Arkansas Bankers Association. Arkansas Trust Code. Introduction. ARKANSAS TRUST CODE General Provisions 5/9/2018. K. Coleman Westbrook, Jr.

Transcription

1 Arkansas Bankers Association May 15, 2018 Arkansas Trust Code K. Coleman Westbrook, Jr. 1 Introduction Own Trust Code - 8 States (TX, GA, CA & NY) Adopted UTC - 31 States & DC (AR, FL, KA, MO, MS & TN) ATC UALR Law Review Winter Codify Rules Court s power to Modify and Terminate Trusts & Creditor s Claims - Establish Defaults Notices & Accountings - Create Innovations Settlements, Virtual Representation, Powers to Direct & Certification of Trust 2 General Provisions A.C.A. Sections , et seq. 3 1

2 General Provisions Scope -All expressed trusts but statutory public trusts -Does not include constructive or resulting trusts Terms of Trust ( TOT ) -As expressed in the trust -Other evidence that would be admissible in a judicial proceeding 4 1 of 6 General Provisions Definitions Beneficiary ( B ) - All potential beneficiaries, present or future, vested or contingent & power holders (common law differs) Qualified Beneficiary ( QB ) - Current Living Permissible Distributees ( PD ); - Successor Living PD; - Living PD on Termination - Attr. Gen. with regard to a Charitable Trust; and - B who requests notice 5 2 of 6 General Provisions TOT Prevail Except: - Requirements for Creating a Trust - Duty for Trustee to act in Good Faith - Appropriate Purpose of Trust - Court s Power to Modify/Terminate - Spendthrift & Creditors Rights - Court s Power over Bond, Compensation & Justice - Rights of persons other than Trustee and B - Periods of Limitations - Jurisdiction 6 3 of 6 2

3 General Provisions Common Law Supplements ATC Governing Law TOT govern interpretation of trust Principal Place of Administration - TOT (tax and jurisdiction) - Transfers (irrevocable on/after Sept. 1, 2005) - 60 days Notice to QB (new jurisdiction, address and number; explanation; effective & objection dates) - Any QB can object to Transfer 7 4 of 6 General Provisions Notice & Waiver - Mail, delivery or electronic -Notice may be Waived -If Notice to QB is required, then Notice must be given to any B who has requested Notice 8 5 of 6 General Provisions Nonjudicial Settlement Can t alter Material Purpose - Trust Interpretation - Approval of Accounting/Reports - Trustee s action/inaction - Resignation/Appointment of Trustee - Trustee Compensation - Transfer of place of Administration - Trustee Liability - TOT could prohibit or add restrictions Rules of Construction Same as Will & Deed Intent & Wording (not pretermitted-heir Kidwell 2007; vested interest Tait 2012) 9 6 of 6 3

4 Judicial Proceedings A.C.A. Sections , et seq. 10 Judicial Proceedings No Judicial Supervision - Unless ordered by Court Jurisdiction -Trustee submits upon acceptance of trust - B submits upon accepting distribution Circuit Court - TOT cannot change 11 Representation A.C.A. Sections , et seq. 12 4

5 Representation Basic Effect - Notice & Consent by person who may represent and bind another person unless objected to - Representative may receive notice and give consent for Incapacitated Settlor except with regard to Modifying, Amending or Terminating a trust, unless specific authorization is given by the Settlor - Settlor cannot represent a B with regard to modifying or terminating a trust - TOT could prohibit or expand 13 1 of 2 Representation Holder of Testamentary General Power Conservator, Guardian, Agent, Trustee, Personal Representative & Parent Class Representation - Minor, Incapacitated, Unborn & Unknown Appointment of Representative - Court may appoint Guardian Ad Litem Not Allowed if Conflict of Interest (unless TOT waives) 14 2 of 2 Creation of Trust A.C.A. Sections

6 Creation of Trust Creation (nonexclusive) - Transfer, Declaration or Exercise of Power Requirements for Creation (TOT cannot change) - Settlor has Capacity & indicates an Intention; - Ascertainable B or is a charitable trust, trust for animal or noncharitable purpose trust; - Trustee has Duties; and - Same person is not the Sole Trustee/B 16 1 of 3 Creation of Trust Out of State Trust are Valid Trust Purposes (TOT cannot change) - Lawful; - Not contrary to Public Policy; and - Possible to Achieve Charitable Purpose Court may select one Void Trust Fraud, duress, or undue influence Oral Trust Clear & Convincing Evidence Subject to Statute of Frauds (Launius 2013) 17 2 of 3 Creation of Trust Care for Animal - Animal alive during Settlor s lifetime - Terminates of death of last surviving animal Noncharitable Trust & No Ascertainable B or Purpose to be Selected by Trustee - Limited term of 21 years Trust applied only to its intended use; provided court determined excess reverts back to Settlor (or successors) unless otherwise in TOT 18 3 of 3 6

7 Modification or Termination of Trust A.C.A. Sections Modification/Termination Modification/Termination of Trust -Mandatory Termination - TOT - Revoked - No Purpose Remains - Purpose is Unlawful, Contrary to Public Policy or Impossible to Achieve - TOT cannot change court s powers 20 1 of 7 Modification/Termination Noncharitable Irrevocable Trust - Any Modification/Termination with the Consent of Settlor (or agent if specifically authorized) & All B (Settlor cannot consent for a B) TOT could prohibit or expand - Court Modification/Termination if all B Consent and not inconsistent with a material purpose (spendthrift is a material purpose see Buckalew 2013) TOT cannot change court s power - On Termination, distributed as B agree - If not all B consent, court can consent if nonconsenting B is adequately protected 21 2 of 7 7

8 Modification/Termination Unanticipated Circumstances TOT cannot change court s power - Court may modify administrative or dispositive terms or terminate a trust because of unanticipated circumstances to further the purposes of the trust in accordance with the settlor s probable intention (not SNT see Ruby G. Owen Trust 2012) - Court can modify administrative terms because of waste - Prior Statutes retained, but require consents and court involvement, allowed even if spendthrift 22 3 of 7 Modification/Termination Cy Pres - Court may modify or terminate a trust for charitable purposes - TOT cannot change court s power; provided terms can provide for reversion to living settlor; or other distribution if trust is less than 30 years old Uneconomic Trust - After Notice to QB, Trustee can terminate a trust if it is less than $100,000 (UTC $50,000) - Court may modify or terminate trust or change Trustee if cost cannot be justified (TOT cannot change court s power) - Does not apply to Easement for Conservation 23 4 of 7 Modification/Termination Reformation - Court may Reform the terms to correct mistake (even if unambiguous) to conform to intent if proven by clear and convincing admissible evidence that both the intent and the terms were affected by mistake of fact or law - TOT cannot change court s powers Settlor s Tax Objectives - Court may modify the terms (retroactively) to match Settlor s tax objectives - TOT cannot change court s powers 24 5 of 7 8

9 Modification/Termination Combination/Division -After Notice to QB, a Trustee may combine or divide trusts -Prior Statutes are retained, but only allow for division of a trust without notice and no court involvement if it is in the best interest of the beneficiaries 25 6 of 7 Modification/Termination TOT could give Power Holder Right to Modify or Terminate a Trust -If Irrevocable Trust such person should not be the Settlor or a B -With long-term trusts it will be important to have a method to modify/terminate 26 7 of 7 Creditor s Claims A.C.A. Sections , et seq. 27 9

10 Creditor s Claims Beneficiary s Creditors - If no spendthrift, then a court may authorize reaching a B s interest Spendthrift Provision - Must restrain Voluntary and Involuntary transfers - Saying spendthrift in the TOT works - If spendthrift, then B s interest may not be reached before it is distributed - UTC allows exceptions for spousal and child support and governmental exceptions 28 1 of 5 Creditor s Claims Discretionary Trusts - Creditor cannot compel Discretionary Distribution even if it is subject to a standard or the Trustee has abused its discretion (with or without spendthrift) - B can proceed against the Trustee for abuse of its discretion (Trustee has a duty to act in good faith) - A Trustee/B s interest may not be reached if the Trustee s discretion is limited by an ascertainable standard (normally deemed subject to such standard) - UTC permits a court to order a distribution to satisfy support obligations of spouse, ex-spouse or child 29 2 of 5 Creditor s Claims Claims Against Settlor (amended in 2015) - Revocable Trust (with or without spendthrift) - During Settlor s Lifetime, subject to creditors - If more than 1 Settlor, only Settlor s contributions - UTC makes subject even after Settlor s death - Irrevocable Trust (with or without spendthrift) - Maximum amount that can be distributed to Settlor - If more than 1 Settlor, only Settlor s contributions - Power of Withdrawal Same as Revocable Trust 30 3 of 5 10

11 Creditor s Claims Claims Against Settlor (Thompson 2014) - Decedent intended to defraud surviving spouse - Decedent's $100,000 bequest intended to deprive Spouse of Spouse's share of Decedent's estate - The decedent's gifts to spouse were not considered as the gifts were not testamentary when made - Surviving Spouse can take from Revocable Trust - The assets were included in the Decedent's Estate only to calculate the Spouse's Elective Share - The Revocable Trust was otherwise left intact 31 4 of 5 Creditor s Claims Overdue Distribution -With or without spendthrift, may reach undistributed Mandatory Distributions (Caubble 2014) Not Subject to Personal Obligations of Trustee TOT Cannot Change Rights of Creditors & Effect of Spendthrift 32 5 of 5 Revocable Trusts A.C.A. Sections , et seq

12 Revocable Trusts Settlor s Capacity Same as for a Will Revocation or Amendment - Post Trust Deemed Revocable contrast to common law - More than 1 Settlor - Community Property Revoke by any spouse; Amend by both spouses - Not Community Property Tracing - Trustee Must Notify other Settlor of any revocation or amendment 34 1 of 3 Revocable Trusts Revocation or Amendment (con t) - Method to Revoke or Amend - TOT (Cason surviving spouse can amend trust) - Other Methods if not contrary to TOT - Later Will or Codicil - Other Clear and Convincing Evidence (Orally?) - Settlor Directs Distribution on Revocation - Agent Power to revoke, amend or distribute only if specifically authorized by trust or power of attorney - Conservator Power to revoke, amend or distribute only with court approval 35 2 of 3 Revocable Trusts Settlor s Powers Unless incapacitated, other B s rights subject to Settlor Contesting Revocable Trust - Contest Period is Earlier of (TOT cannot change): - 3 Years from Settlor s Death; or - 90 Days from Notice to such person - Distributions on Death Trustee not liability unless know of pending or potential judicial proceeding - Invalid B must return any distribution 36 3 of 3 12

13 Office of Trustee A.C.A. Sections , et seq. 37 Office of Trustee Acceptance - Deemed rejected if not prompt Bond -TOT or Court Determines Necessary -No Bond if Regulated Financial Institution (even if TOT requires) - TOT cannot change court s powers 38 1 of 5 Office of Trustee Co-Trustees - Majority Rule contrast to common law - Remaining Co-Trustee Succeeds - Each Co-Trustee must Participate - unless unavailable, previously delegated, or prompt action is needed - Delegation unless Settlor expected otherwise - Not Join; No Liability unless no reasonable care - Reasonable Care prevent/redress serious breach - Dissenting Trustee no liability if prior notification unless serious breach 39 2 of 5 13

14 Office of Trustee Complete Vacancy - Order of Appointment - 1st, TOT; - 2nd, Unanimously by QB (if charitable trust, then by named charitable organizations and attorney general s consent); or - 3rd, Court - Court may Appoint Additional or Special Trustees if Needed Resignation (irrevocable on/after Sept. 1, 2005) - 30 days Notice to QB, Settlor and Trustees; or - Court Approved 40 3 of 5 Office of Trustee Court Removal - Trustee committed Serious Breach; - Lack of Cooperation among Co-Trustees Impairs the trust; - Ineffective Administration and best interest of B; or - Substantial Change of Circumstances or Requested by all QB and best interest of B and not inconsistent with material purpose - TOT could prohibit or expand 41 4 of 5 Office of Trustee Delivery of Property by Former Trustee Compensation - Reasonable if Not Specified in TOT - Amount Specified in TOT - Court can change if Change of Duties or Unreasonable - TOT cannot change court s power Reimbursement of Expenses 42 5 of 5 14

15 Duties and Powers of Trustee A.C.A. Sections , et seq. 43 Duties & Powers Administer in Good Faith - TOT cannot change Loyalty - Solely for B (replaces existing statute) - Voidable Personal Transactions unless (irrevocable on/after Sept. 1, 2005): - Authorized in TOT; - Court Approved; - B Fails to Timely Commence Judicial Proceeding; - B Consented; or - Previously entered Contract or Claim - Presumed Conflict of Interest (irrevocable on/after Sept. 1, 2005) - Trustee s agent and family - Person that Trustee has interest that might effect judgment 44 1 of 9 Duties & Powers -Loyalty (con t) - Unfair Advantage (irrevocable on/after Sept. 1, 2005) - Transaction between Trustee and B is Voidable unless Fair - Trust s Opportunity (irrevocable on/after Sept. 1, 2005) - Investment Company & Affiliates - No Conflict if complies with PIR - Trustee may be compensated by the investment co. - If compensated, must annually notify PD and B who request notice 45 2 of 9 15

16 Duties & Powers Loyalty (con t) - Voting Best Interests of B - Not Precluded If Fair to B - Agreement regarding Compensation or Appointment of Trustee - Reasonable Compensation - Transactions between trusts & estates - Deposits in related financial service institution - Advances - Court May Appoint Special Fiduciary 46 3 of 9 Duties & Powers Impartiality Between B (replaces existing statute) Prudent Administration Reasonable Costs of Administration (replaces existing statute) - As to Assets, Purposes & Trustee s Skills Trustee Uses Special Skills Delegation (replaces existing statute) - Trustee may Cautiously Delegate Duties & Powers subject to Periodic Review - Contrast to Common Law 47 4 of 9 Duties & Powers Powers to Direct - Revocable Trust Follow Settlor s Direction (even if contrary) - TOT Follow Person s Direction unless Contrary or Serious Breach - TOT Other Person can Modify or Terminate - Holder Presumed Fiduciary & No Liability If Good Faith Control & Protect Property Separate Recordkeeping - Joint Investment by Separate Trusts Enforcement & Defense of Claims Collecting Trust Property 48 5 of 9 16

17 Duties & Powers Inform & Report (irrevocable on/after Sept. 1, 2005) - Keep QB Informed & Respond to B s request - Required Notifications - Copy of Trust to B upon request - 60 days after Acceptance (name, address & number) or trust becoming irrevocable (name of Settlor & rights to copy of trust and accountings) to QB - With regard to an irrevocable trust, change in compensation in advance to QB - Can Be Waived by B or in TOT 49 6 of 9 Duties & Powers Accounting (irrevocable on/after Sept. 1, 2005) - Annually & Upon Termination - PD & B who request - Complete Vacancy in Trusteeship - QB from former Trustee (or agent of former Trustee) - Contents - Assets & Liabilities & Inventory at market value - Receipts & Disbursements - Source & Amount of Trustee s Compensation - Can Be Waived by B or in TOT 50 7 of 9 Duties & Powers Discretionary Powers -Good Faith Even if sole & absolute TOT cannot change - Unless TOT Provide Otherwise - Trustee/B (other than Settlor) subject to Ascertainable Standard - No legal obligation of Support owed by Trustee - Does not Apply to GPOA Marital Trust if Spouse is Trustee; Revocable Trust or 2503(c) Minor s Trust - Other Trustees make exercise any powers limited or Court may appoint Special Fiduciary 51 8 of 9 17

18 Duties & Powers General Powers - TOT & ATC - Right of an Unmarried Owner Specific Powers - Listed in ATC - Incorporated by Reference from Distribution Upon Termination - Notice to B of Proposed Distribution and 30 days to Object - Invalid Release if Induced or Unknown right or fact 52 9 of 9 Uniform Prudent Investor Act A.C.A. Sections , et seq. 53 Prudent Investor Act Prudent Investor Rule ( PIR ) (replaces existing statute and applies retroactively) - TOT special terms - Duty to comply with PIR Standard of Care - Invest & Manage purposes, terms & distribution - Whole Trust - Considerations Economy; inflation; taxes; role of each investment; total return; other resources of B; need for liquidity, income or appreciation; and special relationships 54 1 of 2 18

19 Prudent Investor Act Diversification -Required unless special circumstances or purposes of the trust Duties at Inception - Review Assets - Plan for Retention & Disposition Compliance Reviewed at Decision Time 55 2 of 2 Liability of Trustees & Rights of Persons Dealing with Trustees A.C.A. Sections , et seq. 56 Liability Court Remedies for Breach - Compel or Enjoin Trustee s Performance - Charge the Trustee or require Restoration - Order Accounting - Appoint Special Fiduciary - Suspend/Remove Trustee - Reduce/Deny Compensation - Void the Act; Impose Lien or Constructive Trust & Recover Property/Proceeds 57 1 of 7 19

20 Liability Damages for Breach - Greater of Value to Restore or Trustee s Profit - Contributions from other Trustees unless substantially more at fault or bad faith and no contribution to the extent the Trustee benefited Damages if No Breach - Liable for Profit - Not Liable for Loss of Value Award Attorney s Fees & Costs 58 2 of 7 Liability Limitation of Action (TOT cannot change) - 1 Year from Adequate Disclosure to B stating the existence of a potential claim and the time to commence a proceeding - 5 Years if Not Adequately Disclosed from the earlier of: - Trustee s removal, death or resignation; - Termination of B s interest; or - Termination of Trust No Liability Reliance on Trust 59 3 of 7 Liability No Liability if Care Ascertaining Event Exculpation (irrevocable on/after Sept. 1, 2005) - TOT Unenforceable if Bad Faith or Abusive - Drafted by Trustee is Invalid unless Fair and communicated to Settlor Consent, Release & Ratification - Valid unless Induced or Unknown right or fact 60 4 of 7 20

21 Liability Personal Liability (TOT cannot change rights of person other than Trustee or B) - No Contract Liability if disclose fiduciary capacity in the contract - Tort Liability only if personally at fault General Partner (TOT cannot change rights of person other than Trustee or B) - No Contract Liability if disclose fiduciary capacity in the contract or filing with Secretary of State - Tort Liability only if personally at fault - Settlor is deemed liable for a Revocable Trust as general partner - No immunity if Trustee or Trustee s family holds interest in partnership 61 5 of 7 Liability Persons Dealing with Trustee (TOT cannot change rights of person other than Trustee or B) -No Liability if Good Faith and Trustee exceeds powers or trust has terminated -Not Need to Inquire as to Powers or Ensure Proper Allocation 62 6 of 7 Liability Certification of Trust (TOT cannot change rights of person other than Trustee or B) - Serves as a Copy of the Trust (other than to a B or in a judicial proceeding) - Contents Date, Settlor, Trustee, Powers, Revocability, Co-Trustee s authority & Title & Signed by Trustee - State whether or not trust has been amended or revoked - Recipient may ask for excerpts for power to act, but is liable for a bad faith demand of the trust - Recipient not Liable upon reliance of Certification and knowledge of TOT is not inferred 63 7 of 7 21

22 Miscellaneous Provisions A.C.A. Sections , et seq. 64 Miscellaneous Uniformity Among States Electronic Records & Signature Severability Clause Sept. 1, 2005 Effective Date Relationships Before Sept. 1, Judicial Proceeding unless court finds substantial interference or prejudice - Rule of Construction unless contrary to TOT - Time periods run under prior statutes 65 Planning Considerations 66 22

23 Planning Notice, Consent & Information - Transfer Place of Administration all QB must consent (2005) - Modification or Termination all B must consent unless exception and court approval may be required - Termination of Small Trust Notice to QB - Combining/Dividing Trust Notice to QB - Notice to other Settlors of Revocable Trust - Period to Contest Revocable Trust Notice can t change - Dissenting Trustee Notice - Resignation to QB, Settlors & Trustees (2005) 67 1 of 5 Planning Notice, Consent & Information (con t) - Removal of Trustee consent of all QB and court - Compensation from Investment Co. annually Notify PD & B who request rate and method - QB reasonably Informed (2005) - Copy of Trust to B (2005) - Acceptance & Irrevocable Trust Notice to QB (2005) - Accounting to PD & B who request annually and upon termination and to QB on vacancy of trusteeship (2005) - Period to Object to a Proposed Distribution on Termination to B - Period to Contest Breach of Trust to B can t change 68 2 of 5 Planning Powers of Withdrawal Additional Methods to Modify, Terminate & Merge Asset Protection Ascertainable Standard; No Mandatory Distributions; shall as opposed to may Magic Words spendthrift pir Additional Documents Certification & Notices Governing Law Additional Methods to Remove Trustee & Appoint Successors 69 3 of 5 23

24 Planning Additional Investment & Powers Incapacity - Definition - Power to revoke, amend, modify, terminate or distribute Must State Trust is Irrevocable General Partner Filings Allow Trustee to Disclaim Must Indicate Super-majority Vote 70 4 of 5 Planning Powers to Direct Limit Nonjudicial Settlements Override Representation Provisions Material Purpose can Prevent - Nonjudicial Settlement - Court approved termination/modification of noncharitable irrevocable trust - Spendthrift clause is presumed - Removal of Trustee by all QB 71 5 of 5 K. COLEMAN WESTBROOK JR. Trust & Estate Planning I Partner Phone: (501) CWestbrook@FridayFirm.com West Capitol Ave. Suite 2000 I Little Rock, AR North Futrall Dr. Suite 103 I Fayetteville, AR South Pinnacle Hills Pkwy. Suite 301 I Rogers, AR