Constitutional and Other Issues in the Application of the Nebraska Uniform Trust Code to Preexisting Trusts

• Publication year: 2021

82 Nebraska L. Rev. 312. Constitutional and Other Issues in the Application of the Nebraska Uniform Trust Code to Preexisting Trusts

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John M. Gradwohl, William H. Lyons***

Constitutional and Other Issues in the Application of the Nebraska Uniform Trust Code to Preexisting Trusts***

TABLE OF CONTENTS

I. Introduction
....................................................... 313
II. General Applicability to Trusts Created Before
January 1, 2005 ................................................... 317
A. Scope of Retroactive Application ............................... 317
B. Constitutional Limitations ..................................... 318
C. Evolution of UTC Section 1106 and its Comment .................. 324
D. Administrative Provisions ...................................... 327
III. Judicial Proceedings ............................................. 329
IV. Rules of Construction and Presumptions ............................ 330
A. Clear Indication of a Contrary Intent .......................... 330
B. Rules of Construction .......................................... 334
1. Scope of "Rules of Construction" ............................ 334
2. Constitutional Limitations .................................. 337
C. Presumptions ................................................... 338
1. Scope of Presumptions ....................................... 338
2. Constitutional Limitations .................................. 340
V. Act Done Before the Effective Date ................................. 340
VI. Statutes of Limitations ........................................... 341
VII. Substantive Trust Rules Warranting Special
Consideration .................................................... 343
A. Claims of Certain Judgment Creditors Against
Spendthrift and Discretionary Trusts .......................... 343
B. Nonjudicial Settlements ....................................... 345
C. Modification or Termination of a Noncharitable
Irrevocable Trust by Consent .................................. 349
D. Modification or Termination Because of
Unanticipated Circumstances ................................... 352
E. Cy Pres ....................................................... 355
F. Discretionary Distributions of a
Trustee-Beneficiary ........................................... 356
VIII. Nebraska Constitutional Equity Jurisdiction ..................... 359
IX. Nebraska Supreme Court Jurisdiction of Constitutional
Issues ............................................................ 361
X. Conclusion ......................................................... 363

I. INTRODUCTION

The Uniform Trust Code [hereinafter UTC] will become "the first national codification of the law of trusts"(fn1) as it is enacted by state legislatures. The National Conference of Commissioners on Uniform State Laws [hereinafter NCCUSL] is the body responsible for the drafting of the UTC. The UTC is available in Volume 7C (Business and Financial Laws) of the Uniform Laws Annotated (West Group) and online at the University of Pennsylvania web site.(fn2) The UTC is also reproduced in the study report of the Nebraska Unicameral Legislature, Comments and Recommendations For Enactment of a Nebraska Uniform Trust Code, LR 367, December 2002 [hereinafter Report].(fn3) The UTC applies "to express trusts, charitable(fn4) or noncharitable, and trusts created pursuant to a statute, judgment, or decree that requires the trust to be administered in the manner of an express trust."(fn5) The UTC becomes "operative" in Nebraska on January 1, 2005.(fm6)

The UTC applies generally to "all trusts" in existence on its operative date. UTC section 1106 provides:(fn7)

(a) Except as otherwise provided in this [Code],(fn8) on [the effective date of this [Code]]:

(1) this [Code] applies to all trusts created before, on, or after [its effective date];

(2) this [Code] applies to all judicial proceedings concerning trusts commenced on or after [its effective date];

(3) this [Code] applies to judicial proceedings concerning trusts commenced before [its effective date] unless the court finds that application of a particular provision of this [Code] would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of this [Code] does not apply and the superseded law applies;

(4) any rule of construction or presumption provided in this [Code] applies to trust instruments executed before [the effective date of the [Code]] unless there is a clear indication of a contrary intent in the terms of the trust; and

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(5) an act done before [the effective date of the [Code]] is not affected by this [Code].

(b) If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before [the effective date of the [Code]], that statute continues to apply to the right even if it has been repealed or superseded.

Apparently the UTC drafters decided, as a general rule, to make the UTC applicable to preexisting trusts to avoid having two complete sets of trust rules in effect at the same time.(fn9) There are sound policy reasons for applying the UTC to trusts created before its effective date: the nature of the substantive, procedural, and administrative improvements in trust law; the complexity generated by having two bodies of trust law; and the relative ease with which issues involving the application of the UTC rules to preexisting trusts can be resolved. All but one of the five states that have adopted the UTC have reached the same conclusion. Arizona,(fn10) Kansas,(fn11) Nebraska,(fn12) and New Mexico(fn13) have enacted the language of UTC section 1106(a). To date, only Wyoming(fn14) has omitted the language of UTC section 1106(a).

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Although there are sound practical and policy reasons for avoiding having two sets of trust rules in effect at the same time, it is not constitutionally possible to avoid this result entirely. As the drafters recognize in the Prefatory Note and Comments(fn15) to the UTC, there are additional constitutional limitations on the applicability of UTC section 1106. The Prefatory Note to the UTC states that "The Uniform Trust Code is intended to have the widest possible application, consistent with constitutional limitations."(fn16) The Comment to UTC section1106 repeats this statement(fn17) and adds: "The Code cannot be fully retroactive, however. Constitutional limitations preclude application of rules of construction to alter property rights under trusts that became irrevocable prior to the effective date."(fn18)

Further, the Nebraska Uniform Trust Code [hereinafter Nebraska UTC] cannot displace the constitutional equity jurisdiction of Nebraska district courts.(fn19) It is not intended to restrict "the traditional broad equitable jurisdiction of the court."(fn20) There will continue to be a body of Nebraska judicial trust law to be integrated with the new statutory code.

Each application of the Nebraska UTC to a preexisting trust will need to be examined for potential limitations on retroactivity. The examination will include a determination of whether or not the Nebraska UTC changes prior Nebraska law, and, if so, whether it alters beneficial interests under trusts that became irrevocable before January 1, 2005; an interpretation and application of the transitional rules in UTC section 1106; federal and state constitutional requirements concerning retroactive state legislation; and, if necessary, Nebraska constitutional requirements affecting litigation of these constitutional questions.

The drafters of the UTC did not attempt to identify the additional potential federal or state constitutional limits on the retroactive application of the UTC. Instead, the drafters left the fine tuning of the retroactive application of the UTC to the parties, practitioners and the courts. As a result, there will be for some time a "gray zone" in which possible federal and state constitutional limitations on the application of the Nebraska UTC to preexisting trusts will require careful examination. Although this "gray zone" will exist, as a practical matter

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there should be few disputes over the retroactive application of the UTC. Such disputes should be relatively easy to identify because they will relate to beneficial interests and may lend themselves to settlement rather than judicial resolution.(fn21) An understanding of the practical aspects of the "gray zone" will facilitate a smooth and effective implementation of the Nebraska UTC.

II. GENERAL APPLICABILITY TO TRUSTS CREATED BEFORE JANUARY 1, 2005

A. Scope of Retroactive Applicatoin

UTC section 102 provides that the UTC "applies to express trusts, charitable or noncharitable, and trusts created pursuant to a statute, judgment, or decree that requires the trust to be administered in the manner of an express trust."(fn22) The drafters of the UTC intend the UTC "to have the widest possible effect within constitutional limita-tions."(fn23) UTC section 1106(a)(1) provides that "[e]xcept as otherwise provided in this [Code], on [the effective date of this [Code]]: (1) this [Code] applies to all trusts created(fn24) before, on, or after [its effective date] . . . ."(fn25) The Nebraska UTC becomes operative(fn26) on January 1, 2005, at which time it will apply to all trusts described in UTC section 102, whether revocable or irrevocable, and whether written or oral,(fn27) in existence on that date. There are several statutory exceptions to the retroactive application of the Nebraska UTC.(fn28) In addition to the

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statutory exceptions to retroactive application of the UTC, there are, as we explain in the following section, possible federal and Nebraska constitutional limitations to retroactive application of the UTC.

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