Tennessee's Adoption of New Trust Law –
The Tennessee Uniform Trust Code

Tennessee recently enacted the Tennessee Uniform Trust Code (“Code”).  The Code is based on the model Uniform Trust Code, which was drafted in an effort to provide a standardized format for state legislatures to consider.  The Code may prove to be an important tool in the event a beneficiary’s needs change or the original purpose of the trust changes or becomes frustrated given current circumstances. 

The Code became effective on July 1, 2004, and applies to both existing trusts and trusts created after the effective date.  A provision of a trust that conflicts with the Code will be controlling in most circumstances.  The provisions of the Code are intended to provide greater flexibility to trustees and beneficiaries.  With our clients in mind, we have outlined a brief summary of some of the provisions of the Code:

Revocable Trusts
Contrary to former law, the Code presumes that a trust is revocable unless the trust document states otherwise.  A conservator, guardian, or attorney-in-fact may exercise the grantor’s powers of revocation, amendment, or distribution to the extent that either the trust instrument or the grantor's power of attorney specifically grants such powers. 

Creation, Modification, and Termination
The Code clarifies the requirements for creating trusts.  The Code also allows a trust to be modified or terminated, with or without court intervention, even if it is an irrevocable trust.

Modification and Termination.  The Code provides that during the grantor’s lifetime, a noncharitable irrevocable trust may be modified or terminated by the trustee, without court approval, if all of the beneficiaries consent and the grantor is notified in advance and does not object to the proposed action.  The modification or termination can be inconsistent with a material purpose of the trust.  A court also may modify the terms of a trust or terminate the trust if, because of circumstances not anticipated by the grantor, modification or termination will further the purposes of the trust.  The Code also provides that a trustee may terminate a trust with a total value of less than $100,000 if the value of the trust is insufficient to justify the cost of administration.

Settlement Agreements.  The Code allows interested persons to enter into settlement agreements without court approval to the extent such an agreement does not violate a material purpose of the trust.  Matters that can be resolved in this fashion include:

• Interpretation of trust terms
• Approval of trustee accountings
• Resignation or appointment of a trustee
• Transfer of the trust's place of administration
• Establishing the governing law of the trust
• Establishing the criteria for a trustee to use in making discretionary distributions to a trust beneficiary.
   

Trusts for Animals.  The Code authorized the creation of trusts to provide for the care of animals that are alive during the grantor's lifetime.  The assets of the trust must be applied only as the trust provides, unless a court finds that the value of the property exceeds the amount required for the intended purpose.  If the value of the trust is excessive, the property will either be distributed to the grantor or, if the grantor is deceased, to the grantor's successors in interest.  The trust terminates upon the death of the animal (or the death of the last surviving animal if there is more than one) but cannot be enforced for more than 21 years.

Representation
Some beneficiaries cannot represent themselves because they are under age (minor), incapacitated, or unborn.  Under Tennessee’s prior trust law, there was uncertainty about who could represent the interests of these persons if the trust did not address this question.  This uncertainty became an issue if there was a dispute about the interpretation of the terms or powers granted under a trust or if someone sought to modify or terminate a trust.  The Code provides that certain persons may represent the interests of these kinds of beneficiaries.  A representative can receive notice and give binding consent on behalf of beneficiaries, provided the representative’s interests do not conflict with the interests of a beneficiary. 

Creditor’s Claims and Spendthrift Provisions
The Code addresses the issue of spendthrift provisions and the rights of creditors of the grantor and beneficiaries of a trust. A trustee’s creditors cannot attach trust property unless the trustee is a beneficiary of the trust, as specified below.

Spendthrift Provisions.  A spendthrift provision restrains both voluntary and involuntary transfers of a beneficiary’s interest in a trust.  If a spendthrift provision protects a beneficiary’s interest in the trust, a beneficiary's creditor cannot reach the trust until a distribution is made to the beneficiary.  A beneficiary’s creditor cannot force a trustee to make a distribution if the trustee is not required to make distributions from the trust, but a creditor may attach property whose distribution is required, if the trustee has not made such distribution within a reasonable time after the designated time of distribution.  If there is no spendthrift provision or it is limited in any way, a court may authorize a creditor to attach all or a portion of the trust property.  A court may limit the award to a creditor if the court finds appropriate circumstances for doing so.  Spendthrift provisions do not protect a beneficiary’s interest against claims of the State.

Grantor’s Interest - Revocable Trust. During the lifetime of the grantor of a revocable trust, the grantor’s creditors may attach the assets of the trust.  After the grantor’s death, trust property is subject to attachment to pay for the cost of the grantor’s estate administration and funeral expenses.

Grantor’s Interest – Irrevocable Trust.  If the trust is irrevocable, the grantor’s creditors may attach the amount in the trust that can be distributed to the grantor or for the benefit of the grantor. 

Office of Trustee
Resignation and Removal.  Unless the trust provided otherwise, prior law only allowed the trustee to resign with court approval.  The Code allows a trustee to resign by giving thirty days notice to the beneficiaries, grantor, and all other trustees.  Under the Code, a court may remove a trustee for a “serious” breach of trust, lack of cooperation, or due to the unfitness, unwillingness, or persistent failure of a trustee to administer the trust effectively.  Contrary to prior law, a grantor, trustee, or beneficiary may ask the court to remove a trustee or a court may remove a trustee on its own initiative.  Until the trust property is delivered to a successor trustee, a resigning or removed trustee maintains its duties as trustee and has the power to protect the trust property.

Administration and Compensation.  Under the Code, a trustee is entitled to reasonable compensation.  Courts may vary the rate of compensation from that provided in the trust  if the trustee’s duties are substantially different than contemplated when the trust was created; or the compensation specified by the terms of the trust would be unreasonably high or low.  The Code also provides that the published fee schedule of a corporate trustee is presumed reasonable unless the trust provides otherwise.    

Duties of Trustee to Confirm and Report
The Code requires the trustee, within 60 days after acceptance and funding of the trust, to give notice to current income beneficiaries and vested beneficiaries of the remainder interest.  The notice must contain the information specified by the Code.  In addition, notice is required upon termination of a current income beneficiary's interest.  Under the Code, a beneficiary may waive notice; however, any previous waiver can be revoked. 

If you have any question about this article or would like more information about determining the extent to which the provisions of the Code may affect you, please do not hesitate to contact any member of our Taxation & Estate Preservation group listed on the following page.