Nebraska's Total Return Trust Statute: Unitrust Conversion and the Challenges of Managing a Trust and Drafting a Trust

• Publication year: 2022

40 Creighton L. Rev. 135. NEBRASKA'S TOTAL RETURN TRUST STATUTE: UNITRUST CONVERSION AND THE CHALLENGES OF MANAGING A TRUST AND DRAFTING A TRUST

Creighton Law Review

Vol. 40

RONALD R. VOLKMER(fn*)

I. INTRODUCTION

In 2005, the Nebraska Unicameral enacted legislation that authorizes a trustee to "convert a trust to a total return trust." This authorization to convert is contained in Nebraska Revised Statutes section 30-3119.01,(fn1) reprinted at the end of this Article. This Article's main goals are to acquaint the reader with the background for the enactment of this legislation, to examine some of the particulars of the process of conversion to a total return trust, and to place this legislation in the context of the "real world," occupied by those who administer trusts and those who draft trusts.

To place the new legislation in its proper context, the author will review the historical developments that provide the backdrop and context for an examination of the new statute. The brief review leading up to the statute's enactment will focus on two predominant themes: the investment duties of trustees and the historic "principal and income problem." The "principal and income problem" finds its source in the manner in which traditional private trusts have been drafted with regard to their distributive provisions. The "problem" or tension arises out of the trustee's duty of impartiality with regard to the competing investment objectives of the two classes of beneficiaries.

For professionals whose lives intersect with the world of trusts on a daily basis, the story to be told is likely to be a familiar one. For the general practice lawyer and the public at large the topic is a daunting one - filled with complex considerations of fiduciary administration concepts, esoteric tax rules, and a virtual sea of information and advice regarding the "total return trust."

Others have written eloquently and passionately about the "total return trust," producing articles replete with charts, graphs, and grids. These in-depth articles are written, by and large, for the specialist. The author's modest goal in the present undertaking is to take the reader down the road of trust law developments in Nebraska, ending up with a discussion of the Nebraska "total return" statute and its implications for those who administer trusts and those who draft trusts. The story begins with a somewhat personal approach to the telling of recent Nebraska trust law history.

II. A NEBRASKA TRUST LAW ODYSSEY

The author's Nebraska trust law odyssey began in 1971 with his first publication in this Law Review, which, fortuitously, dealt with the topic of Nebraska trust law in light of the Restatement (Second) of Trusts.(fn2) The article focused on Nebraska case law, with barely a mention of Nebraska statutory law.

During the 1970s, the direction of Nebraska statutory law in the area of trusts and estates turned fairly dramatically with Nebraska's adoption of the Uniform Probate Code, effective January 1, 1977. Most readers are likely familiar with the concept of a "uniform" act and the role played by the National Conference of Commissioners on Uniform State Laws ("NCCUSL"). As stated on its web site, NCCUSL "has worked for the uniformity of state laws since 1892."(fn3) From its beginning, NCCUSL has been active in the promulgation of uniform acts relating to commercial law, family law, the law of probate and estates, the law of business organizations, health law, and conflicts of law. At least until 1977, the Nebraska Unicameral had not been particularly active in adopting uniform acts in the field of probate and estates. As noted above, the adoption by the Nebraska Unicameral of the Uniform Probate Code represented a sea of change in Nebraska probate law and paved the way for the parade of trust legislation that began unfolding in 1980.

From 1980 to 2003, the Nebraska Unicameral enacted the following uniform acts:

1980: Uniform Trustees' Powers Act;(fn4) Uniform Principal and Income Act(fn5)

1996: Uniform Management of Institutional Funds Act;(fn6)

1997: Uniform Custodial Trust Act;(fn7) Uniform Prudent Investor Act(fn8)

2002: Revised Uniform Principal and Income Act(fn9)

2003: Uniform Trust Code(fn10)

In the pages of this Law Review the author chronicled each of these statutory developments with special emphasis on the departures from the NCCUSL version of these uniform acts. At the same time, the author attempted to articulate twin themes: how each of the uniform acts impacts trust administration and how each act might impact the drafter of trusts. In the case of Nebraska's newly enacted "total return trust" statute, there is no uniform act upon which it was based, so the author cannot follow the usual pattern of describing how the Nebraska statute departs from the national mode. However, this Article continues the pattern of previous articles in pointing out the impact of the new legislation upon trust administration and the drafting of trusts. It is hoped that with this emphasis the Article will serve to educate and inform both the specialist in estate planning and the general practice lawyer.

III. "TOTAL RETURN TRUST" - THE PRELUDE: UMIFA AND UPIA

As noted at the beginning of this Article, the focal point of the Article is Nebraska Revised Statutes section 30-3119. The heading for this statute, selected by the Revisor of Statutes, is "Conversion to total return trust."(fn11) If any of the readers are former students of the author, the expectation would be that, at this point, the author would turn to the definition of "total return trust" as the appropriate starting point for analysis. And yes, there is a definition for the term contained in the statutes, but not within the confines of section 30-3119.01. But before heading in that direction, the author suggests that a little backtracking is in order. The term "total return trust" did not originate with the enactment of section 30-3119.01, but goes back to other statutes previously enacted by the Nebraska Unicameral.

In 1996, Nebraska enacted the Uniform Management of Institutional Funds Act (UMIFA) followed by the adoption of the Uniform Prudent Investor Act (UPIA) in 1997. In the article written discussing these acts, the author noted that the UMIFA, promulgated in 1972 by NCCUSL, introduced the "total return" concept of trust investing in the rather narrow context of charitable endowments.(fn12) The 1994 UPIA represented the national consensus that the old "prudent person" standard of trustee investing needed to be rethought in light of the acceptance of what was, and still is, called "Modern Portfolio Theory." Much has been written on this theory and its acceptance by the American Law Institute and NCCUSL. It is not necessary to review that history for present purposes. However, it seems helpful at this juncture to point out what led to the development of the concept of investing for "total return."

The structure of the traditional private trust followed the development of the law in England relating to the creation of future interests in land. The law of estates - as classically defined - led to the dichotomy between present (possessory) interests and future interests. When these same concepts were applied to equitable interests - interests held by trust beneficiaries - drafters resorted to the familiar and the accepted categories that had been recognized in the non-trust context. So the familiar devise of Blackacre - a life estate to the widow, remainder to the children - became a devise to a trustee of a life estate to the widow, with a remainder to the children. A trust of this type typically was to last until the death of the widow, at which time the remainder would become possessory.

A trust just described required the trustee to differentiate between the property sticks in the equitable bundle. As trust law developed it became standard practice to denote the widow's equitable life estate as an income interest and the children's remainder interest as an interest in the corpus or principal of the trust. If the trustee were in the position of being a passive title holder holding title to Blackacre, the income/principal distinction created few problems. But, as one can imagine, as trustees began to administer trusts that consisted of all manner of assets - particularly intangibles - the distinction between income and principal became problematic.

For trustees, however, the income/principal distinction was not their main concern. It was the trustee's duty to make the trust property productive and an equally important duty to treat the beneficiaries impartially that put the trustees in a precarious position. The investment objectives of the income and principal beneficiaries conflicted, and it was up to the trustee to delicately balance these interests in the choice of investments. While trust drafters might have put into the trust some language that would give the trustees some measure of protection, the professional trustees were typically caught in the middle in attempting to satisfy the investment objectives of the income and principal beneficiaries.

The typical charitable endowment restricted the payout to the charity to "income" produced by the investments of principal. If charitable trustees made investments that produced capital gains, they would produce very little "income," to the detriment of...