Tennessee § 35-15-814 - Exercise of powers over discretionary and other interests; tax savings.

§ 35-15-814. Exercise of powers over discretionary and other interests; tax savings.

Relative to exercise of powers over discretionary and other interests: “Improper motive” means to demonstrate action such as the following: A trustee refusing to make or limiting distributions to beneficiaries other than the trustee due to the trustee's self interest when the trustee also holds a beneficial interest subject to a discretionary interest; or A trustee making a distribution in excess of an ascertainable standard to such trustee as beneficiary when the trustee is restricted by an ascertainable standard in the trust. Unless otherwise provided in the trust: If the settlor's spouse is named as a beneficiary, the settlor's spouse is still living and the trust is classified as a support trust, then the trustee shall consider the resources of the settlor's spouse, including the settlor's obligation of support, prior to making a distribution; and In all other cases, unless otherwise provided in the trust, the trustee need not consider the beneficiary's resources in determining whether a distribution should be made. The following provisions apply only to discretionary interests: A discretionary interest is neither a property interest nor an enforceable right; it is a mere expectancy; A court may review a trustee's distribution discretion only if the trustee acts dishonestly, acts with an improper motive, or fails to act if under a duty to do so; A reasonableness standard shall not be applied to the exercise of discretion by the trustee with regard to a discretionary interest; Other than for the three (3) circumstances listed in subdivision (b)(2) or to enforce the limitations of subsection (d), a court has no jurisdiction to review the trustee's discretion or to force a distribution; and Absent express language in the trust instrument to the contrary, in the event that the distribution language in a discretionary interest permits unequal distributions between beneficiaries or distributions to the exclusion of other beneficiaries, the trustee may distribute all of the accumulated, accrued, or undistributed income and principal to one beneficiary in the trustee's discretion. The following provisions apply only to mandatory or support interests: A beneficiary of a mandatory or a support interest has an enforceable right to a distribution pursuant to a court's review; A trustee's distribution decision may be reviewed for unreasonableness, dishonesty, improper motivation, or failure to act if under a duty to do so; and In the case of a support interest, nothing in this section shall raise a beneficiary's support interest to the level of a property interest. Unless otherwise provided in subsection (f), and unless the terms of the trust expressly indicate that a rule in this subsection (d) does not apply: A person other than a settlor who is a beneficiary and trustee of a trust that confers on the trustee a power to make discretionary distributions to or for the trustee's personal benefit may exercise the power only in accordance with an ascertainable standard; and A trustee may not exercise a power to make discretionary distributions to satisfy a legal obligation of support that the trustee personally owes another person. A power that is limited or prohibited by subsection (d) may be exercised by a majority of the remaining trustees whose exercise of the power is not so limited or prohibited. If the power of all trustees is so limited or prohibited, the court may appoint a special fiduciary with authority to exercise the power. Subsection (d) shall not apply to: A power held by the settlor's spouse who is the trustee of a trust for which a marital deduction, as defined in § 2056(b)(5) or § 2523(e) of the Internal Revenue Code (26 U.S.C. § 2056(b)(5) and § 2523(e)), was previously allowed; Any trust during any period that the trust may be revoked or amended by its settlor; or A trust if contributions to the trust qualify for the annual exclusion under § 2503(c) of the Internal Revenue Code (26 U.S.C. § 2503(c)). Acts 2004, ch. 537, § 72; 2007, ch. 24, § 31; 2013, ch. 390, § 36; 2014, ch. 829, § 7. Compiler's Notes. Acts 2013, ch. 390, § 55 provided that: (b) Except as otherwise provided in the act, on July 1, 2013: The act applies to all trusts created before, on, or after July 1, 2013; The act applies to all judicial proceedings concerning trusts commenced on or after July 1, 2013; The act applies to judicial proceedings concerning trusts commenced before July 1, 2013, unless the court finds that application of a particular provision of the act would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of the act does not apply and the superseded law applies; Any rule of construction or presumption provided in the act applies to trust instruments executed before July 1, 2013, unless there is a clear and express indication of a contrary intent in the terms of the trust; and An act done before July 1, 2013, is not affected by the act. 1. Order to Clerk Proper. Trustees were under a mandatory obligation to distribute the remaining principal of such child's separate trust to such child, when the terminating event or events occurred, and because the trust did not provide otherwise, the trustees were to perform this task expeditiously, which they failed to do; because the trustees failed to take the appropriate actions for two years following the termination of the trust, the trial court was justified in ordering the clerk to prepare a deed to transfer the real estate to the beneficiaries. In re Farmer Family Trust, — S.W.3d —, 2018 Tenn. App. LEXIS 598 (Tenn. Ct. App. Oct. 11, 2018). Section Comment. Unless provided otherwise hereinafter, any reference to “section,” “subsection” or “subdivision” means all, or such portion of, T.C.A. § 35-15-814 . The provisions of this section diverge significantly from the Uniform Trust Code and the restatements. To the extent this section is in conflict with the Uniform Trust Code, any restatement or any other foreign law, such foreign law is not precedential or controlling and is rejected by the Tennessee Uniform Trust Code. Relative to section 814 of the Uniform Trust Code, according to ULC – NCCUSL: Despite the breadth of discretion purportedly granted by the wording of a trust, no grant of discretion to a trustee, whether with respect to management or distribution, is ever absolute. A grant of discretion establishes a range with-in which the trustee may act. Moreover, a trustee’s exercise of discretion must always be in good faith. Regarding the standards for exercising discretion, the Uniform Trust Code refers one to Restatement (Third) of Trusts § 50. Restatement (Third) of Trusts § 50 and the comments thereto contain language that indicates that even if the terms of a trust specifically give a trustee “absolute, sole and unfettered” discretion, a “reasonableness” standard relative to the exercise (or non-exercise) of that discretion must be inferred. As discussed elsewhere in these comments, regardless of how clear and obvious a drafter is regarding a settlor’s in-tent to create a purely and absolutely discretionary trust, the above enumerated views of the Restatement (Third) of Trusts and the Uniform Trust Code result in nothing other than a vague “continuum” of rights and discretion. In furtherance of its overriding emphasis on settlor’s intent, freedom of disposition and certainty, as well as for numerous other reasons discussed elsewhere in the comments to the Tennessee Uniform Trust Code, such code categorically rejects the above enumerated views of the Restatement (Third) of Trusts and of the Uniform Trust Code. Section (a) provides a definition of “improper motive” as such relates to a trustee who is considering whether or not to make a distribution from a trust, as well as when such trustee need consider a beneficiary’s resources. Section (a) applies to all discretionary, support and mandatory interests. Subsection (b) contains provisions of the Tennessee Uniform Trust Code that only apply to exercise of discretion related to, as well as distributions from, discretionary interests: Subdivision (b)(1), in the clearest words possible, explicitly state that a discretionary interest is not a right or interest that rises to the level of “property.” Instead such interest is nothing more than a “mere expectancy.” Subdivision(b)(2) states the sole and only bases on which a court has any jurisdiction to review a trustee’s distribution discretion made relative to a distribution interest. There are three: (i) if a trustee acts dishonestly; (ii) if a trustee acts with an “improper motive,” as such is defined in section (a); or (iii) if a trustee fails to act if under a duty to do so. Subdivision (b)(3) is directly contra to the view of the Uniform Trust Code and the Restatement (Third) of Trusts regarding exercise of discretion under a distribution interest. It explicitly states that a reasonableness standard shall not be applied to such discretion. Subdivision (b)(4) explicitly states that, other than for the three circumstances listed in subdivision (b)(2), a court has no jurisdiction to review a trustee’s discretion made (or not made) or to force a distribution relative to a discretionary interest. Subdivision (b)(5) further assures the statutory intent of subdivisions (b)(1) – (b)(4). It provides that, absent express language in a trust instrument to the contrary, when distribution language in a discretionary interest permits unequal distributions among beneficiaries, or distributions to the exclusion of other beneficiaries, the trustee truly has complete discretion to distribute all income and principal to one (or more) beneficiary and not to the other beneficiaries. Subsection (c) contains provisions of the Tennessee Uniform Trust Code that only apply to exercise of discretion related to, as well as distributions from, support or mandatory interests: Subdivision (c)(1) assures that a beneficiary under either such type of interest has an enforceable right to a distribution pursuant to a courts review of whether or not a trustee made such a distribution. Subdivision (c)(2) states the sole and only bases on which a court has any jurisdiction to review a trustee’s distribution discretion made relative to a support or mandatory interest. There are four: (i) if a trustee acts unreasonably; (ii) if a trustee acts dishonestly; (iii) if a trustee acts with an “improper motive,” as such is defined in section (a); or (iv) if a trustee fails to act if under a duty to do so. Other than for such four enumerated circumstances, a court has no juris-diction to review whether a trustee made (or did not make) a distribution relative to a support or mandatory interest. Subdivision (c)(3) explicitly states that, although a beneficiary under a support interest has the right to a distribution subject to a court’s review under the four bases contained in (c)(4), such support interest still does not rise to the level of a property right or interest. Subsections (d) – (f) rewrite the terms of a trust that might otherwise result in adverse estate and gift tax consequences to a beneficiary who is serving as a trustee or other fiduciary. Subsections (d) – (f) vary from the fact that The Tennessee Uniform Trust Code does not generally address the subject of tax curative provisions. Tax curative provisions are provisions that automatically rewrite the terms of trusts that might otherwise fail to qualify for probable in-tended tax benefits. Tax curative provisions, because they apply to all trusts using or failing to use specified language, are often overbroad, applying not only to trusts intended to qualify for tax benefits but also to smaller trust situations where taxes are not a concern. Enacting tax curative provisions also requires special diligence by the state legislature to make certain that these provisions are periodically amended to account for the frequent changes in federal tax law. Furthermore, many failures to draft with sufficient care may be correctable by including a tax savings clause in the terms of the trust or by seeking modification of the trust using one or more of the methods authorized by sections T.C.A. §§ 35-15-411 – 35-15-417 . Notwithstanding such reasons, the unintended inclusion in a beneficiary’s gross estate of a trust when such beneficiary is also serving as a trustee or other fiduciary is a frequent enough occurrence that the Tennessee Uniform Trust Code addresses same herein. A tax curative provision differs from a statute such T.C.A. § 35-15-416 , which allows a court to modify a trust to achieve an intended tax benefit. Absent Congressional or regulatory authority authorizing the specific modification, a lower court decree in state court modifying a trust is controlling for federal estate tax purposes only if the decree was issued before the taxing event, which in the case of the estate tax would be the decedent’s death. See Rev. Rul. 73-142, 1973-1 C.B. 405. There is specific federal authority authorizing modification of trusts for a number of reasons (see section comment to T.C.A. § 35-15-416 ) but not on the specific issues addressed in this section. Subsections (d) – (f), by interpreting the original language of the trust instrument in a way that qualifies for intended tax benefits, obviates the need to seek a later modification of the trust. Subsection (d) is applicable unless otherwise provided in section (f) or unless the terms of the trust expressly indicate that a rule in subsection (d) is not to apply. Subdivision (d)(1) states that, subject to such exceptions, the power to make discretionary distributions to a beneficiary who is also serving as a trustee or other fiduciary is automatically limited by the requisite ascertainable standard necessary to avoid inclusion of the trust in the beneficiary’s gross estate or result in a taxable gift upon the beneficiary’s release or exercise of the power. Subdivision (f)(2) provides that trusts of which the trustee-beneficiary is also a settlor are not subject to this subdivision. In such a case, limiting the discretion of a settlor-trustee to an ascertain-able standard would not be sufficient to avoid inclusion of the trust in the settlor’s gross estate. Furthermore, the inadvertent inclusion of a trust in the gross estate of a settlor who is also serving as a trustee or other fiduciary is a far less frequent and generally better understood occurrence than is the inadvertent inclusion of the trust in the estate of a non-settlor beneficiary who is also serving as a trustee or other fiduciary. Subdivision (d)(2) addresses a common trap that can occur when a trustee or other fiduciary is not a beneficiary, but such trustee or other fiduciary has the power to make discretionary distributions to those to whom such trustee or other fiduciary owes a legal obligation of support. Discretion to make distributions to those to whom the trustee or other fiduciary owes a legal obligation of support, including but not limited to a fiduciary’s minor children, results in inclusion of the trust in the gross estate of the trustee or other fiduciary even if the power is limited by an ascertainable standard. That is because the language of both I.R.C. § 2041(b)(1)(A) and Treas. Reg. § 20.2041-1(c)(2) indicate that the ascertainable standard exception to the definition of a general power of appointment applies only to distributions for the benefit of a decedent (i.e., to a beneficiary who is also a trustee or other fiduciary). Such exception language says nothing regarding distributions to those to whom a decedent (i.e., a trustee or other fiduciary) owes a legal obligation of support. Subsection (e) deals with cotrustees, trust advisors and trust protectors and adopts the common planning technique of granting the broader discretion only to the independent trustee(s), trust advisor(s) or trust protector(s). Cotrustees or other fiduciaries who are beneficiaries of the trust or who have a legal obligation to support a beneficiary may exercise the power only as limited by subsection (d). If all trustees are so limited, the court may appoint a special fiduciary to make a decision as to whether a broader exercise is appropriate. Subsection (f) excludes certain trusts from the operation of this section. Trusts qualifying for the marital deduction will be includable in the surviving spouse’s gross estate regardless of whether this section applies. Consequently, if the spouse is acting as a trustee or other fiduciary, there is no need to limit the power of such spouse to make discretionary distributions for the spouse’s benefit. Similar reasoning applies to the revocable trust, which, because of the settlor’s power to revoke, is automatically includable in the settlor’s gross estate even if the settlor is not named as a beneficiary. QTIP marital trusts are subject to this section, however. QTIP trusts qualify for the marital deduction only if so elected on the federal estate tax return. Excluding a QTIP for which an election has been made from the operation of this section would allow the terms of the trust to be modified after the settlor’s death. By not making the QTIP election, an otherwise unascertainable standard would be limited. By making the QTIP election, the trustee's discretion would not be curtailed. This ability to modify a trust depending on elections made on the federal estate tax return could itself constitute a taxable power of appointment resulting in inclusion of the trust in the surviving spouse’s gross estate. The exclusion of an I.R.C. § 2503(c) [ 26 U.S.C. § 2503(c) ] minors trust is necessary to avoid loss of gift tax bene-fits. While preventing a trustee from distributing trust funds in discharge of a legal obligation of support would keep the trust out of the trustee’s gross estate, such a restriction might result in loss of the gift tax annual exclusion for contributions to the trust, even if the trustee were otherwise granted unlimited discretion. See Rev. Rul. 69-345, 1969-1 C.B. 226. If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before July 1, 2013, that statute continues to apply to the right even if it has been repealed or superseded.