Tennessee retains status as a leading trust jurisdiction
On May 12, 2021, Tennessee Governor Bill Lee signed into law a bill containing several revisions to Tennessee’s Uniform Trust Code (the “TN UTC”). Over the past decade, Tennessee has significantly elevated its position as a preeminent jurisdiction to situs a trust, and this recently enacted legislation represents a combined effort of banking and trust practitioners to ensure Tennessee maintains this advantage. Below is a brief summary of some of the more significant recent enhancements of the TN UTC.
1. Ability to Designate Applicable Law
A primary objective of the TN UTC is deference to a settlor’s intention, and this is especially true with regard to a settlor’s desire to designate the law which should govern a trust. Historically, T.C.A.§ 35-15-107 provided that the administration of a trust is determined by the laws of the jurisdiction designated in the terms of the trust instrument, which is called a “state jurisdiction provision.” To the extent the state jurisdiction provision designates Tennessee, Tennessee law applies to trust administration provided there is a requisite nexus with Tennessee, as determined under T.C.A. § 35-15-108. The inclusion of trust administration in both of these statutes made their application and interpretation slightly perplexing.
The recent legislation seeks to eliminate any potential confusion by clearly providing that issues of trust validity and construction are controlled by T.C.A. § 35-15-107, while issues concerning administration (both location and applicable law) are subject to T.C.A. § 35-15-108. The designation of Tennessee law as controlling administration will be respected so long as the requisite minimum nexus exists. The recent legislation also provides further guidance for determining applicable trust administration law when trust administration has been moved to Tennessee. As set forth in the revised T.C.A. §35-15-108(b), in the absence of a valid state jurisdiction provision (as determined under T.C.A. §35-15-108(a), Tennessee trust administration law applies to a trust which is being administered in Tennessee.
These revisions are intended to resolve any potential ambiguity between the interplay of T.C.A. §§ 35-15-107 and 35-15-108, while reinforcing the freedom and ability of a settlor to designate the laws which he or she desires.
2. Registration of Trust
In addition to the changes made to T.C.A. §§ 35-15-107 and 35-15-108, the recent legislation also creates the ability to register a trust as having its principal place of administration in Tennessee. This ability to affirmatively declare the situs of a trust should provide significant protection for a registered Tennessee trust against anyone seeking to argue such trust’s principal place of administration is located somewhere other than Tennessee. Registering a trust in Tennessee is potentially a material benefit for creditor protection and for settlors who reside in jurisdictions with civil law regimes (commonly found in European countries). This registration process requires the filing of a confidential application with the Tennessee Secretary of State and payment of the applicable user fee. Registration is not required under this change, and it is expected that most domestic trusts will not be registered.
3. Enhancement of Silent Trusts
While the TN UTC has long permitted “silent trusts,” the recent legislative activity will likely cause a significant increase in the willingness of Trustees to administer silent trusts. In general, the statute of limitations for a breach of fiduciary duty claim is one year from the earlier of (i) the date the beneficiary was sent a report that adequately disclosed facts indicating the existence of a potential claim for breach of trust, or (ii) the date the beneficiary possessed actual knowledge of facts indicating the existence of a potential claim for breach of trust. Consequently, it is common for a Trustee to wish to provide a beneficiary with a report so as to commence this one year statute of limitations. However, a main feature of a silent trust is the fact that the beneficiaries have no knowledge of the existence of the trust, and this lack of knowledge would be eliminated if a Trustee provided the beneficiary a report. This conflict between silence and trust reporting has been harmonized in the recent legislation by two important, if subtle, revisions.
First, T.C.A. § 35-15-813(d) has been updated to specifically provide that during any period a beneficiary is being represented under T.C.A. § 35-15-303, a report provided to the beneficiary’s representative will have the same effect as if it were given to the beneficiary. In addition to its application to silent trusts, this revision also affirms that a report provided to a minor beneficiary’s representative is sufficient to start the statute. Second, T.C.A. § 35-15-813(e) has been revised to specifically provide that if a settlor has designated a representative for the beneficiary, reports are to be sent to such representative and the provision of such reports has the same effect as if it were given to the beneficiary. As such, these recently enacted revisions allow the Trustee to provide a report sufficient to commence the one year statute of limitations to a representative of a beneficiary, while still achieving a settlor’s desire for the trust to remain silent.
4. Tennessee Investment Services Trust Revisions
Tennessee is one of approximately seventeen states which provide for self-settled asset protection trusts, known in Tennessee as a Tennessee Investment Services Trust (“TIST”). The recent revisions make three significant changes to Tennessee’s TIST laws. Historically, in order to come within the full protection of the law, contemporaneous with any contribution to a TIST, the settlor was required to execute a Qualified Affidavit; however, under the new legislation, a Qualified Affidavit is no longer required to reap the benefits of Tennessee’s TIST laws. Instead, the execution of a Qualified Affidavit will simply give rise to a rebuttable presumption that assets were transferred to the TIST on the date of the Qualified Affidavit; otherwise, the transferor bears the burden of proving the date of transfer by a preponderance of the evidence. In addition, the two year period for bringing claims against property held in a TIST has been reduced to eighteen months. Lastly, the legislation revises the definition of who may create a TIST by providing additional clarity on the class of individuals and organizations who constitute a “Person.”
5. Additional Flexibility in Decanting
Tennessee’s decanting statute has always provided significant flexibility as compared to surrounding jurisdictions. While the recently enacted legislation makes some superficial revisions to the applicable decanting statute, it also provides for two significant enhancements. First, so long as the settlor is deceased, a decanting power may be exercised in a manner to allow remainder beneficiaries to become current beneficiaries of the recipient trust. In light of increased lifespans, decanting for this purpose could be appealing to an elder beneficiary who wishes to see his/her descendants enjoy trust assets during his/her lifetime, rather than postponing such enjoyment until after death. The second enhancement is the ability to eliminate a beneficiary’s income interest, in certain circumstances, where such elimination will not give rise to adverse tax consequences. This power could be immensely helpful for families dealing with an income beneficiary who is a spendthrift or potentially dealing with substance abuse issues, where accumulation might be in the beneficiary’s best interests.
The recently passed updates to the TN UTC include several additional revisions not discussed above, including electronic execution of nonjudicial settlement and modification agreements, enhanced creditor protection for beneficiaries, and extension of maximum duration of special purpose trusts from 90 years to 360 years, etc. These enhancements, as well as those discussed above, will enable Tennessee to maintain, if not further advance, its status as a preeminent jurisdiction for trust administration.