Colorado § 15-16-927 - Obligations.

§ 15-16-927. Obligations.

A debt, liability, or other obligation enforceable against property of a first trust is enforceable to the same extent against the property when held by the second trust after exercise of the decanting power.

Source: L. 2016: Entire part added, (SB 16-085), ch. 228, p. 889, § 1, effective August 10.

COMMENT

It would be inequitable to permit a second trust to evade liabilities incurred by the trustee of the first trust to the extent the creditor would have been entitled to satisfaction out of the trust property. Section 15-16-927 provides that a debt, liability or other obligation of the first trust against property of a first trust is enforceable to the same extent against such property when held by the second trust. Section 15-16-927 may apply to contractual claims, obligations arising from ownership or control of trust property and to torts committed in the course of administering a trust. Cf. Uniform Trust Code § 1010(c).

The Restatement Second of Trusts provides various situations in which a person to whom the trustee has incurred a liability in the course of the administration of a trust can by a proceeding in equity reach trust property and apply it to the satisfaction of such person's claim. See Restatement Second of Trusts § 267. Section 268 of the Restatement Second of Trusts provides that the creditor can reach trust property to the extent the creditor cannot obtain satisfaction of the claim out of the trustee's individual property to the extent the trustee is entitled to exoneration out of the trust estate. Section 269 of the Restatement Second of Trusts provides that a creditor who cannot obtain satisfaction out of the trustee's individual property can by a proceeding in equity reach trust property to the extent the trust estate has benefitted. Section 270 of the Restatement Second of Trusts permits the creditor to reach trust property if by the terms of the trust the settlor manifested an intention to confer such a power on the creditor. Section 271 of the Restatement Second of Trusts permits a creditor to reach trust property on a contractual claim if the contract provides that the trustee shall not be personally liable upon the contract and the contract was properly made by the trustee in the administration of the trust. Section 271A of the Restatement Second of Trusts permits a creditor to obtain satisfaction out of the trust estate if it is equitable to permit him to do so.

For example, assume Chicago Bank makes a loan to the trustee of First Trust, secured by First Trust's holdings of Fuchsia Corp. stock. The loan provides that trustee is not personally liable. The trustee decants First Trust and distributes all of its assets to Second Trust. Chicago Bank may enforce the loan against the property of Second Trust, including the Fuchsia Corp. stock, to the same extent it could have enforced the loan against the property of First Trust. If Second Trust also owns property not attributed to the decanting, Section 15-16-927 does not expose such property to Chicago Bank's claim.

Assume instead that the trustee of First Trust decanted and distributed all of the Fuchsia Corp. stock to Second Trust, and distributed all of the other assets of First Trust to Third Trust. Chicago Bank may enforce the loan against the Fuchsia Corp. stock held by Second Trust to the same extent it could have enforced the loan against the Fuchsia Corp. stock when it was held by First Trust. If prior to the decanting Chicago Bank could have enforced the loan against the property of First Trust other than the Fuchsia Corp. stock to the extent the value of the Fuchsia Corp. stock was insufficient to satisfy the loan, after the decanting Chicago Bank may enforce the loan, to the extent the Fuchsia Corp. stock is insufficient to satisfy the loan, against the other property of Second Trust and Third Trust to the extent it was attributable to the property of First Trust.

Section 15-16-927 only applies to a debt, liability or other obligation that is in existence and enforceable against the property of the first trust at the time of the decanting.

Section 15-16-927 is not intended to impede an authorized fiduciary from exercising the decanting power in a manner that may protect the property of the second trust from debts, liabilities or obligations of the settlor or a beneficiary to a greater extent than the property of the first trust would have been protected from such debts, liabilities or obligations. For example, a decanting may add a spendthrift provision to a trust. As another example, a decanting under Section 15-16-911 could postpone or eliminate a prospective withdrawal right of a beneficiary or eliminate a general power of appointment that is not presently exercisable.