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).

Subsection (b) makes clear that a holder