Uniform Trust Code enacted in NJ
The
governor signed the NJSBA-drafted Uniform Trust Code into law on Jan. 19, as
part of bills approved on the final bill enactment day of the last
session. The law becomes effective on July 17.
This bill, as amended, titled the “Uniform Trust Code,” would supplement
and revise the State’s existing laws concerning trusts. The bill is largely
based upon model legislation prepared by the Uniform Law Commission (formerly
the National Conference of Commissioners on Uniform State Laws), with some
parts modified or altogether not included in order to better fit within New
Jersey’s existing scheme on trust law. Most significantly, the model code
contained two articles which have not been included in this bill: Article 2
concerning the jurisdiction of the court, as these matters are controlled by
court rule and not statutory law; and Article 9 concerning prudent investor
standards, as such standards are already part of the statutory law in this
State, known as the “Prudent Investor Act,” P.L.1997, c.26 (C.3B:20-11.1 et
seq.).
A-2915/S-2035 (Lagana, McKeon, Ciattarelli/Bateman, Barnes) - "Uniform
Trust Code"
ARTICLE 1 (3B:31-1 THROUGH 3B:31-12): This article
provides the definitions and general provisions to be used throughout the bill,
which would largely comprise a new chapter in Title 3B of the New Jersey
Statutes. Among the provisions of general applicability are those detailing mandatory
requirements for the creation and operation of trusts that cannot be modified
or eliminated by the agreed upon terms of a trust; these would include the duty
of a trustee to act in good faith, the rights of certain creditors and
assignees to reach a beneficiary’s trust interest, and the periods of
limitation for commencing judicial proceedings. The article also covers the
means for determining which jurisdiction’s law governs a trust, as well as
determining the location of a trust’s principal place of administration.
Additionally, the article would permit the nonjudicial settlement of a
trustee’s accounts and other matters related to trust administration, so long
as any such settlement does not produce a result contrary to what is allowed in
trust law, including, but not limited to, the modification or termination of a
trust in an impermissible manner.
ARTICLE 2 (3B:31-13 THROUGH 3B:31-17). Article 2
sets out guidelines with regard to the representation of a trust in a
transaction or proceeding. Representation may be provided by the holder
of general testamentary power of appointment, by a fiduciary or a parent,
or by virtual representation. Virtual representation allows a minor,
incapacitated person, unborn individual, or a person whose identity or location
is unknown to be represented by another having a substantially identical
interest concerning a particular question or dispute. If a court determines
that an interest is not represented or that available representation might not
be adequate, the court may appoint a guardian ad litem or other representative
for a minor, incapacitated person, unborn individual, or person whose identity
or location is unknown.
ARTICLE 3 (3B:31-18 THROUGH 3B:31-34). This article
details the methods and requirements for the creation, modification, and
termination of a trust.
The methods to create a trust would be: (1) the transfer of property to a
trustee under a written instrument during the life of a settlor (a person who
creates or contributes property to a trust), or by will or disposition upon the
settlor’s death; (2) a written declaration by the owner of property that the
owner holds identifiable property as trustee; or (3) a written power of
appointment in favor of a trustee. A trust would only be created if there is a
definite beneficiary for the trust, or the trust is a charitable trust, a trust
for the care of an animal, or a trust for a noncharitable purpose. The written
instrument creating a trust or transferring property to a trust would not be
invalid or ineffective because the transferee is identified as the trust rather
than the trustee thereof.
A trust may generally be enforced if its purposes are lawful, not contrary
to public policy, and possible to achieve. Any trust, to the extent its
creation was induced by fraud, duress, or undue influence, would be void to
such extent.
As to the modification and termination of a trust, the article sets forth
the means by which a trustee or beneficiary may commence proceedings to approve
or disapprove a proposed trust modification or termination. Additionally, a
trust is subject to termination to the extent it is revoked or expires pursuant
to its own terms, no purpose of the trust remains to be achieved, or the
purposes of the trust have become unlawful, contrary to public policy, or
impossible to achieve.
A trustee for a trust consisting of property valued at less than $100,000
may, after notice to qualified beneficiaries, terminate the trust if that
trustee concludes that the value of the trust property is insufficient to
justify the costs of administration.
A court may modify the administrative or dispositive terms of a trust or
terminate the trust if, because of circumstances not anticipated by the
settlor, modification or termination would further the purposes of the trust.
To the extent practicable, any such modification should be made in accordance
with the settlor’s probable intent. The court may also reform a trust, even if
unambiguous, to conform the terms to the settlor’s probable intent if it is
proved by clear and convincing
evidence that there was a mistake of fact or law, whether in expression or
inducement.
Provisions in the article further provide that the court may modify the
terms of a trust to achieve a settlor’s tax objectives, so long as done in a
manner that is not contrary to the settlor’s probable intent.
ARTICLE 4 (3B:31-35 THROUGH 3B:31-41). This article
establishes guidelines concerning creditor’s claims, and spendthrift and
discretionary trusts.
A spendthrift provision restricts a beneficiary’s creditor from attaching
the beneficiary’s interest in the trust until there is a distribution to the
beneficiary. A spendthrift provision is created by a reference to a
“spendthrift trust,” or words of similar import, in the trust instrument, that
would restrain both voluntary and involuntary transfer of the beneficiary’s
trust interest.
If there is no spendthrift provision in a trust, a creditor may reach a
beneficiary’s interest by attachment of future or present distributions before
the trust is distributed, subject to New Jersey law concerning wage executions
(N.J.S.2A:17-50 through N.J.S.2A:17-56, and sections 3 and 4 of P.L.1981, c.
203 (C.2A:17-56.1a and C.2A:17- 56.6)).
The article also addresses a type of trust for the young, the elderly, or
the disabled, known as a “special needs trust,” or “OBRA ’93” trust. Such a
trust would limit distributions during the term of the trust to benefit one or
more “protected persons,” such as a person who is aged, blind, disabled,
developmentally disabled, or a person under the age of 18, or over the age of
18 and a full-time student, with a serious disability that may prevent
self-sufficiency.
A creditor could not reach or attach an interest in a special needs trust,
nor require the trustee to distribute to satisfy a creditor’s claim. A special
needs trust would not be required to repay government aid provided to the
protected person unless the aid was provided on the basis that the trust would
repay the aid when the person dies, the trust is terminated, and the special
needs trust instrument expressly calls for such repayment. This provision would
not apply to first-party, self- settled OBRA’93 trusts.
Also, a creditor may not compel a trustee to make a distribution to a
beneficiary that is discretionary.
Regardless of any spendthrift provision in a trust, the property of a
revocable trust is subject to claims by a settlor’s creditor during the settlor’s
lifetime. With respect to an irrevocable trust, a creditor (or assignee of the
settlor) may obtain the maximum amount available that can be distributed to or
for the settlor’s benefit. After the settlor’s death, and subject to the
settlor’s right to direct the source from which liabilities are paid, the
property of a trust revocable at the settlor’s death is subject to creditor
claims, cost of administration of the settlor’s estate, the expenses of the
settlor’s funeral and disposal of remains, and to a surviving spouse or civil
union partner and children
to the extent the settlor’s probate estate is inadequate to satisfy those
claims, costs, and expenses.
ARTICLE 5 (3B:31-42 THROUGH 31-45). This article
addresses the use of revocable trusts as alternatives to wills and seeks to
clarify certain issues in connection with the use of revocable trusts. A
revocable trust is one in which the settlor retains the power to control,
amend, revoke, or add property to the trust similar to a will. The article sets
forth the circumstances in which a settlor, a settlor’s attorney in fact, or
guardian may revoke or amend a revocable trust. A trust is revocable unless the
terms of a trust expressly provide that it is irrevocable, or unless there is
clear and convincing evidence that it is irrevocable. The trustee of a
revocable trust is responsible only to the settlor of the trust. The article
establishes time limits on contesting the validity of a revocable trust after
the death of the settlor, which generally conform to the time limits for
contesting the probate of a will. The bill also protects a trustee who makes
distributions from the trust after the settlor’s death, unless the trustee
knows of a pending or possible contest concerning the validity of the trust.
ARTICLE 6 (3B:31-46 THROUGH 3B:31-53). This article
provides a series of default rules concerning the office of trustee, many of
which are already established in chapters 11, 14 and 18 of Title 3B of the New
Jersey Statutes, New Jersey Rules of Court, and New Jersey case law. Except for
the court’s authority to issue letters of testamentary trusteeship and to order
bond, all of the provisions of Article 6 are subject to modification by the
express terms of the governing trust instrument.
The article addresses the process of qualifying a trustee, including
procedures for accepting or declining the office of trustee and bonding the
trustee. It also establishes the duties and responsibilities between or among
co-trustees, and provides standards for addressing various issues that may
arise with co-trustees. For example, provisions would permit co-trustees to act
by majority action and specify how and what happens when one of several
trustees dissents from a course of action, as well as the extent to which the others
must act when one is unable or has properly delegated performance of a
function.
The article addresses changes in the office of trustee including: when and
how a vacancy is filled, the procedure for resignation, grounds for removal,
and the duties and obligations of a resigning or removed trustee. The settlor,
a co-trustee, a beneficiary or the court on its own initiative may request that
a trustee be removed on grounds as set forth in N.J.S.3B:14-21 (such as failing
to file an inventory, render an account, refusal to abide by a court order,
embezzlement, or neglect, refusal, or inability to perform trustee duties).
The article also prescribes standards for reimbursement for expenses
advanced by the trustee. Since the matter of trustee compensation is addressed
comprehensively in chapter 18 of Title 3B
of the New Jersey Statutes, the provision in the Uniform Trust Code
concerning trustee compensation has not been included in the bill.
ARTICLE 7 (3B:31-54 THROUGH 3B:31-70). This article
sets forth the basic duties and powers of trustees. The basic duty is the duty
of loyalty which requires a trustee to manage the trust solely in the best
interests of the beneficiaries and to avoid conflicts of interest between the
interests of a trustee and that of a beneficiary. The other duties include the
duty of impartiality, the obligation of prudent administration, the obligation
to incur only reasonable costs, and the obligation to apply the trustee’s
special skills when there is reliance on those skills in the naming of the
trustee. A trustee may delegate certain duties and powers, but is held to a
prudent standard of appointment in so doing. The agent of any such delegation
is held to the fiduciary standard of the trustee in the exercise of the
trustee’s delegated duties and powers.
With regard to the trustee’s duty to disclose and make reports, provisions
require the trustee to keep qualified beneficiaries reasonably informed about
the administration of the trust and of the material facts necessary for them to
protect their interests.
The article also includes a section, not included in the model legislation,
concerning the powers of fiduciaries to direct investment decisions for a
trust. When a governing instrument gives authority to one or more persons to
direct, consent to, or disapprove a fiduciary's actual or proposed investment
decisions, such persons would be considered to be investment advisers and
fiduciaries when exercising such authority unless the governing instrument otherwise
provides.
The section provides that if a governing instrument states that the
fiduciary is to follow the direction of an investment adviser, and the fiduciary acts in accordance with such a
direction, then except in cases of willful misconduct or gross negligence, the
fiduciary would not be liable for any loss resulting directly or indirectly
from any such act. Except to the extent that the governing instrument provides
otherwise, the fiduciary, acting under the instrument to follow the investment
adviser’s direction, would have no duty to: (1) monitor the conduct of the
investment adviser; (2) provide advice to the investment adviser or consult
with the investment adviser; or (3) communicate with or warn or apprise any
beneficiary or third party concerning instances in which the fiduciary would or
might have exercised the fiduciary's own discretion in a manner different from
the manner directed by the investment adviser.
If the governing instrument provides that a fiduciary is to make decisions with the consent of an investment adviser, then except in cases of willful misconduct or gross
negligence on the part of the fiduciary, the fiduciary would not be liable for
any loss resulting directly or indirectly from any act taken or omitted as a
result of such investment adviser's failure to provide such consent after
having been requested to do so by the fiduciary.
Absent clear and convincing evidence to the contrary, the actions of the
fiduciary pertaining to matters within the scope of the investment adviser's
authority, such as confirming that the investment adviser's directions have
been carried out and recording and reporting actions taken at the investment
adviser's direction, would be presumed to be administrative actions taken by
the fiduciary solely to allow the fiduciary to perform those duties assigned to
the fiduciary under the governing instrument. Such administrative actions would
not be deemed to constitute an undertaking by the fiduciary to monitor the
investment adviser or otherwise participate in actions within the scope of the
investment adviser's authority.
ARTICLE 8 (3B:31-71 THROUGH 3B:31-81). This article
addresses the liability of a trustee and the rights of persons dealing with the
trustee. It provides for remedies when there is a breach of an obligation by
the trustee and specifies how money damages are to be determined. It also
specifies certain trustee defenses, including the addition of a statute of
limitations for claims alleging breach of trust. Generally, a beneficiary could
not commence a proceeding for breach of trust against a trustee more than six
months after the date the beneficiary (or beneficiary’s representative)
received a report disclosing the existence of a potential claim. If such a
report was not applicable to a potential claim, the claim would have to be
filed within five years of the following first-occurring event: (1) the
removal, resignation, or death of the trustee; (2) the termination of the
beneficiary’s interest in the trust; or (3) the termination of the trust.
However, the foregoing would not bar any proceeding by a beneficiary until five
years after such beneficiary has attained majority, has knowledge of the
existence of the trust and has knowledge that such beneficiary is or was a
beneficiary of the trust, if these factors were applicable to the beneficiary’s
situation.
ARTICLE 9 (3B:31-82 THROUGH 3B:31-84). Miscellaneous
administrative provisions are addressed in this final article, such as clarifying
the status of the proposed code’s provisions under the federal statutory law
regarding electronic records and signatures. The article also provides a
severability clause so that if any provision of the code is held invalid, the
invalidity does not affect other provisions of the code.
The provisions of the code, as stated in this article, would apply to
trusts created before, on, or after the effective date of the bill.
ADDITIONAL SECTIONS
In addition to the new supplemental chapter, described above, the bill
amends existing law, at N.J.S.3B:14-37, clarifying that a person, other than a
beneficiary, who in good faith assists a fiduciary or deals with the fiduciary
for value is protected as if the fiduciary properly exercised his power. A
similar provision would be added to the section concerning a person who in good
faith assists a former trustee,
without knowledge that the trusteeship was terminated, to protect that
person from liability as if the former trustee were still a trustee.
Lastly, the bill repeals four sections of existing law that are unnecessary
or are inconsistent with the bill’s provisions: N.J.S.3B:11- 5 (trustee’s death
or failure to act; appointment of new trustee by court; powers); N.J.S.3B:11-6
(vacancy in trusteeship upon discharge or removal); N.J.S.3B:11-7 (power of
new, substituted or additional trustees); and section 1 of P.L.2001, c.144
(C.3B:11-38) (trust funds for pets).
The bill, as amended and reported by the committee, is identical to
Assembly Bill No. 2915 (1R), also amended and reported today by the committee.
The committee amendments to the bill:
- add a definition for “beneficiary,” to specify that the term
includes persons: who have any
present or future trust interest, vested or contingent; who, in a capacity
other than that of a trustee, hold appointment power over trust property; who
are owners in a trust interest by assignment or other transfer; or who, relating
to a charitable trust only, are entitled to enforce the trust;
- expand the definition of “trustee” set forth in existing law to
include a corporate entity in its capacity as a trustee or co- trustee where
two or more are appointed;
- provide that a nonjudicial settlement of a trust matter cannot be
used to produce results contrary to the statutory trust law, including, but not
limited to, attempts to terminate or modify a trust in an impermissible manner;
- indicate that a settlor may not represent and bind a beneficiary
with respect to the termination or modification of a noncharitable irrevocable
trust;
- clarify that a trustee’s power to select a beneficiary from an
indefinite class is not void pursuant to section 14 of P.L.1999, c.159
(C.46:2F-10), which repealed the Uniform Statutory Rule Against Perpetuities, or any other applicable
rule against perpetuities or restraint on alienation;
- eliminate a provision which would have allowed a settlor general
authority to bring a proceeding to approve or disapprove a proposed
modification or termination of a trust; instead, a settlor may only act to
modify a charitable trust;
- provide that a noncharitable irrevocable trust may be modified or
terminated upon consent of the trustee, not the settlor as originally provided
in the underlying bill;
- add, regarding a trust spendthrift provision, that such a provision
does not prevent the appointment of interests through the exercise of a power
of appointment;
- grant, to a trustee of a special needs trust, broad discretion to
make trust distributions, and require that such a trust have at least one
protected person as a beneficiary;
- remove language concerning creditor claims on an irrevocable trust,
so that assets of such a trust may still be subject to a creditor’s claim even
when a trustee’s authority to pay taxing authorities directly, or reimburse the
settlor for trust income tax payable by the settlor, is solely discretionary;
- add a new section, to be allocated within the proposed new chapter
on trusts in Title 3B, concerning the investment functions of fiduciaries, as
described in the statement above;
- require that a trustee keep qualified beneficiaries reasonably
informed about the administration of a trust and of the material facts
necessary for them to protect their interests;
- provide that the provisions establishing a general five-year
statute of limitations on actions against a trustee would not bar a proceeding
by a beneficiary until five years after such beneficiary has attained majority,
has knowledge of the existence of the trust and has knowledge that such
beneficiary is or was a beneficiary of the trust, if these factors were
applicable to the beneficiary’s situation;
- include references throughout the bill to “partner in a civil
union” whenever only the term “spouse” appears, to reflect the equal status
between marriages and civil unions per the provisions of P.L.2006, c.103
(C.37:1-28 et al.), which established civil unions in this State; and
- correct references to the term “co-trustee,” as well as correct and
update internal cross-references and external references to existing trust law
and other relevant applicable law.
