Matthew Burnett is a member of the Estate Planning and Elder Law Program's Advisory Board. He is an associate attorney with Thomas, Dodson & Wolford PLLC. His practice focuses on estate planning and estate administration. Burnett was a student of Professor Maynard and assisted him in launching the Estate Planning & Elder Law Program in 2016.
First, the bad news: Your sweet grandmother has passed away at the age of 90. Now, the more uplifting news: Your grandmother has kindly decided to leave at her death $100,000 to be held in trust for your benefit.
Though your grandmother worked tirelessly for her entire life, years of nursing home care have significantly depleted her assets. Your grandmother thought it best to name a bank to serve as a corporate trustee, given that banks are highly regulated and staffed with professionals who work with trusts regularly. As well-intentioned as your grandmother may have been, this might not necessarily be the most efficient way for your grandmother to pass her wealth to you.
First, many banks charge trustee fees which can limit the growth potential of the trust assets. Second, trustees must also adhere to the “Prudent Investor Rule.” This rule dictates that trustees should manage and invest trust assets prudently. Again, this may limit the growth potential of the assets left to you in trust. Last, requesting distributions from a corporate trustee can be a time-consuming and sometimes frustrating ordeal. Depending on how your grandmother drafted the language of her trust agreement, you may only be permitted distributions of trust assets in very specific circumstances (e.g. for health reasons). When requesting a distribution, you must demonstrate to the bank that your circumstances permit such a distribution. This can require time and considerable persuasiveness on your part as the beneficiary. The bank might not always permit distributions when you request them.
Enter the Uniform Trust Code (UTC). The UTC allows beneficiaries of trusts similar to the one above to terminate such a trust due to the trust being “uneconomic.” The drafters of the UTC understood that fees and other costs of administration as to a trust holding fewer than $100,000 of assets quickly make such a trust “uneconomic.” In short, the UTC allows smaller trusts to terminate and be distributed outright to beneficiaries so that they may use the funds in a more efficient, economic manner.
Kentucky adopted its version of the UTC in 2014. The UTC — initially drafted by the National Conference of Commissioners on Uniform State Laws (NCUSL) in 2000 — exists to provide “precise, comprehensive, and easily accessible guidance on trust law questions.”
Prior to the adoption of the UTC, most states turned to decades-old case law for guidance on trust law. Aside from the clarity which comes with the adoption of modern uniform codes, Kentuckians will now also enjoy the benefit of a statutory scheme which grants considerable flexibility during the administration of a trust.
Yet another area in which the UTC has given much-needed flexibility is that of trust modification. Imagine yet again that your grandmother has decided to name you as a beneficiary of a trust that will be funded at her death. This time, your grandmother bequeathed to you a generous $200,000. Further, to ensure that the fund will grow so that it can provide you with income for the rest of your life, your grandmother states that you may not receive distributions of trust principal until the age of 50 unless such a distribution is done for a medical emergency.
Now imagine that you are a young adult saddled with significant debt, be it student loans or a mortgage (an all-too-real scenario for many of you reading this, I presume). Such debt often carries high interest rates. To combat the burden of accrued interest, it behooves you — the debtor — to pay off those debts as quickly as possible. Unfortunately, though your grandmother left you quite the nest egg, you generally are unable to apply any of that principal toward paying off your debts. Interest on those debts will accrue for many years and you will ultimately be forced to apply more trust assets toward that debt interest than you would if you could use some of that trust principal to pay off the debt immediately.
Yet again, the UTC offers a solution. Though the trust agreement has been made irrevocable due to your grandmother’s passing, there exists a way to modify the trust in order to best preserve assets for future growth. In the circumstance described above, the UTC permits a modification of the trust agreement so long as that modification is not inconsistent with a material purpose of the trust. Assuming a material purpose of your grandmother’s trust is to provide you with income for the rest of your life, it follows that modifying the trust to prevent unnecessary expenditures on debt interest would not be inconsistent with such a material purpose. In all likelihood, such a modification would be granted by a District Court Judge.
Trusts come in many different shapes and sizes. Historically, adjusting and adapting trusts to changed or unexpected circumstances proved to be difficult. Inherent flaws and inefficiencies in the trust agreement often went unmodified and as a result, countless dollars were wasted. The Uniform Trust Code offers much-needed flexibility to help combat issues which unexpectedly arise during trust administration.