Nonjudicial Settlement Agreements under the CUTC What Are the Limits?, 0520 COBJ, Vol. 49, No. 5 Pg. 42
| Author | BY CAROL WARNICK |
| Position | Vol. 49, 5 [Page 42] |
TRUST AND ESTATE LAW
BY CAROL WARNICK
This article considers how to use nonjudicial settlement agreements in connection with trust administration, estate planning, and related disputes.
In 2018, the Colorado Legislature passed Colorado's version of the Uniform Trust Code (UTC), the Colorado Uniform Trust Code (CUTC), with an effective date of January 2, 2019. A previous Colorado Lawyer article covered a range of ways to modify irrevocable trusts, including the use of methods set forth in the CUTC.1 This article digs deeper into one of the more exciting areas of the CUTC, the CRS § 15-5-111 provision for a nonjudicial settlement agreement (N1SA), which states that "any person may enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust, regardless of whether the settlement agreement is supported by consideration"2 unless an N1SA violates a material purpose of the trust or includes terms that could not be properly approved by a court.3
The CUTC's NJSA provision opens up a world of new opportunities for trustees and beneficiaries who discover during a trust administration that the trust isn't working as intended and needs to be modified. This may be due to factors such as changed circumstances, changes to state or federal law, or just plain bad drafting. Moreover, the CUTC encourages using NISAs to resolve trustee and beneficiary disputes by giving NJSAs the same credence as if they were approved by a court. This article provides an overview of NJSAs and their uses.
The Parameters
CRS§ 15-5-111 defines the required parties to an NJSA and describes the terms and conditions required for a valid NJSA.
Required Parties
CRS § 15-5-111 specifies the parties who are required to sign an NJSA as "those persons whose interests in the trust would be materially affected by its provisions"4 if the agreement had instead been approved by the court. The comments to corresponding UTC § 111 state that the definition of "interested persons" is intentionally vague because of the wide variety of matters that might be handled by an NJSA. As a practical matter, because non-signatories to an NJSA are not bound by it, anyone against whom enforcement of the agreement might be sought should be included as a signatory. Typically, the parties to the NJSA are the trustee, the beneficiaries (both current and remainder), and anyone else interested in the issues covered by the agreement.
Material Purpose
As stated above, an NJSA is valid in Colorado only if it does not violate a material purpose of the trust.[5] The CUTC does not define a trust's material purpose, but this is generally the settlor's intent in creating the trust. Unless the settlor is alive, the terms of the trust must be examined to determine the material purpose. The drafting attorney may also be able to help by expounding on the material purpose through the attorney's notes, recollections, extrinsic evidence, and comments from family members. Under the CUTC, a spendthrift clause is not presumed to be a material purpose of a trust.6
When crafting an NJSA, drafters should consider the pros and cons of stating the trust's material purpose in the trust document itself While stating the trust's material purpose in the document might make it easier to argue that a proposed modification does not violate such material purpose, it may also limit the use of an NJSA if the stated material purpose is too narrow.
Terms and Conditions
An NJSA cannot contain terms and conditions that a court could not properly approve, such as provisions that would terminate a trust prematurely (e.g., if the termination violated a material purpose of the trust) or that might be against public policy. The specific matters that are resolvable under the statute include, but are not limited to:
■ the interpretation or construction of the trust terms;
■ the approval of a trustee's report or accounting;
■ the direction to a trustee to refrain from performing a particular act, or the grant to a trustee of any necessary or desirable power;
■ a trustee's resignation or appointment, and the determination of a trustee's compensation;
■ the transfer of a trust's principal place of administration; and
■ a trustee's liability for an action relating to the trust.7
By explicitly stating that these factors are non-exhaustive, the CUTC is arguably more expansive than the UTC, which does not contain the "but are not limited to" language in its list of factors. In addition, because NJSAs are applicable to "any matter involving a trust,"8 Colorado practitioners have an open door to be creative when determining when to use an NJSA. The CUTC's NJSA provision was clearly enacted to save interested parties the time and expense of going to court for matters that they can easily decide themselves.
The CUTC NJSA statute also allows any person whose interest in the trust is affected by the NJSA to request court approval or disapproval of the NJSA. However, the court's scrutiny is limited to determining "whether the representation as provided in Part 3 of this code was adequate," and "whether the agreement contains terms and conditions the court could have properly approved."9 Part 3 deals with representation of a person by another, and among other things, specifically approves virtual representation.
Therefore, a court is not permitted to examine the NJSA to approve or disapprove the result; it may only...
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