The New Jersey UTC: The Time Has Come
What is the Uniform Trust Code (UTC) and why should it be adopted in New Jersey? The Uniform Trust Code is, as the name denotes, an attempt to codify rules related to trust administration and planning. It was originally proposed by the National Conference of Commissioners on Uniform State Laws (also called the Uniform Law Commission) in 2000 but it was primarily for jurisdictions that had little or no established trust law. In New Jersey, unlike many other states, our trust law has been developed and has been settled for more than 150 years. Thus, many questions have been asked and answered. The Uniform Trust Code is designed to provide precise comprehensive and accessible guidance on trust law questions. Because of the established case law New Jersey is not be a jurisdiction that needs the UTC, but there are still fantastic reasons for adoption. The consolidation of the rules in one place will assist lawyers, judges and clients alike, and New Jersey may not have long to wait. While this legislation was first introduced in 2008, this is the first time since then, that the bills have been introduced simultaneously in both houses. In the General Assembly, the bill (A-2915) is sponsored by Assemblymen Joseph Lagana (D-Hudson), John McKeon (D-Essex) and Jack M. Ciattarelli (R- Somerset) and in the State Senate the bill (S-2035) is sponsored by Senators Christopher “Kip” Bateman (R-Somerset) and Peter J. Barnes, III (D-Middlesex).
In 2004, after our Probate Code (N.J.S.A. 3B: 1-1 et. seq.) was revised and updated to bring New Jersey’s law in line with the 1990 amendments to the Uniform Probate Code, a group of “senior” lawyers [1]that had participated in the project convened to consider the benefits and burdens of consideration the UTC. New Jersey has been a Uniform Probate Code jurisdiction since 1951 and, as such, adopting another uniform act appeared to be a logical step. New Jersey has already adopted a multitude of uniform acts, including many in the trust and estate arena.
In considering the pros and cons of the UTC, it soon became apparent that most trust and estates lawyers in New Jersey believe that our law is excellent and there was little interest in a “one size fits all” provision. However, what was most surprising among the committee members was the fact that there were differences of opinion about some of the rules. Accordingly, by consensus, this trust code committee spent hundreds of hours fashioning a version of the UTC for New Jersey purposes that followed to the extent possible, our law. When completed in 2007, this group reviewed the finding with a representative of the New Jersey Law Revision Commission and received its approval. Nevertheless, after the five year hiatus without legislative action, the committee reconvened in 2012 to update and reconsider the earlier draft.
Even in a circumstance where a “uniform” act is adopted with modifications from the original, there is a tremendous utility for the population at large. We live in a mobile society where clients, as trust creators, as trustees, as beneficiaries, as lifetime beneficiaries and as remainder beneficiaries, move from jurisdiction to jurisdiction. By having a unified set of principles, greater clarity to complicated rules can provide easier access to answers. Even if laws differ from state to state, a codification on a uniform basis can provide residents of other jurisdictions an opportunity to know where to look for answers to some general trust law questions. Without codification, hours of painstaking analysis of the common law is required to determine simple answers.
The UTC contains 11 Articles. Two of the Articles were not relevant for New Jersey purposes. UTC Article Two contains rules about judicial proceeding for trusts that, for New Jersey purposes, have historically been handled by our court rules. As such, rather than mix judicial administration and statutory procedure, this Article was omitted entirely from the New Jersey version. Secondly, Article Nine of the UTC includes the Uniform Prudent Investor Act. New Jersey had already adopted the Prudent Investor Act in 1997, L. 1997, ch. 26, N.J.S.A. 3B:20-11.1 et. seq. Thus, consideration was not necessary.
The UTC has now been adopted in 28 states and the District of Columbia with 4 more states pending in addition to New Jersey.
Who should be in favor of the UTC? Generally, trust creators, trustees and beneficiaries should benefit from the uniform act being adopted in New Jersey like it has been in so many other jurisdictions. Banks and Trust companies should embrace the UTC because of the responsibility of serving as trustee of many trusts. A Bank and/or Trust company would be a prime beneficiary of such an act being adopted in as many jurisdictions as possible.
For jurisdictions that have rejected the UTC, the dominant reason appears to be that their law has gone in a more aggressive “pro trust beneficiary” direction. States such as Delaware and Alaska have adopted rules to allow for a creation of “self settled asset protection trust.” This is a trust in which an individual can place their own assets while reserving present or future rights in the Trust principal. Under these states laws, the trust assets would then become exempt from claims of the creator’screditors, assuming statutory formalities have been followed. New Jersey law contains a provision indicating that a trust settlor cannot place their own assets in a trust which is beyond the reach of their creditors. This applies where the creator of the trust has the opportunity to have the trust funds returned to them by the trustee. This statute N.J.S.A. 3B:11-1(a) has been in our law since 1981, L. 1981, ch. 405. By contrast, in an effort to “compete” on a world stage against foreign jurisdictions that had allowed for similar “asset protection trusts,” several states have reversed the presumption contained in our statutory rule.
The nine Articles remaining of the UTC contain guidance on seven different topics. Article One includes general provisions and definitions; however, it was a subject of some of the early criticism of the UTC. UTC Article 105, proposed N.J.S.A. 3B:31-5 has mandatory rules that cannot be overridden by the Trust agreement itself (described below). Article Eleven of the UTC (N.J. Article Nine) has other miscellaneous provisions. The remaining substantive rules concern: Representation (UTC Article Three /N.J. Article Two), Creation/Validity/Modification/ Termination (UTC Article Four/N.J. Article Three), Creditor’s Claims (UTC Article Five /N.J. Article Four), Revocable Trusts (UTC Article Six /N.J. Article Five), Office of the Trustee (UTC Article Seven /N.J. Article Six), Duties of the Trustee (UTC Article Eight /N.J. Article Seven), Liability of Trustee and Rights in dealing with the Trustee (UTC Article Ten /N.J. Article Eight).
Since the UTC was first enacted in 2000, there have been a variety of controversies concerning individual provisions. However, the uniform commissioners, like the New Jersey committee have addressed and corrected some of these more controversial aspects. The UTC was last amended in 2005; however in 2010 a separate uniform act was proposed to deal with life insurance held by a trust. This 2010 amendment is not considered in the New Jersey proposal.[2]
One of the most controversial provisions of the UTC dealt with the trust settlor’s ability to provide in the trust that it could be “secret” from the beneficiary. On the one hand, such a provision would allow the beneficiary (usually a younger beneficiary), to grow up without knowing of the trust benefits and accordingly, not become overly reliant on the trust assets. On the other hand, if the beneficiary is unaware of the trust existence, who will properly police the activities of the trustee? The proposed New Jersey provision N.J.S.A. 3B: 31-5(b)(7) would allow the so called “secret trust” but if a beneficiary knows of the trust after attaining age 35, the Trustee must provide information or notice under N.J.S.A. 3B: 31-66 (a copy of the Trust and accounting information). Another controversial provision is contained in UTC Section 503 mandating that certain creditors of a beneficiary have rights in the trust assets. These so called “exception creditors” were given powers that were arguably beyond the common law (particularly, the ability to create a “special needs trust” was called into question). The New Jersey version N.J.S.A. 3B: 31-37, deleted the UTC provision entirely and in its place included a provision clarifying issues surrounding the “special needs trust”. Special needs planning has been permitted in New Jersey by N.J.S.A. 3B: 11-36 and N.J.S.A. 3B: 11-37. Finally, in initial consideration of the UTC, commentators raised questions about the estate tax treatment of trusts where a settlor could participate in the modification process. The New Jersey version N.J.S.A. 3B: 31-27 excludes the Settlor from the deliberations. Further, these tax questions have not materialized since adoption elsewhere. Still, a New Jersey court has the ability to modify trust terms by virtue of case law, see Wiedenmayer v Johnson, 106 N.J. Super 161, aff’d 55 N.J. 81 (1969) and the “probable intent” of the donor should be considered. See NJSA 3B:3-33.1 Fidelity Union Trust Co v. Robert 36 N.J. 561 (1962), In re Estate of Branigan 129 N.J. 324 (1992).
In conclusion, the adoption of the New Jersey version of the UTC is long overdue. With the prevalent use of trusts in estate planning throughout the state, and elsewhere, codification of a clear set of rules can only serve to assist in trust administration. While the provisions may never be perfect, the fact that fourteen years have passed since initial adoption has given drafters an opportunity to consider some of the more questionable provisions. Certainly, as with any large codification, there will be new questions raised in the future but the perfect should not be the enemy of the good.
[1] The committee consisted of the author, Glenn Henkel, of Kulzer & DiPadova, Haddonfield; Richard Kahn, now retired, Day Pitney, Florham Park; Richard Lert, Wilentz, Woodbridge; Michael Backer, Greenbaum Rowe, Woodbridge; Andrew DeMaio, Neff-Aguilar, Red Bank; Jordan Weitberg, Bressler, Amery & Ross, Florham Park; Warren Racusin, Lowenstein, Roseland; Robert Pless, Pless & Habeeb, Hackensack; and Richard Greenberg, Greenberg & Schulmann, Woodbridge.
[2] The 2010 “Insurance Interest Amendment to the UTC” is designed to address a singular issue arising out of case Chawla ex rel Giesinger v. Transamerica Occidental Life Insurance Co., 2005 WL 405405 (E.D. Va. 2005), aff’d in part, vac’d in part, 440 F.3d 639 (4th Cir. 2006), where a Virginia federal district court applying Maryland law held that a trust did not have an insurable interest in the life of the insured who was the Settlor and the creator of the trust.
It is commonplace for life insurance to be held by a Trustee as a trust asset. Generally, a purchaser of life insurance must have an “insurable interest” in the life of the insured, typically a relative who is dependent upon the insured for the death benefit. While the use of life insurance “trusts” are commonplace in New Jersey, there has been no similar precedent challenging the insurable interest test where the policy is held by a Trustee. Thus, this issue is not as pressing as the balance of the U.T.C.