Musings on Contemporary Trust Issues

“Musings on Contemporary Trust Issues,” that’s the subject of today’s ACTEC Trust and Estate talk.

Transcript/Show Notes

This is Doug Stanley, ACTEC Fellow from St. Louis. To discuss these trust issues in 2019 we will be hearing today from Turney Berry, ACTEC Fellow from Louisville, Kentucky.

Thanks very much. I thought we’d talk a little about some issues that I see, particularly dealing with uniform acts, not so much the Uniform Trust Code, but some collateral uniform acts. In particular the Uniform Power of Appointment Act and the Uniform Directed Trust Act, some issues that have arisen since we created those acts as they have started to be adopted across the country. And then there are some other issues that I think we’re going to see the Uniform Law Commission and ACTEC want to grapple with in the next few years.

Uniform Power of Appointment Act

Let me start with the Uniform Power of Appointment Act. It’s important to realize that in uniform law land that we distinguish between a non-fiduciary power over a trust- which is power of appointment- and a fiduciary power in a trust- which is something held by a trustee or someone who is directing a trustee. For example, the Uniform Directed Trust Act is primarily dealing with trust directors, that’s the term we use in that act as opposed to trust protectors or trust advisors. And those are presumed to be fiduciaries; power of appointment holders are presumed not to be fiduciaries. So, in the Uniform Power of Appointment Act largely what we’re doing is codifying traditional power of appointment law, there are a couple of changes that are made that I will mention. The reason that we were excited about that act is because very few states have much law on powers of appointment yet they’re in almost every document. We all know what they do, what they should to, how they should work, but actually if you go in your state to figure out where the law is you may or may not be unable to find it.

Two or three things that we did in particular that were a little different than traditional law, one had to do with the rights of creditors. This has turned out to be controversial in a way we did not expect. The question of when creditors should be able to compel distribution out of a trust, or should be able to attach assets in a trust, is something that the academic community and practitioners commonly disagree about. Practitioners mostly representing individuals who do not want creditors to be able to reach their assets, or the assets in trusts, take a very narrow view of when creditors should be able to reach assets. And so if you ask a practitioner what the law should be it would be that, “If I have a power of appointment over assets, even if I could appoint those assets to myself, or my creditors, or the creditors of my estate, that creditors should not be able to compel me to do that. Creditors should only be able to reach those assets if I actually do it.” That was, more or less, the general common law answer to the question of when could creditors reach assets. Like all common law there were some outlier states, but that was the general answer.

The academic community has a hard time defending that. Why should creditors have to wait if in fact they could be paid by a trust beneficiary? Shouldn’t a creditor of a power holder, somebody who has a power of appointment, compel the exercise of that power? When we worked on the Uniform Act, our conclusion was that if a power holder could pay a creditor then the creditor should be able to reach those assets. And we didn’t really worry about that because general powers of appointment at that point were fairly rare. They were in large trusts for generation-skipping tax purposes, that sort of thing. Since that time, however, we have seen a general powers of appointment sprinkled all over the world for income tax basis purposes. We now see powers of appointment, general powers of appointment, added to all sorts of trusts, and these creditor issues have become uppermost in our minds. In that sense, the Uniform Act does not comport with the expectations perhaps, at least of most practitioners, and we started to see states modify those provisions. Happily, it is a very easy modification to do, but it is a very important change, it’s a trap for the unwary.

Uniform Directed Trust Act

There’s a similar sort of situation that occurs in the Uniform Directed Trust Act. The Directed Trust Act says that powers of appointment are not included because, as I said earlier, a power of appointment is a non-fiduciary power and is dealt with in a different place. So, in the Directed Trust Act, we simply except out powers of appointment. Many times when we’re adding powers of appointment to documents for income tax basis purposes what we want to do is make those powers exercisable only with the consent of a non-adverse party. The question is can that consent be held in a non-fiduciary manner? Interestingly enough, the Uniform Directed Trust Act does not except out that, it excepts out people with powers of appointment but not with the consent power. So arguably, under the Uniform Directed Trust Act, lo and behold you have a difficulty there. So as we’re thinking about the Directed Trust Act and adopting it in states, we probably will want to make a modification to the Act on that score as well.

These Uniform Acts are very helpful and very important. They’re never perfect, we always discover issues that should be worked on. Thank you.

Thank you Turney.

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