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  • 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, Creditors 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 TRUSTSEXPANDING 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 settlors 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 Tennessees. 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 Hampshires statute, to understand UTC states approach to DAPTs.

    Wyoming modelthe 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 Wyomings 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 settlors

    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.

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    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 modelthe 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 settlors 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 modelthe 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 settlors 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

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