Uniform Trust Code: Looking Back Five Years

I. MARK COHEN

MORGAN YUAN

COHEN & BURNETT, P.C.

MCLEAN, VA

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INTRODUCTION

Since 2008, many states have revisited their Uniform Trust Code (“UTC”) enactments,

making revisions that are significant in both substance and number. This paper discusses three

key changes to UTC Article 5, Creditor’s Claims; Spendthrift and Discretionary Trusts:

(i) Providing for domestic asset protection through self-settled spendthrift trusts;

(ii) Including provisions for “supplemental needs trusts” related to eligibility for

public benefits such as Medicaid; and

(iii) Addressing asset protection in lifetime QTIP trusts with a reversion in the

settlor.

In the sections to follow, we will examine the most recent amendments to the UTC

nationwide, with a focus on these “common threads,” while also noting more unique provisions

that have appeared.

I. SELF-SETTLED SPENDTHRIFT TRUSTS—EXPANDING DOMESTIC ASSET PROTECTION

A major focal point of recent UTC amendments is the validation of self-settled

spendthrift trusts, which runs parallel with the increasing popularity of domestic asset-protection

trusts (“DAPTs”). UTC Section 505 provides that a creditor or assignee of the settlor may reach

the maximum amount that can be distributed to, or for, the settlor’s benefit, arguably giving

creditors better rights to trust assets than the settlor. Alaska (not a UTC state) was the first state

to authorize DAPTs in 1997, and since then many states have followed, including six UTC

states. Prior to 2008, Wyoming, Missouri, Tennessee, and Utah had enacted code sections

authorizing self-settled spendthrift trusts. Since then, Virginia and New Hampshire have

followed suit. Among these six states, only five distinct statutory models are used. The four

states that adopted prior to 2008 each took unique approaches. Of the two more recent states,

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New Hampshire opted to model its DAPT provisions after Tennessee’s. Virginia, on the other

hand, began by looking to the relevant Delaware statute (not a UTC state), but ultimately opted

to craft its own, unique language. We now examine each of the five models, and key distinctions

in New Hampshire’s statute, to understand UTC states’ approach to DAPTs.

Wyoming model—the “qualified spendthrift trust.” A.

Wyoming added subsection (c) to its adoption of UTC § 505,1

along with a handful of

additional sections to provide for self-settled spendthrift trusts, referring to them as “qualified

spendthrift trusts.” Qualified spendthrift trusts must:2

(i) be irrevocable and include a spendthrift provision restraining either voluntary

or involuntary transfers, or both;3

(ii) expressly state the trust is a qualified spendthrift trust;

(iii) expressly state that Wyoming law governs validity, construction and

administration;

(iv) have at least one “qualified” trustee who is either a resident of the state or an

entity authorized by state law to act as trustee that materially participates in

administration; and

(v) the settlor must have personal liability insurance equal to the lesser of

$1,000,000 or the value of the trust assets.

Settlors of qualified spendthrift trusts may retain the following interests:4

1 Wyoming’s adoption of UTC § 505 is found at Wyo. Stat. § 4-10-506.

2 Wyo. Stat. § 4-10-510; Id. at § 4-10-523(ix)(requiring that settlors include assurances as to personal liability

insurance coverage in sworn, written qualified transfer affidavits). 3 See Wyo. Stat. § 4-10-103(xix); Wyo. Stat. § 4-10-502(b). While Wyoming requires a spendthrift provision only

restrain either voluntary or involuntary transfers, the use of the term “spendthrift provision” is sufficient to restrain

both.

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Current income;

CRAT, CRUT, GRAT or GRUT income;

Up to a 5% interest in a total-return trust; and

Interests in QPRTs.

Settlors may retain the following powers: 5

Power to veto distributions;

General power of appointment, either inter vivos or testamentary;

The right to add or remove a trustee, trust protector, or trust advisor other than

the settlor; and

The ability to serve as an investment advisor.

Creditors may not reach the assets of a qualified spendthrift trust, except where a

debtor-beneficiary:

(i) acts in bad faith;

(ii) makes a fraudulent transfer;

(iii) is subject to child support orders; or

(iv) lists trust property in an application to obtain or maintain credit for settlor’s

personal benefit.

In addition, asset protections are ineffective with respect to any property transferred

to the trust by a settlor who received the property by fraudulent transfer. 6

4 Wyo. Stat. § 4-10-510(iv). The ability to retain interests in GRUT and GRAT income was recently added in 2011.

5 Id.

6 Wyo. Stat. § 4-10-520. Except where specifically noted, governmental entities are always exception creditors.

4

The statute of limitations for fraudulent transfer actions are the same for both existing

and future creditors. If the claim is based upon intent to hinder, delay or defraud, it must be

brought within either four years after the transfer, or one year after the transfer could have

reasonably been discovered. For claims based on constructive fraud, there is a four-year

absolute bar.

Missouri model—the minimalist approach. B.

Under the Missouri UTC, an individual may create an irrevocable trust with a valid

spendthrift provision, provided the funding of the trust does not run afoul of the fraudulent

conveyance statute. Such trusts must: 7

(i) be irrevocable and contain a spendthrift clause restraining either voluntary or

involuntary transfers, or both;

(ii) have a non-settlor beneficiary; and

(iii) the settlor’s interest must be discretionary.

Settlors may be a member of a class of beneficiaries, if the self-settled spendthrift

trust is discretionary as to income or principal.8 There is no requirement that certain persons

serve as trustee of a self-settled spendthrift trust.

Asset protections are effective against creditors unless there is a fraudulent transfer or

the creditor is exempt under the statute. The statute of limitations for fraudulent transfer

actions is the same for both future and existing creditors. All claims must be brought within

either four years after the transfer, or one year after the transfer could reasonably have been

7 Mo. Rev. Stat. § 456.5-505(3).

8 Id.

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discovered.9 Exception creditors are limited to children with support claims or ex-spouses

with alimony orders.10

In 2011, Missouri added subsection (4) which clarifies that such trusts

are protected against creditors, even if the settlor has a testamentary power of appointment

exercisable in favor of third parties, including creditors.11

Tennessee model—the “investment services trust.” C.

Tennessee differs from the previous two states, as its DAPT-friendly provisions are

not included in its UTC, but are referenced in UTC § 505(a)(2). Subsection (a)(2) excepts

“investment services trusts” referred to in chapter 16 from the general rule of creditors’

claims against settlors of irrevocable trusts. 12

To create a valid investment services trust in

Tennessee, it must:13

(i) be irrevocable;

(ii) expressly incorporate the law of Tennessee to govern the validity,

construction and administration of the trust;

(iii) have some or all trust assets located in-state;

(iv) include a spendthrift provision restraining both voluntary and involuntary

transfers; and

(v) have a qualified trustee who may not be the settlor and is:

(1) a resident individual; or

(2) an entity authorized by state law to act as trustee.

9 Mo. Rev. Stat. § 428.049; Id. at § 428.024; Id. at § 428.029. This “dual-limitations” period applies to claims based

upon intent to hinder, delay or defraud. A four year absolute bar applies to claims based upon constructive fraud. 10

Mo. Rev. Stat. § 456.5-503(2). 11

Supra note 7, at (4). 12

See generally, Tenn. Code Ann. §§ 35-16-101, et. seq. 13

See id. at § 35-16-102.

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Tennessee adds that qualified trustees are subject to supervision by various state

agencies and departments. Settlors of investment services trusts may retain interests in:14

(i) current income;

(ii) CRAT or CRUT income;

(iii) up to a 5% interest in total-return trusts; and

(iv) interests in QPRTs.

They may also be reimbursed for income taxes attributable to the trust, and may pay

debts, expenses and taxes of the settlor’s estate, from the trust. In addition, settlors may retain

the following powers:15

(i) power to veto distributions;

(ii) specific testamentary powers of appointment;

(iii) powers to replace trustees with parties not related or subordinate to the settlor;

and

(iv) the ability to serve as an investment advisor.

Exception creditors include:16

(i) children with support claims; and

(ii) alimony and property division claims, if the ex-spouse was married to the

settlor before or on the date the assets were transferred to the trust.

The statute of limitations for fraudulent transfer actions differs for existing creditors

and future creditors. For existing creditors with claims based upon intent to hinder, delay or

14 Id.

15 Id.

16 Tenn. Code Ann. § 66-3-310; Id. at § 35-16-104(b)(2).

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defraud, the period is four years after the transfer, or one year after the transfer could

reasonably have been discovered.17

There is a four-year absolute bar for existing creditors’

claims of constructive fraud, and all claims of future creditors.18

Utah model—incorporation into Uniform Fraudulent Transfers Act. D.

Utah, like Tennessee, does not include its provisions on self-settled spendthrift trusts

in its UTC, but instead codifies it externally.19

The provisions are incorporated into Utah’s

Uniform Fraudulent Transfers Act. To be a valid self-settled spendthrift trust, a trust must:

(i) be irrevocable and contain a spendthrift clause restraining both voluntary and

involuntary transfers;

(ii) deposit some or all trust assets in-state;20

and

(iii) appoint a Utah-authorized trust company as trustee.21

Settlors may retain:22

(i) interests in charitable remainder trusts;

(ii) powers to veto distributions;

(iii) testamentary special powers of appointment; and

(iv) powers to appoint advisors and protectors who are not subordinate to the

settlor.

The statute of limitations for fraudulent transfer actions is the same for both existing

and future creditors. Claims based on intent to hinder, delay or defraud must be brought

17 Id.

18 Id.

19 See generally Utah Code Ann. § 25-6-14.

20 Id. at (1)(a).

21 Utah Code Ann. § 7-5-1(1)(d) (defining “trust company” as an institution authorized by Utah to engage in trust

business). 22

Utah Code Ann. § 25-6-14(2)(e).

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within four years of the transfer, or one year after it could have reasonably been discovered.

A four-year absolute bar applies to claims of constructive fraud.23

Exception creditors

include:24

(i) children with support claims;

(ii) ex-spouses with alimony orders or property division claims upon divorce;

(iii) claims arising from judicial, arbitration, mediation, or administrative decisions

commenced prior to or within three years of the trust’s creation;

(iv) claims for violation of written representation or agreements; and

(v) claims of general fraud.

Now, we turn to the two most recent UTC states to adopt DAPT-friendly

provisions—New Hampshire and Virginia.

New Hampshire—“qualified dispositions in trust.” E.

Like Utah and Tennessee, New Hampshire codifies its DAPT provisions outside the

UTC, in a separate chapter addressing qualified dispositions in trust.25

Substantively,

however, New Hampshire’s DAPT provisions are modeled after Tennessee’s Chapter 16 on

investment services trusts. The few differences are:

(i) Federally chartered companies with a place of business in-state may act as

qualified trustees if authorized to conduct trust business in-state;26

23 Id. at § 25-6-10.

24 Id. at (2)(c).

25 N.H. Rev. Stat. Ann. § 564-D:1-18. 26

Id. at 564-D:3.

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(ii) While Tennessee allows settlors to act as “investment advisors,” New

Hampshire refers to the office as “trust advisor,” though the substance of the

office is the same;27

(iii) New Hampshire allows settlors to replace both trustees and trust advisors, but

adds that they may not be related to the settlor;28

and

(iv) Tort creditors are exempt from spendthrift protections for claims arising from

death, personal injury or property damage occurring before, or on, the date of

transfer.

Virginia and the “qualified self-settled spendthrift trust.” F.

Virginia’s approach was originally meant to follow the Delaware DAPT statute, but

after further review the state opted to draft its own, unique approach. Like Wyoming and

Missouri, Virginia incorporates its DAPT-friendly code sections directly into the UTC.29

Self-settled spendthrift trusts are referred to as “qualified self-settled spendthrift trusts.” To

qualify as such, a trust must:30

(i) be an irrevocable, inter vivos trust;

(ii) contain a spendthrift provision restraining both voluntary and involuntary

transfers;

(iii) expressly incorporate the laws of Virginia to govern validity, construction,

and administration;

(iv) deposit some or all trust assets in-state; and

27 Id. at 564-D:5.

28 Id. at 564-D:2(g).

29 Va. Code Ann. §§ 64.2-745.1-2.

30 Id. at § 64.2-745.2.

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(v) have at least one “qualified trustee” at all times, who:

(1) is a resident individual; or

(2) a legal entity authorized to engage in trust business within the state;

and

(3) may be independent, but is not required to be.

Here, Virginia takes a very different approach from the other UTC states. Virginia

creates a higher “tier” of qualified trustees—the independent qualified trustee. Independent

qualified trustees are qualified trustees who are not subject to direction from any parties

either related or subordinate to the settlor, or any person who would not otherwise meet the

requirements of a qualified trustee. 31

This last point applies generally to qualified trustees as

well—a qualified trustee who becomes subject to the direction of a person not otherwise

meeting the same requirements ceases to qualify as such.32

Virginia also takes a unique approach to defining the assets held in such a trust.

Virginia approaches it from the perspective of the settlor, opting to refer to the settlor’s

“qualified interest,” rather than qualified trust property, or qualified transfers in general.33

Qualified interests are those that entitle the settlor to distributions of income, principal, or

both, in the sole discretion of an independent qualified trustee.34

Settlors of qualified self-

settled spendthrift trusts may have both qualified and non-qualified interests. Thus, whether a

settlor has a qualified interest depends entirely on whether there is an independent qualified

31 Id.

32 Id.

33 Id. at (A).

34 Id.

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trustee with absolute discretion. Non-qualified interests are subject to the rules of UTC § 505,

while qualified interests are not.35

With respect to settlors as beneficiaries, Virginia prohibits settlors with qualified

interests from being the sole beneficiaries of a qualified self-settled spendthrift trust.36

Specifically, the language requires that at all times a settlor has a qualified interest entitling

him to receive distributions of income, principal, or both, there must be at least one other

similarly-entitled beneficiary.37

Finally, a beneficiary with a power to withdraw his entire

interest is treated as a settlor, to the extent of assets subject to the power, upon its lapse,

release, or expiration.38

With respect to the interests settlors may retain, they match those permissible under

Tennessee’s laws governing investment services trusts. However, Virginia’s provisions on

retainable powers are quite different. The key distinctions are as follows:

(i) Settlors may not retain power to veto distributions;39

and

(ii) Settlors may only retain general testamentary powers of appointment, except

such powers to appoint to the settlor’s own estate or its creditors. 40

As far as creditors’ claims are concerned, the general asset protection rules are the

same as all the other states, but only with respect to qualified interests.41

The statute of

limitations for fraudulent transfers is a flat five-year bar on actions to void transfers to

35 Id.

36 Id. This is reflected in (3) in the definition of a qualified self-settled spendthrift trust.

37 Id.

38 Id. at (E).

39 Id. at (A). This is the final requirements in (7) under the definition of a qualified self-settled spendthrift trust.

40 Id. at (D)(1).

41 Va. Code Ann. § 64.2-745.1(B)Recall that non-qualified interests are subject to the general rules of UTC § 505, or

Va. Code Ann. § 64.2-747.

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qualified self-settled spendthrift trusts, or enforce claims existent on the date of transfer.42

Excepted creditors include:

(i) children with support orders;

(ii) judgment creditors providing necessary servoces protecting the settlor’s

interest; and

(iii) federal and state claims, subject to limitations regarding reimbursement for

medical assistance.43

II. SPECIAL NEEDS TRUSTS—QUALIFYING FOR MEDICAID AND PUBLIC BENEFITS

Another area that has been addressed by a number of states in recent amendments to their

respective UTC sections relates to “special needs trusts” (“SNTs”).44

A number of states have

paid greater attention to such trusts in recent years. The primary purpose of SNTs is to allow

disabled persons to benefit from trusts designed to supplement the relatively meager benefits

provided by Medicaid (or replace them should Medicaid no longer provide benefits) without

having these trusts counted as a “resource” thereby disqualifying any Medicaid payments.

Medicaid is meant to benefit those of meager resources, so eligibility for the program often

requires applicants to “spend down” their excess assets. Trusts, therefore, seem a natural vehicle

for reducing the amount of resources which are “countable” assets. However, for policy reasons

Medicaid penalizes individuals for simply giving away their money. To that end, Medicaid

“looks back” on all transfers an applicant made within the last five years, and imposes an

ineligibility period based on the total amounts transferred. This reflects a congressional effort to

42 Id. at (D). Note that the substantive provisions on fraudulent transfers are codified separately in §§ 55-80-105.

43 Id. at § 64.2-744.

44 See generally, 42 U.S.C. 1396p(d)(4).

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prevent individuals from displacing the burden of their medical care to the taxpayers at large,

while still continuing to enjoy their wealth. Nonetheless, SNTs are still commonly used to avoid

disqualification for Medicaid.

An overview of SNTs A.

Two general types of SNTs will be discussed here. First are “self-settled spendthrift

trusts” designed to avoid disqualifying the settlor for Medicaid. The others are created

pursuant to the Social Security Act, commonly referred to as “(d)(4) trusts.”45

(d)(4) trusts

differ from self-settled spendthrift trusts in that the latter are private trusts focused on

Medicaid eligibility requirements, whereas (d)(4) trusts are Medicaid sanctioned and provide

for “mandatory”46

reimbursement of costs associated with the provision of public benefits

from the remaining assets.

Self-settled spendthrift trusts. 1.

The first type of trust which may serve as an SNT is the self-settled

spendthrift trust, discussed above.47

However, two problems arise in attempting to

utilize a self-settled spendthrift trust to avoid disqualifying for public benefits.

Notwithstanding the growing trend of acceptance, self-settled spendthrift trusts are

only viable in a minority of jurisdictions. Furthermore, even assuming one avoids

ineligibility after the five-year “look-back,” trust assets are not automatically non-

countable assets. To the extent that a settlor has control over the assets, they will be

counted as resources, thereby lowering the chances of qualifying for public

45 Supra note 44.

46 “Mandatory” is used loosely, as there is a narrow exception in the case of (d)(4)(C) pooled trusts, as will be

discussed later. 47

See generally, infra Part I.

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assistance. Thus, the question is whether settlor-beneficiaries of such trusts have the

power to compel distributions under the recent changes in state UTCs.48

(d)(4) trusts—payback, Miller, and pooled trusts. 2.

The Social Security Act lays out three types of SNTs expressly exempt from

“resource-counting” requirements in determining Medicaid eligibility—(1) “payback”

trusts, (2) “Miller” trusts, and (3) “pooled trusts.” “Payback” trusts are for the benefit

of disabled individuals under the age of 65 at the time of creation and funding.49

Payback trusts must be created by a parent, grandparent, guardian or court.50

Upon

the beneficiary’s death, the state must be reimbursed for the total medical assistance

provided, to the extent possible from the trust’s remaining assets.51

“Miller” trusts are perhaps more accurately referred to as “qualified income”

trusts, as their main purpose is to qualify applicants for public benefits despite

incomes in excess of statutory caps.52

After creation, one ordinarily assigns his or her

right to receive social security and pension income to the trust. Thus, the income

“belongs” to the trust rather than the individual, allowing the individual to meet

income cap. Like payback trusts, Miller trust assets must be used to reimburse the

State for medical assistance provided upon the beneficiary’s death.53

These trusts are

only significant in states that apply income caps on Medicaid eligibility.

48 Danforth, Robert T., Trust Law in the 21

st Century: Article Five of the UTC and the Future of Creditors’ Rights in

Trusts, 27 Cardozo L. Rev. 2551, 2588 (citing Clifton B. Kruse, Jr., Third-Party and Self-Created Trusts: Planning

for the Elderly and Disabled Client, 52-54 (3d ed. 2002). 49

“Disabled” is defined in the Social Security Act at 42 U.S.C. § 1382c(a)(3). 50

See supra note 44 at (d)(4)(A). 51

Id. 52

Wiesner, Ira S., The Miller Trust: OBRA ’93 Implementation in Turmoil, 19 Nova L. Rev. 679, 723 (1995). 53

Supra note 44 at (d)(4)(B)(ii).

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“Pooled” trusts may be established for beneficiaries of any age, for multiple

beneficiaries, and may be either self-settled or for a third party.54

To qualify, the

beneficiaries must be disabled, the trust must be solely for their benefit, and it must

be administered by a nonprofit association, with a separate account for each

beneficiary.55

The accounts are then “pooled” for investment.56

Furthermore, these

trusts are only required to reimburse the State for medical assistance provided to the

extent that the remaining amounts in the beneficiary’s account are not retained by the

trust.57

Thus, nonprofit trustees may apply the remaining funds from decedents’

accounts towards providing for the surviving beneficiaries.

These (d)(4) trusts have been given a great deal of attention in recent

amendments to state UTCs, and in many cases states have enhanced the asset

protections for such trusts. Thus, we first turn our attention to a state-by-state analysis

of changes in the treatment of (d)(4) trusts. Afterwards, we will focus on the options

for people who cannot qualify as “disabled” for the purposes of (d)(4) trusts, namely

the self-settled spendthrift trust and third-party SNTs.

Prior to 2008, Alabama58

and New Hampshire were the only states addressing

special needs trusts, and these were limited to (d)(4) trusts. 59

However, in the past

54 Supra note 44 at (d)(4)(C)(iii).

55 Id.

56 Id. at (ii).

57 Id. at (iv).

58 Alabama added Article 11 to its UTC, which states, in its entirety:

Section 19-3B-1101. Protection of special needs trusts and other similar trusts for disabled persons:

Notwithstanding the provisions of this chapter that may otherwise be applicable to a trust, no provision

thereof shall apply to any special needs trust, supplemental needs trust, or other similar trust established for a person

with a disability as a beneficiary, including without limitation, any trust established pursuant to the provisions of 42

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few years, Wyoming, Tennessee, Vermont, Arizona, North Carolina, and Virginia

have all made amendments or enactments to provide for SNTs.

Wyoming—Supplementing federal law and limiting creditor reach B.

The Wyoming changes began with adding to the definition of a “qualified

beneficiary”60

the State Department of Health, making it a qualified, vested remainder

beneficiary of trusts established under federal law, or its local equivalent.61

From there, the

legislators filled gaps to enhance asset protection from creditors’ claims. This process

involved two separate amendments. First, discretionary SNTs were granted the same

protections afforded to wholly discretionary trusts under Wyoming UTC § 504, making them

“automatic” spendthrift trusts.62

To ensure consistency, Wyoming lawmakers also added an

introductory phrase exempting discretionary SNTs from the general rule that allows creditor

attachment of amounts distributable to or for the settlor’s benefit in irrevocable trusts without

spendthrift clauses.63

U.S.C. § 1396p(d)(4)A or C, as amended from time to time, or other similar federal or state statute, to the extent that

such provision would disqualify such trust beneficiary at any time from eligibility for public needs-based assistance

benefits for which the beneficiary would otherwise qualify.

59

New Hampshire § 564B:5-505(a)(2). ([§505(a)(2) shall not apply to] (A) an irrevocable "special needs trust''

established for a disabled person as described in 42 U.S.C. 1396p(d)(4) or similar federal law governing the transfer

to such a trust 60

See Wyo. Stat. § 4-10-103(a)(xv) (defining “qualified beneficiary). 61

Id.; see also Wyo. Stat. 42-2-403(f)(i-iii) (copying the language of 42 U.S.C. § 1396p(d)(4)(A)-(C) verbatim into

Wyoming law). 62

Wyo. Stat. § 42-2-504(f). “Discretionary SNTs” as used here refers to those created pursuant to Wyo. Stat. § 4-10-

504(f), the local equivalent to 42 U.S.C. § 1396p(d)(4). 63

Wyo. Stat. § 42-2-506(a)(ii).

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Tennessee—providing for “irrevocable special needs trusts.” C.

Tennessee added rules governing creditors’ claims against settlors of “irrevocable

special needs trusts.”64

This includes any irrevocable trust created for the benefit of a person

who qualifies as disabled under any federal, state, or other law or regulation.65

In addition,

beneficiaries not disabled under that definition, may still benefit from these provisions if:

(i) they have a condition “substantially equivalent”66

to one which qualifies

persons as “disabled;” and

(ii) a trust purpose is to allow such beneficiaries to qualify for “benefits that may

otherwise be available.”67

As we will discuss later,68

Tennessee’s consideration of individuals not “officially”

deemed disabled has implications for using self-settled spendthrift trusts that do not meet the

requirements of (d)(4) trusts as an alternative means of qualifying for Medicaid. The mere

existence of nondisabled, remainder beneficiaries does not serve to disqualify trusts as an

“irrevocable special needs trust.”69

Creditors may not reach any amounts distributable to, or

for, the settlor’s benefit in irrevocable SNTs.

Vermont D.

Vermont is among the most recent adopters of the UTC, having only enacted the

uniform law in 2009. Nonetheless, it made revisions later that same year, including a small

64 Tenn. Code Ann. § 35-15-505(a)(3)

65 Id.

66 Id.

67 Id.

68 Infra part (II)(H), ¶ 4 (Self-settled spendthrift trusts).

69 Id.

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but significant addition offering asset protections to SNTs. Vermont copied its neighbor,

New Hampshire, verbatim, excepting (d)(4) trusts from the general rule of UTC 505(a)(2).70

Arizona E.

Another of the recent UTC-adopting states, Arizona enacted the Arizona Trust Code,

modeled after the UTC, in 2009. Though it shares a temporal relation to Vermont in this

sense, Arizona’s consideration of SNTs in its Code is more comprehensive, and their

integration is smoother, spanning several sections. This is demonstrated by the legislature’s

decision to begin by adding “special needs trusts” to the definitions under § 103.71

Arizona’s definition of “special needs trust” is quite similar to Tennessee’s definition

of “irrevocable special needs trust.”72

Under the Arizona Code, an SNT is one established for

the benefit of disabled persons,73

if one of the trust purposes, implied or express, is to allow

them to qualify, or continue qualifying, for benefits that might otherwise be available There

are no exception creditors to SNTs,74

and these trusts are specifically excepted from the

general rule under UTC § 505(a)(2) so that a creditor cannot reach or compel a distribution

to, or for, the benefit of the beneficiary of such a trust.75

North Carolina F.

North Carolina’s original adoption of the UTC was perhaps the least “uniform” of all

the adopting states. In the time since 2008, the state’s lawmakers have continued to carve out

their own provisions, reinforcing its state-specific approach. Its attention to SNTs is,

70 Vt. Stat. Ann. tit. 14A, § 505(a)(2).

71 See A.R.S. § 14-10103(17).

72 See supra note 64.

73 “Disabled” is defined under this section pursuant to 42 U.S.C. § 1382(c).

74 See A.R.S. § 14-10503 B.

75 See A.R.S. § 14-10505 A.2.(c).

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however, nominal, simply adding enabling language allowing the courts to create trusts,

including (d)(4) trusts.76

Virginia—SNTs and self-settled spendthrift trusts G.

Along with the recent transposition of Virginia’s UTC, additions were made which

relate to SNTs. Virginia adds a procedure for the state to recover public assistance funds

provided to the beneficiary, either from mandatory distributions or from discretionary

distributions the trustee chooses to make.77

There is an absolute bar, however, against

ordering any reimbursements, where the beneficiary has been medically determined so

physically or mentally disabled that it constitutes a substantial impairment of his ability to

provide for himself.78

Virginia further clarifies that a trustee’s duty to make distributions in a

manner that avoids disqualifying the beneficiary for public assistance does not amount to a

power held by the beneficiary to compel such payments.

Self-settled spendthrift trusts H.

As mentioned in the first part of our discussion, several UTC states have adopted

provisions which authorize the creation of self-settled spendthrift trusts. Aside from the

obvious advantages of allowing settlors to protect their assets, these trusts may also provide

the added function of helping individuals, who are not officially “disabled” under the Social

Security Act to plan for the eventual qualification for Medicaid benefits. As (d)(4) trusts are

often available only for the benefit of individuals with pre-existing disabilities, they would

76 See UTC § 401; N.C. Gen. Stat. § 36C-4-401 (providing for methods of creating trusts).A concern shared by New

Hampshire, Vermont, Alabama, DC, Missouri, Ohio, Oregon, Tennessee, Vermont, Wyoming and West Virginia,

All other UTC enacting jurisdictions have not seen the need to provide enabling legislation for courts to create

trusts. 77

See Va. Code Ann §64.2-745. 78

Id.

20

not be viable options in this regard. For example, if an individual is perfectly healthy, but

anticipates that they may need to enter a nursing home in ten years’ time, they may want to

begin placing assets in trust now to avoid facing ineligibility due to Medicaid’s five-year

“look-back” period on applicant’s gifts. However, the key issue then is, even if one manages

to avoid the ineligibility period, or is found ineligible for a non-prohibitive period of time,

would the assets of a self-settled spendthrift trust still count as resources available to the

settlor? If they do, then these new provisions do nothing to enhance settlors’ abilities to

qualify for Medicaid benefits. If they don’t, then DAPT states have opened up an entirely

new avenue for elder law clients.

To restate the general common-law principle mentioned above, amounts held in trust

are considered countable assets only to the extent that the beneficiary can compel distribution

of such funds.79

The UTC is generally silent on this issue, and goes no further than to specify

that trustees of discretionary trusts must exercise their discretion in good faith.80

However, it

follows that a trust subject to a spendthrift provision (particularly one that restrains voluntary

transfers) limits the beneficiaries’ abilities to freely access and control the funds within.

Thus, the ability of self-settled and third-party spendthrift trusts to avoid disqualification

from Medicaid benefits depends to a large degree on the independence of the trustees, and

the extent of their distribution discretion.

First, we take a look at Missouri, New Hampshire, Tennessee, Wyoming, and Utah.

All these states specify that trustees of self-settled spendthrift trusts may exercise sole

79 Supra note 48.

80 UTC § 814.

21

discretion, or may be limited by an ascertainable standard.81

However, settlors may still

retain some measure of control through various powers. For example, all these states except

Missouri allow settlors to retain powers to veto distributions.82

Powers to veto distributions

are not substantially equivalent to a power to compel distributions, but they do offer a greater

degree of control over trust assets. Therefore, Missouri’s DAPT provisions offer less control

to settlors than New Hampshire, and consequently, are more likely to be useful for purposes

of qualifying for Medicaid in the future.

Earlier, it was noted that Tennessee includes in its definition of “irrevocable special

needs trusts” certain trusts created for the benefit of people not officially qualified as

“disabled” under the Social Security Act.83

If beneficiaries have conditions substantially

equivalent to an official disability, settlors may still be protected from creditors if one of the

trust purposes is to facilitate qualification for public benefits. Thus far we have only

discussed self-settled spendthrift trusts as they might be used by healthy persons to plan for

Medicaid applications. This Tennessee provision provides for the middle ground between

healthy persons and those officially found to be disabled.

The final state to discuss with respect to self-settled spendthrift trusts is Virginia.

Virginia requires that settlors with qualified interests may not be the trustees, and that the

trustee be independent.84

Similarly, Virginia prohibits settlors with qualified interests from

being the sole beneficiaries of a self-settled spendthrift trust. Unlike most DAPT states,

81 Mo. Rev. Stat. § 456.5-503(2); NH. Rev. Stat. Ann. § 564-D:2(II)(f); Tenn. Code Ann. § 35-16-111((6); Utah

Code Ann. § 25-6-14(2)(e)(iii); Wyo. Stat. § 4-10-510(a)(iv)(F). 82

Id. at (A); NH. Rev. Stat. Ann. § 564-D:2(II)(a); Tenn. Code Ann. § 35-16-111(1); Utah Code Ann. § 25-6-

14(2)(e)(i). 83

Infra part II-C, ¶ 2. 84

Supra note 29 at § 64.2-745.2(A)(“qualified interests” must be administered in the sole discretion of an

independent qualified trustee).

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Virginia prohibits settlors from retaining a power to veto distributions.85

However, Virginia

allows the simultaneous holding of qualified and non-qualified interests to be held in such

trusts. Practically speaking, these trusts are only valuable as DAPTs if the settlor maintains

qualified interests, as non-qualified interests are subject to the creditors’ claim rules of UTC

§ 505. Thus, settlors of qualified self-settled spendthrift trusts who hold qualified interests

will have no control or power to compel distributions with respect to those interests, and any

assets related to such qualified interests would be excluded from consideration when

determining Medicaid eligibility.

III. LIFETIME QTIP TRUSTS WITH REVERSIONS IN THE SETTLOR

Several states have addressed the treatment of marital trusts as they relate to creditors’

claims against settlors. These sections reference §§ 2523(e)-(f) of the Internal Revenue Code.86

The specific concern here relates to lifetime QTIP trusts with reversions in the settlor. Recently

there has been an increased interest in lifetime gifting to minimize estate taxes, no doubt spurred

on by the expansion of the gift tax exemption to $5.12 million. For example, Husband has $10M

and Wife (perhaps a second or subsequent wife, not the mother of Husband’s children) has no

estate. Husband could give $5 million to Wife, with the hope that she will eventually transfer it

to his children. It is common, however, for Husband to gift into an irrevocable living trust for the

children and/or grandchildren’s benefit, reserving lifetime use of the funds, to Wife. The trust is

drafted so that it qualifies for the marital deduction as a qualified terminable interest trust (QTIP)

under I.R.C. § 2523. Husband has no direct access to the funds so gifted, but retains it indirectly

while married to Wife (particularly if the trust were to use a “generic wife” definition). When

85 Id.

86 I.R.C. § 2523.

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Wife dies, the funds are transferred to the children/grandchildren using Wife’s unified credit, not

Husband’s. But what if Wife dies first? Husband wants continued access to those funds. The

solution is to have the trust continue for his benefit upon her death. But since he was the settlor

of this trust, does this reversionary interest now give his creditors access to the funds, perhaps

also causing inclusion into his taxable estate? This is the context in which we examine the

various UTC states’ approach to lifetime QTIP trusts. In the last five years, Wyoming,

Tennessee, North Carolina, Arizona, Florida, Michigan and Virginia have all made amendments

modifying the asset protections afforded to these marital trusts.87

There are three variations among the states: (i) decree that the donor spouse IS NOT the

“settlor,” or that the property of such trust IS NOT contributed by the “settlor;” (ii) treat amounts

contributed to the trust as originating from the settlor’s spouse after her death rather than from

the settlor; or (iii) exempt the settlor’s ability or power to benefit from trust property from

treatment as “distributable to or for” his benefit after the spouse’s death.88

Treatment as “settlor” after spouse’s death A.

Wyoming and Michigan take the first approach. If the donor spouse is not the settlor,

who is? That question is, pardon the pun, unsettled. Wife, in the above example, is the

“deemed transferor” under the QTIP rules, but that is not the same as settlor. Wyoming

defines “settlor” as:

“…a person, including a testator, grantor or

trust maker, who creates, transfers or contributes

property to, a trust. If more than one (1) person

87 See generally, Wyo. Stat. § 4-10-505.1(e); Tenn. Code Ann. § 35-15-505(d); N.C. Gen. Stat. § 36C-5-505(c);

A.R.S. § 13-10505(E); Fla. Stat. § 736.0505(3); M.C.L.S. § 700.7506(4); Va. Code Ann. § 64.2-747. 88

Compare Wyo. Stat. § 4-10-505.1(e) with Fla. Stat. § 736.0505(3) and Tenn. Code Ann. § 35-15-505(d).

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creates, or transfers or contributes property to, a

trust, each person is a settlor of the portion of the

trust property attributable to that person's

contributions or transfers, except to the extent

another person has the power to revoke that

portion.” 89

Michigan defines “settlor” as:

“…a person, including a testator, who

creates a trust. If more than one person creates a

trust, each person is a settlor of the portion of the

trust property attributable to that person's

contribution. The lapse, release, or waiver of a

power of appointment shall not cause the holder of

a power of appointment to be treated as a settlor of

the trust.”90

Both these definitions clearly make the donor spouse the settlor, not the donee.

In addition to changing treatment of settlors, Arizona also deems property of such

trusts as not contributed by the settlor. 91

This begs the same question – who did contribute

the property? Additionally, Arizona expressly provides for the exception’s applicability to

three other types of trusts not officially qualifying as “marital” under the I.R.C., including

irrevocable trusts created:

(i) inter vivos, for the settlor’s spouse, if the settlor is a beneficiary after the

spouse’s death;

89 Wyo. Stat. § 4-10-103(xviii).

90 Michigan § 700.7103(i).

91 A.R.S. § 14-10505(E).

25

(ii) for the benefit of a person, the settlor of which is the person’s spouse,

regardless of whether and when the person was also a settlor of a similar trust

for the benefit of that spouse; and

(iii) for the benefit of a person to the extent that the trust property was subject to a

general power of appointment in another.92

Source of contribution after spouse’s death B.

Florida, Virginia, and North Carolina do not leave us “unsettled” but instead decree

that the property, in our example, is contributed by Wife.93

The exception provides that

marital trust property is considered to be contributed by the decedent spouse, and therefore

primarily takes aim at multi-settlor marital trusts.94

Both states then provide a “catch-all”

provision to apply the exception to trusts not explicitly comporting with §§ 2523(e)-(f), but

has property attributable to such trusts.95

Such trusts, however, are protected against creditor

claims against settlors only to the extent of such attributions.96

As an additional note, North Carolina provides even further, expressly bringing

another type of trust into the scope of the exception. Irrevocable, inter vivos trusts that

designate the settlor’s spouse as the sole life beneficiary, but do not qualify for the federal

gift tax marital deduction may seek the same protections as those that do under North

Carolina law.97

92 Id. at (E)(3)-(5).

93 Fla. Stat. § 736.0505(3); Va. Code Ann §55-545.05B(3), [unintentionally omitted during a code renumbering

effort] N.C. Gen. Stat. § 36C-5-505(c). 94

UTC § 505(a)(2). 95

Fla. Stat. § 736.0505(3)(b); N.C. Gen. Stat. § 36C-5-505(c)(4). 96

Id.; Fla. Stat. §736.0505(3)(b). 97

Id. at (c)(3).

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Distributions “to or for” the settlor’s benefit C.

The final approach is similar to the first, but less unsettling. Tennessee alone adopts

this approach in its 2010 amendment to UTC § 505, providing that, regardless of what is

actually distributed to the settlor, they are deemed not to be treated as “amounts distributable

to or for the settlor’s benefit” for purposes of § 505.98

CONCLUSION

Changes in recent years have demonstrated the “flow” of trust law during that time as

well. States are becoming more receptive to DAPTs and self-settled spendthrift trusts. There is

also a growing recognition of the need to fill the “Medicaid gap” left by the original UTC, and to

provide greater clarity on marital trusts as well. While these changes, and the UTC, are not yet

ubiquitous, looking at the quantity and substance of legislative activity in UTC states over the

past five years reflects a commitment to continual attention to trust law.

98 Tenn. Code Ann. § 35-15-505(d).