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MAURICE A. HARTNETT, III, Supreme Court, 57 The Green, Dover, DE 19901, Chair

FRANK W. DAYKIN, 4745 Giles Way, Carson City, NV 89704

E. EDWIN ECK, II, University of Montana, School of Law, Missoula, MT 59812

WILLIAM L. EVANS, Ohio Northern University, Pettit College of Law, 525 S. Main Street,

Ada, OH 45810

RUSSELL L. GEORGE, P.O. Box 907, 120 W. Third Street, Rifle, CO 81650

JOHN H. LANGBEIN, University of Cambridge, Faculty of Law, 10 West Road, Cambridge

CB3 9DZ, ENGLAND

GLEE S. SMITH, P.O. Box 360, 111 E. 8th, Larned, KS 67550

NATHANIEL STERLING, Law Revision Commission, Suite D-2, 4000 Middlefield Road,

Palo Alto, CA 94303

RICHARD V. WELLMAN, University of Georgia, School of Law, Athens, GA 30602

DAVID M. ENGLISH, Santa Clara University, School of Law, Santa Clara, CA 95053,

Reporter

GENE N. LEBRUN, P.O. Box 8250, 9th Floor, 909 St. Joseph Street, Rapid City, SD 57709,

President

MARTHA T. STARKEY, One Indiana Square, Suite 2100, Indianapolis, IN 46204,

Division Chair

JOSEPH KARTIGANER, 425 Lexington Avenue, New York, NY 10017, Advisor

DAVID ALAN RICHARDS, 875 3rd Avenue, New York, NY 10022, Real Property, Probate &

Trust Law Section Advisor

RAYMOND H. YOUNG, 26th Floor, 150 Federal Street, Boston, MA 02110, Real Property,

Probate & Trust Law Section Advisor

FRED H. MILLER, University of Oklahoma, College of Law, 300 Timberdell Road,

Norman, OK 73019, Executive Director

WILLIAM J. PIERCE, 1505 Roxbury Road, Ann Arbor, MI 48104,

Executive Director Emeritus

SECTION 1-101. SHORT TITLE 8

SECTION 1-102. CONSTRUCTION AGAINST IMPLIED REPEAL 8

SECTION 1-103. COMMON LAW OF TRUSTS 8

SECTION 1-104. CHOICE OF LAW 9

SECTION 1-105. DEFINITIONS 9

SECTION 1-201. ROLE OF COURT IN ADMINISTRATION OF TRUST 17

SECTION 1-202. PRINCIPAL PLACE OF ADMINISTRATION 17

SECTION 1-203. JURISDICTION OVER TRUSTEE AND BENEFICIARY 19

SECTION 1-204. DISMISSAL OF MATTERS RELATING TO FOREIGN TRUSTS 20

SECTION 1-205. TRANSFER OF JURISDICTION 22

[SECTION 1-206. SUBJECT MATTER JURISDICTION] 25

[SECTION 1-207. VENUE] 25

SECTION 2-101. METHODS OF CREATING TRUST 27

SECTION 2-102. REQUIREMENTS FOR CREATION 30

SECTION 2-103. EVIDENCE OF ORAL TRUST 31

SECTION 2-104. TRUST PURPOSES 32

SECTION 2-105. TRUST FOR CARE OF ANIMAL 33

SECTION 2-106. TRUST FOR VALID NONCHARITABLE PURPOSE 35

SECTION 2-201. TERMINATION OF TRUST 36

SECTION 2-202. MODIFICATION OR TERMINATION OF IRREVOCABLE TRUST

BY CONSENT 37

SECTION 2-203. MODIFICATION OR TERMINATION BECAUSE OF UNANTICIPATED

CIRCUMSTANCES 40

SECTION 2-204. UNECONOMIC NONCHARITABLE TRUST 41

SECTION 2-205. REFORMATION TO CORRECT MISTAKES 42

SECTION 2-206. ACHIEVING SETTLOR'S TAX OBJECTIVES 43

SECTION 2-207. COMBINATION AND DIVISION OF TRUSTS 44

SECTION 2-208. PETITION FOR APPROVAL OR DISAPPROVAL; REPRESENTATION

OF SETTLOR 46

SECTION 2-301. CHARITABLE PURPOSES 48

SECTION 2-302. APPLICATION OF CY PRES 48

SECTION 2-303. UNECONOMIC CHARITABLE TRUST 50

SECTION 2-401. SPENDTHRIFT PROVISION RECOGNIZED 51

SECTION 2-402. CREDITOR'S CLAIM AGAINST TRUST WITHOUT SPENDTHRIFT PROVISION 52

SECTION 2-403. EXCEPTIONS TO SPENDTHRIFT PROVISION 53

SECTION 2-404. DISCRETIONARY TRUSTS AND TRUSTS SUBJECT TO STANDARD 54

SECTION 2-405. CREDITOR'S CLAIM AGAINST SETTLOR 56

SECTION 2-406. LATE PAYMENTS 58

SECTION 3-101. CAPACITY OF SETTLOR TO CREATE REVOCABLE TRUST 60

SECTION 3-102. REVOCATION OR MODIFICATION OF REVOCABLE TRUST 61

SECTION 3-103. OTHER RIGHTS OF SETTLOR; PRESENTLY EXERCISABLE POWERS

OF WITHDRAWAL 65

SECTION 3-104. LIMITATION ON ACTION CONTESTING REVOCABLE TRUST 66

SECTION 4-101. ACCEPTANCE OR REJECTION OF TRUSTEESHIP 68

SECTION 4-102. TRUSTEE'S BOND 70

SECTION 4-103. COTRUSTEES 71

SECTION 4-104. VACANCY IN TRUSTEESHIP 72

SECTION 4-105. RESIGNATION OF TRUSTEE 73

SECTION 4-106. REMOVAL OF TRUSTEE 75

SECTION 4-107. DELIVERY OF PROPERTY BY FORMER TRUSTEE 77

SECTION 4-108. FILLING VACANCY 78

SECTION 4-109. COMPENSATION OF TRUSTEE 79

SECTION 4-110. REPAYMENT FOR EXPENDITURES 81

SECTION 5-101. MODIFICATION OF DUTIES AND POWERS BY SETTLOR 83

SECTION 5-102. DUTY TO ADMINISTER TRUST 84

SECTION 5-103. DUTY OF LOYALTY 85

SECTION 5-104. IMPARTIALITY 88

SECTION 5-105. PRUDENT ADMINISTRATION 89

SECTION 5-106. COSTS OF ADMINISTRATION 89

SECTION 5-107. TRUSTEE'S SKILLS 89

SECTION 5-108. DELEGATION BY TRUSTEE 90

SECTION 5-109. POWERS TO DIRECT 92

SECTION 5-110. CONTROL AND SAFEGUARDING OF TRUST PROPERTY 93

SECTION 5-111. SEPARATION AND IDENTIFICATION OF TRUST PROPERTY 93

SECTION 5-112. ENFORCEMENT AND DEFENSE OF CLAIMS 94

SECTION 5-113. FORMER FIDUCIARIES 95

SECTION 5-114. DUTY TO INFORM AND REPORT 95

SECTION 5-115. DUTY WITH REGARD TO DISCRETIONARY POWER 99

SECTION 5-116. GENERAL POWERS OF TRUSTEE 100

SECTION 5-117. SPECIFIC POWERS OF TRUSTEE 101

SECTION 5-201. PRUDENT INVESTOR RULE 110

SECTION 5-202. STANDARD OF CARE; PORTFOLIO STRATEGY; RISK AND RETURN

OBJECTIVES 111

SECTION 5-203. DIVERSIFICATION 116

SECTION 5-204. DUTIES AT INCEPTION OF TRUSTEESHIP 118

[SECTION 5-205. LOYALTY] 119

[SECTION 5-206. IMPARTIALITY] 120

[SECTION 5-207. INVESTMENT COSTS] 121

SECTION 5-208. REVIEWING COMPLIANCE 121

[SECTION 5-209. DELEGATION OF INVESTMENT AND MANAGEMENT FUNCTIONS] 122

SECTION 5-210. LANGUAGE INVOKING PRUDENT INVESTOR RULE 126

SECTION 6-101. SHORT TITLE 130

SECTION 6-102. DEFINITIONS 130

SECTION 6-103. FIDUCIARY DUTIES; GENERAL PRINCIPLES 132

SECTION 6-104. TRUSTEE'S POWER TO ADJUST 135

SECTION 6-201. DETERMINATION AND DISTRIBUTION OF NET INCOME 145

SECTION 6-202. DISTRIBUTION TO RESIDUARY AND REMAINDER BENEFICIARIES 150

SECTION 6-301. WHEN RIGHT TO INCOME BEGINS AND ENDS 152

SECTION 6-302. APPORTIONMENT OF RECEIPTS AND DISBURSEMENTS WHEN

DECEDENT DIES OR INCOME INTEREST BEGINS 153

SECTION 6-303. APPORTIONMENT WHEN INCOME INTEREST ENDS 155

SECTION 6-401. CHARACTER OF RECEIPTS 157

SECTION 6-402. DISTRIBUTION FROM TRUST OR ESTATE 160

SECTION 6-403. BUSINESS AND OTHER ACTIVITIES CONDUCTED BY TRUSTEE 161

SECTION 6-404. PRINCIPAL RECEIPTS 163

SECTION 6-405. RENTAL PROPERTY 164

SECTION 6-406. OBLIGATION TO PAY MONEY 165

SECTION 6-407. INSURANCE POLICIES AND SIMILAR CONTRACTS 166

SECTION 6-408. INSUBSTANTIAL ALLOCATIONS NOT REQUIRED 167

SECTION 6-409. DEFERRED COMPENSATION, ANNUITIES, AND SIMILAR PAYMENTS 168

SECTION 6-410. LIQUIDATING ASSET 172

SECTION 6-411. MINERALS, WATER, AND OTHER NATURAL RESOURCES 173

SECTION 6-412. TIMBER 176

SECTION 6-413. PROPERTY NOT PRODUCTIVE OF INCOME 177

SECTION 6-414. DERIVATIVES AND OPTIONS 179

SECTION 6-415. ASSET-BACKED SECURITIES 182

SECTION 6-501. DISBURSEMENTS FROM INCOME 183

SECTION 6-502. DISBURSEMENTS FROM PRINCIPAL 184

SECTION 6-503. TRANSFERS FROM INCOME TO PRINCIPAL FOR DEPRECIATION 187

SECTION 6-504. TRANSFERS FROM INCOME TO REIMBURSE PRINCIPAL 188

SECTION 6-505. INCOME TAXES 189

SECTION 6-506. ADJUSTMENTS BETWEEN PRINCIPAL AND INCOME BECAUSE

OF TAXES 191

SECTION 7-101. BREACH OF TRUST FOR VIOLATION OF DUTY 194

SECTION 7-102. REMEDIES FOR BREACH OF TRUST 194

SECTION 7-103. DAMAGES AGAINST TRUSTEE FOR BREACH OF TRUST 196

SECTION 7-104. LIMITATION OF ACTION AGAINST TRUSTEE AFTER FINAL REPOR

OR OTHER STATEMENT 197

SECTION 7-105. EXCULPATION OF TRUSTEE 198

SECTION 7-106. NONLIABILITY OF TRUSTEE UPON BENEFICIARY'S CONSENT,

RELEASE, OR RATIFICATION 199

SECTION 7-201. LIMITATION ON PERSONAL LIABILITY OF TRUSTEE 201

SECTION 7-202. PROTECTION OF PERSON DEALING WITH TRUSTEE 202

SECTION 7-203. CERTIFICATION OF TRUST 204

SECTION 7-301. REPRESENTATION OF BENEFICIARIES 208

SECTION 7-302. SETTLEMENT AGREEMENTS 208

SECTION 7-303. EFFECT OF CONSENT 209

SECTION 7-304. GENERAL TESTAMENTARY POWER OF APPOINTMENT 209

SECTION 7-305. REPRESENTATION BY FIDUCIARIES AND PARENTS 210

SECTION 7-306. REPRESENTATION BY PERSON WITH SUBSTANTIALLY IDENTICAL

INTEREST 210

SECTION 7-307. NOTICE OF JUDICIAL SETTLEMENT 211

SECTION 7-308. APPOINTMENT OF GUARDIAN AD LITEM 211

SECTION 7-309. APPOINTMENT OF SPECIAL REPRESENTATIVE 212

SECTION 8-101. APPLICATION OF [ACT] 213

SECTION 8-102. UNIFORMITY OF APPLICATION AND CONSTRUCTION 214

SECTION 8-103. SEVERABILITY CLAUSE 214

SECTION 8-104. SPECIFIC REPEALER AND AMENDMENTS 215

The Uniform Trust Act is the first comprehensive attempt at the national level to codify the law of trusts. A Study Committee was appointed in 1993. The Drafting Committee was appointed in 1994, met once during the 1994-1995 year, and twice yearly during 1995-1996, 1996-1997, and 1997-1998.

Reasons for Trust Act - There are several reasons why the drafting of a Uniform Trust Act is timely. The primary stimulus is the much greater use of trusts in recent years, particularly the revocable living trust, even among those of moderate wealth. This greater use of the trust, and consequent rise in the number of day-to-day questions involving trusts, has led to a recognition that the trust law in many States is quite thin - a few scattered statutes and even less in the way of reported cases. It has also led to a recognition that the existing Uniform Acts relating to trusts, while numerous, are incomplete. The primary source of trust law in most States is thus the Restatement (Second) of Trusts and the multivolume treatises by Scott and Bogert, sources which fail to address numerous practical issues and which on others provide insufficient guidance. While there are numerous Uniform Acts related to trusts, none is comprehensive. The Uniform Trust Act hopefully will provide States with precise answers to these trust law questions and in an easily findable place.

Existing Uniform Laws on Trust Law Subjects - There are numerous Uniform Acts on trusts and related subjects, but none provide comprehensive coverage of trust law issues. Certain of these Acts are incorporated into the larger Uniform Trust Act. Others, addressing more specialized topics, will continue to be available for enactment in their free-standing form. The following are the most relevant Acts:

Uniform Trustee Powers Act - approved in 1964, it has been enacted in 16 States. The Act, as its name implies, contains a list of specific trustee powers and deals with selected other issues, particularly rights of third parties. The Trustee Powers Act, at a minimum, needs to be updated to reflect the recently approved Uniform Prudent Investor Act. Revisions are also needed due to changes in commercial practice, such as the invention of the LLC. The substantive issues covered by the Trustee Powers Act, but with numerous updates, are fully incorporated into the draft of the Uniform Trust Act, principally at Sections 5-117 and 7-202.

Uniform Prudent Investor Act - approved in 1994, this Act has been enacted in over half of the States. This Act, and variant forms enacted in a number of other States, will soon displace the obsolete "prudent man" concept. The Prudent Investor Act is incorporated into the Uniform Trust Act as Article 5, Part 2.

Revised Uniform Principal and Income Act - a major revision of this widely enacted Uniform Act was approved in 1997. The Act extensively revises the accounting rules applicable to both trusts and estates. The Revised Uniform Principal and Income Act (1997) is incorporated into the Uniform Trust Act as Article 6.

Uniform Custodial Trust Act - approved in 1987, this Act has been enacted to date in 13 jurisdictions. This Act, which allows standard trust provisions to be automatically incorporated into the terms of the trust simply by referring to the Act, is not displaced by the Uniform Trust Act but complements it.

Uniform Probate Code Article VII - approved in 1969, Article VII has been enacted in about 15 jurisdictions. Article VII, although titled "Trust Administration," is a modest statute, addressing only a limited number of topics, such as trust registration, jurisdiction, and trustee liability to third parties. The substance of Article VII, other than its provisions on trust registration, are absorbed into the Uniform Trust Act, the provisions on jurisdiction at Article 1, Part 2, and the provisions on rights of third parties at Section 7-201.

Uniform Common Trust Fund Act - approved in 1938, this Act has been enacted in 34 States. The drafters of the Uniform Trust Act have elected not to address the subject of common trust funds and will leave this Act undisturbed. Common trust funds have receded in importance in recent years and are being replaced by proprietary mutual funds that may also be made available to non-trust customers. The Uniform Trust Act addresses the use of proprietary funds, principally at Section 5-103.

Uniform Trust Act (1937) - this largely overlooked Act of the same name was enacted in only six States, none within the past several decades. Despite a title suggesting comprehensive coverage of its topic, this Act addresses even less topics than does Article VII of the UPC. This Act is not being used in the drafting of the current Act and should be withdrawn as obsolete.

Uniform Supervision of Trustees for Charitable Purposes Act - approved in 1954, this Act has been enacted in four States. This Act is limited to mechanisms for monitoring the actions of charitable trustees and does not address the substantive law of charitable trusts, including the doctrine of cy pres. Cy pres is dealt with in Article 2, Part 3 of the Uniform Trust Act.

Uniform Testamentary Additions to Trusts Act - this Act is available in two versions: the 1960 Act, with 32 enactments; and the 1991 Act, with 15 enactments through 1996. This Act validates pourover devises to trusts. While not incorporated into the Uniform Trust Act, the Testamentary Additions to Trusts Act, like the Uniform Trust Act, is designed to facilitate the use of the revocable living trust.

Uniform Probate Code - approved in 1969, and enacted in close to complete form in about 20 States but influential in all, the UPC overlaps with trust topics in several areas. One area of overlap, already mentioned, is UPC Article VII. A second area of overlap are the rules of construction found in UPC Article II, Part 7. These provisions extend to revocable trusts and other nonprobate arrangements the rules of construction originally developed under the law of wills. Because the Uniform Trust Act deals exclusively with the law of trusts, the Drafting Committee has elected not to incorporate these rules of construction into the draft. A third area of overlap between the UPC and the Uniform Trust Act concerns representation of beneficiaries. UPC Section 1-403 provides principles of representation for achieving binding judicial settlements of matters involving both estates and trusts. The Uniform Trust Act adopts these representation principles, and extends them to nonjudicial settlements concerning trusts and to notices and consents required by or which may be given under the Act. See Uniform Trust Act, Article 7, Part 3.

Role of Restatement of Trusts - The Restatement (Second) of Trusts was approved by the American Law Institute in 1957. But beginning in the late 1980s, work on the Restatement Third began. The portion of Restatement Third relating to the prudent investor rule and other investment topics was completed and approved in 1992. A tentative draft of the portion of Restatement Third relating to the rules on the creation and validity of trusts was approved in 1996. The Uniform Trust Act is being drafted in close coordination with the writing of the Restatement Third. To the extent feasible, the Trust Act follows the portions of the Restatement Third which have been completed to date. Through close consultation with the other project's reporter, efforts are being made as well to coordinate the drafting of the Uniform Act with the current best guess on the probable substance of the uncompleted portions of the Restatement. Given the current pace of the Restatement Third, the Uniform Trust Act will likely be completed several years ahead of the other project.

Models for Drafting - While the Uniform Trust Act is the first comprehensive Uniform Act on the subject of trusts, comprehensive trust statutes are already in effect in several States. Notable examples include the statutes in California, Georgia, Indiana, and Texas, all of which have been referred to in the drafting process. Most influential has been the 1986 California statute, which was used by the Drafting Committee as its initial model. The California statute is known as the Trust Law and is found at Division 9 of the California Probate Code (Sections 15000 et seq.). There are several reasons why the California statute was selected. First, the California statute addresses many more issues than do the statutes of the other States. Second, the California law draws extensively from the other state models. Most importantly, the California Law Revision Commission, which drafted the California Trust Law, conformed its drafting with the text of the Restatement, although of the Restatement Second, not Restatement Third. The California law was only a starting point, however. The draft at this point is entirely the Drafting Committee's work product. Since drafting began in 1995, each of the California provisions had been discussed by the Drafting Committee and either accepted, rejected or revised. The provisions which remain have also been reorganized.

Act as Default Law - The Act contains a series of default rules which may be modified by the terms of a trust. But there are certain provisions not subject to change by the settlor. These include the methods for creating a trust (Article 2, Part 1), the procedures for terminating of modifying a trust other than by its express terms (Article 2, Part 2), the exceptions to enforcement of a spendthrift provision (Article 2, Part 4), and the standard of capacity for creating a revocable trust (Section 3-101). While the settlor is free to modify the powers and duties of a trustee, a trustee must always act in good faith and with regard to the purposes of the trust and the interest of the beneficiaries. See Sections 5-101 and 7-105.

Article 1 - General Provisions, Definitions, and Jurisdiction of Court - Besides supplying definitions which apply throughout the Act (Section 1-105), this article addresses selected issues involving judicial proceedings concerning trusts, particularly trusts with contacts to more than one State or country (Article 1, Part 2). The key concept is locating the trust's principal place of administration, which determines where the trustee and beneficiaries have consented to jurisdiction and which court has primary jurisdiction over proceedings involving the administration of a trust. A procedure for changing the principal place of administration is also provided.

Article 2, Part 1 - Creation and Validity of Trust - This part specifies the requirements for the creation of a trust. Most of the requirements track traditional doctrine, including intention, capacity, a requirement of property, and a purpose that must be for the benefit of the trust's beneficiaries. This part develops a three-part classification system for trusts. Noncharitable trusts ordinarily require an ascertainable beneficiary, charitable trusts by their very nature are created to benefit the public at large. Honorary trusts are trusts for noncharitable purposes which are valid despite the absence of an ascertainable (i.e., human) beneficiary. These include trusts for the care of an animal and trusts for other noncharitable purposes such as the maintenance of a cemetery lot.

Article 2, Part 2, Modification or Termination of Trust - This part provides a series of interrelated rules on when a trust may be terminated or modified other than by its express terms. The overall objective of this part is to liberalize the common law rules but without losing sight of the principle that preserving the settlor's intent is paramount. Termination or modification may be allowed upon beneficiary consent if the trust no longer serves a material purpose or if the settlor concurs (Section 2-202), by the court in response to unanticipated circumstances (Section 2-203), or if continued administration under the trust's existing terms would be uneconomical (Section 2-204). Trusts may be reformed to correct a mistake of law or fact (Section 2-205), or modified to achieve the settlor's tax objectives (Section 2-206). Trusts may be combined or divided (Section 2-207). A settlor, trustee, or beneficiary has standing to petition the court with respect to a proposed termination or modification (Section 2-208).

Article 2, Part 3, Charitable Purposes - This part does not comprehensively address the topic of charitable giving. Instead, its focus is on the doctrine of cy pres, which it attempts to restate by stating explicitly what courts tend to do in actual practice. Unless the terms of the trust provide to the contrary, a charitable trust does not fail if a specific charitable purpose becomes impracticable, unlawful, impossible to fulfill, or wasteful. Rather, the court, applying cy pres, must apply or distribute the trust property, in whole or in part, in a manner most closely approximating the settlor's charitable purpose.

Article 2, Part 4 - Spendthrift Provisions and Claims by Creditors - This part addresses the validity of a spendthrift provision and other issues relating to the rights of creditors, both of the settlor and beneficiaries, to reach the trust to collect a debt. Section 2-401 specifies the requirements for a valid spendthrift provision and, if valid, its effect. For trusts without valid spendthrift provisions, Section 2-402 describes the circumstances under which a beneficiary's creditors may reach the beneficiary's interest. Section 2-403 lists the categories of creditors whose claims are not subject to a spendthrift bar, and the extent to which such a creditor may reach the trust. Sections 2-404 to 2-406 address special categories where the rights of a beneficiary's creditors may not depend on whether the trust contains a spendthrift provision. Section 2-404 deals with discretionary trusts and trusts which provide for a standard of distribution. Section 2-405 addresses creditor claims against a settlor, whether the trust is revocable or irrevocable, and if revocable, whether the claim is made during the settlor's lifetime or incident to the settlor's death. Section 2-406 provides a creditor with a remedy if a trustee fails to make a required distribution within a reasonable time.

Article 3, Revocable Trusts - Because of the widespread use in recent years of the revocable trust as an alternative to a will, this short article is one of the more important articles of the Act. Each section of this article deals with issues of significance not totally settled under current law. A general theme of this article and of the other parts of the Act is to treat the revocable trust as the functional equivalent of a will. The article specifies a standard of capacity, provides that a trust is presumed revocable unless its terms provide otherwise, prescribes the procedure for revocation or modification, and provides a statute of limitations on contests.

Article 4, Office of Trustee - This article contains a series of default rules dealing with the office of trustee, all of which may be modified by the terms of the trust. Sections 4-101 and 4-102 address the process for getting a trustee into office, including the procedures for indicating an acceptance of office and whether bond will be required. Section 4-103 covers the office of cotrustee, permitting cotrustees to act by majority action, specifying the extent to which one trustee may delegate to another, and describing the circumstances under which a cotrustee may be held responsible for the actions of the other trustee or trustees. Sections 4-104 through 4-108 address changes in the office of trustee, specifying the circumstances when a vacancy must be filled, the procedure for resignation, the grounds for removal, and the process for appointing a successor. Sections 4-109 and 4-110 describe the standard for determining trustee compensation and reimbursement for expenses advanced.

Article 5, Part 1, Duties and Powers of Trustee - This part states the fundamental duties of a trustee and lists the trustee's powers. The duties listed are not new, but how the particular duties are formulated and applied has changed over the years. This part was drafted where possible to conform with the 1994 Uniform Prudent Investor Act. The Uniform Prudent Investor Act prescribes a trustee's responsibilities with respect to the management and investment of trust property. This Act also addresses a trustee's duties with respect to distributions to beneficiaries.

Article 5, Part 2, Uniform Prudent Investor Act - This part reproduces the Uniform Prudent Investor Act as approved in 1994. Because of the widespread adoption of the Uniform Prudent Investor Act, no effort has been made to interweave the Prudent Investor Act into the preceding part of this Act. States adopting this Act which have previously enacted the Prudent Investor Act are encouraged to recodify their version of the Prudent Investor Act by reenacting it as part of this Act. By enacting the Prudent Investor Act as a separate part of this Act, uniformity with States which have enacted the Prudent Investor Act in its free-standing form will be preserved.

Article 6, Revised Uniform Principal and Income Act - This article reproduces the Revised Uniform Principal and Income Act as approved by the Uniform Law Conference at its 1997 Annual Meeting.

Article 7, Part 1, Liability of Trustees to Beneficiaries - This part lists the remedies for breach of trust, describes how money damages are to be determined, provides a statute of limitations on claims against a trustee, and specifies other defenses, including consent of a beneficiary and recognition of and limitations on the effect of an exculpatory clause.

Article 7, Part 2, Rights of Third Persons - This part addresses trustee relations with third parties. The emphasis is on encouraging trustees and third parties to engage in commercial transactions to the same extent as would occur if the property were not held in trust. This part, among other things, permits a trustee to rely on a certification of trust, thereby hopefully reducing requests by third parties for copies of the complete trust instrument.

Article 7, Part 3, Representation of Beneficiaries and Settlement Agreements - This part deals with the important topic of representation of beneficiaries, both representation by fiduciaries (personal representatives, guardians and conservators), and what is known as virtual representation. The representation principles of the part apply for purposes of settlement of disputes, whether by a court or nonjudicially. They apply for the giving of required notices. They apply for the giving of consents to certain actions.

Article 8, Transitional and Miscellaneous Provisions - The Act is intended to have the widest possible application, consistent with constitutional limitations. The Act applies not only to trusts created on or after the effective date, but also to trusts in existence on the date of enactment.

SECTION 1-101. SHORT TITLE. This [Act] may be cited as the Uniform Trust Act.

SECTION 1-102. CONSTRUCTION AGAINST IMPLIED REPEAL. This [Act] is a general act intended to provide unified coverage of its subject matter. No part of this [Act] may be construed as impliedly repealed by subsequent legislation if that construction can reasonably be avoided.

SECTION 1-103. COMMON LAW OF TRUSTS. The common law of trusts supplements this [Act] except to the extent that it is modified by this [Act] or another statute of this State.

The Act codifies those portions of the law of express trusts that are most amenable to codification. The Act is supplemented by the common law of trusts, including principles of equity, particularly as articulated in the Restatement of Trusts. The common law of trusts is not static but includes the contemporary and evolving rules of decision developed by the courts in exercise of their power to adapt the law to new situations and changing conditions.

SECTION 1-104. CHOICE OF LAW. The meaning and effect of the terms of a trust are determined by the law of the State designated in those terms, unless the application of that State's law is contrary to the public policy of this State applicable to the trust.

This section, which is derived from Section 2-703 of the Uniform Probate Code, allows a settlor to select the law to govern the meaning and effect of the terms of a trust, regardless of where the trust property may be physically located, whether it consists of real or personal property, and whether the trust was created by will or during the settlor's lifetime. Because this section deals solely with matters of construction, and not with choice of law as to the validity of a trust, the law selected by the settlor need not have any other connection with the trust.

The section does not attempt to specify the particular public policies sufficient to override a settlor's expression of intent. These will vary depending upon the locale and may change over time. But certain examples do reoccur. Trusts which seek to defeat the marital property rights of a surviving spouse or to encourage a beneficiary to divorce are examples of trusts which, depending on the particular jurisdiction, may be overridden on public policy grounds. The mere fact that a term of a trust violates the public policy of the forum jurisdiction does not necessarily mean that the term is invalid. The public policy violated must also have some connection to the trust. The fact that the forum is a convenient location to resolve a dispute does not mean that it should apply its own public policy restrictions if it is neither the trust's principal place of administration or other jurisdiction having a significant connection with the trust or its beneficiaries.

This Act does not attempt to prescribe choice of laws rules should the trust not include a governing law provision, preferring to leave these often complex issues to the courts. Nor does this Act prescribe choice of law rules with respect to the validity of a trust. For a discussion of the validity and effect of governing law clauses, see 5A Austin W. Scott & William F. Fratcher, The Law of Trusts §§ 591, 596, 606, and 611 (4th ed. 1989). For a discussion of the choice of law rules applicable to trusts more generally, see id. §§ 553-666.

SECTION 1-105. DEFINITIONS. In this [Act]:

(1) "Beneficiary" means a person who has any present or future beneficial interest in a trust, whether vested or contingent, or a power of appointment.

(2) "Charitable trust" means a trust created for a charitable purpose as described in Section 2-301. The term excludes the interests in the trust of a noncharitable beneficiary.

(3) "Conservator" means a person appointed by a court to manage the estate of a minor or adult individual.

(4) "Fiduciary," used as a noun, includes a personal representative, guardian, conservator, and trustee.

(5) "Good faith" means honesty in fact and, when used in reference to:

(A) a trustee, the observance of fiduciary principles; or

(B) a third party, the observance of reasonable standards of fair dealing.

(6) "Guardian" means a person appointed by a court [,parent, or spouse] to make decisions regarding the support, care, education, health, and welfare of a minor or adult individual. The term does not include a guardian ad litem.

(7) "Know," with respect to a particular fact, means to have actual knowledge of the fact or have reason to know, based upon all of the facts and circumstances actually known to the person at the time, that the particular fact exists.

(8) "Person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, or agency, or any other legal or commercial entity.

(9) "Petition" includes a complaint and statement of claim.

(10) "Property" means anything that may be the subject of ownership, whether real or personal, legal or equitable, or any interest therein. The term includes a chose in action, claim, or beneficiary designation under a policy of insurance, financial instrument, employees' trust, or other arrangement, whether revocable or irrevocable.

(11) "Qualified beneficiary" means a beneficiary who, on the date the beneficiary's qualification is determined, is entitled or eligible to receive a distribution of trust income or principal or who would be entitled to receive a distribution if the event causing the trust's termination occurred.

(12) "Settlor" means a person who creates a trust. The term includes a testator.

(13) "Spendthrift provision" means a term of a trust which restrains the voluntary or involuntary transfer of a beneficiary's interest.

(14) "State" means a State of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.

(15) "Terms of a trust" means the manifestation of the intent of a settlor regarding a trust's provisions at the time of the trust's creation or amendment which is expressed in a manner admitting of its proof in a judicial proceeding, whether by written or spoken words or by conduct.

(16) "Trust" means an express trust, charitable or noncharitable, with additions thereto, wherever and however created, including a trust created pursuant to a statute, judgment, or decree under which the trust is to be administered in the manner of an express trust.

(17) "Trustee" includes an original, additional, or successor trustee, whether or not appointed or confirmed by a court.

"Beneficiary" (paragraph (1)) refers only to a beneficiary of a trust as defined in the Act. The term includes not only beneficiaries who received their interests under the terms of the trust but also beneficiaries who received their interests by any other means, including by an assignment, the exercise of a power of appointment, by a resulting trust upon the failure of an interest or gap in a disposition, or through the operation of an antilapse statute upon the predecease of a named beneficiary. The fact that a person incidentally benefits from the trust does not mean that the person is a beneficiary. For example, neither a trustee nor persons hired by the trustee become beneficiaries merely because they receive compensation from the trust. See Restatement (Third) of Trusts § 49 (Preliminary Draft No. 3, 1997).

Under the Act, only the charitable portion of a trust with both charitable and noncharitable beneficiaries qualifies as a "charitable trust" (paragraph (2)). Consequently, a split-interest trust will in certain instances be governed by two sets of provisions, one applicable to the charitable interests, the other the noncharitable. Compare, e.g., Section 2-204 (termination or modification of uneconomic noncharitable trust) with Section 2-303 (termination or modification of uneconomic charitable trust).

The definition of "fiduciary" (paragraph (4)) refers to the person holding a fiduciary office as opposed to the duties or obligations of the office. A trustee may engage in transactions with another trust, decedent's estate or conservatorship estate of which the trustee is the fiduciary. See Section 5-103(f)(3). A trustee has a duty to redress a breach of trust committed by a former trustee or other fiduciary from whom the trustee received trust property. See Section 5-113.

Under the Act, more is required than honesty of intent before a trustee, in dealing with the beneficiaries, or a third party, in dealing with a trustee, can be said to have been acting in "good faith" (paragraph (5)). The trustee or third party must also have exhibited honesty in conduct. For a third party, this requires the observance of reasonable standards of fair dealing, a requirement based on comparable provisions of the Uniform Commercial Code. See Unif. Commercial Code Section 3-103(4). For a trustee, honesty in conduct is exhibited by acting in accordance with fiduciary principles, particularly the obligation not to place the trustee's own interests above those of the beneficiaries. See Section 5-103 (duty of loyalty). The obligation of a trustee to act in good faith may not be waived in the terms of the trust. See Section 5-101 (modification of duties and powers of settlor); Section 5-115 (duty with regard to discretionary power). Nor is a term of a trust which exculpates a trustee for not acting in good faith enforceable. See Section 7-105 (exculpation of trustee). With respect to a third person, good faith, and the associated requirement of observance of reasonable standards of fair dealing, is required before the third person may be protected in dealings with the trustee (see Section 7-202), or for rejecting a certification of trust. See Section 7-203.

Under the Act, a "guardian" (paragraph (6)) makes decisions with respect to personal care; a "conservator" (paragraph (3)) manages property. The terminology used is that employed in Article V of the Uniform Probate Code, and in its free-standing Uniform Guardianship and Protective Proceedings Act. Enacting jurisdictions not using these terms in the defined sense may wish to substitute their own terminology. The definition of "guardian" accommodates those jurisdictions which allow appointment of a guardian by a parent or spouse in addition to appointment by a court. Enacting jurisdictions which allow appointment of a guardian solely by a court should delete the bracketed language.

The fact that a person does not have actual knowledge of a particular fact does not mean that the person did not "know" the fact (paragraph (7)). But neither is a person charged with knowledge of facts the person would have discovered upon investigation. This definition takes an intermediate approach. A fact is known to a person if the person had actual knowledge of the fact or had reason to know of the fact's existence based on all of the circumstances and other facts actually known to the person. "Know" is used in its defined sense in Section 5-109 (trustee knows holder of power to direct has violated fiduciary duty owes to beneficiaries), and Section 7-202 (protection of persons dealing with trustee). But actual knowledge is required if the knowledge requirement relates to a proceeding in court. See Sections 3-104(b) (limitation on contest of revocable trust), 7-307 (notice of judicial settlement), and 7-308 (appointment of guardian ad litem). And for certain actions, a person is charged with knowledge of facts the person would have discovered upon reasonable inquiry. See Sections 7-104 (limitation of action against trustee following final report or other statement), and 7-106 (nonliability of trustee for beneficiary's consent, release, or ratification).

The definition of "property" (paragraph (10)) removes any lingering uncertainty that a revocable designation under an employee plan or life insurance contract is not a sufficient property interest to activate a trust. See also Section 2-101 and Comment (methods of creating trust).

Because of the difficulty of identifying beneficiaries with remote contingent interests and their probable lack of interest in the day-to-day affairs of the trust, the Act uses the concept of "qualified beneficiary" (paragraph (11)) to limit the class of beneficiaries to whom certain notices must be given or consents received. The definition of qualified beneficiaries is used to define the class to whom notice must be given of a trustee resignation. See Section 4-105. The qualified beneficiary must receive the trustee's annual report and other notices required by Section 5-114. Notice to the qualified beneficiaries is also required before a trust may be combined or divided. See Section 2-207. Actions which may be accomplished by the consent of the qualified beneficiaries include the transfer of a trust's jurisdiction and the appointment of a successor trustee. See Sections 1-205 (transfer of jurisdiction) and 4-108 (filling vacancy).

The qualified beneficiaries are limited to the beneficiaries currently eligible to receive a distribution from the trust as well as what might be termed the first line remaindermen, that is, the beneficiaries who would receive the principal were the event triggering the trust's termination to occur on the date in question. Such a terminating event will typically be the death or deaths of the beneficiaries currently eligible to receive the income. Should a qualified beneficiary be a minor, incapacitated, unknown or unascertained, the representation and virtual representation principles of Article 7, Part 3 may apply, including the possible appointment of a guardian ad litem or special representative to represent the beneficiary's interest.

Determining the identity of the "settlor" (paragraph (12)) is usually not an issue. The same person will both sign the trust instrument and fund the trust. Ascertaining the identity of the settlor becomes more difficult when more than one person signs the trust instrument or funds the trust. The fact that a person is designated as the "settlor" by the terms of the trust is not necessarily determinative. For example, the person who executes the trust instrument may be acting as the agent for the person who will be funding the trust. In that case, the person funding the trust, and not the person signing the trust instrument, will be the settlor. Similarly, should more than one person contribute to a trust, all of the contributors will ordinarily be treated as settlors in proportion to their respective contributions, regardless of which one signed the trust instrument. However, in the case of a revocable trust, transfers made to the trust by a person who did not participate in the trust's creation will frequently be intended as a donative transfer to the person who originally created the trust. In that event, only the person who created the trust, and not the later donor, will be the settlor.

Ascertaining the identity of the settlor is important for a variety of reasons. It is important for determining rights in revocable trusts. See Sections 2-405(a)(2)-(3) (creditor claims against settlor of revocable trust), 3-102 (revocation or modification of revocable trust), and 3-104 (limitation on contest of revocable trust). It is also important for determining rights of creditors in irrevocable trusts. See Section 2-405(a)(1) (creditor can reach whatever trustee could pay to settlor). While the settlor of an irrevocable trust traditionally has no continuing rights over the trust except for a right to terminate the trust with the beneficiaries' consent (see Section 2-202), under the Act the settlor of an irrevocable trust may also petition for removal of the trustee or for a court order relating to trust termination or modification. See Sections 2-208 (petitions for approval or disapproval), and 4-106 (removal of trustee). Also, per Section 2-301(c), the settlor may maintain an action to enforce or modify a charitable trust.

"Spendthrift provision" (paragraph (13)) means a term of a trust which restrains the transfer of a beneficiary's interest, either by a voluntary act of the beneficiary or by an action by a beneficiary's creditor or assignee, which at least as far as the beneficiary is concerned, would be involuntary. The effect of a spendthrift provision is addressed in Article 2, Part 4. The presence of a spendthrift provision may also constitute a material purpose sufficient to prevent the termination of a trust by agreement of the beneficiaries, although the Act does not presume this result. See Section 2-202.

"Terms of a trust" (paragraph (15)) is a defined term used with some frequency in the Act. While the wording of a written trust instrument is almost always the most important determinant of a trust's terms, the definition is not so limited. Oral statements, the settlor's family circumstances, and, to the extent the settlor was otherwise silent, rules of construction, all may have a bearing on determining a trust's meaning. If a trust established by order of court is to be administered as an express trust, the terms of the trust are determined from the court order as interpreted in light of the general rules governing interpretation of judgments. See Restatement (Third) of Trusts § 4 and cmt. f (Tentative Draft No. 1, 1996).

Not all evidence may necessarily be considered in determining the terms of a trust. A manifestation of a settlor's intention does not constitute evidence of a trust's terms if it would be inadmissible in a judicial proceeding in which the trust's terms are in question. See Restatement (Third) of Trusts § 4 cmt. b (Tentative Draft No. 1, 1996). See also Restatement (Third) Property: Donative Transfers §§ 10.2, 11.1-11.3 (Tentative Draft No. 1, 1995). For example, in many States a trust of real property is unenforceable unless evidenced by a writing, although this Act does not so require, leaving this issue to be covered, if the enacting jurisdiction so elects, by separate statute. See Section 2-103 (evidence of oral trust). Evidence otherwise relevant to determining the terms of a trust may also be excluded under other principles of law, such as the parol evidence rule.

Under the Act, a "trust" (paragraph (16)) means an express trust, whether private or charitable, including a trust created by court judgment or decree which is to be administered in the manner of an express trust. Excluded from the Act's coverage are constructive trusts, which are not express trusts but remedial devices imposed by law. The Act is directed primarily at express trusts which arise in an estate planning or other donative context, but the definition of "trust" is not so limited. Trusts created pursuant to a divorce action would be included, even though such a trust is not donative but is created pursuant to a bargained for exchange. The extent to which even more commercially-oriented trusts are subject to the Act will vary depending on the type of trust and the laws, other than this Act, under which the trust was created. Commercial type trusts come in numerous different forms, including trusts created pursuant to a state business trust act and trusts created for special purposes, such as to pay a pension or managed pooled investments. See John H. Langbein, The Secret Life of the Trust: The Trust as an Instrument of Commerce, 107 Yale L.J. 165 (1997).

This part addresses selected issues involving judicial proceedings concerning trusts, particularly trusts with contacts in more than one State or country. This part is not intended as a comprehensive coverage of court jurisdiction or procedure with respect to trusts, recognizing that many of these issues are better addressed elsewhere, such as in the State's rules of civil procedure or as provided by court rule.

While the intervention of the court in the administration of a trust is not encouraged, the jurisdiction of the court is available as invoked by persons interested in the trust or as otherwise provided by law, such as on the direct initiative of the court (Section 1-201). Proceedings involving the administration of a trust will normally be brought in the court at the trust's principal place of administration, which is defined in Section 1-202. If not specified in the terms of the trust, the principal place of administration will usually be the place where the day-to-day activity of the trust is carried out. The trustee, by operation of law, is deemed to have consented to the jurisdiction of the court at the principal place of administration (Section 1-203), although courts in other places may also entertain proceedings involving the administration of a trust if the parties consent or the interests of justice so require (Section 1-204).

Changing a trust's principal place of administration is sometim