DRAFT

FOR DISCUSSION ONLY

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

by

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

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

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

EX OFFICIO

AMERICAN BAR ASSOCIATION ADVISORS

EXECUTIVE DIRECTOR

Copies of this Act may be obtained from:

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

676 North St. Clair Street, Suite 1700

Chicago, Illinois 60611

312/915-0195

Article 1. Definitions, General Provisions,

and Jurisdiction of Court . . . . . . . . . . 1

Section 1-101. Short Title.

Section 1-102. Construction Against Implied Repeal

Section 1-103. Common Law of Trusts.

Section 1-104. Representation of Beneficiaries. Section 1-105. Choice of Law.

Part 2. Definitions . . . . . . . . . . . . . . . . . .3

Section 1-201. Definitions

Part 3. Jurisdiction of Court. . . . . . . . . . . . . 9

Section 1-301. Function of Court in Administration

of Trust

Section 1-302. Principal Place of Administration

Section 1-303. Jurisdiction Over Trustees and

Beneficiaries

Section 1-304. Dismissal of Matters Relating to

Foreign Trusts

Section 1-305. Transfer of Jurisdiction

[Section 1-306. Subject Matter Jurisdiction]

[Section 1-307. Venue]

Part 1. Creation and Validity of Trusts. . . . . . . . 15

Section 2-101. Methods of Creating Trusts.

Section 2-102. Requirements for Validity.

Section 2-103. Requirement of Writing; Oral Trusts.

Section 2-104. Trust Purposes.

Section 2-105. Trust for Valid Noncharitable Purpose;

Trust for Pets.

[Section 2-105. Honorary Trusts; Trusts for Pets.]

Part 2. Modification and Termination of Trusts. . . . 24

Section 2-201. Termination of Trust.

Section 2-203. Judicial Review of Termination or Modification by Consent. Section 2-204. Modification or Termination Because of Unanticipated Circumstances

Section 2-205. Noncharitable Trust with Uneconomically

Low Value.

Section 2-206. Reformation to Correct Mistakes or Achieve

Tax Objectives.

Section 2-207. Combination and Division of Trusts.

Part 3. Cy Pres . . . . . . . . . . . . . . . . . . . 31

Section 2-301. Charitable Purposes

Section 2-302. Application of Cy Pres

Section 2-303. Charitable Trust With Uneconomically

Low Value

Part 4. Spendthrift Provisions and Claims by Creditor of Beneficiary . . . . . . . . . . . 34

Section 2-401. Spendthrift Provision Recognized.

Section 2-402. Claims by Creditor of Beneficiary.

Article 3. Provisions Relating to Revocable Trusts . . . 39

Section 3-101. Capacity of Settlor to Create Revocable Trust.

Section 3-102. Revocation or Modification of Revocable Trust.

Section 3-103. Other Rights of Settlor; Presently Exercisable Powers of Withdrawal.

Section 3-105. Limitation on Contest of Revocable Trust.

Article 4. Trust Administration . . . . . . . . . . . . .46

Part 1. Office of Trustee . . . . . . . . . . . . . . . . .46

Section 4-101. Acceptance or Rejection of Trust.

Section 4-102. Trustee's Bond.

Section 4-103. Cotrustees.

Section 4-104. Vacancy in Trusteeship.

Section 4-105. Filling Vacancy.

Section 4-106. Resignation of Trustee.

Section 4-107. Disqualification or Removal of Trustee.

Section 4-108. Delivery of Property by Former Trustee.

Section 4-109. Compensation of Trustee.

Section 4-110. Repayment for Expenditures.

Part 2. Fiduciary Duties of Trustee. . . . . . . . . . . .58

Section 4-201. Duty to Administer Trust; Alteration

by Terms of Trust.

Section 4-202. Duty of Loyalty.

Section 4-203. Impartiality.

Section 4-204. Prudent Administration.

Section 4-205. Costs of Administration.

Section 4-207. Delegation by Trustee.

Section 4-208. Powers to Direct.

Section 4-209. Control and Safeguarding of Trust Property.

Section 4-210. Separation and Identification of Trust Property.

Section 4-211. Enforcement and Defense of Claims.

Section 4-212. Prior Fiduciaries.

Section 4-213. Duty to Inform and Report.

Section 4-214. Duty with Regard to Discretionary Power.

Part 3. Powers of Trustee. . . . . . . . . . . . . . . . .73

Section 4-301. General Powers of Trustee; Standard

for Exercise.

Section 4-302. Specific Powers of Trustee

Part 4. Uniform Prudent Investor Act. . . . . . . . . . . 79

Section 4-401. Prudent Investor Rule.

Section 4-403. Diversification.

Section 4-404. Duties at Inception of Trusteeship.

Section 4-405. Loyalty.

Section 4-406. Impartiality

Section 4-407. Investment Costs.

Section 4-408. Reviewing Compliance.

Section 4-409. Delegation of Investment and Management Functions.

Section 4-410. Language Invoking Prudent Investor Rule.

(1997). . . . . . . . . . . . . . . . . . . . 97

Article 6. Liability of Trustees, Rights of Third Persons, Settlement Agreements. . . . . . . . . . . . .97

Part 1. Liability of Trustees to Beneficiaries. . . . . . .97

Section 6-101. Breach of Trust for Violation of Duty.

Section 6-102. Remedies for Breach of Trust.

Section 6-103. Measure of Damages for Breach of Trust.

Section 6-104. Limitation of Action Against Trustee Following Final Report or Other Statement.

Section 6-105. Exculpation of Trustee.

Section 6-106. Nonliability of Trustee for

Beneficiary's Consent, Release, or Affirmance.

Part 2. Rights of Third Persons . . . . . . . . . . . . . 103

Section 6-201. Limitations on Personal Liability of

Trustee.

Section 6-203. Certification of Trust.

Part 3. Settlement Agreements and Representation . . . . .108

Section 6-301. Definition and Applicability.

Section 6-302. Representation By Holders of Powers

Section 6-304. Representation By Holders of Similar Interests.

Section 6-305. Notice of Judicial Settlement.

Section 6-306. Appointment of Guardian ad Litem.

Section 6-307. Appointment of Special Representative.

Provisions. . . . . . . . . . . . . . . . . .110

Section 7-101. Application of [Act].

Section 7-102. Specific Repealer and Amendments.

Section 7-103. Uniformity of Application and Construction.

Section 7-104. Severability Clause.

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

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

Source: UPC Sec. 1-105.

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

Source: Cal. Prob. Code (CPC) Sec. 15002.

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 presented 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. REPRESENTATION OF BENEFICIARIES. Whenever under this [Act] notice may be given to or, without precluding the right of a beneficiary to object, a consent may be required of a beneficiary who is a minor, incapacitated, unborn or unascertained, notice to or the consent of a person who may bind the beneficiary under [Article 6, part 3] is considered notice to or the consent of the beneficiary.

(1) Approval of a transfer of jurisdiction by the qualified beneficiaries (Section 1-305);

(2) Modification or termination of a trust upon the consent of the beneficiaries, with or without the consent of the settlor (Section 2-202);

(3) Notice to qualified beneficiaries of proposed reformation of trust (Section 2-206);

(4) Notice to qualified beneficiaries of proposed trust combination or division (Section 2-207);

(5) Notice to qualified beneficiary of emergency assumption of duties without accepting trusteeship (Section 4-101(c));

(6) Appointment of successor trustee upon agreement of qualified beneficiaries (Section 4-105(b)(2));

(7) Notice to qualified beneficiaries of resignation of trustee (Section 4-106);

(9) Nonliability of trustee upon consent, release, or affirmance of beneficiary (Section 6-106).

Source: UPC Sec. 2-703.

SECTION 1-201. DEFINITIONS. In this [Act]:

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

(2) "Charitable trust" means a trust created for a charitable purpose as described in Section 5-101, excluding the interests of any noncharitable beneficiaries.

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

(4) "Court" means the [designate appropriate court].

(5) "Fiduciary," when used in reference to a person, includes a personal representative, guardian, conservator, and trustee.

(7) "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, but excludes a guardian ad litem.

(8) "Interested person" includes a trustee, a beneficiary, and a fiduciary representing a beneficiary. The meaning as it relates to particular persons may vary from time to time according to the particular purposes of, and matters involved in, any judicial proceeding.

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

(11) "Petition" includes a complaint or statement of claim.

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

(14) "Settlor" means a person, including a testator, who creates a trust.

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

(16) "Terms of the trust" means the manifestation of the settlor's intent regarding a trust's provisions at the time of the trust's creation or amendment that is expressed in a manner admitting of its proof in a judicial proceeding. The terms may be expressed in writing or orally or inferred from conduct, and may include constructional preferences or rules.

(17) "Trust" means an express trust, charitable or noncharitable, with additions thereto, wherever and however created, which is used primarily for the donative transfer of property, including a trust created or determined by a statute, judgment or decree under which the trust is to be administered in the manner of an express trust. The term does not include a trust that is used primarily for business, employment, investment, or commercial transactions, such as a business trust, land trust, voting trust, common trust fund, security arrangement liquidation trusts, trust created by a deposit arrangement in a financial institution, trust created for paying debts, dividends, interest, salaries, wages, profits, pensions, or employee benefits of any kind, or any arrangement under which a person is nominee or escrowee for another.

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

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 Sec. 49 (Prelim. Draft No. 3, 1997).

The definition of "property" (paragraph (12)) 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 trusts).

Determining the identity of the "settlor" (paragraph (14)) 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 3-102 (revocation or modification of revocable trust), 3-104 (creditor claims against revocable trust), and 3-105 (limitation on contest of revocable trust). It is also important for determining rights of creditors in irrevocable trusts. See Section 2-402(b)(2) (claims by creditor of settlor). While the settlor of an irrevocable trust ordinarily has no continuing rights 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 an order preventing the beneficiaries from terminating the trust. See Sections 2-203 (judicial review of termination or modification by consent), and 4-107 (removal of trustee). Also, per Section 2-302(c), the settlor is an interested person in a judicial proceeding involving a charitable trust.

"Terms of the trust" (paragraph (16)) 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 Sec. 4 and comm. f (Tent. Draft No. 1, 1996).

Not all evidence may necessarily be considered in determining the terms of the trust. A manifestation of a settlor's intention does not constitute evidence of a trust's terms if it would not be admissible in a judicial proceeding in which the trust's terms are in question. See Restatement (Third) of Trusts Sec. 4 comm. b (Tent. Draft No. 1, 1996). See also Restatement (Third) Property-Donative Transfers Sec. 10.2, 11.1-11.3 (Tent. 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 but leaves the issue of whether a trust must be evidenced by a writing to the discretion of the enacting jurisdiction. See Section 2-103 (requirement of writing; oral trusts). Evidence otherwise relevant to determining the terms of the trust may also be excluded under other principles of law, such as the parol evidence rule.

SECTION 1-301. FUNCTION OF COURT IN ADMINISTRATION OF TRUST. The administration of trusts shall proceed free of judicial supervision or intervention, except to the extent the jurisdiction of the court is invoked by interested parties or otherwise exercised as provided by law.

Uniform Probate Code Section 7-201(b) contains similar language. See also National Probate Court Standard 3.2.1 (Natl. Center for State Courts 1993).

SECTION 1-302. PRINCIPAL PLACE OF ADMINISTRATION.

(a) Unless otherwise designated in the terms of the trust, the principal place of administration of a trust is the usual place where the day-to-day activity of the trust is carried on by the trustee or the trustee's representative who is primarily responsible for the administration of the trust.

(b) If the principal place of administration of the trust cannot be determined under subsection (a), the principal place of administration is:

(1) if the trust has one trustee, the trustee's residence or usual place of business; or

(2) if the trust has more than one trustee:

(A) the usual place of business of the corporate trustee if there is but one corporate trustee;

(B) the residence or usual place of business of the individual who is a professional fiduciary if there is but one such person and no corporate cotrustee; or

(C) the residence or usual place of business of the greater number of the cotrustees, or if there is no such place, the residence or usual place of business of any of the cotrustees.

Source: CPC Section 17002; Az. Rev. Stat. Ann. Sec. 14-7202.

Section 1-305 governs the transfer of the principal place of administration to another jurisdiction.

(1) by accepting the trusteeship of a trust having its principal place of administration in this State, or by moving the principal place of administration to this State, the trustee submits personally to the jurisdiction of the courts of this State as to any matter relating to the trust; and

(2) to the extent of their interests in the trust, all beneficiaries of the trust are subject to the jurisdiction of the courts of this State as to any matter relating to the trust.

Source: CPC Section 17003.

This section, which is intended to provide the widest possible long-arm effect consistent with constitutional principles, is based on Arizona Revised Statutes Annotated Sec. 14-7202.

SECTION 1-304. DISMISSAL OF MATTERS RELATING TO FOREIGN TRUSTS. The court shall not, over the objection of a party, entertain proceedings involving the internal affairs of a trust which is under the continuing supervision of a court outside of this State, or is registered in or has its principal place of administration outside of this State unless:

(1) all appropriate parties could not be bound by litigation in the courts of the other jurisdiction;

(2) by failing to entertain proceedings the interests of justice would be seriously impaired. The court may condition a stay or dismissal of a proceeding on the consent of any party to the jurisdiction of another court, or the court may grant a continuance or enter any other appropriate order.

Source: Ariz. Rev. Stat. Ann. Sec. 14-7205.

This section confirms the primary jurisdiction of the court at the principal place of administration but only as to matters governing the internal affairs of trusts. Actions concerning the internal affairs of trusts include actions to:

(4) compel the trustee to report information about the trust;

(5) grant powers to or modify the powers of the trustee;

(7) appoint or remove a trustee;

(8) approve the resignation of a trustee;

(9) compel redress of a breach of trust;

(10) review the modification, termination or reformation of a trust;

(11) review the combination or division of trusts;

(12) authorize the transfer of a trust or trust property to or from another jurisdiction; and

(1) by substantially complying with the method specified in the terms of the trust; or

(2) if the terms of the trust do not specify a method;

(A) with the consent of the qualified beneficiaries; or

(B) with the approval of the court, subject to such terms and conditions as the court may order.

(1) the transfer will promote the best interest of the trust and those interested in it, taking into account the economical and convenient administration of the trust and the views of the beneficiaries;

(2) any new trustee to whom the trust property is to be transferred is willing and able to administer the trust or trust property under the terms of the trust; and

(3) if approval of the transfer by the other court is required under the law of the other jurisdiction, the proper court in the other jurisdiction has approved the transfer.

(c) If the court approves a transfer of a trust or of trust property to another jurisdiction, the court may require that a successor trustee be substituted in any pending litigation in this State. A delivery of property in accordance with the order of the court is a full discharge of the trustee with respect to all property covered by the order.

(d) If the court approves a transfer of a trust or of trust property to this State, the court may require bond as provided in Section 4-102.

(e) Except as to its validity and the construction of its beneficial provisions, a trust transferred to this State must be administered in the same manner as a trust created in this State.

This section is not limited to transfers to or from other states of the United States, but may include a transfer to or from a different country.

This section provides a method whereby the court can indicate its willingness to accept jurisdiction over a trust administered in another jurisdiction if the law of the other jurisdiction requires appointment of a trustee in the proposed new place of administration before approving the transfer. See, e.g., Mass. Gen. Laws Ann. ch. 206, Sec. 29 (West 1969).

If appropriate to facilitate transfer of the trust property or the place of administration of a trust to this State, the court may issue a conditional order appointing a trustee to administer the trust in this State and indicating that transfer to this State will be accepted if transfer is approved by the proper court of the other jurisdiction.

Under this section, a transferred trust is treated the same as a trust that was created in this State, and so is governed by this Act. This section is not intended to provide choice of law rules. A trust that was subject to judicial supervision in another state will not be subject to continuing court jurisdiction unless the terms of the trust so provide and the court so determines in the order accepting transfer to this state.

(a) The court has exclusive jurisdiction of judicial proceedings concerning the internal affairs of a trust.

(b) The court has concurrent jurisdiction with other courts of this State of judicial proceedings to determine the existence of a trust; actions and judicial proceedings by or against creditors or debtors of trusts; and other judicial proceedings involving trustees, beneficiaries and third persons.]

Source: CPC Section 17000.

Subsection (a) of this section is drawn from Section 7-201(a) of the Uniform Probate Code. Subsection (b) is drawn from Section 7-204 of the Uniform Probate Code.

(a) A judicial proceeding involving the internal affairs of a trust may be commenced in the [county] in which the trust's principal place of administration is or is to be located, and if the trust is created by will, also in the [county] in which the decedent's estate is administered.

(b) If a trust not created by will has no trustee, a judicial proceeding for appointing a trustee shall be commenced in the [county] in which either a beneficiary resides or the trust property, or some portion of the trust property, is located.

(c) A judicial proceeding other than those addressed in subsections (a) and (b) must be commenced in accordance with the venue rules applicable to civil actions generally.]

Source: CPC Section 17005.

See Section 1-302 (principal place of administration of trust).

Subsection (b) applies only to appointment of a trustee for a trust not created by will. Judicial proceedings to appoint a trustee for a trust created by will that has no trustee are commenced in the county where the decedent's estate is administered. See subsection (a).

Subsection (c), which is drawn from Section 7-204 of the Uniform Probate Code, provides venue rules applicable in cases not covered by subsections (a) and (b). This would include cases where jurisdiction over a trust, trust property, or parties to a trust is based on a factor other than the presence of the principal place of administration in this state. When the principal place of administration of a trust is in another state, but jurisdiction is proper in this State, the general rules governing venue apply.

(a) A trust may be created by:

(1) transfer of property to another person as trustee during the settlor's lifetime, or by will or other disposition taking effect upon the settlor's death;

(2) declaration by the owner of property that the owner holds identifiable property as trustee; or

(3) exercise of a power of appointment in favor of another person as trustee.

(c) A transfer of property to a trustee may be accomplished by the terms of the trust, which may function as a deed of conveyance.

Source: CPC Section 15200.

Subsection (a) follows Restatement (Second) of Trusts Sec. 17 (1959) and Restatement (Third) of Trusts Sec. 10 (Tent. Draft No. 1, 1996). Under all three methods specified in this section for creating a trust, the trust is not created until it receives property. For what constitutes an adequate property interest, see Restatement (Third) of Trusts Sec. 41 (Prel. Draft No. 3, 1997). The property interest necessary to fund and create a trust need not be substantial. A revocable designation of the trustee as beneficiary of a life insurance policy or employee benefit plan is a property interest sufficient to create a trust. See Section 1-201(12)("property" defined). Furthermore, the property interest need not be transferred contemporaneously with the signing of the trust instrument. A trust created by means of an instrument signed during lifetime is not invalid simply because the trustee does not receive property until a later date, including by will or contract at or after the settlor's death. A pourover devise to such a trust is also valid. See Uniform Probate Code Sec. 2-511 (pourover devise to trust valid regardless of existence, size, or character of trust corpus).

While a trust created by will may come into existence immediately at the testator's death and not necessarily only upon the later transfer of title from the personal representative, the nominated trustee does not have a duty to act until there is an acceptance of the trusteeship, express or implied. See Section 4-101 (acceptance or rejection of trust by trustee). To avoid an implied acceptance, a nominated testamentary trustee who is monitoring the actions of the personal representative but who has not yet made a final decision on acceptance should inform the beneficiaries that it has assumed only a limited role. The failure to so inform the beneficiaries could result in liability if the misleading conduct by the nominated trustee causes harm to the trust beneficiaries. See Restatement (Third) of Trusts Sec. 36 comm. b (Prel. Draft No. 3, 1997).

Consideration is not ordinarily required to create a trust, but a promise to create a trust in the future is enforceable only if the requirements for an enforceable contract are satisfied. See Restatement (Third) of Trusts Sec. 15 (Tent. Draft No. 1, 1996). Should the right to enforce the contract be held by the trustee, however, the chose in action thus created in the trustee is itself a property interest sufficient to create a present trust. Otherwise, the enforceable right, if held by another, does not create a present trust but may give rise to an action for breach of contract. A trust created by means of a promise enforceable by the trustee is valid notwithstanding that the trustee may resign or die before the promise is fulfilled. Unless expressly made personal, the promise can be enforced by a successor trustee. For examples of trusts created by means of promises enforceable by the trustee, see Restatement (Third) of Trusts Sec. 10 comm. e (Tent. Draft No. 1, 1996).

While this section recognizes the established principle that a trust may be created by means of the exercise of a power of appointment (see subsection (a)(3)), this Act does not attempt to legislate comprehensively on the subject of powers of appointment but addresses only selected issues. See Section 3-103(b)(rights of holder of power of withdrawal). For the law on powers of appointment generally, see Restatement (Second) of Property: Donative Transfers Sec. 11.1-24.4 (1986).

While trusts are usually created by a transfer of property by the settlor or by a self-declaration, trusts may also be created by the courts or by special statute. See., e.g., Uniform Probate Code Sec. 2-212 (elective share of incapacitated surviving spouse to be held in trust on terms specified in statute); Uniform Probate Code Sec. 5-407 (conservator may create trust with court approval); Restatement (Third) of Trusts Sec. 10 comm. b (Tent. Draft No. 1, 1996).

While subsection (b) confirms that separate documents of transfer are not required to subject specific assets to a self-declaration of trust, to avoid possible later problems with third party transferees and to better protect the interests of the beneficiaries, it is recommended that settlors not rely on the rule of this subsection but instead perfect title to the trust assets by going ahead and executing separate instruments of transfer.

Subsection (c) applies a similar rule to trusts in which someone other than the settlor is named as trustee. While the execution of separate instruments of transfer for each asset is recommended, this section recognizes that the terms of the trust may themselves include language effectively conveying assets to the trustee.

(a) A trust is created only if:

(1) the settlor, having capacity, indicated an intention to create a trust;

(2) the same person is not the sole trustee and sole beneficiary; and

(3) unless the trust is a charitable trust or a trust for a valid noncharitable purpose or care of a pet animal as provided in Section 2-105, the trust has a definite beneficiary or a beneficiary who may be validly ascertained [in the future] [within the applicable perpetuities period].

(b) A power or direction to a trustee to select from an indefinite class is valid and can be exercised.

Subsection (a) codifies the basic requirements for the creation of a trust. To create a valid trust, the settlor must indicate an intention to create a trust. Restatement (Second) of Trusts Sec. 23 (1959); Restatement (Third) of Trusts Sec. 13 (Tent. Draft No. 1, 1996). But only such manifestations of intent as are admissible as proof in a judicial proceeding may be considered. See Sections 1-201(16) ("terms of the trust" defined).

To create a trust, a settlor must have the requisite mental capacity. To create a revocable or testamentary trust, the settlor must have the capacity to make a will. To create an irrevocable trust, the settlor must have capacity during lifetime to transfer the property free of trust. See Section 3-101 (capacity of settlor to create revocable trust), and see generally Restatement (Third) of Trusts Sec. 11 (Tent. Draft No. 1, 1996).

Subsection (a)(2) addresses what is known as the doctrine of merger. Under this doctrine, a trust is not created if the settlor is the sole trustee unless there are one or more beneficiaries other than the settlor. The doctrine of merger has been inappropriately applied by the courts in some jurisdictions to invalidate self-declarations of trust in which the settlor is the sole life beneficiary but other persons are designated as beneficiaries of the remainder. The doctrine of merger, however, is properly applicable only if all beneficial interests, both life interests and remainders, are vested in the same person, whether in the settlor or someone else. Under the Act, a beneficiary of a trust includes any person who has a present or future interest, vested or contingent. See Section 1-102(1) ("beneficiary" defined).

Subsection (b) allows a settlor to empower the trustee to select the beneficiaries even if the class from whom the selection may be made is indefinite. While such a provision would fail under traditional doctrine because it is an imperative power with no designated beneficiary capable of enforcement, such a provision is valid under both this Act and the Restatement. Should the power not be exercised within a reasonable time, the power will fail and the property pass by resulting trust. See Restatement (Second) of Trusts Sec. 122 (1959); Restatement (Second) of Property: Transfers, Sec. 12.1 comm. e (1986).

SECTION 2-103. REQUIREMENT OF WRITING; ORAL TRUSTS. Except as required by another statute, a trust need not be evidenced by a writing, but the creation of an oral trust may be established only by clear and convincing evidence.

For the Statute of Frauds generally, see Restatement (Second) of Trusts Sec. 40 et seq. For a description of what the writing must contain, assuming that a writing is required, see Restatement (Third) of Trusts Sec. 22 (Tent. Draft No. 1, 1996). For a discussion of when the writing must be signed, see Restatement (Third) of Trusts Sec. 23 (Tent. Draft No. 1, 1996). For a discussion of the law on oral trusts, see Sarajane Love, Imperfect Gifts as Declarations of Trust: An Unapologetic Anomaly, 67 Ky. L. J. 309 (1979).

SECTION 2-104. TRUST PURPOSES. A trust may only be created if its purposes are lawful, in accord with public policy, and possible to fulfill. A charitable trust must be created for a charitable purpose as specified in Section 2-301. Except as provided in Section 2-105 with respect to a trust for a valid noncharitable purpose or trust for the care of a pet animal, a noncharitable trust must have a purpose which is for the benefit of its beneficiaries.

For an explication of the requirement that a trust must have a purpose that is not unlawful or against public policy, see Restatement (Third) of Trusts Sections 28-29 (Prel. Draft No. 3, 1997). A trust with a purpose that is unlawful or against public policy is invalid. Depending on when the violation occurred, the trust may be invalid at its inception or the invalidity may occur at a later date. The invalidity may also be limited to particular provisions. Generally, a trust has a purpose which is illegal or against public policy if: (1) its performance involves the commission of a criminal or tortious act by the trustee; (2) its enforcement would otherwise be against public policy even though not criminal or tortious; (3) the settlor's purpose in creating the trust was to defraud creditors or others; or (4) the consideration for the creation of the trust was illegal. See Restatement (Third) of Trusts Sec. 28 comm. a (Prel. Draft No. 3, 1997).

For the requirement that a trust must have a purpose which is for the benefit of its beneficiaries, see Restatement (Third) of Trusts Sec. 27 (Prel. Draft No. 3, 1997). Excepted from this requirement, however, are trusts for the care of a pet animal, which may be performed for the life of the animal, and trusts for a valid noncharitable purpose, which may be performed for twenty-one years. See Section 2-105.

For a provision permitting reformation of trusts which fail to comply with this section, see Section 2-206.

(a) A trust for the care of a pet animal living at the settlor's death is valid. The trust terminates when no living animal is covered by the terms of the trust.

(b) A trust without a definite or definitely ascertainable beneficiary which is created for a lawful noncharitable purpose or for lawful noncharitable purposes to be selected by the trustee is valid but may not be enforced for more than [21] years.

(c) No portion of the property of a trust authorized by this section may be applied to any use other than its intended use unless the court determines that the value of the trust property substantially exceeds the amount required for the intended use.

(d) The intended use of a trust authorized by this section may be enforced by a person designated for that purpose in the terms of the trust or, if none, by a person appointed by the court.

Subsection (a) addresses a particular type of honorary trust, the trust for the care of a pet animal. Subsection (b) validates other types of honorary trusts. A trust for the care of a pet animal may last for the life of the animal. While the pet will ordinarily be alive at the time of the trust's creation, subsection (a) permits an animal to be added as a beneficiary after the date of the trust's creation as long as such addition is made prior to the settlor's death.

Subsection (b) places a twenty-one year limit on the duration of other types of honorary trusts, such as a trust for the care of a cemetery plot. The figure "21" is bracketed to indicate that an enacting jurisdiction may select a different duration. Trusts and other funding devices for the perpetual care of cemetery plots is a topic frequently addressed by separate legislation.

Upon termination of an honorary trust created under either subsections (a) or (b), a resulting trust is ordinarily created in the settlor unless the terms of the trust provide for a different disposition. See Restatement (Third) of Trusts Section 48 (Prel. Draft No. 3, 1997).

Subsections (c) and (d) address administrative issues commonly encountered in connection with honorary trusts. No portion of the trust property of such a trust may be applied other than for its intended use. But if the trust property substantially exceeds the amount needed, provision is made for partial termination.

This section is based on Section 2-907 of the Uniform Probate Code but is much less elaborate. The UPC provision also addresses a number of trust issues that are covered elsewhere in this Act.

(a) [Honorary Trusts.] Subject to subsection (c), if (i) a trust is for a specific lawful noncharitable purpose or for lawful noncharitable purposes to be selected by the trustee and (ii) there is no definite or definitely ascertainable beneficiary designated, the trust may be performed by the trustee for [21] years but no longer, whether or not the terms of the trust contemplate a longer duration.

(c) [Additional Provisions Applicable to Honorary Trusts and Trusts for Pets.] In addition to the provisions of subsection (a) or (b), a trust covered by either of those subsections is subject to the following provisions:

(2) Upon termination, the trustee shall transfer the unexpended trust property in the following order:

(i) as directed by the trust instrument;

(3) The intended use of the principal or income can be enforced by an individual designated for that purpose in the trust instrument or, if none, by an individual appointed by a court upon application to it by an individual.

(4) Except as ordered by the court or required by the trust instrument, no filing, report, registration, periodic accounting, separate maintenance of funds, appointment, or fee is required by reason of the existence of the fiduciary relationship of the trustee.

(5) A court may reduce the amount of the property transferred, if it determines that that amount substantially exceeds the amount required for the intended use. The amount of the reduction, if any, passes as unexpended trust property under subsection (c)(2).

(6) If no trustee is designated or no designated trustee is willing or able to serve, a court shall name a trustee. A court may order the transfer of the property to another trustee, if required to assure that the intended use is carried out and if no successor trustee is designated in the trust instrument or if no designated successor trustee agrees to serve or is able to serve. A court may also make such other orders and determinations as shall be advisable to carry out the intent of the transferor and the purpose of this section.]

Source: UPC Sec. 2-907.

Presented as an alternate to Section 2-105 above, this alternate copies UPC Section 2-907 without change except for the deletion of cross references to other sections of the UPC.

SECTION 2-201. TERMINATION OF TRUST. In addition to the methods specified in Sections 2-202 through 2-205, a trust terminates when:

(1) the trust expires by its terms;

(2) the purpose of the trust is fulfilled;

(3) the purpose of the trust becomes unlawful or impossible to fulfill; or

(4) the trust is revoked.

Source: CPC Section 15407; Tex. Prop. Code. Ann. Sec. 112.052.

This section lists the ways in which trusts typically terminate. In addition to other powers granted under this Act or by the terms of the trust, a trustee has the powers appropriate to wind up the affairs of the trust. See Section 4-302(24).

For the requirement that a trust must have a purpose that is not illegal or violative of public policy, see Section 2-104 and comments.

(c) Upon termination of a trust under this section, the trustee shall distribute the trust property as agreed by the beneficiaries.

A trust may be modified or terminated pursuant to this section without court approval and even over a trustee's objection. For the circumstances under which the settlor, trustee, or beneficiary may petition the court to approve or prevent a termination or modification under this section, see Section 2-203. For provisions governing modification or termination of trusts without the need to seek beneficiary consent, see Sections 2-204 (modification or termination due to unanticipated circumstances) and 2-205 (noncharitable trust with uneconomically low value).

This section is limited to irrevocable trusts. If the trust is revocable by the settlor, the method of revocation specified in Section 3-102 applies.

If virtual representation is unavailable because of a conflict of interest, Sections 6-306 and 6-307 of the Act permit the court to appoint either a special representative or guardian ad litem who may give the necessary consent to the proposed modification or termination, unascertained or unborn beneficiary.

(a) Upon petition by a settlor, trustee or beneficiary, the court may affirm or prevent a proposed modification or termination of a trust.

(b) If a beneficiary does not consent to a proposed modification or termination of a trust by the other beneficiaries or by the settlor and other beneficiaries, the court, with the consent of the other beneficiaries, and of the settlor, if required, may approve the proposed modification or termination, subject to such order as may be necessary to protect the rights of the beneficiaries who do not consent.

Subsection (b) addresses situations in which a termination or modification is requested by less than all of the beneficiaries, either because a beneficiary objects or the consent of a beneficiary cannot be obtained due to such factors as minority or incapacity and virtual representation is either unavailable or its application uncertain. Subsection (b) allows the court to fashion an appropriate order protecting the interests of the nonconsenting beneficiaries while at the same time permitting the remainder of the trust property to be distributed without restriction. The order of protection for the nonconsenting beneficiaries might include continuation of the trust, the purchase of an annuity, or the valuation and cashout of the interest.

UNANTICIPATED CIRCUMSTANCES.

This section permits modification or termination of a trust when there are circumstances not anticipated by the settlor. This may include circumstances in existence at the time of the trust's creation which were known to but not considered by the settlor. Unlike Restatement (Second) of Trusts Sections 167 and 336, upon which this section is partially based, this section extends equitable deviation to the dispositive terms of a trust. Modification of the dispositive terms for the support of a beneficiary may be appropriate, for example, in a case in which the beneficiary has become unable to provide for support due to poor health or serious injury.

See also Section 2-104 (trust must have purpose for benefit of beneficiaries).

SECTION 2-205. NONCHARITABLE TRUST WITH UNECONOMICALLY LOW VALUE.

(a) Except as otherwise provided by the terms of the trust, if the value of the trust property of a noncharitable trust is less than [$50,000], the trustee may terminate the trust.

(b) The court may modify or terminate a noncharitable trust or appoint a new trustee if it determines that the value of the trust property is insufficient to justify the cost of administration involved.

Source: CPC Section 15408.

Subsection (a) assumes that a trust with a value of $50,000 or less is inherently uneconomical and may be terminated without court approval. This provision is a default rule. The settlor is free to set a higher or lower figure or to specify different procedures or to prohibit termination without a court order.

Subsection (b) establishes the general principle that trusts should be modified or terminated if the costs of administration would otherwise be excessive. A court termination procedure may be utilized for a trust of any size but most cases will involve smaller trusts although ones greater than $50,000 in value. For the comparable provision on charitable trusts, see Section 2-303.

(a) Without approval of court, but only following written notice to the qualified

beneficiaries, a trustee may:

(2) modify the terms of a trust, in a manner that does not violate the settlor's probable intention, to achieve the settlor's tax objectives.

(c) On petition by a trustee or beneficiary, the court may affirm or prevent a proposed combination or division.

This section is based on Restatement (Third) of Property: Donative Transfers Section 12.1-12.2 (Tent. Draft No. 1, 1995).

(a) Except as otherwise provided by the terms of the trust, without approval of court but only following written notice to the qualified beneficiaries, a trustee may combine two or more trusts into a single trust or divide a trust into two or more separate trusts, if the combination or division does not impair the rights of any of the beneficiaries or substantially affect the accomplishment of the trust purposes.

(b) On petition by a trustee or beneficiary, the court may affirm or prevent a proposed combination or division.

This section, which authorizes the combination or division of trusts, is a default rule. Many trust instruments and standardized estate planning forms include comprehensive provisions addressing these subjects.

Division of trusts is often beneficial and, in certain circumstances, almost routine. For example, a division of trusts is often necessitated by a desire to obtain maximum advantage of exemptions available under the federal generation-skipping tax. While the terms of the trusts which result from such a division are identical, the division will permit differing investment objectives to be pursued and also allow for discretionary distributions to be made from one trust and not the other.

This section does not require that a combination or division be approved by either the court or beneficiaries. Prudence may dictate, however, that court approval under subsection (b) be sought and beneficiary consent obtained to the extent feasible whenever the terms of the trusts to be combined or the trusts that will result from a division differ substantially one from the other.

While the consent of the beneficiaries is not necessary before a trustee may combine or divide trusts under this section, advance notice to the qualified beneficiaries of the proposed combination or division is required. This is consistent with Section 4-213, which requires that the trustee keep the beneficiaries reasonably informed of trust administration, including the giving of advance notice to the qualified beneficiaries of several specified actions that may have a major impact on their interests.

For a list of statutes authorizing division of trusts, either by the trustee or court order, see Restatement (Third) Property: Transfers Sec. 12.2 Statutory Note (Tent. Draft No. 1, 1995). For a provision authorizing a trustee, in distributing the assets of the divided trust, to make non-pro-rata distributions, see Section 4-302(20).

A main purpose of this Article is to substantially broaden the authority of courts and trustees to make charitable gifts more effective. Many of the concepts expressed in this Article are not new, but have long been advocated by commentators. See, e.g., Roger G. Sisson, Relaxing the Dead Hand's Grip: Charitable Efficiency and the Doctrine of Cy Pres, 74 Va. L. Rev. 635 (1988); Report, Cy Pres and Deviation: Current Trends and Application, 8 Real Prop. Prob. & Trust J. 391 (1971); Joseph A. DiClerico, Jr., Cy Pres: A Proposal for Change, 47 B.U.L. Rev. 153 (1967); Kenneth L. Karst, The Efficiency of the Charitable Dollar: An Unfulfilled State Responsibility, 73 Harv. L. Rev. 433 (1960). A liberalizing trend is also apparent in a number of the state statutes, with the reforms in Wisconsin, from which this Article borrows extensively, being the most notable. See Wis. Stat. Ann. Sec. 701.10.

SECTION 2-301. CHARITABLE PURPOSES.

(a) A charitable trust may be created for the relief of poverty, the advancement of education or religion, the promotion of health, or any other purpose the accomplishment of which is beneficial to the community.

(b) If the terms of the trust do not indicate a particular charitable purpose or beneficiaries, the trustee may select one or more charitable purposes or beneficiaries.

This section, unlike the remainder of the Article, does not break significant new ground, but merely restates the well-established categories of charitable purposes listed in Restatement (Second) of Trusts Section 368 and ultimately derived from the Statute of Charitable Uses, 43 Eliz. I, c.4 (1601).

This section also ratifies a common estate planning technique that grants the trustee discretion to distribute the trust property for any charitable purpose or beneficiary. See Restatement (Second) of Trusts Section 396 (1959).

SECTION 2-302. APPLICATION OF CY PRES.

(a) Unless the terms of the trust provide to the contrary:

(1) a charitable trust does not fail, in whole or in part, if a particular charitable purpose becomes impracticable, unlawful, or impossible to fulfill;

(2) if a particular charitable purpose becomes impracticable, unlawful, or impossible to fulfill, the trust property does not revert to the settlor, but the court shall instead modify the terms of the trust or direct that the trust property be distributed in whole or in part in a manner meeting the settlor's charitable purposes.

(b) If a term of a charitable trust impairs the effective administration of the trust, the court may modify the term.

(c) The settlor is an interested person in a judicial proceeding brought to enforce a charitable trust.

This section codifies the court's inherent authority to apply cy pres. The power may be applied to modify an administrative or dispositive term. The court may order the trust terminated and distributed to other charitable entities. Partial termination may also be ordered if the trust property is more than sufficient to satisfy the trust's current purpose. Cy pres under the Act is a default rule. The court's authority is subject to the settlor's right to specify an alternate disposition.

This section also modifies the doctrine of cy pres. Under traditional doctrine, if a specific charitable purpose becomes impossible to fulfill, the courts then determine whether the settlor had a general charitable intent. If so, the trust property is diverted to other charitable purposes. But if not, the trust fails. This section is built on the assumption that in the great majority of cases the settlor would prefer that the gift be used for other charitable purposes rather than fail. Consequently, unless the terms of the trust provide expressly to the contrary, a charitable trust does not fail in whole or in part if the particular purpose for which the trust was created becomes impracticable, unlawful, or impossible to fulfill. The court must instead either modify the terms of the trust or direct that the property of the trust be distributed in whole or in part in a manner best meeting the settlor's charitable purposes. The effect of this provision is to ratify the actual practices of courts. Upon the failure of a particular charitable purpose, courts will rarely divert the trust property to a noncharitable use. Courts are almost always able to find a general charitable purpose to which to apply the property, no matter how vaguely such purpose may have been expressed by the settlor.

The application of cy pres requires a balancing of the needs of society against an assessment of the settlor's probable intent. In determining the settlor's probable intent, the court may wish to consider the current and future community needs in the general field of charity for which the trust was created, the settlor's other charitable interests, and the value of the available trust property.

The doctrine of cy pres is not limited to charitable trusts, but applies as well to other types of charitable dispositions, such as not-for-profit corporations. This Section, because it is part of a Trust Act, does not apply to charitable dispositions made in nontrust form, but in formulating the rules for such dispositions the courts are of course free to refer to the principles of this Section.

Subsection (c), unlike Restatement (Second) of Trusts Sec. 391 (1959), authorizes the settlor to enforce a charitable trust.

SECTION 2-303. CHARITABLE TRUST WITH UNECONOMICALLY LOW VALUE.

(a) Except as otherwise provided by the terms of the trust, if the value of the trust property of a charitable trust is less than [$50,000], the trustee may terminate the trust.

(b) If the court determines that the value of the trust property is insufficient to justify the cost of administration involved, the court may appoint a new trustee or modify or terminate the trust.

(c) Upon termination of a trust under this section, the trustee or the court shall distribute the trust property in a manner consistent with the settlor's charitable purposes.

Subsection (a) strives to make charitable giving more effective by permitting the nonjudicial termination of small charitable trusts, thereby avoiding the expense of a judicial termination proceeding. Nonjudicial termination is allowed if the value of the trust property is less than $50,000. While the creation of small charitable trusts is not encouraged, subsection (a) does not interfere with the right of a settlor to create such a trust. Under this subsection, the trustee may not terminate a charitable trust with a value of less than $50,000 if such termination is prohibited by the terms of the trust.

Subsection (b) authorizes the court to terminate a charitable trust. Unlike subsection (a), there is no dollar limit. In order to reduce administrative costs in relation to the size of the trust, the court, instead of terminating the trust, may appoint a new trustee. Upon termination of the trust, the trust property is to be distributed pursuant to the cy pres principles articulated in Section 2-302.

For the comparable provision on termination of small noncharitable trusts, see Section 2-205. During the lifetime of the settlor, the trust property of a revocable trust is subject

to the claims of the settlor's creditors.

(c) This [part] does not limit the right of a beneficiary to compel a trustee to make a distribution to which the beneficiary is entitled.

Source: CPC Section 15300-15301; Tex. Prop. Code Ann. Sec. 122.035.

Under this section, a settlor has the power to restrain transfer of the beneficiary's interest, regardless of the nature of the interest. A restraint may be placed on an interest in the income, the principal, or both. Unless one of the exceptions under Section 2-402 applies, a creditor of the beneficiary is prohibited from attaching a protected interest and may only attempt to collect directly from the beneficiary after payment is made. This section is similar to Restatement (Second) of Trusts Sections 152-153 (1959).

Per subsection (c), the power to force a distribution due to an abuse of discretion or failure to comply with a standard belongs solely to the beneficiary. A creditor of a beneficiary does not stand in the shoes of the beneficiary for this purpose. Under Section 4-214, a trustee must always exercise a discretionary power in good faith and with regard to the purposes of the trust and the interest of the beneficiaries.

A disclaimer, because it is a refusal to accept ownership of an interest and not a transfer of an interest already owned, is not affected by the presence or absence of a spendthrift provision. Also, most disclaimer statutes also expressly provide that the validity of a disclaimer is not affected by a spendthrift protection. See, e.g., Uniform Probate Code Sec. 2-801.

A voluntary assignment by a beneficiary as to periodic payments otherwise due the beneficiary may be honored by a trustee but is revocable by the beneficiary at any time.

(b) Whether or not the terms of the trust contain a spendthrift provision:

(1) a creditor or assignee of a beneficiary may compel payment of a distribution required to be made to the beneficiary by the express terms of the trust if the trustee has failed to make the distribution within a reasonable time;

(2) a creditor or assignee of the settlor may reach the maximum amount that the trustee could pay to or for the settlor's benefit. If a trust has multiple settlors, the amount the creditor or assignee of a particular settlor may reach may not exceed the settlor's discretionary interest in the portion of the trust attributable to that settlor's contribution.

Under subsection (c), a preferred creditor, like a creditor of a trust without a spendthrift trust, may reach only distributions required to be made by the express terms of the trust or which the trustee had otherwise decided to make. But unlike a trust without a spendthrift provision, the court, with respect to judgments for support, has discretion in setting the amount and terms of the payment. In making this determination, the court should consider the amount of the available distributions and the present and future needs of the settlor, the spouse or former spouse, and the children. The Act does not attempt to prescribe the particular procedural methods for enforcing this right to collect from the trust, leaving that matter to local collection law. For an example of such a procedure, see Cal. Prob. Code Sec. 15305.

SECTION 3-101. CAPACITY OF SETTLOR TO CREATE REVOCABLE TRUST. An individual has capacity to create a revocable trust if the individual has capacity to make a will.

The purpose of this section, which is patterned after Restatement (Third) of Trusts Sec. 11 (Tent. Draft No. 1, 1996), is to provide some clarification to what has become a major issue in the law of trusts due to the recent and widespread use of the revocable trust as an alternative to a will.

The application of the capacity standard for wills does not mean that the revocable trust must be executed with the formalities of a will. There are no execution requirements for trusts, and a trust, at least one containing personal property, may be created by an oral statement. See Section 2-103. Nor does the application of the capacity standard for wills, and the fact that most states prohibit a guardian or conservator from making a will for the ward or protected person, mean that a guardian or conservator cannot create a trust, if allowed under local guardianship or conservatorship law.

The Act does not explicitly spell out the capacity necessary to create other types of trusts, although Section 2-102 does require that the settlor have capacity. This section expressly states a capacity standard for the creation of revocable trusts because of the lack of clarity in the case law and the importance of the issue in modern estate planning. No such uncertainty exists with respect to the capacity standard for other types of trusts, however. To create a revocable or testamentary trust, the settlor must have the capacity to make a will. To create an irrevocable trust, the settlor must have the capacity during lifetime to transfer the property free of trust. See generally Restatement (Third) of Trusts Sec. 11 (Tent. Draft No. 1, 1996).

(a) Unless the terms of the trust expressly provide that a trust is irrevocable, the settlor may revoke or modify the trust. This subsection does not apply to trusts created under instruments executed before [the effective date of this Act].

(b) Except as otherwise provided by the terms of the trust, if a trust is created or funded by more than one settlor, each settlor may revoke the trust as to the portion of the trust contributed by that settlor, but may modify the trust only upon the joint action of all of the settlors.

[(b) Except as otherwise provided by the terms of the trust, if a trust is created or funded by more than one settlor:

(1) to the extent the trust consists of community property, the trust may be revoked by either spouse acting alone;

(2) to the extent the trust consists of other property, each settlor may revoke the trust as to the portion of the trust contributed by that settlor;

(3) whether or not the trust consists of community or other property, the trust may be modified only by joint action of all of the settlors.]

(c) A trust that is revocable by the settlor may be revoked or modified:

(1) by substantially complying with the method specified by the terms of the trust; or

(2) unless the terms of the trust expressly make the specified method exclusive, by any other method indicating an intention to revoke.

(d) Upon termination of a revocable trust, the trustee shall distribute the trust property as the settlor directs.

(e) The settlor's powers with respect to revocation or modification may be exercised by an agent under a power of attorney only to the extent the terms of the trust or the power of attorney expressly so authorizes.

(f) Except to the extent prohibited by the terms of the trust, a conservator may revoke or modify a revocable trust with the approval of the court supervising the conservatorship.

Subsection (a), which provides that a settlor may revoke or modify a trust unless the terms of the trust expressly state that the trust is irrevocable, is contrary to the common law of trusts. See Restatement (Second) of Trusts Sec. 330 (1959). This subsection will not govern trusts created in another state which may follow the common law rule. In addition, this subsection does not prevent a trust from being reformed to make it irrevocable if the settlor was proceeding under a mistake of law at the time of its creation. See Section 2-206 (reformation of trust). But far easier than relying on choice of law rules or reformation is for the drafter to simply express in the terms of the trust whether the trust is revocable or irrevocable.

A power of revocation includes the power to modify. See Restatement (Second) of Trusts Section 331, comm. g (1959). An unrestricted power to modify may also include the power to revoke a trust. See Restatement (Second) of Trusts Section 331, comm. h.

Under subsection (c), the settlor may revoke a revocable trust by a writing delivered to the trustee or by a will even if the terms of the trust specify a method of revocation. Only if the method specified by the terms of the trust is exclusive are use of the other methods prohibited, and even then a failure to comply with a technical requirement, such as required notarization, may be excused, as long as compliance with the method specified in the terms of the trust is otherwise substantial.

Subsection (d), dealing with distribution of trust property upon revocation, codifies a provision commonly included in revocable trust instruments.

The settlor's power to revoke under this section does not preclude termination of the trust under another section.

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

(a) Except to the extent the terms of the trust otherwise provide, while a trust is revocable and the settlor has capacity to revoke the trust, the settlor, and not the beneficiary, has the rights afforded beneficiaries under this [Act], and the duties of the trustee are owed exclusively to the settlor.

(b) The holder of a presently exercisable power of withdrawal has the rights of a settlor of a revocable trust under this section to the extent of the property subject to the power.

This section has the effect of postponing the enjoyment of rights of beneficiaries of revocable trusts until the death or incapacity of the settlor or other person holding the power to revoke the trust. This section thus recognizes that the settlor of a revocable trust is in control of the trust and should have the rights to enforce the trust.

Under this section, the duty to inform and report to beneficiaries is owed to the settlor of a revocable trust as long as the settlor has capacity. See Section 4-213 (trustee's duty to inform and report to beneficiaries). The introductory clause recognizes that the terms of the trust may grant rights to the beneficiaries which, under this section, would otherwise be held by the holder of the power to revoke.

This section no longer applies should the settlor lose capacity. In that event, the beneficiaries are granted all rights normally afforded the beneficiaries of irrevocable trusts, subject to a possible right of a conservator or agent to revoke or modify the trust. See Section 3-102(e)-(f).

See also Section 6-302, which authorizes the settlor of a revocable trust and the holder of a presently exercisable power of withdrawal to represent and bind the beneficiaries to judicial orders and nonjudicial settlements.

(a) During the lifetime of the settlor, the trust property of a revocable trust is subject

to the claims of the settlor's creditors.

Source: CPC Sections 18200, 19001.

Subsection (a) is contrary to the common law of trusts as expressed in the Restatement. See Restatement (Second) of Trusts Section 330, comm. o (1959). But because a settlor usually also retains a beneficial interest which a creditor may reach, the common law rule is normally of little significance. See Section 2-402(b)(2) (claim of creditor of settlor); and Restatement (Second) of Trusts Section 156(2) (1959).

Subsection (b) recognizes that a revocable trust is normally used as a will substitute. As such, the trust assets, following the death of the settlor, should be subject to the settlor's debts and other charges. However, in accordance with traditional doctrine, the assets of the settlor's probate estate must normally first be exhausted before the assets of the revocable trust can be reached.

SECTION 3-105. LIMITATION ON CONTEST OF REVOCABLE TRUST.

(a) Unless previously barred by adjudication, consent, or other limitation, a judicial proceeding to contest the validity of a revocable trust must be brought no later than three years

after the death of the settlor.

(b) Unless the trustee has actual knowledge that a judicial proceeding contesting a revocable trust is pending, six months after the death of the settlor the trustee of the revocable trust may assume that the trust is valid and proceed to distribute the trust property in accordance with the terms of the trust without liability for so doing.

This section, placing a time limit on the right to contest a trust, applies not only to contests to invalidate the trust in its entirety but also to contests to invalidate the trust in part.

SECTION 4-101. ACCEPTANCE OR REJECTION OF TRUST.

(a) Except as provided in subsection (c), a person designated as trustee accepts the trusteeship by:

(1) substantially complying with the method specified in the terms of the trust;

(2) unless the terms of the trust make the specified method exclusive, by accepting delivery of the trust property, exercising powers or performing duties as trustee, or otherwise indicating an intention to accept the trusteeship.

(b) A person designated as trustee who has not yet accepted the trusteeship may reject the trusteeship. A failure to accept the trust within a reasonable time after learning of the appointment constitutes a rejection of the trusteeship.

(c) If there is an immediate risk of loss to the trust property, the person named as trustee may act to preserve the trust property without accepting the trusteeship, if within a reasonable time after acting the person delivers a written rejection of the trusteeship to the settlor or, if the settlor is dead or lacks capacity, to a qualified beneficiary.

While a person designated as trustee who decides not to accept the trusteeship need not give a formal rejection, a clear and early communication is recommended. The appropriate recipient of the written rejection depends upon the circumstances of the particular case. Ordinarily, it would be appropriate to give the rejection to the person who informs the person of the proposed trusteeship. If judicial proceedings involving the trust are pending, the rejection could be filed with the court clerk. In the case of a person named as trustee of a revocable trust, it would be appropriate to give the rejection to the settlor. In any event it would be best to give notice of rejection to a beneficiary with a present interest in the trust because the beneficiary would be motivated to seek appointment of a new trustee.

To avoid the inaction that can result if the person designated as trustee fails to communicate a decision to either accept or reject, subsection (b) provides that a failure to accept within a reasonable time constitutes a rejection of the trust. A trustee's rejection of a trust normally precludes a later acceptance of the trust but does not cause the trust to fail. See Restatement (Third) of Trusts Sec. 36 comm. c (Prel. Draft No. 3, 1997). As to filling vacancies in the event of a rejection, see Section 4-105.

(a) A trustee shall be required to give a bond to secure performance of the trustee's duties only if the court finds that a bond is necessary to protect the interest of beneficiaries or a bond is required by the terms of the trust and the court has not excused the requirement.

(b) When required, the bond shall be in such amount and with such sureties and liabilities as the court may specify. The court, by requiring bond, is not precluded from later modifying or excusing the bond.

(c) Except as otherwise provided by the terms of trust or ordered by the court, the cost of a bond is charged to the trust.

Source: CPC Sec.15602.

This provision is consistent with the Restatement and with the bonding provisions of the Uniform Probate Code. See Restatement (Third) of Trusts Sec. 35 comm. a (Prel. Draft No. 3, 1997); Uniform Probate Code Sections 3-604 (personal representatives), 5-410 (conservators), and 7-304 (trustees). Because a bond is required only if the terms of the trust require bond or a bond is found by the court to be necessary to protect the interests of beneficiaries, bond will rarely be required under the Act. This section does not specifically waive bond for financial institutions with trust powers, preferring instead to leave that topic to separate legislation.

The amount of a bond otherwise required may be reduced by the value of trust property deposited in a manner that prevents its unauthorized disposition, and by the value of real property which the trustee, by express limitation of power, lacks power to convey without court authorization.

The court may excuse or otherwise modify a requirement of a bond, reduce or increase the amount of a bond, release a surety, or permit the substitution of another bond with the same or different sureties.

(a) Except as otherwise provided by the terms of the trust:

(1) a power held by cotrustees may be exercised by majority action;

(2) if a vacancy occurs in a cotrusteeship, the remaining cotrustees may act for the trust; or

(3) if a cotrustee is unavailable to perform duties because of absence, illness, or other temporary incapacity, the remaining cotrustees may act for the trust, as if they were the only trustees, to the extent necessary to accomplish the purposes of the trust or to avoid irreparable injury to the trust property.

(b) If a trust has more than one trustee, each trustee shall:

(1) participate in the administration of the trust and not delegate to a cotrustee the performance of functions that the settlor reasonably expected the trustee to personally perform; and

(2) take reasonable steps to prevent a cotrustee from committing a breach of trust and to compel a cotrustee to redress a breach of trust.

(c) A trustee who complies with subsection (b) is not liable for the actions or failures to act of a cotrustee.

Source: CPC Sec. 15621, 15622, 16013.

Subsection (a)(1) is in accord with Restatement (Third) of Trusts Sec. 40 (Prel. Draft No. 3, 1997), which rejects earlier Restatement formulations and allow action by a majority of the trustees. This rule is subject to contrary provision in the terms of the trust, as noted in the introductory clause. Should a cotrustee resign or a vacancy occur by some other means, only a majority of the remaining trustees need be counted, even though the number of trustees constituting a majority would then be less than before the vacancy occurred.

Under subsection (a)(2), a vacancy in a cotrusteeship is disregarded in the operation of the trust if there is at least one trustee remaining. This is consistent with Section 4-105, which provides, unless the terms of the trust state otherwise, that a vacancy in a cotrusteeship need be filled only if there is no cotrustee remaining in office. Subsection (a)(3) addresses a problem that may arise when a cotrustee is temporarily unable to perform duties but the cotrusteeship is not vacant.

Under subsection (a), a dissenting trustee is not liable to a third party for failing to join in the majority's exercise of a power. However, should the action by the majority constitute a breach of trust, the dissenting trustee may be held liable under subsection (b) for failing to take action to rectify the acts of the cotrustees.

Subsection (b) codifies the substance of Sections 184 and 224 of the Restatement (Second) of Trusts (1959). This subsection combines the duties of the trustee and the provision on exemption from liability for the actions of a cotrustee. This subsection also addresses the extent to which a trustee may delegate the performance of functions to a cotrustee. Consistent with Restatement (Second) of Trusts Section 171, a trustee may not delegate to a cotrustee the performance of functions that the settlor expected the trustee to personally perform. The exact extent of the delegation authority in a particular case will thus depend on the reasons why the settlor decided to appoint cotrustees. The best practice is to address the division of functions in the terms of the trust, as allowed by Section 4-201.

SECTION 4-104. VACANCY IN TRUSTEESHIP. There is a vacancy in the trusteeship if:

(1) the person named as trustee rejects the trust;

(2) the person named as trustee cannot be identified or does not exist;

(3) the trustee resigns;

(4) the trustee is disqualified or removed;

(5) the trustee dies; or

(6) a guardian or conservator is appointed for the individual serving or otherwise eligible to serve as trustee.

Source: CPC Section 15643.

This section lists the typical ways in which a trusteeship becomes vacant. It does not preclude other methods, such as the suspension of the powers of a trust company under federal or state banking regulations. For the rules on filling a vacancy, see Section 4-105. See also Section 4-101 (acceptance or rejection of trust), 4-106 (resignation and liability of resigning trustee), 4-107 (disqualification or removal of trustee).

(a) A trustee must be appointed to fill a vacancy in the trusteeship if the trust has no remaining trustee or the terms of the trust require a vacancy in the trusteeship to be filled.

(b) A vacancy in the trusteeship required to be filled shall be filled:

(1) by the person named in or nominated pursuant to the method specified by the terms of the trust;

(2) if the terms of the trust do not name a person or specify a method for filling the vacancy, or the person named or nominated pursuant to the method specified fails to accept:

(A) by a person designated by the unanimous agreement of the qualified beneficiaries; or

(B) by a person appointed by the court on petition of a beneficiary or of a person named as trustee by the terms of the trust.

This section addresses only circumstances where a vacancy in the trusteeship must be filled. The court, exercising its inherent equity authority, may always appoint additional trustees if the appointment would promote better administration of the trust. See Restatement (Third) of Trusts Sec. 35 comm. e (Prel. Draft No. 3, 1997).

Good drafting practice suggests that the terms of the trust deal expressly with the problem of vacancies, naming successors and addressing other matters such as the circumstances under which a vacancy in the trusteeship need be filled. For this reason, subsection (b)(1) provides that the first choice for filling the vacancy is the person named in or nominated pursuant to the method specified by the terms of the trust. Furthermore, subsection (a) clarifies that a vacancy in the cotrusteeship must be filled only if the trust so requires. If the vacancy in the cotrusteeship is not filled, the remaining cotrustees may continue to administer the trust under Section 4-103. For a listing of the circumstances when a vacancy in the cotrusteeship may occur, see Section 4-104.

Subsection (b)(2)(B) authorizes the court to fill a vacancy if the trust does not name a successor who is willing to accept the trust or if the trust does not provide another method of appointment. The appointment of a successor by the court is an alternative to an appointment by the beneficiaries under subsection (b)(2)(A). The petition may be brought by any beneficiary, including beneficiaries who were without authority to participate in an appointment by the beneficiaries. Any beneficiary without authority to join in a beneficiary appointment may also petition the court to rescind the appointment by the other beneficiaries on the theory that the appointment was improvidently made. For a list of factors for the court to consider in making its selection, see Restatement (Third) of Trusts Sec. 35 comm. f (Prel. Draft No. 3, 1997).

Because the settlor of a revocable trust with capacity has all the powers of the beneficiaries, in the case of a revocable trust, the appointment of a successor will normally be made directly by the settlor. See Section 3-103. As to the duties of successor trustees, see Section 4-212.

(a) A trustee may resign by any of the following methods:

(1) as provided by the terms of the trust;

(2) in the case of a revocable trust, upon at least [30] days written notice to;

(A) the settlor if the settlor has capacity;

(C) the qualified beneficiaries if the settlor lacks capacity and is not represented by a conservator, guardian, or agent; or

(3) in the case of an irrevocable trust, upon at least [30] days written notice to the qualified beneficiaries; or

(4) with the approval of the court.

(b) A qualified beneficiary, by a written consent, may waive a notice otherwise required under this section.

(c) In approving a resignation, the court may impose such orders and conditions as are reasonably necessary for the protection of the trust property, including the appointment of a receiver or temporary trustee.

(d) The liability for acts or omissions of a resigning trustee or of any sureties on the trustee's bond is not released or affected by the trustee's resignation.

This section provides several alternative choices for accomplishing the resignation of a trustee. As provided in subsection (a)(1), a trustee may always resign as provided by the terms of the trust. Should the terms of the trust not provide a method for resignation or should the method for whatever reason not be followed, a trustee may resign by giving notice as provided in subsection (a)(2)-(3). Under subsection (a)(4), court approval of a resignation is required only if none of the other alternatives specified are available.

The persons to whom notice of a resignation must be given are generally the same as who must approve the appointment of a successor trustee to fill a vacancy. See Section 4-105. For a revocable trust, the notice to the settlor will ordinarily be required, but should the settlor be incapacitated, subsection (a)(2) makes provision for a substitute consent. For an irrevocable trust, subsection (a)(3) requires that notice be given to the qualified beneficiaries.

(a) A trustee may be removed in accordance with the terms of the trust, by the court on

its own initiative or on petition of a settlor, cotrustee, or beneficiary.

(b) The court may remove a trustee, or order other appropriate relief:

(1) if the trustee has committed a material breach of

the trust;

(2) if the trustee is unfit to administer the trust;

(3) if hostility or lack of cooperation among cotrustees substantially impairs the administration of the trust;

(4) if the trustee's investments perform persistently and substantially below standard;

(6) for other good cause shown.

(c) If it appears to the court that trust property or the interests of a beneficiary may suffer loss or injury pending a final decision on a petition for removal of a trustee, the court may suspend the trustee, compel the trustee to surrender trust property to a cotrustee, receiver or temporary trustee, or order other appropriate relief.

Source: CPC Section 15642.

Subsection (a) of this section is the same in substance as Section 38 of the Restatement (Third) of Trusts (Prel. Draft No. 3, 1997), except that it gives the settlor of an irrevocable trust the right to petition for removal of a trustee. As to rights of a settlor of a revocable trust, see Sections 3-102 (revocation or modification), 3-103 (other rights of settlor). The right to petition for removal of a trustee does not give the settlor of an irrevocable trust any other rights, such as the right to an annual report or to receive other information concerning administration of the trust.

The statement of grounds for removal of the trustee by the court is taken in part from the Texas Trust Code and the Restatement. See Tex. Prop. Code Ann. Sec. 113.082(a)(Vernon 1984); Restatement (Third) of Trusts Sec. 38 comm. e (Prel. Draft No. 3, 1997). If a trustee is removed, another may be appointed to fill the vacancy as provided in Section 4-105.

The section does not attempt to catalog every conceivable ground for removal. Subsection (a)(6) instead permits the court to remove a trustee whenever there is good cause. Friction between a trustee and beneficiaries which substantially interferes with the proper administration of the trust, indifference on the part of the trustee, or mediocre service or investment performance may all justify removal if in the best interests of the beneficiaries and not inconsistent with the purposes of the trust.

SECTION 4-108. DELIVERY OF PROPERTY BY FORMER TRUSTEE. Unless a cotrustee remains in office or the court otherwise orders, and until the trust property is delivered to a successor trustee or to a person appointed by the court to receive the property:

(1) a trustee who has resigned or been removed has the duties and powers of the trusteeship; and

SECTION 4-109. COMPENSATION OF TRUSTEE.

(a) If the terms of the trust do not specify the trustee's compensation, a trustee or cotrustee is entitled to compensation that is reasonable under the circumstances.

(b) If the terms of the trust specify the trustee's compensation, the trustee is entitled to be compensated as provided, except that the court may allow more or less compensation:

(1) if the duties of the trustee are substantially different from those contemplated when the trust was created;

(2) if the compensation specified by the terms of the trust would be unreasonably low or high; or

(3) in extraordinary circumstances calling for equitable relief.

Source: CPC Section 15680-15681.

Subsection (a) establishes a standard of reasonable compensation. For a list of factors relevant in determining reasonable compensation, see Restatement (Third) of Trusts Sec. 39 comm. c (Prel. Draft No. 3, 1997). In setting compensation, the services actually performed and responsibilities assumed by the trustee should be closely examined. For example, an adjustment in compensation may be appropriate if the trustee has delegated significant duties. On the other hand, a trustee with special skills, such as those of a real estate agent, may be entitled to extra compensation for performing services that would ordinarily be delegated. See Restatement (Third) of Trusts Sec. 39 comm. f (Prel. Draft No. 3, 1997).

Compensation may also be set by agreement. A trustee may enter into an agreement with the beneficiaries for lesser or increased compensation, although an agreement increasing the compensation is not binding on a nonconsenting beneficiary. A trustee may also agree to waive compensation and should do so prior to rendering significant services if concerned about possible gift and income tax liability on the compensation accrued prior to the waiver. See Rev. Rul. 66-167, 1966-1 C.B. 20. See also Restatement (Third) of Trusts Sec. 39 comm. f (Prel. Draft No. 3, 1997).

Section 4-302(22) grants the trustee authority to fix and pay its compensation without the necessity of prior court review, but without precluding the right of a beneficiary to object to the compensation in a later judicial proceeding.

SECTION 4-110. REPAYMENT FOR EXPENDITURES. A trustee is

entitled to be repaid out of the trust property, with interest as appropriate, for:

(1) expenditures that were properly incurred in the administration of the trust; and

(2) to the extent necessary to prevent unjust enrichment of the trust, expenditures that

were not properly incurred in the administration of the trust.

Source: CPC Section 15684.

A trustee has the authority to expend trust funds as necessary in the administration of the trust, including expenses incurred in the hiring of agents. See Sections 4-207 (delegation to trustee) and 4-302(15) (trustee to pay expenses of administration from trust).

Paragraph (1) clarifies that a trustee is entitled to reimbursement from the trust for incurring expenses within the trustee's authority. The trustee may also withhold appropriate reimbursement for expenses before making distributions to the beneficiaries. Restatement (Third) of Trusts Sec. 39 comm. b (Prel. Draft No. 3, 1997). But a trustee is ordinarily not entitled to reimbursement for incurring unauthorized expenses. Such expenses are normally the personal responsibility of the trustee.

Only if the unauthorized expenditures benefitted the trust, as provided in paragraph (2), is the trustee entitled to reimbursement. The purpose of paragraph (2), which is derived from Restatement (Second) of Trusts Section 245, is not to ratify the unauthorized conduct of the trustee, but to prevent the unjust enrichment of the trust. Given this purpose, a court, on grounds of equity, may delay or even deny reimbursement for expenses which benefitted the trust. For a list of factors which the court may wish to take into consider in making this determination, see Restatement (Second) of Trusts Section 245 comm. g (1959).

Reimbursement under this section may include attorney's fees and expenses incurred by the trustee in defending an action. However, a trustee is not ordinarily entitled to attorney's fees and expenses if it is determined that the trustee breached the trust. See, e.g., Estate of Gilmaker, 38 Cal. Rptr. 270 (Ct. App. 1964); Estate of Vokal, 263 P.2d 64 (Cal. App. 1953).

(b) The terms of the trust may expand, restrict, eliminate, or otherwise alter the duties prescribed by this [part], and the trustee may reasonably rely on those terms, but this [Act] does not authorize a trustee to act other than in good faith and with regard to the purposes of the trust and the interest of the beneficiaries.

Source: CPC Section 16000.

A settlor is free to vary the duties prescribed by this Part but only within limits. Pursuant to subsection (b), a trustee must always act in good faith and in accordance with the purposes of the trust and the interests of the beneficiaries. This obligation to act in good faith and in light of fiduciary principles is a fundamental concept the application of which is not limited to this section. See Sections 4-214 (duties with regard to discretionary powers), 6-105 (exculpation of trustee). See also Sections 4-202 (duty of loyalty), and 4-204 (duty to act with prudence). In addition and perhaps stating the obvious, the trustee is not required to perform a duty prescribed by the terms of the trust if performance would be impossible. Furthermore, the terms of a trust created for an invalid purpose are also invalid. Consequently, a trustee need not comply with a term of the trust if it requires the performance of an illegal act or an act violative of public policy.

While a trustee generally must administer a trust in accordance with its terms and purposes, the purposes and particular terms of the trust will on occasion conflict. Should such a conflict occur because of circumstances not anticipated by the settlor, it may be appropriate for the trustee to petition under Section 2-204 to modify or terminate the trust.

For a provision requiring the trustee to follow the terms of the trust with respect to the making of investments, see Section 4-401(b).

(a) A trustee shall administer the trust solely in the interest of the beneficiaries.

(b) Any transaction involving the trust property which is affected by a substantial conflict between the trustee's fiduciary and personal interests is voidable by a beneficiary affected by the transaction unless the transaction was authorized by the terms of the trust or approved by the court.

(c) A transaction is presumed to involve a substantial conflict between personal and fiduciary interests if it involves a sale, encumbrance, or other transaction concerning the trust property entered into by the trustee with the spouse, descendants, siblings, parents, agent, or attorney of a trustee, or with a corporation or other enterprise in which the trustee has a substantial beneficial interest.

(d) A transaction between a trustee and a beneficiary which occurs during the existence of the trust or while the trustee retains significant influence over the beneficiary and from which the trustee obtains an advantage is voidable unless the trustee establishes that the transaction was fair to the beneficiary.

(e) This section does not apply to the following transactions, if fair to the beneficiaries: (A) an agreement relating to the appointment of the trustee;

(B) the payment of reasonable compensation to the trustee, whether by agreement, the terms of the trust, or this [Act];

(C) a transaction between a trust and another trust, decedent's estate or conservatorship of which the trustee is a fiduciary or a beneficiary has an interest; and

Subsection (b) states the general rule with respect to transactions involving trust property. A transaction involving the trust property which is affected by a substantial conflict between the trustee's fiduciary and personal interests is voidable by a beneficiary affected by the transaction.

The right of a beneficiary to void a transaction involving a substantial conflict of interest is purely elective. Should the transaction prove unprofitable, the beneficiary will likely allow the transaction to stand. Also, as provided in subsection (b), the beneficiary may be precluded from acting if the transaction was expressly authorized by the terms of the trust or approved by the court. In addition, a beneficiary may be precluded from acting by choosing to ratify the transaction, either prior to or subsequent to its occurrence, by statute of limitations, or by laches. See Sections 6-104, 6-106. In determining whether a beneficiary has consented to a transaction, the principles of fiduciary and virtual representation from Article 6, Part 3 may be applied.

The duty of loyalty is applied to investment decisions in Section 4-405.

SECTION 4-203. IMPARTIALITY. If a trust has two or more beneficiaries, the

trustee shall act impartially in investing and managing the trust property, taking into account

any differing interests of the beneficiaries.

Source: Unif. Prudent Investor Act Sec. 6.

The duty of impartiality is an important aspect of the duty of loyalty. This section is identical to Section 6 of the Uniform Prudent Investor Act, except that this section also requires that the trustee take the differing interests of the beneficiaries into account when making distributions. The Prudent Investor Act is limited to duties with respect to the investment and management of trust property. The differing beneficial interests for which the trustee must act impartially include those of the current beneficiaries versus those holding interests in the remainder, and among those currently eligible for distributions, the interests of those entitled or eligible to receive distributions of income versus those eligible to receive distributions of principal. In effectuating the duty to act impartially, the trustee should be particularly sensitive to allocation of receipts and disbursements between income and principal and should consider, in an appropriate case, a reallocation of income to the principal account and vice versa, if allowable under local law. For an example of such a provision, see Revised Unif. Principal & Income Act (1997) Sec. 104.

For the specific application of the duty of impartiality to trustee investment and property management, see Section 4-406.

SECTION 4-204. PRUDENT ADMINISTRATION. A trustee shall administer the

trust as a prudent person would, by considering the purposes, terms, distribution requirements,

and other circumstances of the trust. In satisfying this standard, the trustee shall exercise

reasonable care, skill, and caution.

The duty to administer the trust with prudence is a fundamental duty of the trustee. This duty is not affected by whether the trustee receives compensation but may be altered by the terms of the trust. See Section 4-201(b) (alteration of duties by terms of the trust). For a specialized application of this standard within the context of trust investment and management, see Section 4-401 (prudent investor rule). This section is applicable to matters such as determining whether to make discretionary distributions, communicating with beneficiaries, and relations with creditors.

SECTION 4-205. COSTS OF ADMINISTRATION. In administering the trust, a trustee may only incur costs that are reasonable in relation to the trust property, the purposes of the trust, and the skills of the trustee.

Source: Unif. Prudent Investor Act Sec. 7.

This section is consistent with the rules concerning costs in Section 227(c)(3) of the Restatement (Third) of Trusts: Prudent Investor Rule (1992). For related rules concerning reimbursement and compensation of trustees, see Sections 4-109 and 4-110. The duty to minimize costs applies to delegation to agents as well as to other aspects of trust administration. In deciding whether and how to delegate, the trustee must be alert to balancing projected benefits against the likely costs. The trustee must also be alert to adjusting compensation for functions which the trustee has delegated to others in order to protect the beneficiary against "double dipping."

For a specific application of the duty to minimize costs within the context of trust investment and management, see Section 4-407.

(b) A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee's representation that the trustee has special skills or expertise, has a duty to use those special skills or expertise.

Source: CPC Section 16014.

(a) A trustee may delegate trustee duties and powers that a prudent trustee of comparable skills could properly delegate under the circumstances. The trustee shall exercise reasonable care, skill, and caution in:

(1) selecting an agent;

(2) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and

(3) periodically reviewing the agent's actions in order to monitor the agent's performance and compliance with the terms of the delegation.

(b) In performing a delegated function, an agent owes a duty to the trust to exercise reasonable care to comply with the terms of the delegation.

(c) A trustee who complies with the requirements of subsection (a) is not liable to the beneficiaries or to the trust for the decisions or actions of the agent to whom the function was delegated.

(d) By accepting the delegation of trustee powers or duties from the trustee of a trust that is subject to the law of this State, an agent submits to the jurisdiction of the courts of this State.

(e) By accepting the delegation of a trust function from the trustee of a trust that is subject to the law of this State, an agent submits to the jurisdiction of the courts of this State.

This section, which is largely copied from Section 9 of the Uniform Prudent Investor Act, codified at Section 4-409, eliminates the traditional emphasis against delegation by a trustee and the often futile attempt to distinguish specified ministerial functions, which were delegable, from discretionary functions, which the trustee was required personally to perform. See Section 4-409 comm.; and John H. Langbein, Reversing the Nondelegation Rule of Trust-Investment Law, 59 Mo. L. Rev. 105 (1994).

Under this section, the emphasis is instead placed on encouraging and protecting the trustee in making delegations appropriate to the facts and circumstances of the particular trust. Whether particular functions of the trustee are delegable is based on whether it is a function that a prudent trustee might delegate under similar circumstances. For example, delegation of the trustee reporting function might be proper and prudent for a family member trustee but improper for a corporate trustee which holds itself out as having expertise in and which is being compensated for this activity.

This section does not mandate delegation or hold a trustee liable for failing to delegate. However, such liability may be imposed under some other section if the trustee, due to the failure to delegate, is unable to perform in accordance with the required standards of a trustee. See, e.g., Sections 4-204 (trustee's standard of prudence in performing duties), 4-401 (prudent investor rule).

This section applies only to delegation to agents, and not to delegation to a cotrustee. For the provision authorizing but at the same time limiting the ability to delegate to a cotrustee, see Section 4-103(b)(1).

Under subsection (b)(3), the duty to review the agent's performance includes the periodic evaluation of the continued need for and appropriateness of the delegation of authority. In particular circumstances, the trustee may need to terminate the delegation to comply with the duty under subsection (b)(1) (duty to use reasonable care, skill, and caution in selecting agent).

(a) If the terms of the trust grant a person other than the trustee power to direct certain actions of the trustee, the trustee shall act in accordance with the exercise of the power unless an attempted exercise manifestly violates the terms of the trust or the trustee knows that the attempted exercise violates a fiduciary duty that the person holding the power owes the beneficiaries of the trust.

(b) The holder of a power to direct is presumptively a fiduciary who, as such, is required to act in good faith, with regard to the purposes of the trust and the interest of the beneficiaries, and is liable for any loss that results from breach of a fiduciary duty.

Comment

This section is derived from Restatement (Second) of Trusts Section 185. Powers to direct in the terms of a trust usually relate either to choice of investment or management of closely-held business interests. A power to direct must be distinguished from a veto power. Per a power to direct, action is initiated and is within the control of a third party and the trustee usually has no responsibility other than to carry out the direction when made. But if a third party holds a veto power, the trustee is responsible for initiating the decision, subject to the third party's approval. A trustee who administers a trust subject to a veto power occupies a position akin to that of a cotrustee and is responsible for taking appropriate action if the third party's refusal to consent would result in a breach of trust. See Restatement (Second) of Trusts Sec. 185 comm. g (1959); Section 4-103(b)(2)(duties of cotrustees).

PROPERTY. A trustee shall take steps reasonable under the circumstances to take control of

and to safeguard the trust property.

Source: CPC Section 16006.

SECTION 4-210. SEPARATION AND IDENTIFICATION OF TRUST PROPERTY.

(a) A trustee shall keep the trust property separate from other property of the trustee.

(b) Unless the trustee is a regulated financial institution, a trustee shall cause the trust property to be designated so that the interest of the trust clearly appears in records maintained by a third party.

SECTION 4-211. ENFORCEMENT AND DEFENSE OF CLAIMS. A trustee shall take reasonable steps to enforce claims of the trust and to defend against claims against the trust.

Source: CPC Section 16010, 16011.

This section codifies the substance of Sections 177 and 178 of the Restatement (Second) of Trusts (1959). Under this section, it may not be reasonable to enforce a claim depending upon the likelihood of recovery and the cost of suit and enforcement. It might also be reasonable to settle an action or suffer a default rather than to defend an action. See also Section 4-302(14) (power to pay, contest, settle or release claims).

SECTION 4-212. PRIOR FIDUCIARIES. A trustee shall take reasonable steps to compel a former trustee or other fiduciary to deliver trust property to the trustee, and to discover and redress a breach of trust committed by the former trustee or other fiduciary.

This section has its origins in Restatement (Second) of Trusts Sec. 223 (1959). Unlike the Restatement, however, this section is written in terms of the affirmative duties of the trustee rather than specifying actions for which the trustee will not be held liable. Also, this section applies not only to duties with respect to predecessor trustees, but also to personal representatives and conservator from whom the trustee received trust property.

This section is a specific application of Section 4-211 on the duty to enforce claims, which could include a claim against a predecessor trustee for breach of trust. In certain circumstances it may not be reasonable to enforce a claim against a predecessor trustee or other fiduciary, depending upon the likelihood of recovery and the cost of suit and enforcement.

For a provision permitting the beneficiaries to relieve a trustee of liability for acts of a predecessor trustee or other fiduciary, see Section 6-106.

SECTION 4-213. DUTY TO INFORM AND REPORT.

(b) On request of a beneficiary, a trustee shall promptly provide the beneficiary with a copy of the trust instrument.

(c) Within [30] days after accepting the trusteeship, the trustee shall inform the beneficiaries of the acceptance. Within [30] days after the death of the settlor of a revocable trust, the trustee shall inform the beneficiaries of their respective interests in the trust.

(f) Copies of trustee reports, and other information required to be provided under subsections (b)-(e) shall be sent to:

(1) the qualified beneficiaries; and

(2) each beneficiary who has delivered to the trustee or other fiduciary a written request for a copy of the report or other information.

The duty to keep the beneficiaries reasonably informed of the administration of the trust is one of the fundamental duties of a trustee. The trustee is under a duty to communicate to the beneficiary information about the administration of the trust that is reasonably necessary to enable the beneficiary to enforce the beneficiary's rights under the trust or to prevent or redress a breach of trust. See Restatement (Second) of Trusts Section 173, comment c (1959). Ordinarily, the trustee is not under a duty to furnish information to the beneficiary in the absence of a specific request for the information. See id., comm. d. Thus, the general duty provided in subsection (a) is ordinarily satisfied by complying with the annual report mandated by subsection (e) unless there are special circumstances requiring particular information to be reported to beneficiaries. However, if the trustee is dealing with the beneficiary on the trustee's own account, the trustee has a duty to communicate material facts relating to the transaction that the trustee knows or should know. The trustee also has a duty to communicate material facts that affect the beneficiary's interest and which the trustee knows the beneficiary does not know and that the beneficiary needs to know for protection in dealing with a third person. See id.

While the principle that the trustee must keep the beneficiaries reasonably informed is well established, less certain is who among the many different types of beneficiaries must be given the required notices. Subsection (f) provides that required notices under subsections (b)-(e) must be given to the qualified beneficiaries as well as other beneficiaries who have requested a copy of the report or other information. For the definition of qualified beneficiaries, see Section 1-201(13). The result of this limitation is that the information need not be furnished to beneficiaries with remote remainder interests unless they have filed a specific request with the trustee.

(a) A trustee, without authorization by the court, may exercise:

(1) the powers conferred by the terms of the trust;

(2) except as limited by the terms of the trust:

(A) all powers over the trust property which an unmarried competent owner has over individually owned property;

(B) any other powers appropriate to accomplish the proper management, investment, and distribution of the trust property; and

(C) any other powers conferred by this [Act].

(b) Any power granted by the terms of the trust or this [Act] must be exercised in good faith and with regard to the purposes of the trust and the interest of the beneficiaries, and except as modified by the terms of the trust, in accordance with the duties of the trustee as prescribed by Article 4, Parts 2 and 4.

This section is intended to grant trustees the broadest possible powers, but to be exercised always in accordance with the terms of the trust and fiduciary principles. The fiduciary principles referred to in this Section include all of the duties specified in Article 4, Parts 2 and 4. The powers conferred elsewhere in this Act and which are recognized by this Section include all of the specific powers listed in Section 4-302.

The powers conferred by this Act may be exercised without court approval. Should court approval of the exercise of a power be desired, a petition for court approval should be filed.

A power differs from a duty. A duty imposes either a mandatory obligation or mandatory prohibition. A power, on the other hand, is a discretion, the exercise of which is not obligatory. The existence of a power, however created or granted, does not speak to the question of whether it is prudent under the circumstances to exercise the power.

SECTION 4-302. SPECIFIC POWERS OF TRUSTEES. Without limiting the authority conferred by Section 4-301, a trustee may:

(1) collect trust property and receive additions to the trust property from a settlor or any other person;

(2) acquire property for the trust, for cash or on credit, including property in which the trustee, in any fiduciary capacity, holds an undivided interest;

(3) sell property, for cash or on credit, at public or private sale, or by exchange;

(4) deposit trust funds in an account in a financial institution, including an institution operated by the trustee;

(5) borrow money, with or without security, and mortgage or pledge trust property for a term within or extending beyond the term of the trust;

(6) advance money for the protection of the trust, for which advances the trustee has a lien on the trust property as against a beneficiary;

(7) with respect to an interest in a proprietorship, partnership, limited liability company, business trust, corporation or other form of business or enterprise, continue the business or enterprise and take any action that can be taken by shareholders, members, or property owners, including changing the form of business organization, voting, or giving proxies to vote, shares of stock or membership interests, and holding a security in the name of a nominee or in other form without disclosure of the trust so that title may pass by delivery;

(8) with respect to an interest in real property, make ordinary or extraordinary repairs, alterations, or improvements in buildings or other structures, demolish improvements, raze existing or erect new party walls or buildings, subdivide or develop land, dedicate land or easements to public use, and make or vacate plats and adjust boundaries;

(9) enter into a lease for any purpose as lessor or lessee, including a lease or other arrangement for exploration and removal of natural resources, with or without the option to purchase or renew and for a term within or extending beyond the term of the trust;

(10) grant an option involving a sale, lease, or other disposition of trust property or take an option for the acquisition of property, including an option exercisable beyond the term of the trust;

(12) abandon or decline to administer property which the trustee reasonably believes is of little or no value;

(13) inspect or investigate property that the trustee holds or has been asked to hold, or property owned or operated by an entity in which the trustee holds or has been asked to hold an interest for the purpose of determining the application of environmental law with respect to the property; take action to prevent, abate, or otherwise remedy any actual or potential violation of any environmental law affecting property held directly or indirectly by the trustee; and decline to accept property into trust or to disclaim any power with respect to property which has or may have environmental liability attached;

(14) pay or contest any claim, settle a claim by or against the trust by compromise, arbitration, or otherwise, and release, in whole or in part, a claim belonging to the trust;

(15) pay taxes, assessments, compensation of the trustee and of employees and agents of the trust, and other expenses incurred in the administration of the trust;

(16) exercise elections with respect to federal, state, and local taxes;

(17) select a mode of payment under any employee benefit or retirement plan, annuity contract or life insurance contract payable to the trustee, to exercise rights thereunder, and to take appropriate action to collect the proceeds, including the right to indemnification against expenses and liabilities;

(18) make loans out of trust property to a beneficiary on terms and conditions the trustee considers to be fair and reasonable under the circumstances, and guarantee loans to the beneficiary by encumbrances on trust property;

(C) if there is no conservator, guardian, custodian, or custodial trustee, a relative or other person having physical custody of the beneficiary;

(20) make a distribution of property and money in divided or undivided interests, pro rata or non-pro-rata, and adjust resulting differences in valuation;

(21) resolve a dispute concerning the interpretation of the trust or its administration by mediation, arbitration or other procedure for alternative dispute resolution;

(22) prosecute or defend an action, claim, or judicial proceeding in any jurisdiction to protect trust property and the trustee in the performance of the trustee's duties;

(23) sign and deliver instruments that are useful to accomplish or facilitate the exercise of the trustee's powers;

(24) on termination of the trust, exercise the powers appropriate to wind up the affairs of the trust and distribute the trust property to those entitled.

Source: CPC Section 16220-16249.

Most of the powers listed in this section are drawn from Section 3 of the Uniform Trustee's Powers Act (1964). Several of the paragraphs are new, however, and other provisions of the Trustee's Powers Act have been modified.

Certain specific powers of a trustee which may be exercised without court approval are contained in other sections, although in some cases subject to other requirements. See Sections 1-305 (transfer of jurisdiction), 2-205 (termination of noncharitable trust with value less than $50,000), 2-206 (reformation of trust or modification to achieve tax objectives), 2-207 (combination and division of trusts), 2-303 (termination of charitable trust with value less than $50,000), 4-103 (delegation to cotrustee), 4-207 (delegation of powers and duties), and 4-401 et seq. (power to invest, delegation of investment and management functions),

Paragraph (3) authorizes a trustee to dispose of property, for cash or on credit, at public or private sale, or by exchange. Under the Restatement, a trustee may sell on credit only if security is given. Restatement(Second) of Trusts Section 190, comment j (1959).

Paragraph (7) authorizes the trustee to continue, incorporate or otherwise change the form of a business. Any such decision by the trustee must be made in light of the standards of prudent investment stated in Part 4 of this article. The authority under this paragraph is broader than that granted under Section 3(c)(3) of the Uniform Trustee's Powers Act. Under the Trustee's Powers Act, a trustee may continue a business only if authorized by the terms of the trust or court order.

Paragraph (13), which addresses possible liability for violations of environmental law, is drawn primarily from the Texas Trust Code.

Paragraph (14) authorizes a trustee to release claims. The determination of when to release a claim depends upon the duties imposed on the trustee. As a general matter, the trustee should be able to release a claim not only when it is uncollectible, but also when it is uneconomical to attempt to collect it. See also Sections 4-211 (duty to enforce claims and defend actions).

Paragraph (15) authorizes a trustee to pay compensation without prior court approval. For other provisions relating to trustees' compensation, see Section 4-109. See also Section 4-110 (repayment to trustees for expenses incurred).

Paragraph (18) allows a trustee to make loans to or guarantee loans of a beneficiary upon such terms and conditions the trustee considers fair and reasonable. The determination of what is fair and reasonable must be made in light of the fiduciary duties of the trustee and purposes of the trust. If the trustee requires security for the loan to the beneficiary, adequate security under this paragraph may consist of a charge on the beneficiary's interest in the trust. See Restatement (Second) of Trusts Section 255 (1959). The interest of a beneficiary that is subject to a spendthrift restraint may not be used for security for a loan under this paragraph. See Section 2-301 et seq. (spendthrift protection).

Paragraph (19) allows a trustee to make payments to another person for the use or benefit of the beneficiary, including to a custodian under the Uniform Transfers to Minor Act.

Paragraph (20) allows a trustee to make non-pro rata distributions and distribute undivided interests. The trustee also has the power to sell property in order to make the distribution. This paragraph recognizes the authority to take gains and losses into account for tax purposes when making distributions. This power provides needed flexibility and avoids the possibility of a taxable event arising from a non-pro rata distribution.

Paragraph (22) authorizes a trustee to prosecute or defend an action. As to the propriety of reimbursement for attorney's fees and other expenses of an action or judicial proceeding, see Section 4-110 and comment. See also Sections 4-211 (duty to defend actions), 4-301(b)(exercise of powers subject to fiduciary principles), 6-202 (protection of persons dealing with trustees).

Paragraph (24), which is similar to Section 344 of the Restatement (Second) of Trusts, clarifies that even though the trust has terminated, the trustee retains the powers needed to wind up the affairs of the trust and distribute the remaining trust property. While such terminations should not be delayed, neither should they be hasty or ill-considered. By anticipating the termination prior to the terminating event, many of the problems that typically arise can usually be avoided.

PREFATORY NOTE

Over the decades from the late 1960's the investment practices of fiduciaries experienced significant change. The Uniform Prudent Investor Act (UPIA) undertakes to update trust investment law in recognition of the alterations that have occurred in investment practice. These changes have occurred under the influence of a large and broadly accepted body of empirical and theoretical knowledge about the behavior of capital markets, often described as "modern portfolio theory."

This Act draws upon the revised standards for prudent trust investment promulgated by the American Law Institute in its Restatement (Third) of Trusts: Prudent Investor Rule (1992) [hereinafter Restatement of Trusts 3d: Prudent Investor Rule; also referred to as 1992 Restatement].

Objectives of the Act. UPIA makes five fundamental alterations in the former criteria for prudent investing. All are to be found in the Restatement of Trusts 3d: Prudent Investor Rule.

Literature. These changes in trust investment law have been presaged in an extensive body of practical and scholarly writing. See especially the discussion and reporter's notes by Edward C. Halbach, Jr., in Restatement of Trusts 3d: Prudent Investor Rule (1992); see also Edward C. Halbach, Jr., Trust Investment Law in the Third Restatement, 27 Real Property, Probate & Trust J. 407 (1992); Bevis Longstreth, Modern Investment Management and the Prudent Man Rule (1986); Jeffrey N. Gordon, The Puzzling Persistence of the Constrained Prudent Man Rule, 62 N.Y.U.L. Rev. 52 (1987); John H. Langbein & Richard A. Posner, The Revolution in Trust Investment Law, 62 A.B.A.J. 887 (1976); Note, The Regulation of Risky Investments, 83 Harvard L. Rev. 603 (1970). A succinct account of the main findings of modern portfolio theory, written for lawyers, is Jonathan R. Macey, An Introduction to Modern Financial Theory (1991) (American College of Trust & Estate Counsel Foundation). A leading introductory text on modern portfolio theory is R.A. Brealey, An Introduction to Risk and Return from Common Stocks (2d ed. 1983).

Other fiduciary relationships. The Uniform Prudent Investor Act regulates the investment responsibilities of trustees. Other fiduciaries - such as executors, conservators, and guardians of the property - sometimes have responsibilities over assets that are governed by the standards of prudent investment. It will often be appropriate for states to adapt the law governing investment by trustees under this Act to these other fiduciary regimes, taking account of such changed circumstances as the relatively short duration of most executorships and the intensity of court supervision of conservators and guardians in some jurisdictions. The present Act does not undertake to adjust trust-investment law to the special circumstances of the state schemes for administering decedents' estates or conducting the affairs of protected persons.

Relationship to Uniform Trust Act. The text of UPIA below is identical to that of the free-standing Act except for minor revisions to conform terminology.

(a) Except as otherwise provided in subsection (b), a trustee who invests and manages trust property owes a duty to the beneficiaries of the trust to comply with the prudent

investor rule set forth in this [part].

(b) The prudent investor rule, a default rule, may be expanded, restricted, eliminated, or otherwise altered by the terms of the trust. A trustee is not liable to a beneficiary to the extent that the trustee acted in reasonable reliance on the terms of the trust.

Comment

This section imposes the obligation of prudence in the conduct of investment functions and identifies further sections of the Act that specify the attributes of prudent conduct.

Origins. The prudence standard for trust investing traces back to Harvard College v. Amory, 26 Mass. (9 Pick.) 446 (1830). Trustees should "observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested." Id. at 461.

Objective standard. The concept of prudence in the judicial opinions and legislation is essentially relational or comparative. It resembles in this respect the "reasonable person" rule of tort law. A prudent trustee behaves as other trustees similarly situated would behave. The standard is, therefore, objective rather than subjective. Sections 4-302 through 4-309 identify the main factors that bear on prudent investment behavior.

(a) A trustee shall invest and manage trust property as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.

(b) A trustee's investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.

(c) Among circumstances that a trustee shall consider in investing and managing trust property are such of the following as are relevant to the trust or its beneficiaries:

(1) general economic conditions;

(2) the possible effect of inflation or deflation;

(3) the expected tax consequences of investment decisions or strategies;

(4) the role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property;

(5) the expected total return from income and the appreciation of capital;

(6) other resources of the beneficiaries;

(7) needs for liquidity, regularity of income, and preservation or appreciation of capital; and

(8) an asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

(d) A trustee shall make a reasonable effort to verify facts relevant to the investment and management of trust property.

(e) A trustee may invest in any kind of property or type of investment consistent with the standards of this [Act].

(f) A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee's representation that the trustee has special skills or expertise, has a duty to use those special skills or expertise.

Objective standard. Subsection (a) carries forward the relational and objective standard made familiar in the Amory case, in earlier prudent investor legislation, and in the Restatements. Early formulations of the prudent person rule were sometimes troubled by the effort to distinguish between the standard of a prudent person investing for another and investing on his or her own account. The language of subsection (a), by relating the trustee's duty to "the purposes, terms, distribution requirements, and other circumstances of the trust," should put such questions to rest. The standard is the standard of the prudent investor similarly situated.

Portfolio standard. Subsection (b) emphasizes the consolidated portfolio standard for evaluating investment decisions. An investment that might be imprudent standing alone can become prudent if undertaken in sensible relation to other trust assets, or to other nontrust assets. In the trust setting the term "portfolio" embraces the entire trust estate.

Risk and return. Subsection (b) also sounds the main theme of modern investment practice, sensitivity to the risk/return curve. See generally the works cited in the Prefatory Note to this Act, under "Literature." Returns correlate strongly with risk, but tolerance for risk varies greatly with the financial and other circumstances of the investor, or in the case of a trust, with the purposes of the trust and the relevant circumstances of the beneficiaries. A trust whose main purpose is to support an elderly widow of modest means will have a lower risk tolerance than a trust to accumulate for a young scion of great wealth.

Another familiar example of how tax considerations bear upon trust investing: In a regime of pass-through taxation, it may be prudent for the trust to buy lower yielding tax-exempt securities for high-bracket taxpayers, whereas it would ordinarily be imprudent for the trustees of a charitable trust, whose income is tax exempt, to accept the lowered yields associated with tax-exempt securities.

When tax considerations affect beneficiaries differently, the trustee's duty of impartiality requires attention to the competing interests of each of them.

Duty to monitor. Subsections (a) through (d) apply both to investing and managing trust assets. "Managing" embraces monitoring, that is, the trustee's continuing responsibility for oversight of the suitability of investments already made as well as the trustee's decisions respecting new investments.

Duty to investigate. Subsection (d) carries forward the traditional responsibility of the fiduciary investor to examine information likely to bear importantly on the value or the security of an investment -- for example, audit reports or records of title. E.g., Estate of Collins, 72 Cal. App. 3d 663, 139 Cal. Rptr. 644 (1977) (trustees lent on a junior mortgage on unimproved real estate, failed to have land appraised, and accepted an unaudited financial statement; held liable for losses).

The Act impliedly disavows the emphasis in older law on avoiding "speculative" or "risky" investments. Low levels of risk may be appropriate in some trust settings but inappropriate in others. It is the trustee's task to invest at a risk level that is suitable to the purposes of the trust.

The abolition of categoric restrictions against types of investment in no way alters the trustee's conventional duty of loyalty, which is reiterated in Section 4-405. For example, were the trustee to invest in a second mortgage on a piece of real property owned by the trustee, the investment would be wrongful on account of the trustee's breach of the duty to abstain from self-dealing, even though the investment would no longer automatically offend the former categoric restriction against fiduciary investments in junior mortgages.

SECTION 4-403. DIVERSIFICATION. A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.

Comment

The 1992 Restatement of Trusts takes the significant step of integrating the diversification requirement into the concept of prudent investing. Section 227(b) of the 1992 Restatement treats diversification as one of the fundamental elements of prudent investing, replacing the separate section 228 of the Restatement of Trusts 2d. The message of the 1992 Restatement, carried forward in this section, is that prudent investing ordinarily requires diversification.

Circumstances can, however, overcome the duty to diversify. For example, if a tax-sensitive trust owns an underdiversified block of low-basis securities, the tax costs of recognizing the gain may outweigh the advantages of diversifying the holding. The wish to retain a family business is another situation in which the purposes of the trust sometimes override the conventional duty to diversify.

Rationale for diversification. "Diversification reduces risk . . . [because] stock price movements are not uniform. They are imperfectly correlated. This means that if one holds a well diversified portfolio, the gains in one investment will cancel out the losses in another." Jonathan R. Macey, An Introduction to Modern Financial Theory 20 (American College of Trust and Estate Counsel Foundation, 1991). For example, during the Arab oil embargo of 1973, international oil stocks suffered declines, but the shares of domestic oil producers and coal companies benefitted. Holding a broad enough portfolio allowed the investor to set off, to some extent, the losses associated with the embargo.

Modern portfolio theory divides risk into the categories of "compensated" and "uncompensated" risk. The risk of owning shares in a mature and well-managed company in a settled industry is less than the risk of owning shares in a start-up high-technology venture. The investor requires a higher expected return to induce the investor to bear the greater risk of disappointment associated with the start-up firm. This is compensated risk -- the firm pays the investor for bearing the risk. By contrast, nobody pays the investor for owning too few stocks. The investor who owned only international oils in 1973 was running a risk that could have been reduced by having configured the portfolio differently -- to include investments in different industries. This is uncompensated risk -- nobody pays the investor for owning shares in too few industries and too few companies. Risk that can be eliminated by adding different stocks (or bonds) is uncompensated risk. The object of diversification is to minimize this uncompensated risk of having too few investments. "As long as stock prices do not move exactly together, the risk of a diversified portfolio will be less than the average risk of the separate holdings." R.A. Brealey, An Introduction to Risk and Return from Common Stocks 103 (2d ed. 1983).

Diversifying by pooling. It is difficult for a small trust fund to diversify thoroughly by constructing its own portfolio of individually selected investments. Transaction costs such as the round-lot (100 share) trading economies make it relatively expensive for a small investor to assemble a broad enough portfolio to minimize uncompensated risk. For this reason, pooled investment vehicles have become the main mechanism for facilitating diversification for the investment needs of smaller trusts.

SECTION 4-404. DUTIES AT INCEPTION OF TRUSTEESHIP. Within a reasonable time after accepting a trusteeship or receiving trust property, a trustee shall review the trust property and make and implement decisions concerning the retention and disposition of assets, in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust, and with the requirements of this [Part].

The criteria and circumstances identified in Section 4-302 as bearing upon the prudence of decisions to invest and manage trust assets also pertain to the prudence of decisions to retain or dispose of inception assets under this section.

SECTION 4-405. LOYALTY. A trustee shall invest and manage the trust property solely in the interest of the beneficiaries.

Comment

SECTION 4-406. IMPARTIALITY. If a trust has two or more beneficiaries, the

trustee shall act impartially in investing and managing the trust property, taking into account

any differing interests of the beneficiaries.

The duty of impartiality derives from the duty of loyalty. When the trustee owes duties to more than one beneficiary, loyalty requires the trustee to respect the interests of all the beneficiaries. Prudence in investing and administration requires the trustee to take account of the interests of all the beneficiaries for whom the trustee is acting, especially the conflicts between the interests of beneficiaries interested in income and those interested in principal.

The trustee's duty of impartiality commonly affects the conduct of investment and management functions in the sphere of principal and income allocations. This Act prescribes no regime for allocating receipts and expenses. The details of such allocations are commonly handled under specialized legislation, such as the Revised Uniform Principal and Income Act (1962) (which is presently under study by the Uniform Law Commission with a view toward further revision).

SECTION 4-407. INVESTMENT COSTS. In investing and managing trust

property, a trustee may only incur costs that are appropriate and reasonable in relation to the

property, the purposes of the trust, and the skills of the trustee.

Wasting beneficiaries' money is imprudent. In devising and implementing strategies for the investment and management of trust assets, trustees are obliged to minimize costs.

SECTION 4-408. REVIEWING COMPLIANCE. Compliance with the

prudent investor rule is determined in light of the facts and circumstances existing at the time

of a trustee's decision or action and not by hindsight.

(a) A trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances. The trustee shall exercise reasonable care, skill, and caution in:

(1) selecting an agent;

(2) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and

(3) periodically reviewing the agent's actions in order to monitor the agent's performance and compliance with the terms of the delegation.

(b) In performing a delegated function, an agent owes a duty to the trust to exercise reasonable care to comply with the terms of the delegation.

(c) A trustee who complies with the requirements of subsection (a) is not liable to the beneficiaries or to the trust for the decisions or actions of the agent to whom the function was delegated.

(d) By accepting the delegation of a trust function from the trustee of a trust that is subject to the law of this State, an agent submits to the jurisdiction of the courts of this State.

Comment

For discussion and criticism of the former rule see William L. Cary & Craig B. Bright, The Delegation of Investment Responsibility for Endowment Funds, 74 Columbia L. Rev. 207 (1974); John H. Langbein & Richard A. Posner, Market Funds and Trust-Investment Law, 1976 American Bar Foundation Research J. 1, 18-24.

The modern trend to favor delegation. The trend of subsequent legislation, culminating in the Restatement of Trusts 3d: Prudent Investor Rule, has been strongly hostile to the nondelegation rule. See John H. Langbein, Reversing the Nondelegation Rule of Trust-Investment Law, 59 Missouri L. Rev. 105 (1994).

John H. Langbein & Bruce A. Wolk, Pension and Employee Benefit Law 496 (1990).

Protecting the beneficiary against unreasonable delegation. There is an intrinsic tension in trust law between granting trustees broad powers that facilitate flexible and efficient trust administration, on the one hand, and protecting trust beneficiaries from the misuse of such powers on the other hand. A broad set of trustees' powers, such as those found in most lawyer-drafted instruments and exemplified in the Uniform Trustees' Powers Act, permits the trustee to act vigorously and expeditiously to maximize the interests of the beneficiaries in a variety of transactions and administrative settings. Trust law relies upon the duties of loyalty and prudent administration, and upon procedural safeguards such as periodic reports and the availability of judicial oversight, to prevent the misuse of these powers. Delegation, which is a species of trustee power, raises the same tension. If the trustee delegates effectively, the beneficiaries obtain the advantage of the agent's specialized investment skills or whatever other attributes induced the trustee to delegate. But if the trustee delegates to a knave or an incompetent, the delegation can work harm upon the beneficiaries.

This section is designed to strike the appropriate balance between the advantages and the hazards of delegation. This section authorizes delegation under the limitations of subsections (a) and (b). Subsection (a) imposes duties of care, skill, and caution on the trustee in selecting the agent, in establishing the terms of the delegation, and in reviewing the agent's compliance.

Although subsection (c) exonerates the trustee from personal responsibility for the agent's conduct when the delegation satisfies the standards of subsection (a), subsection (b) makes the agent responsible to the trust. The beneficiaries of the trust can, therefore, rely upon the trustee to enforce the terms of the delegation.

Costs. The duty to minimize costs that is articulated in Section 4-407 applies to delegation as well as to other aspects of fiduciary investing. In deciding whether to delegate, the trustee must balance the projected benefits against the likely costs. Similarly, in deciding how to delegate, the trustee must take costs into account. The trustee must be alert to protect the beneficiary from "double dipping." If, for example, the trustee's regular compensation schedule presupposes that the trustee will conduct the investment management function, it should ordinarily follow that the trustee will lower its fee when delegating the investment function to an outside manager.

SECTION 4-410. LANGUAGE INVOKING PRUDENT INVESTOR RULE. The following terms or comparable language in the terms of the trust, unless otherwise limited or modified, authorizes any investment or strategy permitted under this [Act]: "investments permissible by law for investment of trust funds," "legal investments," "authorized investments," "using the judgment and care under the circumstances then prevailing that persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital," "prudent man rule," "prudent trustee rule," "prudent person rule," and "prudent investor rule."

(This Article reserved for insertion of text and comments of Revised Uniform Principal and Income Act (1997), when available)

(b) The remedies of a beneficiary for breach of trust are exclusively equitable.

Source: CPC Section 16400, 16421.

Subsection (a) is drawn from Section 201 of the Restatement (Second) of Trusts (1959). While a trust is revocable, the trustee owes duties to the person holding the power to revoke and not to the named beneficiaries. See Section 3-103(a). See also Section 3-103(b)(holder of presently exercisable power of withdrawal treated as settlor).

Subsection (b) is drawn from Section 197 of the Restatement (Second) of Trusts (1959). For a list of equitable remedies, see Section 6-102. See also Section 6-103 (measure of liability for breach of trust).

SECTION 6-102. REMEDIES FOR BREACH OF TRUST. To remedy a breach of trust which has occurred or may occur, the court may:

(1) compel the trustee to perform the trustee's duties;

(2) enjoin the trustee from committing a breach of trust;

(3) compel the trustee to redress a breach of trust by payment of money or otherwise;

(4) appoint a receiver or temporary trustee to take possession of the trust property and administer the trust;

(5) suspend or remove the trustee;

(6) reduce or deny compensation to the trustee;

(7) subject to Section 6-202, void an act of the trustee, impose an equitable lien or a constructive trust on trust property, or trace trust property wrongfully disposed of and recover the property or its proceeds; or

(8) grant any other equitable remedy.

Source: CPC Section 16420.

This section codifies in general terms the remedies available to a beneficiary or cotrustee when a trustee has committed a breach of trust or threatens to do so. The list of remedies is not necessarily exclusive and is not intended to prevent resort to any other appropriate remedy. This section provides a general list of remedies and does not attempt to set out the refinements and exceptions developed in the case law. The availability of a particular remedy listed in this section, and its application under the circumstances, are governed by the common law of trusts. See Section 1-103. The petitioner may seek any one or more of the remedies listed as is appropriate in the circumstances of the case.

Paragraph (1) is consistent with Restatement (Second) of Trusts Section 199(a) (1959). Paragraph (2) is consistent with Restatement (Second) of Trusts Sec. 199(b) (1959).

The reference to payment of money in paragraph (3) includes liability that might be characterized as damages, restitution, or surcharge. For the measure of liability, see Section 6-103. The characterization of monetary liability does not affect the fact that the remedies for breach of trust are exclusively equitable, as provided in Section 6-101(b). In certain circumstances, rather than ordering the payment of money, it may be appropriate for the court to order the trustee to transfer tangible property as a remedy for breach of trust. See Restatement (Second) of Trusts Sec. 199(c)(1959).

As to paragraph (5), see Restatement (Second) of Trusts Section 199(e) (1959). For provisions governing disqualifying or removing trustees, see Section 4-107 (grounds for removal).

Paragraph (6) follows Section 243 of the Restatement (Second) of Trusts (1959).

The authority under paragraph (7) to set aside wrongful acts of the trustee is a corollary of the power to enjoin a threatened breach as provided in paragraph (2). As recognized in the introductory clause, the wrongful acts of the trustee may not be set aside if to do so would impair the rights of bona fide purchasers as provided in Section 6-202. See Restatement (Second) of Trusts Section 202 (1959). See also G. Bogert, The Law of Trusts and Trustees Sec. 861, at 16-17 (rev. 2d ed. 1982).

A successor trustee may also have standing to sue for a breach of trust. As to standing generally, see Restatement (Second) of Trusts Section 200.

SECTION 6-103. MEASURE OF DAMAGES FOR BREACH OF TRUST. A beneficiary may charge a trustee who commits a breach of trust with the amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred, or, if greater, the amount of profit that the trustee made by reason of the breach.

This section is based on Restatement (Third) of Trusts-Prudent Investor Rule Section 205 (1992).

For extensive commentary on the determination of damages, with numerous specific applications, see Restatement (Third) of Trusts-Prudent Investor Rule Sections 204-213 (1992).

The court is not precluded from reducing or excusing damages if equitable to do so. See Restatement (Second) of Trusts Section 205, comment g (1959).

As to defenses of the trustee, see Sections 6-104 to 6-106.

The remedies provided in this section do not preclude resort to other remedies provided by this Act or available under the common law of trusts. See Sections 1-103 (common law of trusts) and 6-102 (remedies for breach of trust).

(a) Unless previously barred by adjudication, consent, or other limitation, a claim against a trustee for breach of trust is barred as to a beneficiary who has received from the trustee a report or other statement adequately disclosing the existence of the claim unless a judicial proceeding to assert the claim is commenced within two years after the later of the receipt of the report or statement, or the termination of the trust relationship between the beneficiary and that particular trustee. A report or statement adequately discloses the existence of a claim if it provides sufficient information so that the beneficiary knows of the claim or reasonably should have inquired into its existence.

(b) For the purpose of subsection (a), a beneficiary is deemed to have received a report or other statement:

(1) in the case of an adult who is reasonably capable of understanding the report or other statement, if it is received by the adult personally;

(2) in the case of an adult who is not reasonably capable of understanding the report or other statement, if it is received by the adult's conservator, guardian, or agent with authority;

(3) in the case of a minor, if it is received by the minor's guardian or conservator or, if the minor does not have a guardian or conservator, if it is received by a parent of the minor who does not have a conflict of interest.

This section is based in part on Section 7-307 of the Uniform Probate Code. For provisions governing consent, release, and affirmance by beneficiaries to relieve the trustee of liability, see Section 6-106. The reference in the introductory clause to claims previously barred also includes principles such as estoppel and laches that apply under the common law of trusts. See Section 1-103. During the time that a trust is revocable, the person holding the power to revoke is the one who must receive the report or other statement in order to commence the running of the limitations period provided in this section. See Section 3-103 (rights of settlor).

Subsection (b) provides special rules concerning who must receive the report or other statement for it to have the effect of later barring claims based on the information disclosed. This subsection addresses only the issue of when the clock will start to run for purposes of the statute of limitations. Should the trustee wish to immediately foreclose possible claims based on the information disclosed, a consent to the report or other information must be obtained under Section 6-106.

For the provisions relating to the duty to report information to beneficiaries, see Section 4-213.

SECTION 6-105. EXCULPATION OF TRUSTEE. A term of the trust relieving a trustee of liability for breach of trust is unenforceable to the extent that it:

(1) relieves a trustee of liability for breach of trust committed intentionally, in bad faith, or with reckless indifference to the purposes of the trust or the interest of the beneficiaries; or

(2) was inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor. When the exculpatory clause was drafted by or on behalf of the trustee, the clause is presumed to have been inserted as a result of such abuse unless the trustee proves that the clause was fair under the circumstances and that its existence and contents were adequately communicated to the settlor.

Paragraph (1) is the same in substance as Section 222 of the Restatement (Second) of Trusts (1959). It is also consistent with the standards expressed in Sections 4-201(b) and 4-214, relating to the extent to which a settlor may negate a duty in the terms of the trust, and with the standard stated in Section 4-301(b), which provides the standard by which trustee powers must be exercised. There is a minimum standard of conduct to which a trustee must comply, whether stated as a negation of a duty or in the form of an exculpatory provision. A trustee must always act in good faith and with regard to the purposes of the trust and the interest of the beneficiaries.

SECTION 6-106. NONLIABILITY OF TRUSTEE FOR BENEFICIARY'S CONSENT, RELEASE, OR AFFIRMANCE. A beneficiary may not hold a trustee liable for a breach of trust if the beneficiary consented to the conduct constituting the breach, released the trustee from liability for the breach, or affirmed the transaction constituting the breach, unless:

(1) the beneficiary at the time of the consent, release, or affirmance did not know of the beneficiary's rights and of the material facts that the trustee knew, or with the exercise of reasonably inquiry, should have known, and which the trustee did not reasonably believe that the beneficiary knew; or

(2) the consent, release, or affirmance of the beneficiary was induced by improper conduct of the trustee.

Source: CPC Section 16463-16465.

This section is drawn from Sections 216 to 218 of the Restatement (Second) of Trusts (1959). When one beneficiary has consented but others have not, courts give a remedy to the nonconsenting beneficiaries. Restatement (Second) of Trusts Section 216, comment h. But consent by the settlor of a revocable trust or by the holder of a presently exercisable power of withdrawal binds all of the beneficiaries. See Section 3-103.

Restatement (Second) of Trusts Section 218, comment d, states that its rule relating to affirmance applies only to breaches which give beneficiaries the option to affirm or disaffirm, but that in other cases the trustee may be protected by laches.

(a) Except as otherwise agreed, a trustee is not personally liable on a contract properly entered into in the trustee's fiduciary capacity in the course of administration of the trust unless the trustee fails to disclose in the contract the representative capacity or identify the trust.

(b) A trustee is personally liable for obligations arising from ownership or control of trust property, or for torts committed in the course of administering a trust, only if the trustee is personally at fault, whether negligently or intentionally.

(c) A claim based on a contract entered into by a trustee in the trustee's representative capacity, on an obligation arising from ownership or control of trust property, or on a tort committed in the course of administering a trust may be asserted against the trust by judicial proceeding against the trustee in the trustee's fiduciary capacity, whether or not the trustee is personally liable on the claim.

(d) A question of liability between the trust and the trustee personally may be determined in an appropriate proceeding.

Source: CPC Section 18000-18002, 18004-18005.

This section is based on Section 7-306 of the Uniform Probate Code (1977). However, unlike the Uniform Probate Code, this section excuses the trustee from personal liability on a contract if either the trustee's representative capacity or the identity of the trust is revealed in the contract. Under this section, it is assumed that either one of these statements in a contract puts the person contracted with on notice of the fact that the other person is a trustee. The protection afforded the trustee by this section applies only to contracts that are properly entered into in the trustee's fiduciary capacity, meaning that the trustee is exercising an available power and is not violating a duty. This section does not excuse any liability the trustee may have for breach of trust. To fall within the rule of subsection (a), either the trustee's status or the identity of the trust must be revealed.

Subsection (b) addresses liability for situations where the trustee, either intentionally or negligently, acts, or fails to act, or commits a tort either intentionally or negligently. This is contrary to Restatement (Second) of Trusts Section 264, which imposes liability on a trustee regardless of fault, including liability for acts of agents under respondeat superior.

Subsection (c) alters the case law rule that the trustee could not be sued in a representative capacity if the trust estate was not liable.

Under subsection (d), ultimate liability between an estate and trustee need not be determined before the third person's claim can be satisfied. It is permissible, and may be preferable, for judgment to be entered against the trust without determining the trustee's ultimate liability until later. If judgment is entered against the trustee individually, the question of the trustee's right to reimbursement may be settled informally with the beneficiaries or in a separate judicial proceeding in the probate court. For rules governing indemnification of trustees, see Section 4-110.

(c) A person who in good faith assists a former trustee or who for value and in good faith deals with a former trustee without knowledge that the person is no longer a trustee is fully protected as if the former trustee were still a trustee.

(d) The protection provided by this section is not a substitute for protection provided to persons assisting or dealing with a trustee by comparable provisions in other law relating to commercial transactions or to the transfer of securities by fiduciaries.

Subsection (a) protects two different classes; persons who assist a trustee with a transaction, and persons who deal with the trustee for value. The third person is protected in the transaction despite the fact the trustee was exceeding or improperly exercising the power as long as the assistance was provided or transaction was entered into in good faith and without knowledge as defined in Section 1-201. Consequently, a third party who receives a purported gift from the trust is not protected, and the transferred property may be recovered for the trust.

Subsection (c) extends the protections afforded by the section to assistance provided to or dealings for value with a former trustee. The third party is protected the same as if the former trustee still held the office.

Subsection (d) clarifies that the protections provided by this section will in many cases be superseded by protections provided by other statutes, in particular the statutes relating to commercial transactions or to transfers of securities by fiduciaries. The principal statutes in question are the various articles of the Uniform Commercial Code, including Article 8 on the transfer of securities, as well as the Uniform Simplification of Transfer of Securities by Fiduciaries Act.

(a) To establish the existence or terms of a trust, a trustee may present a certification of

trust to any person in lieu of providing a copy of the trust instrument.

(b) The certification must contain a statement that the trust has not been revoked,

modified, or amended in any manner that would cause the representations contained in the

certification of trust to be incorrect and must contain a statement that it is being signed by all of the currently acting trustees of the trust.

(c) A certification of trust need not contain the dispositive terms of the trust which set forth the distribution of the trust estate.

(d) A person may require that the trustee offering the certification of trust provide copies of those excerpts from the original trust instrument and amendments thereto which designate the trustee and confer upon the trustee the power to act in the pending transaction.

(e) A person who acts in reliance upon a certification of trust without knowledge that the representations contained therein are incorrect is not liable to any person for so acting and may assume without inquiry the existence of the facts contained in the certification. Knowledge may not be inferred solely from the fact that a copy of all or part of the trust instrument is held by the person relying upon the trust certification. A transaction, and a lien created thereby, entered into by the trustee and a person acting in reliance upon a certification of trust is enforceable against the trust assets.

(f) A person making a demand for the trust instrument in addition to a certification of trust or excerpts is liable for damages, including reasonable attorney's fees, incurred as a result of the refusal to accept the certification of trust or excerpts in lieu of the trust instrument if the court determines that the person did not act in good faith in requesting the trust instrument.

(g) This section does not limit the rights of beneficiaries to obtain copies of the trust instrument or rights of others to obtain copies in a judicial proceeding concerning the trust.

Source: CPC Section 18100.5.

(a) For purposes of this [part], "fiduciary matter" refers to any matter relating to a trust.

(b) Persons interested in a fiduciary matter may approve a judicial settlement and represent and bind other persons interested in the fiduciary matter as provided in this [part].

(c) Except to the extent the terms of the trust indicate that the procedures specified in this [part] are not to apply, persons interested in a fiduciary matter may approve a nonjudicial settlement containing such terms and conditions as a court could properly approve and represent and bind other persons interested in the fiduciary matter as provided in this [part].

SECTION 6-302. REPRESENTATION BY HOLDERS OF POWERS. The holders or all coholders of a power of revocation or presently exercisable general power of appointment, including one in the form of a power of amendment, may represent and bind the persons whose interests as objects, takers in default, or otherwise are subject to the power. To the extent there is no conflict of interest between the holders and the persons represented with respect to the fiduciary matter, persons whose interests are subject to a general testamentary power of appointment may be represented and bound by the holder or holders of the power.

SECTION 6-303. REPRESENTATION BY FIDUCIARIES AND PARENTS. To the extent there is no conflict of interest between the representor and those represented with respect to the fiduciary matter:

(1) a conservator may represent and bind the person whose estate the conservator controls;

(2) a guardian may represent and bind the ward if no conservator of the ward's estate has been appointed;

(3) an agent with authority may represent and bind the principal;

(4) a trustee may represent and bind the beneficiaries of the trust;

(5) a personal representative may represent and bind the persons interested in the decedent's estate; and

(6) if no conservator or guardian has been appointed, a parent may represent and bind a minor child.

SECTION 6-304. REPRESENTATION BY HOLDERS OF SIMILAR INTERESTS. Unless otherwise represented, a minor or an incapacitated, unborn, or unascertained person may be represented by and bound by another person having a substantially identical interest with respect to the fiduciary matter but only to the extent that the person's interest is adequately represented.

SECTION 6-305. NOTICE OF JUDICIAL SETTLEMENT. Notice of a proposed judicial settlement must be given to every interested person or to one who can bind an interested person as described in Sections 6-302 and 6-303. Notice may be given to a person and to another who may bind the person. Notice is given to unborn or unascertained persons, who are not represented under Sections 6-302 and 6-303, by giving notice to all persons whose interests in the judicial proceedings are substantially identical to those of the unborn or unascertained persons and whose identities are actually known.

SECTION 6-306. APPOINTMENT OF GUARDIAN AD LITEM. At any point in a judicial proceeding, the court may appoint a guardian ad litem to represent and approve a settlement on behalf of the interest of a minor, an incapacitated, unborn, or unascertained person, or a person whose identity or address is not actually known, if the court determines that representation of the interest otherwise would be inadequate. If not precluded by conflict of interest, a guardian ad litem may be appointed to represent several persons or interests. The court shall set out its reasons for appointing a guardian ad litem as a part of the record of the judicial proceeding. In approving a judicially supervised settlement, a guardian ad litem may consider general family benefit.

SECTION 6-307. APPOINTMENT OF SPECIAL REPRESENTATIVE. In connection with a nonjudicial settlement, the court may appoint a special representative to represent the interests of and approve a settlement on behalf of designated persons. If not precluded by conflict of interest, a special representative may be appointed to represent several persons or interests. In approving a settlement, a special representative may consider general family benefit. As a condition for approval, a special representative may require that those represented receive a benefit.

(a) This [Act] takes effect on ______________.

(b) Except as provided elsewhere in this [Act], on the effective date of this [Act]:

(1) the [Act] applies to all trusts created before, on, or after its effective date;

(2) the [Act] applies to all judicial proceedings concerning trusts commenced on or after its effective date.

(3) the [Act] applies to judicial proceedings concerning trusts commenced before its effective date unless the court finds that application of a particular provision of this [Act] would substantially interfere with the effective conduct of the judicial proceedings or the rights of the parties, in which case the particular provision of this [Act] does not apply and prior law applies;

(4) any rule of construction or presumption provided in this [Act] applies to trust instruments executed before the effective date unless there is a clear indication of a contrary intent in the terms of the trust; and

(5) an act done before the effective date in any proceeding and any accrued right is not impaired by this [Act].

(c) If a right is acquired, extinguished or barred upon the expiration of a prescribed period of time which has commenced to run by the provisions of any statute before the effective date, the provisions remain in force with respect to that right.

Source: CPC Section 15001; UPC Section 8-101; S.D. Codified Laws Ann. Sec. 29A-8-101.

(a) The following Acts and parts of Acts are repealed:

(1)

(2)

(3)

(b) The following Acts and parts of Acts are amended:

(1)

(2)

(3)

Source: UPC Sec. 8-102.

SECTION 7-103. UNIFORMITY OF APPLICATION AND CONSTRUCTION. In applying and construing this Uniform Act, consideration must be given to the need to promote uniformity of the law with respect to its subject matter among States that enact it.

SECTION 7-104. SEVERABILITY CLAUSE. If any provision of this [Act] or its application to any person or circumstances is held invalid, the invalidity does not affect other provisions or applications of the [Act] which can be given effect without the invalid provision or application, and to this end the provisions of this [Act] are severable.