Changes in the role and the form of the trust at the new millennium, or, we don't have to think of England anymore.

• Author: Dobris, Joel C.

1. INTRODUCTION

   This Article is about changes in the role and the form of the trust at the turn of the century and, even more grandly, at the turn of the millennium, with a few thoughts about various reforms in the draft Restatement of Trusts,(1) the draft Uniform Trust Act,(2) the completed Uniform Principal and Income Act,(3) and the Alaska(4) and Delaware(5) trust codes.

   Hopefully it contains a number of interesting ideas. Some of them may even be right. It is neither a grand unified theory nor a unified field theory of trusts. It is not a comprehensive assessment of where we have been or where we are going. It is a report from the front, if you will, or preliminary sketches of a work in progress.

   We are in a moment in time when our ideas about what a trust is, what it is for, and how to operate it are under consideration and, indeed, are changing meaningfully.(6) To paraphrase Dickens: these are the best of times and the worst of times.(7)

   In other words, do we still quite know what a trust is and will we still have trusts as we know them in the twenty-first century?(8) Looming changes may well modify our answers in the years to come.(9)

   An article of this sort must begin with the time honored quote from Cardozo: "A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior."(10) And, in turn, we must ask if we will be saying that with a straight face ten or twenty years from now.

   This Article alludes to several ideas. First, the agreement about what a trust is may well be breaking down.(11) Second, the high-mindedness is leaching out of the trusts and estates world. Cardozo is turning in his grave.(12) Third, everyone wants to slurp at the great river of money that is roaring through our society at the end of the century, as the depression generation starts to pass its money to the baby boomer generation, and as the market soars to new heights.(13) And a lot of those slurpers think the trust is the vessel that will give them a nice long drink. Fourth, the population of people using trusts, including esoteric trusts, is growing rapidly and that growth is changing the world of trusts.(14) Let us call this the massification of trusts. Or, the pedestrianization of trusts.(15) Fifth, there are so many trust reforms both completed, and underway, that our picture of the trust must change.(16)

2. BREAKDOWN OF AGREEMENT ON THE DEFINITION OF TRUSTS

   What is a trust? Why do we have trusts at all? Some countries do not.(17) A law student would probably say that a trust is there to provide for successive ownership, to avoid probate, to protect spendthrifts other than the grantor, to provide management for grantors who later become mentally incompetent, to save some taxes, and to obtain professional investment "management," which historically has been conservative and tilted to income investments.(18)

   A lot of lawyers will tell you that, just like trust investing, the trust itself is a benign, sleepy too(19) for reaching decent, socially wholesome goals,(20) such as taking care of poor Uncle Harry, who never met a horse, or a bottle, he did not like.

   A client might well tell you that trusts are there for similar reasons, but would quickly add, in many cases, the proviso that trusts perform some kind of magic, and that trusts give sophisticated consumers of legal services an advantage over folks who are less aggressive.(21) Probate and taxes are for losers. Trusts make people into winners. Trusts are there to beat the probate system, Uncle Sam, and other creditors, like minor children of prior marriages and Medicaid.(22)

   The view that trusts are there to beat somebody out of something is in the ascendancy.(23) The once unquestioned assumption that people want to pay their bills, and want their beneficiaries to pay their bills, is seemingly under siege.(24) Professors Hangman and Matte can be read to suggest that the definition and clarification of the relationship of the creditor to the universe of the trust--settlor, trustee, beneficiary, trust principal is the crucial point of the trust's existence.(25) One of the points of this Article is that the perceived view of the relationship between creditors and the world of the trust is changing.

   Why is the trust hot? There are a number of reasons, including some of the points to be discussed below: the increasing number and diversity of players in the trust game; the diversity of goals of those different players; the merchandising of trusts and trust planning by those players; and the roaring bull market of the late 1990s.

   In the spring of 1998, the author was walking through a parking lot near the University of California, Davis campus and passed an undergraduate's lowered and "souped-up" car. It was the modern-day version of a hot rod. One of the windows was covered with decals advertising the products used to speed up the car. One of them was stunning. It read, "TRUST--Racing Performance."(26)

   There is meaning and a message in that serendipitous discovery--a number of settlors and their lawyers are looking to their trusts for racing performance. Twenty or thirty years ago, settlors and their lawyers both agreed on what a trust was, and what it was for, and neither was looking for hot rod performance. Today, there is reason to believe that, if asked, a meaningful population of clients think in terms of hot rod performance.

   Indeed, it is not entirely clear what a client wants when she asks for a trust, or agrees to a trust suggested by an advisor. For most clients the word trust might be casually labeled a "heuristic":(27) the equivalent of asking the butcher for "something nice for dinner tonight." It is about as precise as "Give me something cheap, that will take care of my family, make me and them lots of money, save lots of taxes, and give my creditors a poke in the eye with a big stick, if they get too close to me. We'll call it a trust."(28)

3. THE LEACHING OF HIGH-MINDEDNESS

   High-mindedness in trust law is fading like an old picture in a family album. Putting it differently, there seems to be an erosion in fiduciary responsibility in the trust world, still more surely as to creditors of various sorts, most surely if the term fiduciary responsibility is broadly defined.(29)

   What follows are a number of different, but related, "proofs" of the erosion of fiduciary responsibility.

   1. Duty's Loss of Power as an Organizing Principle

      First, it seems that fiduciary duty, or to speak more broadly, fiduciary responsibility,(30) is losing some of its power as an organizing principle in the trust world. Fewer and fewer people believe in fiduciary duty, unless someone is watching. Fiduciaries may be held to the Cardozo standard(31) if they get caught, but it does not apply much offshore.(32) Stating it more broadly, one could fill a hall with people who would say the traditional doctrine of trustee duty and accountability is more moth-eaten than it is modern.(33)

      Clearly, loyalty is a key part of fiduciary duty.(34) While mourning the death of loyalty in a different context, Professor Henry Louis Gates, Jr. quotes Jack Valenti (president of the Motion Picture Association of America) as saying, "`You can count me as an out-of-date dinosaur. I come from an era when loyalty and gratitude were regally honored.'"(35) Valenti goes on to say, "In a strange way, loyalty is now seen as some kind of a character flaw."(36) Gates says the most trenchant thing of all: "Loyalty, is, in essence, a premodern virtue.(37) As such, it is understood--even by those who profess devotion to it--to be one of those things we inherited and must do with, like a grandmother's quilt or the national debt."(38)

      Thus far the discussion has been about trustee loyalty to the beneficiaries. Moth-eaten or not, loyalty and fidelity to beneficiaries still exists to one degree or another.(39) The standard causes of action for breach exist and are used all the time.(40) Of course, beneficiaries hope for dutiful (loyal) trustees, just as they hope not to have to sue their trustees. In the new trust world, the trustees who fear being sued may well seek, hopefully unsuccessfully, to avoid liability under all circumstances.(41)

      Moving on from the trustee's relationship with her beneficiaries, the notion that the people who occupy the world of a given trust have "civic" responsibilities to those outside that world is essentially dead.(42) Once, in a simpler time, when the population of trust lawyers and people involved with trusts was much smaller, there arguably was a custom that suggested it was inappropriate, ungenteel, and perhaps even immoral to use trusts as tools of sharp dealing.(43) If you will, a gentleman(44) would not use his trust to "cheat" his creditors or his son's creditors unless his son was a spendthrift, and thus very much in need of protection.(45) This moral duty(46) to outsiders, if it ever existed outside the apprenticeships and practices of trust lawyers of an earlier time,(47) never became a duty enforced in equity.(48) It was a cultural norm; creditors, the Internal Revenue Service (IRS) in particular, got a free ride--gentle settlors, trustees, lawyers, and the like chose to pay their taxes (or advised paying taxes) and not to skate on thin ice. The free

      ride is over.(49) To one degree or another, in one place or another, it is something of a given today that outsiders--whether in the person of the government, the IRS, other creditors of any sort, claimed stakeholders, or social beneficiaries--are given short shrift in the minds of most settlors and trustees.(50) The IRS is going to have to use law not norms.(51) Gentility no longer limits trusts and asset protection activities.

      Professors Hansmann and Mattei tell us that "the fundamental contribution of trust law is in its arrangement of creditors' rights, and not in the fiduciary duties it provides."(52) It seems...