Significant trends in the trust law of the United States.

• Author: Halbach, Edward C., Jr.
• Position: The Rise of the International Trust

1. INTRODUCTION

   In examining significant trends in American trust law, several observations are worth mentioning at the outset. First, trust law in the United States is primarily a matter of state law; thus, the trends discussed below may appear in some states but not in others.(1) Second, procedural merger of law and equity in this country has been substantially accomplished in nearly all states, but this should not be understood as eliminating the importance of equitable doctrine and remedies. Third, without abandoning the basic definition of a trust as a fiduciary relationship,(2) there appear to be subtle but practically significant departures from the traditional concept that a trust is not an "entity."(3) Certainly, the tax law has long treated the typical trust as an entity separate from the trustee.(4) In addition, an increasing number of states draw a distinction for various purposes between the trustee personally and the trustee's fiduciary or "representative" capacity.(5)

   Property owners in the United States and elsewhere are generally living longer, often into longer periods of diminished physical or mental health. In addition, it is generally accepted that today broader segments of society than in the past are using trusts, and with a greater diversity of objectives,(6) but increasingly without the aid of legal counsel who are highly skilled in estate planning and trust practice.(7) Perhaps these factors are playing some role in the "user friendly" responses below, making the trust law more sympathetic to the results of error or oversight and more sensitive to the broad variety of trusts, trusteeships, settlor objectives, and beneficiary circumstances.

   Part II of this Article will describe substantive trust law in the United States, in particular the creation, interpretation, and reformation of trusts, as well as trust termination and modification. Revocable inter vivos trusts, spendthrift trusts, and related topics will also be addressed. Part III will discuss fiduciary standards, focusing on the duties of the trustee and the rights of beneficiaries.

2. SUBSTANTIVE TRUST LAW

   1. Creation of Trusts

      The new and developing Restatements(8) of Property and Trusts (Property Third and Trusts Third), the Uniform Probate Code (UPC), and early but distinct trends in other statutory and common law authorities are moving American law in the direction of upholding property owners' attempts to establish trusts in situations in which traditional law would have found a transfer defective or an expression of trust intent deficient on some technical or formal ground. This tendency exists whether the transfer is made during life or at death, as long as there is evidentiary and circumstantial security that the trust represents the settlor's properly considered, final intention. Moreover, this trend is evident in various other areas: in legislative or judicial acceptance of some form of "harmless error," "substantial compliance," or "dispensing power" doctrine;(9) in increased tolerance of certain failures to satisfy the Statute of Frauds(10) or the requirements for a completed inter vivos transfer;(11) and in increasingly sympathetic views of attempts to create "semi-secret" testamentary trusts.(12)

      American law is finally beginning to clarify and refine rules concerning capacity to create, amend, and revoke inter vivos trusts, recognizing that the degree of capacity to create a revocable trust should be no higher than that to execute a will.(13) The creation of an irrevocable inter vivos trust should depend on whether the trust is purely donative, in which case a gift standard is appropriate,(14) or whether it is part of a negotiated or adversary transaction, for which the higher contract standard would be appropriate.(15)

      Similarly, state law throughout the country is beginning to come to grips with issues concerning the creation, amendment, and revocation of trusts on behalf of incapacitated persons by their personal fiduciaries. Examples include agents acting under express provisions of durable powers of attorney and conservators exercising substituted judgment with court approval. The tendency here, subject to proper safeguards, is to avoid wholly denying incapacitated persons and their families the benefits of updated estate plans and the ability to adapt to changed legal, financial, and family circumstances.(16)

   2. Interpretation, Reformation, and Policy Limitations

      Analogous trends are discernible in a tendency to lessen traditional obstacles to discovering and carrying out the specific intentions or general objectives of settlors. Evolving doctrine, however, continues to seek reasonable evidentiary reliability in these matters while also insisting that purposes be lawful and within the acceptable limits of dead hand control.

      Policy limits on the dead hand begin with the rules regulating perpetuities, the unnecessarily destructive features of which have been removed or at least greatly curtailed in nearly all states in the last several decades. More recent and extreme--and of dubious policy merit--are statutes in several states abolishing the rule against perpetuities as part of an effort to attract trust business from elsewhere by enhancing certain tax-motivated arrangements.(17) Perhaps moving in an understandably more restrictive direction is the inevitably more subjective body of doctrine concerning trust provisions that may be contrary to public policy on grounds other than duration. A lengthy Trusts Third section(18) has just received ALI approval. It is designed to clarify, with the general effect of limiting, the extent to which settlors may subject interests of trust beneficiaries to conditions that tend seriously to intrude upon significant personal decisions and the private lives of beneficiaries and their families. These rules, however, would also recognize a court's equitable discretion in appropriate cases to reform objectionable provisions to accommodate reasonable concerns a settlor may have.(19)

      Subject to such policy limits, the trend of current Restatements, the UPC, and other recent legislative and common law authorities is to lower the barriers to admission of extrinsic evidence and to grant more flexible remedies as needed to give effect to settlor intentions. For example, in addition to the traditional use of extrinsic evidence to clarify ambiguities, Property Third leads the way in allowing reformation of unambiguous instruments(20) to cure scriveners' errors and other mistakes that are shown by clear and convincing evidence.(21) Courts are also becoming more willing to supply gifts by implication in the trust context.(22)

   3. Non-Charitable Purposes; Absence of Definite Beneficiaries

      Both Trusts Third and a modest trend in caselaw and legislation show a growing willingness to give some effect to traditionally invalid attempts to create trusts for indefinite classes of beneficiaries or for specific or trustee-selected non-charitable purposes. Although recognizing dead hand policy limitations and practical enforcement concerns, trust law has thus begun to reject the notion that "because we can't force you to do it, we can't allow you to do it."(23) Under Trusts Third, intended trusts, or mandatory provisions of trusts, that cannot be enforced as such may be allowed as "adapted trusts."(24) That is, the intended purpose may be carried out within reasonable time limits, if the devisee or legatee will exercise a generally personal, nonmandatory "power," to appoint or expend funds that are otherwise held in trust for distribution in default of appointment to beneficiaries implied by law--that is, for the testator's successors in interest or for the other beneficiaries of the trust.(25) Examples include intended trusts for "friends and relatives" to be selected by the intended trustee,(26) intended trusts for "such benevolent, charitable or non-charitable, purposes as T may select,"(27) and the so-called "honorary trusts" for pets, monuments, and other more-or-less worthy, non-capricious purposes that fall short of charity.(28)

   4. Revocable Inter Vivos Trusts

      Earlier concerns and uncertainties about the permissibility and role of revocable living trusts have been gradually resolved over the last half-century or are currently being rapidly resolved in nearly all of the states.

      With solid and consistent support in statutes and caselaw, the Trusts Third section on the "Validity and Effect of Revocable Inter Vivos Trusts" states:(29)

      [A] trust that is created by the settlor's declaration of trust, by his or her inter vivos transfer to another, or by beneficiary designation or other payment under a life insurance policy, employee benefit or retirement arrangement, or other contract is not rendered testamentary merely because the settlor retains extensive fights such as a beneficial interest for life, powers to revoke and modify the trust, and the right to serve as or control the trustee, or because the trust is funded in whole or in part or comes into existence at or after the death of the settlor, or because the trust is intended to serve as a substitute for a will.(30) Trusts Third section 25(2) continues with the related and similarly well established proposition(31) that a trust that is "not testamentary"--i.e., not literally created by will--"is not subject to the formal requirements of section 17 (the Wills Act) or to procedures for the administration of a decedent's estate." Although representing an ongoing trend of authority, the rest of section 25(2) presently lacks consistent support from state to state.(32) It continues by stating: "nevertheless, a revocable inter vivos trust is ordinarily subject to substantive restrictions on testation(33) and to rules of construction(34) and other rules(35) applicable to testamentary dispositions, and in other respects the property of such a trust is ordinarily treated as if it were owned by the settlor."(36)

   5. Termination and Modification...