full or partial revocation.

Additionally, appellant assumes that, like the settlor in Heifetz, Scott first amended the trusts to deprive the beneficiaries of their rights and then drew down the trust corpus. But as we have explained, the amendments, as drafted, did not change the beneficiaries’ rights or the trustees’ duties. Rather, they allowed Scott to withdraw funds, notwithstanding the beneficiaries’ unaltered rights, the trustees’ unaltered duties to the beneficiaries, and the requirement that the trustees consent to any full or partial revocation. They affected the corpus of the trusts and nothing else. It is important to recall that the provision requiring the trustees’ consent for any revocation was included for the express purpose of protecting the beneficiaries from the kind of action Scott took against their interests.

In the two other cases appellant cites, the courts declined to imply a general power to amend or revoke expressly irrevocable trusts from either the settlor’s right to withdraw trust assets or from the settlor’s subsequent conduct. (See Crook v. Contreras (2002) 95 Cal.App.4th 1194, 1209; Laycock v. Hammer (2006) 141 Cal.App.4th 25, 30–31.) Like Heifetz, these cases do not involve conditionally revocable trusts, and their reasoning does not support appellant’s position. Because they partially revoked the trust’s corpus, the purported amendments required the trustees’ consent.

Turney P. Berry

Louisville, Kentucky


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Arbitration Provisions

Arbitration Provisions

Is a trust provision requiring that the trustee and beneficiaries submit to binding arbitration enforceable on the beneficiaries?  Not in California, held the California Court of Appeals in Diaz v. Bukey, 125 Cal.Rptr.3d 610 (Ca. App. Ct. 2011).  The court followed an Arizona decision which it summarized as follows:

In Schoneberger v. Oelze (2004) 208 Ariz. 591, 96 P.3d 1078, the court construed an arbitration provision in a trust substantially similar to that involved here. We find its reasoning persuasive. In Schoneberger, two trust beneficiaries filed separate, but similar, lawsuits against the settlors and trustees of the trusts asserting claims of breach of trust, conversion and fraudulent concealment, mismanagement and dissipating trust assets. Among other relief, each beneficiary demanded an accounting.

Defendants answered, denied the allegations of wrongdoing and alleged that the beneficiaries’ claims were subject to mandatory arbitration under the Arizona arbitration statute. The defendants asserted the arbitration clauses in the trust documents constituted provisions in a written contract requiring arbitration, and although the beneficiaries were not signatories to the trusts, they were nevertheless obligated to arbitrate as third party beneficiaries. Alternatively, they contended the beneficiaries were equitably estopped from objecting to arbitration as they were affirmatively seeking benefits under the trusts. The beneficiaries opposed defendants’ motion to compel arbitration. They argued the arbitration provisions in the trusts were unenforceable because the trusts were not contractual agreements. They also asserted that, as nonsignatories to the trust documents, they had never agreed to arbitrate their claims against the defendants.

In Schmitz v. Merrill Lynch, 939 N.E.2d 40 (Ill. App. 2010) the trustee entered into a “client relationship agreement” with an investment advisor that contained an arbitration provision.  The provision did not bind the beneficiaries because the beneficiaries were not contractually bound to the investment advisor.

In Rachal v. Reitz, 2013 Tex. LEXIS 348 (2013), the could held that an arbitration clause in trust was enforceable against non-signatory beneficiaries.  A.F. Reitz established a trust for the benefit of his son, John, and appointed himself as initial trustee and Hal Rachal Jr. as successor trustee. After A.F. Reitz died, Rachal became trustee of the trust.  John sued Rachal as trustee alleging breach of fiduciary duty by failure to account and looting of the trust for personal gain. The trustee moved to compel arbitration of the suit under the arbitration provision in the trust. The trial court denied the motion and the trustee appealed.

On appeal, the Texas Court of Appeals sitting en banc (with four dissenting justices) affirmed on the grounds that: (1) the trust document did not satisfy the requirement for a valid contract; and (2) the settlor’s intent does not transform the trust into a contract to arbitrate between the successor trustee and the beneficiary.

The Texas Supreme Court reversed the Court of Appeals and held that the arbitration clause was enforceable, on the grounds that:  (a) Texas courts enforce the settlor’s intent over the objections of the beneficiaries that disagree with the trust terms; (b) The Texas Arbitration Act applies to written “agreements”, and the Texas legislature could have limited the Act to “contracts” and did not do so, therefore the legislature intended to include all agreements and not just contracts; (c) the Act does not define “agreements”, but the common definition is a manifestation of mutual assent; (d) mutual assets to an arbitration provision exists where a non-signatory party has obtained or is seeking substantial benefit under an agreement through the doctrine of “direct benefits estoppels”; (e) deemed assent exists here through direct benefits estoppels because the trust beneficiary did not disclaim his interest in the trust, did not challenge the validity of the trust, and attempted to enforce his rights under the trust and sought the benefits provided to him under the terms; (f) a valid underlying contract is not required to apply direct benefits estoppel; (g) the claims in this case were within the scope of the arbitration provision, which required arbitration of “any dispute of any kind involving this Trust or any of the parties or persons connected herewith”; and (h) the other trust provisions that exonerate the trustee from liability do not defeat the arbitration provision which applies “notwithstanding anything herein to the contrary” and could apply where a claim is filed in court and the direct benefits estoppel doctrine does not apply (which presumably would mean only claims by non-beneficiaries under the court’s reasoning).

Turney P. Berry

Louisville, Kentucky


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Kentucky Uniform Trust Code

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.

Jurisdiction.

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.

Virtual Representation.

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.

Elder Law.

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.

Pet Trusts.

Section 30 authorizes the creation of a trust for the benefit of an animal and provides rules with respect to such trusts.

Charitable 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.

Delegation.

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.

Proposed Distribution.

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.

Beth Anderson

Louisville, Kentucky

 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