Tennessee § 35-16-111 - Revocability of trusts.

§ 35-16-111. Revocability of trusts.

An investment services trust shall not be deemed revocable on account of its inclusion of one (1) or more of the following: A transferor's power to veto a distribution from the trust; A power of appointment, other than a power to appoint to the transferor, the transferor's creditors, the transferor's estate or the creditors of the transferor's estate, either exercisable by written instrument of the transferor during the transferor's life or exercisable by will or other written instrument of the transferor effective upon the transferor's death; The transferor's potential or actual receipt of income, including rights to the income retained in the trust; The transferor's potential or actual receipt of income or principal from a charitable remainder unitrust or charitable remainder annuity trust as those terms are defined in § 664 of the Internal Revenue Code of 1986 (26 U.S.C. § 664), and any successor provision; The transferor's receipt each year of an amount specified in the trust, the amount not to exceed five percent (5%) of the initial value of the trust or its value determined from time to time pursuant to the trust; The transferor's potential or actual receipt or use of principal if the potential or actual receipt or use of principal would be the result of a qualified trustee's or qualified trustees' acting: In the qualified trustee's or qualified trustees' discretion. For purposes of this section, a qualified trustee is presumed to have discretion with respect to the distribution of principal unless the discretion is expressly denied to the trustee by the terms of the trust; Pursuant to a standard that governs the distribution of principal and does not confer upon the transferor a power to consume, invade or appropriate property for the benefit of the transferor, unless the power of the transferor is limited by an ascertainable standard relating to the health, education, support, or maintenance within the meaning of § 2041(b)(1)(A) or § 2514(c)(1) of the Internal Revenue Code of 1986 (26 U.S.C. § 2041(b)(1)(A) or 26 U.S.C. § 2514(c)(1)), as in effect on July 1, 2007, or as later amended; or At the direction of an advisor described in § 35-16-108 who is acting: In the advisor's discretion; or Pursuant to a standard that governs the distribution of principal and does not confer upon the transferor a power to consume, invade, or appropriate property for the benefit of the transferor, unless the power of the transferor is limited by an ascertainable standard relating to the health, education, support, or maintenance within the meaning of § 2041(b)(1)(A) or § 2514(c)(1) of the Internal Revenue Code of 1986 (26 U.S.C. § 2041(b)(1)(A) or 26 U.S.C. § 2514(c)(1)), as in effect on July 1, 2007, or as later amended; The transferor's right to remove a trustee or advisor and to appoint a new trustee or advisor; provided, however, that the right shall not include the appointment of a person who is a related or subordinate party with respect to the transferor within the meaning of § 672(c) of the Internal Revenue Code of 1986, (26 U.S.C. § 672(c)), and any successor provision; The transferor's potential or actual use of real property held under a qualified personal residence trust within the meaning of the term as described in § 2702(c) of the Internal Revenue Code of 1986 (26 U.S.C. § 2702(c)), and any successor provision; The transferor's potential or actual receipt of income or principal to pay, in whole or in part, income taxes due on income of the trust if such potential or actual receipt of income or principal is pursuant to a provision in the trust instrument that expressly permits a distribution to the transferor as reimbursement for such taxes and if such distribution would be the result of a qualified trustee's or qualified trustees' acting: In such qualified trustee's or qualified trustees' discretion or pursuant to a mandatory direction in the trust instrument; or At the direction of an adviser described in § 35-16-108, who is acting in such adviser's discretion; The ability, whether pursuant to direction in the investment services trust or discretion of a qualified trustee to pay, after the death of the transferor, all or any part of the debts of the transferor outstanding at the time of the transferor's death, the expenses of administering the transferor's estate, or any estate or inheritance tax imposed on or with respect to the transferor's estate; and A qualified trustee's or qualified trustees' authority to make distributions to pay taxes in lieu of or in addition to the power to make a distribution for taxes pursuant to subdivision (3), (6), (9), or (10) by direct payment to the taxing authorities. Acts 2007, ch. 144, § 11; 2010, ch. 725, § 19; 2013, ch. 390, § 53. Compiler's Notes. Acts 2013, ch. 390, § 55 provided that: 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. Section Comment. This section sets forth eleven additional rights that the Transferor may retain without endangering the qualification of the trust as an Investment Services Trust. The trust will not be deemed revocable (and thus lose its protective value) if the trust instrument provides that: (1) the Transferor retains a power to veto trust distributions; (2) the Transferor retains a special power of appointment over trust assets. In 2013, the power of appointment in subsection 2 was expanded from a testamentary power of appointment to a power that could also be exercised during the Transferor’s lifetime. The purpose for this change was to allow the creation of a trust that qualifies as a non-grantor trust for federal income tax purposes, yet is not a completed gift for federal gift tax purposes; (3) the Transferor receives trust income or has a right to retained trust income; (4) the Transferor retains a right to income or principal from a charitable remainder unitrust or charitable remainder annuity trust; (5) the Transferor receives annually either an annuity or unitrust interest not in excess of five percent (5%); (6) the Transferor receives trust principal through either the actions of the Qualified Trustee or advisor in his sole discretion or based on an ascertainable standard set forth in the trust instrument; (7) the Transferor retains the right to remove the Trustee and appoint a new one who is not related or subordinate to the Transferor, as such term is defined in Internal Revenue Code Section 672(c); (8) the Transferor uses real property held under a personal residence trust as a personal residence; (9) the Transferor receives trust income or principal to pay income taxes due on income of the trust through either the actions of the Qualified Trustee or advisor in his sole discretion or based on mandatory direction set forth in the trust instrument; (10) the Qualified Trustee uses trust assets to pay the Transferor’s debts outstanding at the time of the Transferor’s death including the expenses of administering the Transferor’s estate, or any estate or inheritance taxes imposed on the Transferor’s estate; or (11) the Qualified Trustee pays certain tax obligations of the Transferor or the Transferor’s estate. Thus, the Transferor can retain significant benefits and control while gaining protection from creditors for trust assets. 1. Bankruptcy. Living trust for which debtor served as trustee was not valid and enforceable Tennessee Asset Protection Trust (TAPT) such that its assets were excluded from bankruptcy estate because debtor was not qualified trustee, which rendered trust not “investment services trust” for purposes of Tennessee law. In re Erskine, 550 B.R. 362, 2016 Bankr. LEXIS 1169 (Bankr. W.D. Tenn. Apr. 8, 2016). 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.