Trusts as Entities Under Restatement (third): a Conceptual Framework for Drafting—part 1
| Publication year | 2016 |
| Pages | 45 |
Articles
Trust and Estate Law
Trusts as Entities Under Restatement (Third): A Conceptual Framework for Drafting—Part 1
By Georgine M. Kryda.
Trust and Estate Law articles are sponsored by the CBA Trust and Estate Section. Topics include trust and estate planning and administration, probate litigation, guardianships and conservatorships, and tax planning.
Coordinating Editors
David W. Kirch, Aurora, of David W. Kirch, P.C.—(303) 671-7726, dkirch@dwkpc.net; Constance D. Smith, Denver, of Fairfield and Woods P.C.—(303) 894-4474, csmith@fwlaw.com
About the Author
Georgine M. Kryda is a sole practitioner in Golden—(303) 205-8485, gkryda@gkryda.com. Kryda practices in the areas of trust and estate planning and administration, probate litigation, and tax. She is also a CPA, a CFE, and a media tor-arbitra tor.
Restatement (Third) of Trusts reflects the practice of referring to the trust res and the fiduciary relationship as a legal entity (i.e., "the trust"). This article provides a conceptual framework based on transaction cost theory for drafting trust agreements when clients and courts look at trusts as entities rather than exclusively as fiduciary relationships.
Restatement (Third) of Trusts (Restatement (Third))[1] launched the latest round in the debate regarding trusts as fiduciary relationships versus trusts as entities by acknowledging the increasingly common practice of referring to the trust property (res) and the fiduciary relationship as a legal entity (i.e., "the trust"). Colorado's real estate titling statute,[2] which permits titling real property in the name of a trust, is one example of the hybrid nature of the concepts of trusts as fiduciary relationships and as entities. Colorado has not formally adopted Restatement (Third); however, courts have referenced Restatement (Third) concurrently with Restatement (Second) of Trusts (Restatement (Second))[3] in several cases.[4] Whether one conceptualizes a trust as a fiduciary relationship or as an entity poses practical consequences for attorneys representing trustees and has significant implications for attorneys drafting trust agreements, clients' expectations of how immutable the trust arrangement will be, and the courts' treatment of trusts.
Part 1 of this article examines these concepts by contrasting the definitions of "trust" in Restatement (Second) (trust as fiduciary relationship) and in Restatement (Third) (trust as entity), reviews the origins of the concepts of trusts as purely fiduciary relationships and as entities, identifies drafting challenges, and introduces the essential elements of transaction cost theory that can provide a framework for the drafter of trust agreements. Part 2 continues to develop a conceptual framework for drafters of trust agreements under Restatement (Third) based on transaction cost theory, examines court decisions for discussions of trusts as entities, and revisits the question of "what is a trust" by presenting a hypothetical based on a computer as trustee.
Definitions of "Trust" in Restatement (Second) and Restatement (Third)
The principal changes in the definition of "trust" from Restatement (Second) § 2 to Restatement (Third) § 2 are: (1) "equitable duties" in Restatement (Second) become "duties" in Restatement (Third),[5] and (2) a trust benefits only "another person" in Restatement (Second), but Restatement (Third) includes a charity as a potential beneficiary in addition to one or more persons.[6]Both changes reflect the evolution of trust administration and have practical purposes.
The change in definition from "equitable duties" to "duties" reflects how U.S. courts have analyzed trusts in the 20th century. When trusts originated in the 15th century, the individual chosen as trustee was subjected to fiduciary duties that were enforced in courts of equity, as opposed to courts of law. Restatement (Second) and Restatement (Third) contain the phrase, "subjecting the person," suggesting the continued importance of the individual trustee.[7] In analyzing a trustee's actions, the original decision tree started with whether the individual was a trustee and then examined the individual's actions. In the 20th century, U.S. courts began to ask first whether an individual was acting in the capacity of trustee and then examined only the subset of actions taken in the fiduciary capacity.
Regarding potential beneficiaries, Restatement (Second) refers only to "a person" as beneficiary whereas Restatement (Third) refers to "the benefit of charity or for one or more persons."[8] While no comment or note explicitly addresses the rewording, Restatement (Third) presumably captures the commonplace motivation of a settlor to establish a trust for the benefit of charity or individuals.
Similarities Between the Restatements' Definitions of "Trust"
The definitions of "trust" in both Restatement (Second) and Restatement (Third)
• refer to express or private trusts;[9]
• require a manifestation of the intention to create a trust;[10]
• acknowledge that the fiduciary relationship is "with respect to property";[11]
• require a trustee, trust property, and beneficiary;[12]
• acknowledge that a trustee or beneficiary may be temporarily absent without defeating the creation or existence of the trust;[13]
• imply that the trust must be for a valid purpose and comply with necessary formalities (e.g., "A trust cannot be created by a testamentary disposition unless the requirements of the statutes relating to the validity of wills are complied with");[14] and
• acknowledge that the trust ceases to exist upon merger (i.e., upon one person holding all of the legal title to the trust property and all of the beneficial interest).[15] However, Restatement (Second) states: "If the beneficiary of a spendthrift trust having the entire beneficial interest in the trust property becomes without his consent the sole trustee, he can procure the appointment of a new trustee and have the trust reconstituted."[16]Restatement (Third) omits this provision,[17] with the explanation that a timely disclaimer of the additional interest by the trustee-beneficiary could achieve the same result as that under Restatement (Second).[18]
Thus, the attorney's checklist under Restatement (Third) retains the same stalwart requirements for drafting a valid trust: manifestation of intent to create a trust with respect to property, identification of at least one trustee and one beneficiary, and compliance with local laws and formalities. Note, though, that Restatement (Second) permits a spendthrift trust to be reconstituted after merger, thereby offering a chance to preserve the settlor's intent, whereas under Restatement (Third), the initial spendthrift trust ceases once merger occurs. The focus has changed from asking whether it is equitable to extinguish a settlor's intent and have a beneficiary suffer the (often unintended) consequences of merger to asking whether the spendthrift trust itself qualifies as a trust post-merger.
The Trust as Entity Concept
The "trust as entity" concept is introduced in Restatement (Third) § 2 cmt. (a)[19] and the associated Reporter's Note.[20]
Restatement (Third) § 2 cmt. (a) states:
Increasingly modern common-law and statutory concepts and terminology tacitly recognize the trust as a legal "entity," consisting of the trust estate and the associated fiduciary relation between the trustee and the beneficiaries. This is increasingly and appropriately reflected both in...
To continue reading
Request your trial