On July 1, 2013, an extensive amendment to Tennessee Trust Law came into effect. The length of the amendment was about fifty pages. Although practitioners (including myself) are still (even 8 months later) wrapping their heads around the changes, a brief perusal of the amendment reveals three essential themes which permeate the new law:
- Creditor Protection for Trust Beneficiaries: Trusts are better than ever at protecting the assets from the beneficiary’s creditors, divorce, and lawsuits.
- Protection for Trustees: Trustees have significantly more discretion and significantly less exposure to potential liability under the new law.
- Directed Trusts: There are more options and detailed rules on “Directed Trusts,” which are Trusts where you name a third party to advise and direct the trustee on a particular issue, such as an investment advisor, or trust distribution committee.
With respect to protection from creditors, arguably pre-July 1 Tennessee law had very good protection for beneficiaries. In my estimation, the law has gone from very good protection from creditors to all but iron clad.
That being said, there may be some unintentional consequences of these changes in the law.
One of the key changes is in (of all places) the definitions section. T.C.A. § 35-15-103 defines a beneficiary’s interest. The law creates three types of interests depending on the terms of the trust: (1) Mandatory Interests, (2) Support Interests, and (3) Discretionary Interests. Every interest of every trust beneficiary will fall into one or more of these categories.
The point of these changes was to enhance the creditor protection available to beneficiaries by classifying most trusts as Discretionary Interests/Trusts. The potential problem is that the law purports to have retroactive effect and may well change the rights of beneficiaries and the duties of trustees under tens of thousands of existing trusts (i.e., all existing trusts) across the state—changes which were never considered when the documents were drafted or signed.
The biggest change is to discretionary interests. The new law at § 814(b) plainly gives trustees administering discretionary interests total discretion. Language such as “may” or “shall in the trustee’s absolute discretion” will cause the interest to be discretionary. This language is all too common in trusts and is regularly thrown in just for good measure. Practitioners beware.
Under pre-July 1 law, when a document purported to give a trustee “sole and absolute” discretion, in reality, it meant “reasonable” discretion. In other words, the Trustee was still held to a reasonableness standard and could not unreasonably withhold distributions.
Under new law, a court can only review a Trustee’s discretion for things like dishonesty and improper motive. Section 814(b)(3) makes clear that a trustee of a discretionary trust is not held to a reasonableness standard.
In other words, you can’t haul the trustee into court even when the trustee acts unreasonably (as trustee’s are won’t to do…)!
But wait, there’s more! Section 814(b) also says that a discretionary interest “is neither a property interest nor an enforceable right; it is a mere expectancy.” The beneficiary of a discretionary trust has no legal right to force a distribution.
Thus, a beneficiary with a discretionary interest has extremely limited legal rights against the Trustee.
Although there may be constitutional arguments that old law should still apply to trusts funded prior to July 1, 2013, not unlike arguments in condemnation suits for unconstitutional takings of property without just compensation, who wants to have to make constitutional arguments to force a trustee to act reasonably?
What does this mean for existing trusts? Well folks, as of July 1, your trust just got rewritten! Beneficiaries beware, your trustee no longer has to act reasonably and you can’t do anything about it.
Trustees? Time to party!
As a practical note, one thing is for sure, Practitioners should (if they did not before) always give strong consideration to a provision for the removal and replacement of the Trustee.
While the new law protects beneficiaries better than ever from their creditors and gives practitioners more arrows in their quiver, more changes may be needed to protect beneficiaries from unscrupulous trustees.
Robert D. Malin, Esq.