Holland & Knight Alert July 20, 2023


Highlights


  • The Tennessee legislature continues to take action to maintain Tennessee's status as one of the foremost states in which to situs trusts.
  • Recent statutory developments resulted from the practical experiences of trustees, grantors and beneficiaries in the administration of trusts.
  • Consequential improvements to Tennessee's Uniform Trust Code range from clarification of virtual representation and the importance of grantor's intent to the ability to appoint successor trustees and create a directed trustee structure.

The Tennessee legislature continues to take action to maintain Tennessee's status as one of the foremost states in which to situs trusts. The legislature's most recent enhancements to Tennessee's Uniform Trust Code (TN UTC) are codified in Public Chapter No. 166. These recent statutory developments result from the reflection on practical experiences of trustees, grantors and beneficiaries in the administration of trusts. This Holland & Knight alert provides a brief summary of some of the more consequential improvements to the TN UTC.

Clarification of Virtual Representation

The concept of virtual representation refers to the ability of one party to legally represent and bind another party (e.g., a beneficiary or class of beneficiaries) concerning a trust. During the course of administering a trust, a trustee often desires to obtain the unanimous consent of all beneficiaries, and the TN UTC facilitates obtaining such consent pursuant to its virtual representation statute. One specific type of virtual representation is the ability of a parent to represent his/her minor children and/or unborn descendants. The legislature recently revised the parent-child representation provisions to address situations in which there is a disagreement or conflict of interest between parents and each parent seeks to represent the minor or unborn child under the statute. The legislature introduced a four-prong test under Tenn. Code Ann. §35-15-303(a)(7) clarifying that the parent best suited for representation of a minor or unborn descendant is the parent with the closest relationship to the trust as a beneficiary or settlor of the trust or as a person related by reason other than marriage to the settlor of the trust for which the representation is sought. It should be noted that representation of a descendant is still subject to the requirement that the representative not have a material conflict of interest with the descendants with respect to the question or dispute.

A second type of virtual representation is one in which the trustee of a trust that is a beneficiary of another trust (beneficiary trust) may represent the beneficiary trust. Tenn. Code Ann. §35-15-303(a)(5) now provides that in the event the beneficiary trust is not then in existence, or if the trustee of the beneficiary trust is unable or unwilling to represent the beneficiary trust, the beneficiary trust may be represented by those persons who are qualified beneficiaries of the beneficiary trust or who would be qualified beneficiaries of the beneficiary trust if the beneficiary trust were then in existence.

Lastly, the recent legislative update accounts for representation of an incapacitated individual other than a minor child by providing in Tenn. Code Ann. §35-15-303(a)(10) that "[a] parent or spouse of an incapacitated adult who has assumed responsibility for the adult, may represent and bind the incapacitated adult if no conservator or guardian has been appointed and no agent has authority to act with respect to the matter in question."

Multiple Successor Trustees and Directed Trustee Structure

A new section (Tenn. Code Ann. §35-15-716) was added to Part 7 of the TN UTC that addresses the appointment of successor trustees. Specifically, the power to appoint a successor trustee under a trust instrument now includes the power to appoint multiple successor trustees, and the presently exercisable power to remove and replace a trustee under a trust instrument includes the power to appoint trustees to serve with the current trustee. Moreover, the power to appoint successor trustees and additional trustees now includes a power to bifurcate the powers and duties of the successors and/or additional trustees, thereby creating a directed trustee structure with an excluded fiduciary who is relieved of liability arising from such removed powers and/or duties.

In light of this addition, the definition of "excluded fiduciary" under Tenn. Code Ann. §35-15-103(12) was revised to include a trustee, trust advisor or trust protector who, through "an exercise of the authority described in Section 7" is "excluded from exercising a power, or is relieved of a duty; and [t]he power or duty is granted or reserved to another person." Further, Tenn. Code Ann. §35-15-710 now provides that if, pursuant to "an exercise of the authority described in Section 7" a trustee, trust advisor or trust protector is required to follow the direction of another, then the directed trustee, trust advisor or trust protector is an excluded fiduciary with respect to those removed powers and duties. By including a reference to an exercise of authority described in Section 7 to Tenn. Code Ann. §§35-15-103(12) and 35-15-710, liability protection afforded an excluded fiduciary applies to directed trustees appointed pursuant to the recently enacted Tenn. Code Ann. §35-15-716.

Clarification of Nonjudicial Power to Terminate Trust

The recent legislation clarified the ability of qualified beneficiaries and the trustee to terminate a noncharitable trust following a settlor's death. Specifically, Tenn. Code Ann. §35-15-411(b) and (c) were specifically revised to authorize the qualified beneficiaries and trustee to modify and/or terminate a noncharitable trust, provided that the modification or termination does not violate a material purpose of the trust.

Express Confirmation of Lack of Personal Liability of Beneficiaries

Tenn. Code Ann. §35-15-1010 expressly provides that a trustee is not personally liable for debts, obligations or liabilities incurred by reason of the ownership, management or control of trust property in a fiduciary capacity, other than for torts committed with willful misconduct and proven by clear and convincing evidence. Under Tennessee common law, beneficiaries of a trust are similarly not subject to personal liability arising from the trustee's administration of the trust because the beneficiaries do not have control over the trust's assets or operations. The newly enacted Tenn. Code Ann. §35-15-1015 codifies current Tennessee common law regarding the absence of personal liability for beneficiaries by expressly providing that a beneficiary is not personally liable for the debts, obligations or liabilities arising from the administration of a trust, including liability arising from contracts entered into by the trustee or torts committed by the trustee in the course of administering the trust.

The Importance of Grantor's Intent

A fundamental duty of a trustee is the duty of loyalty, which requires a trustee to administer a trust solely in the interests of the beneficiaries. The TN UTC shows a strong deference to the grantor's intention:

Tenn. Code Ann. §35-15-105, Comments: It is the policy of the state of Tennessee, as well as the overriding objective of the Tennessee trust statutes: that a settlor's intent be the lodestar by which a trust is interpreted; that such intent be carried out; and that settlors have the freedom to dispose of their assets to whom and in the manner they wish; all to the greatest extent constitutionally allowable.

Consistent with this deference, the legislature revised the TN UTC's duty of loyalty to expressly acknowledge that the interests of a beneficiary are determined by reference to the terms of the trust agreement (and thus the settlor's intent). Tenn. Code Ann. §35-15-802(a) is revised by adding the following italicized words: A trustee shall administer the trust solely in the interests of the beneficiaries as the beneficiaries' interests are defined under the terms of the trust.

Funding a Community Property Trust

The Tennessee Community Property Trust Act of 2010 provides for the ability of married couples to create a joint trust with the express intention that the trust estate thereof constitutes the couples' community property. The recently enacted legislation amended Tenn. Code Ann. §35-17-105(a) by replacing the term "classify" with "transmute" so that the revised language provides that "spouses may transmute any or all of their property to community property by transferring property to a community property trust." This word substitution expressly acknowledges that the character of the assets contributed to the community property trust has been changed to a different, new form of ownership (i.e., community property).

Distribution of Assets and Release of Liability upon Termination of Trust or Change of Trustee

The legislature added Tenn. Code Ann. §35-15-817 to the TN UTC in 2022 to provide a statutory framework for distributing assets upon trust termination by permitting a trustee to take affirmative actions in an effort to accelerate the time during which breach of fiduciary duty claims may be brought. As originally enacted, Tenn. Code Ann. §35-15-817 focused solely on the distribution of assets upon termination of the trust. In addition to expanding its scope to a change of trusteeship, the recent changes made to Tenn. Code Ann. §35-15-817 provide additional safeguards and protections to both trustees and beneficiaries and provides for a clear method for relief of trustee liability in appropriate circumstances.

Conclusion

In collaboration with a consortium of interested parties, including Holland & Knight attorneys, the Tennessee legislature has made significant strides toward securing and maintaining the state’s status as one of the leading jurisdictions for trust administration. These efforts include legislative adjustments to the TN UTC. Trustees, grantors and beneficiaries should stay current with these changes in order to take advantage of new opportunities for the administration of trusts that have situs in Tennessee. Individuals considering relocating trusts to Tennessee or other states should also consider the recent update to TN UTC when evaluating the advantages provided by different states for situs.