FIDUCIARY
ARTICLE 1 FIDUCIARY
Cross references: For bank and trust company fiduciaries and common trust funds, see articles 24 and 101 to 109 of title 11; for legal investments, see part 6 of article 75 of title 24 and article 60 of title 11; for investment of police officers' and firefighters' pension funds, see article 30.5 of title 31; for investments by veterans administration fiduciaries, see § 28-5-301; for investment by custodians under the "Colorado Uniform Transfers to Minors Act", see § 11-50-113; for abolition of the rule against perpetuities in cases of cemetery trust and employee pension trust, see §§ 38-30-110 to 38-30-112.
Section
PART 1 GENERAL PROVISIONS
15-1-101. Short title.
This part 1 shall be known and may be cited as the "Uniform Fiduciaries Law".
Source: L. 23: p. 178, § 14. CSA: C. 67, § 14. CRS 53: § 57-1-14. C.R.S. 1963: § 57-1-13.
ANNOTATION
Law reviews. For article, "Uniform State Laws of Interest to Colorado Probate Lawyers", see 14 Colo. Law. 1961 (1985). For article, "Some Problems Arising in the Representation of a Fiduciary", see 32 Colo. Law. 11 (June 2003).
The purpose of the Uniform Fiduciaries Act is that uniform and definite rules were found necessary to take the place of diverse and conflicting rules that had grown up concerning constructive notice of breach of fiduciary obligations in order that commerce might proceed with as little hindrance as possible. Wysowatcky v. Denver-Willys, Inc., 131 Colo. 266 , 281 P.2d 165 (1955); Commercial Sav. Bank v. Baum, 137 Colo. 538 , 327 P.2d 743 (1958).
Applied in Fry & Co. v. District Court, 653 P.2d 1135 (Colo. 1982).
15-1-102. Legislative declaration.
This part 1 shall be interpreted and construed so as to effectuate its general purpose to make uniform the law of those states which enact it.
Source: L. 23: p. 178, § 13. CSA: C. 67, § 13. CRS 53: § 57-1-13. C.R.S. 1963: § 57-1-12.
15-1-103. Definitions.
As used in this part 1, unless the context otherwise requires:
- "Bank" includes any person or association of persons, whether incorporated or not, carrying on the business of banking.
- "Fiduciary" includes a trustee under any trust, expressed, implied, resulting, or constructive, executor, administrator, personal representative, guardian, conservator, curator, receiver, trustee in bankruptcy, assignee for the benefit of creditors, partner, agent, officer of a corporation, public or private, public officer, or any other person acting in a fiduciary capacity for any person, trust, or estate.
- "Person" includes a corporation, partnership, or other association, or two or more persons having a joint or common interest.
- "Principal" includes any person to whom a fiduciary as such owes an obligation.
Source: L. 23: p. 173, § 1. CSA: C. 67, § 1. CRS 53: § 57-1-1. C.R.S. 1963: § 57-1-1. L. 2002: (2) amended, p. 650, § 1, effective July 1.
ANNOTATION
Law reviews. For article, "Conflict of Interest Transactions: Fiduciary Duties of Corporate Directors Who Are Also Controlling Shareholders", see 57 Den. L.J. 609 (1980).
Officers and directors of a corporation are fiduciaries as to its stockholders and owe all stockholders the obligation of good faith, candor, forthrightness, and fairness. Herald Co. v. Bonfils, 315 F. Supp. 497 (D. Colo. 1970).
The existence of a fiduciary relationship between a customer and a stockbroker is a question of fact and is created if the relationship is accompanied by the customer's trust and confidence in the broker. Adams v. Paine, Webber, Jackson & Curtis, Inc., 686 P.2d 797 (Colo. App. 1983).
Applied in Clibon Drilling Co. v. Wyoming Mineral Corp., 42 Colo. App. 41, 589 P.2d 78 (1978).
15-1-104. Prior transactions.
The provisions of this part 1 shall not apply to transactions taking place prior to April 16, 1923.
Source: L. 23: p. 178, § 11. CSA: C. 67, § 11. CRS 53: § 57-1-11. C.R.S. 1963: § 57-1-10.
15-1-105. Application of payments to fiduciary.
A person who in good faith pays or transfers to a fiduciary any money or other property which the fiduciary as such is authorized to receive is not responsible for the proper application thereof by the fiduciary; and any right or title acquired from the fiduciary in consideration of such payment or transfer is not invalid in consequence of a misapplication by the fiduciary.
Source: L. 23: p. 174, § 2. CSA: C. 67, § 2. CRS 53: § 57-1-2. C.R.S. 1963: § 57-1-2.
ANNOTATION
Applied in Clibon Drilling Co. v. Wyoming Mineral Corp., 42 Colo. App. 41, 589 P.2d 78 (1978); Kaneco Oil & Gas v. Univ. Nat. Bank, 732 P.2d 247 (Colo. App. 1986).
15-1-106. Transfer of negotiable instruments by fiduciary.
If any negotiable instrument payable or indorsed to a fiduciary as such is indorsed by the fiduciary, or if any negotiable instrument payable or indorsed to his principal is indorsed by a fiduciary empowered to indorse such instrument on behalf of his principal, the indorsee is not bound to inquire whether the fiduciary is committing a breach of his obligation as fiduciary in indorsing or delivering the instrument and is not chargeable with notice that the fiduciary is committing a breach of his obligation as fiduciary unless he takes the instrument with actual knowledge of such breach or with knowledge of such facts that his action in taking the instrument amounts to bad faith. If, however, such instrument is transferred by the fiduciary in payment of or as security for a personal debt of the fiduciary to the actual knowledge of the creditor or is transferred in any transaction known by the transferee to be for the personal benefit of the fiduciary, the creditor or other transferee is liable to the principal if the fiduciary in fact commits a breach of his obligation as fiduciary in transferring the instrument.
Source: L. 23: p. 174, § 4. CSA: C. 67, § 4. CRS 53: § 57-1-4. C.R.S. 1963: § 57-1-3.
15-1-107. Check drawn by fiduciary payable to third person, effect.
If a check or other bill of exchange is drawn by a fiduciary as such or in the name of his principal by a fiduciary empowered to draw such instrument in the name of his principal, the payee is not bound to inquire whether the fiduciary is committing a breach of his obligations as fiduciary in drawing or delivering the instrument and is not chargeable with notice that the fiduciary is committing a breach of his obligation as fiduciary unless he takes the instrument with actual knowledge of such breach or with knowledge of such facts that his action in taking the instrument amounts to bad faith. If, however, such instrument is payable to a personal creditor of the fiduciary and delivered to the creditor in payment of or as security for a personal debt of the fiduciary to the actual knowledge of the creditor or is drawn and delivered in any transaction known by the payee to be for the personal benefit of the fiduciary, the creditor or other payee is liable to the principal if the fiduciary in fact commits a breach of his obligation as fiduciary in drawing or delivering the instrument.
Source: L. 23: p. 175, § 5. CSA: C. 67, § 5. CRS 53: § 57-1-5. C.R.S. 1963: § 57-1-4.
ANNOTATION
The Uniform Fiduciaries Act relaxes some of the harsher rules which require of a bank and of individuals the highest degree of vigilance in the detection of a fiduciary's wrongdoing. Wysowatcky v. Denver-Willys, Inc., 131 Colo. 266 , 281 P.2d 165 (1955).
Where an instrument is good on its face, there is no apparent reason for inquiry; it remains good until shown to have been taken in "bad faith" and the burden of proving that is on the plaintiff. Wysowatcky v. Denver-Willys, Inc., 131 Colo. 266 , 281 P.2d 165 (1955).
The loss for breach of a fiduciary obligation should fall on the party directly responsible for the faithless agent and not on one who was a mere conduit to transmit the fund. Wysowatcky v. Denver-Willys, Inc., 131 Colo. 266 , 281 P.2d 165 (1955); Commercial Sav. Bank v. Baum, 137 Colo. 538 , 327 P.2d 743 (1958).
15-1-108. Check drawn by and payable to fiduciary, effect.
If a check or other bill of exchange is drawn by a fiduciary as such or in the name of his principal by a fiduciary empowered to draw such instrument in the name of his principal, payable to the fiduciary personally or payable to a third person and by him transferred to the fiduciary, and is thereafter transferred by the fiduciary, whether in payment of a personal debt of the fiduciary or otherwise, the transferee is not bound to inquire whether the fiduciary is committing a breach of his obligation as fiduciary in transferring the instrument and is not chargeable with notice that the fiduciary is committing a breach of his obligation as fiduciary unless he takes the instrument with actual knowledge of such breach or with knowledge of such facts that his action in taking the instrument amounts to bad faith.
Source: L. 23: p. 175, § 6. CSA: C. 67, § 6. CRS 53: § 57-1-6. C.R.S. 1963: § 57-1-5.
15-1-109. Deposit in name of fiduciary.
If a deposit is made in a bank to the credit of a fiduciary as such, the bank is authorized to pay the amount of the deposit or any part thereof upon the check of the fiduciary, signed with the name in which such deposit is entered, without being liable to the principal, unless the bank pays the check with actual knowledge that the fiduciary is committing a breach of his obligation as fiduciary in drawing the check or with knowledge of such facts that its action in paying the check amounts to bad faith. If, however, such a check is payable to the drawee bank and is delivered to it in payment of or as security for a personal debt of the fiduciary to it, the bank is liable to the principal if the fiduciary in fact commits a breach of his obligation as fiduciary in drawing or delivering the check.
Source: L. 23: p. 176, § 7. CSA: C. 67, § 7. CRS 53: § 57-1-7. C.R.S. 1963: § 57-1-6.
ANNOTATION
The mere failure of a bank to make inquiry, even though there are suspicious circumstances, does not constitute bad faith unless the facts and circumstances are so cogent and obvious that to remain passive would amount to deliberate desire to evade knowledge because of a belief or fear that inquiry would disclose a defect in the transaction. Richards v. Platte Valley Bank, 866 F.2d 1576 (10th Cir. 1989); In re M & L Business Machine Co., 84 F.3d 1330 (10th Cir. 1996).
In order for bank to be liable to real estate purchaser for bank's paying money to escrow agent who then converted money to his own use, bank was required to either have had actual knowledge that escrow agent was committing a breach of his obligation as fiduciary when he took the money or have acted in bad faith in paying escrow agent. Richards v. Platte Valley Bank, 866 F.2d 1576 (10th Cir. 1989).
Applied in Kaneco Oil & Gas v. Univ. Nat. Bank, 732 P.2d 247 (Colo. App. 1986).
15-1-110. Check drawn upon account of principal by fiduciary.
If a check is drawn upon the account of his principal in a bank by a fiduciary who is empowered to draw checks upon his principal's account, the bank is authorized to pay such check without being liable to the principal, unless the bank pays the check with actual knowledge that the fiduciary is committing a breach of his obligation as fiduciary in drawing such check or with knowledge of such facts that its action in paying the check amounts to bad faith. If, however, such a check is payable to the drawee bank and is delivered to it in payment of or as security for a personal debt of the fiduciary to it, the bank is liable to the principal if the fiduciary in fact commits a breach of his obligation as fiduciary in drawing or delivering the check.
Source: L. 23: p. 176, § 8. CSA: C. 67, § 8. CRS 53: § 57-1-8. C.R.S. 1963: § 57-1-7.
15-1-111. Deposits in personal account of fiduciary.
If a fiduciary makes a deposit in a bank to his personal credit of checks drawn by him upon an account in his own name as fiduciary, or of checks payable to him as fiduciary, or of checks drawn by him upon an account in the name of his principal if he is empowered to draw checks on that account, or of checks payable to his principal and indorsed by him, if he is empowered to indorse such checks or if he otherwise makes a deposit of funds held by him as fiduciary, the bank receiving such deposit is not bound to inquire whether the fiduciary is committing a breach of his obligation as fiduciary by that action; and the bank is authorized to pay the amount of the deposit or any part thereof upon the personal check of the fiduciary without being liable to the principal, unless the bank receives the deposit or pays the check with actual knowledge that the fiduciary is committing a breach of his obligation as fiduciary in making such deposit or in drawing such check or with knowledge of such facts that its action in receiving the deposit or paying the check amounts to bad faith.
Source: L. 23: p. 177, § 9. CSA: C. 67, § 9. CRS 53: § 57-1-9. C.R.S. 1963: § 57-1-8.
Cross references: For deposits by a fiduciary, see part 5 of this article.
ANNOTATION
Section inapplicable where funds not held as fiduciary. This section does not apply where a person depositing the funds to his personal account did not hold such funds as a fiduciary and was not empowered to endorse the checks. Arvada Hardwood Floor Co. v. James, 638 P.2d 828 (Colo. App. 1981).
In order for bank to be liable to real estate purchaser for bank's paying money to escrow agent who then converted money to his own use, bank was required to either have had actual knowledge that escrow agent was committing a breach of his obligation as fiduciary when he took the money or have acted in bad faith in paying escrow agent. Richards v. Platte Valley Bank, 866 F.2d 1576 (10th Cir. 1989).
15-1-112. Deposits in name of two or more trustees.
When a deposit is made in a bank in the name of two or more persons as trustees and a check is drawn upon the trust account by any trustee authorized by the other trustee to draw checks upon the trust account, neither the payee nor other holder nor the bank is bound to inquire whether it is a breach of trust to authorize such trustee to draw checks upon the trust account and is not liable unless the circumstances be such that the action of the payee or other holder or the bank amounts to bad faith.
Source: L. 23: p. 177, § 10. CSA: C. 67, § 10. CRS 53: § 57-1-10. C.R.S. 1963: § 57-1-9.
Cross references: For deposits by a fiduciary, see part 5 of this article.
15-1-112.5. Liability of a fiduciary for acts of predecessor fiduciary.
In the absence of actual knowledge or information which would cause a reasonable fiduciary to inquire further, a fiduciary shall be under no duty to examine the accounts and records of or inquire into the acts or omissions of a predecessor fiduciary and shall not be liable for failure to seek redress for any act or omission of any predecessor fiduciary.
Source: L. 77: Entire section added, p. 829, § 1, effective July 1.
15-1-113. Cases not provided for in law.
In any case not provided for in this part 1, the rules of law and equity, including the law merchant and those rules of law and equity relating to trusts, agency, negotiable instruments, and banking, shall continue to apply.
Source: L. 23: p. 178, § 12. CSA: C. 67, § 12. CRS 53: § 57-1-12. C.R.S. 1963: § 57-1-11.
PART 2 DISTRIBUTION BY FIDUCIARIES OF EXPRESS TRUSTS
15-1-201. When part 2 applicable.
This part 2 shall be applicable to all powers of appointment or disposition existing or created on or after April 1, 1953, the donees of which powers shall be living on such date.
Source: L. 53: p. 304, § 6. CRS 53: § 57-2-6. C.R.S. 1963: § 57-2-6.
15-1-201.5. Definitions.
As used in this part 2, "donee" has the same meaning as "powerholder" as set forth in section 15-2.5-102 (13).
Source: L. 2014: Entire section added, (HB 14-1353), ch. 209, p. 782, § 3, effective July 1, 2015.
15-1-202. Trustee not liable, when.
If a trustee of an express trust which includes property subject to a power of appointment or other power of disposition distributes such property to those persons who would take such property in default of appointment and such distribution is made not sooner than six months after the death of the donee of such power and without knowledge of the existence of an instrument exercising such power, he shall not be responsible to the appointee under the instrument exercising such power.
Source: L. 53: p. 303, § 1. CRS 53: § 57-2-1. C.R.S. 1963: § 57-2-1.
ANNOTATION
Law reviews. For article, "Trusts and Estates", see 30 Dicta 435 (1953).
15-1-203. No liability if distribution under instrument.
If a trustee of an express trust which includes property subject to a power of appointment or other power of disposition distributes such property pursuant to an instrument exercising such power and without knowledge of any infirmity in such instrument and thereafter such instrument shall be held wholly or partially invalid, such trustee shall not be responsible to those persons who would take in default of appointment.
Source: L. 53: p. 303, § 2. CRS 53: § 57-2-2. C.R.S. 1963: § 57-2-2.
15-1-204. Rights of appointees.
Nothing in this part 2 shall be deemed to affect the right of the appointee of such property to trace such property into the hands of the distributee or to affect the cause of action of such appointee against such distributee.
Source: L. 53: p. 303, § 3. CRS 53: § 57-2-3. C.R.S. 1963: § 57-2-3.
15-1-205. Rights of persons entitled.
Nothing in this part 2 shall be deemed to affect the right of the person entitled to such property in default of appointment to trace such property into the hands of the appointee or to affect the cause of action of such person against such distributee.
Source: L. 53: p. 303, § 4. CRS 53: § 57-2-4. C.R.S. 1963: § 57-2-4.
15-1-206. Rights of bona fide purchasers.
Nothing in this part 2 shall be construed to impair the title or lien of a purchaser or mortgagee in good faith and for value from the person to whom such property was first conveyed pursuant to, or in default of, appointment, as the case may be.
Source: L. 53: p. 304, § 5. CRS 53: § 57-2-5. C.R.S. 1963: § 57-2-5.
PART 3 FIDUCIARY INVESTMENTS
15-1-301. Fiduciary defined.
The word "fiduciary" as used in this part 3 means original or successor administrators, special administrators, administrators cum testamento annexo, executors, guardians, conservators, and trustees, whether of express or implied trusts.
Source: L. 51: p. 841, § 5. CSA: C. 176, § 126(9). CRS 53: § 57-3-5. C.R.S. 1963: § 57-3-5.
15-1-302. Application.
The provisions of this part 3 shall apply to and govern all fiduciaries appointed or lawfully acting.
Source: L. 51: p. 841, § 3. CSA: C. 176, § 126(7). CRS 53: § 57-3-3. C.R.S. 1963: § 57-3-4.
15-1-303. Construction of part 3.
Nothing in this part 3 shall be construed as modifying or repealing either section 28-5-214 or section 28-5-301, C.R.S., with respect to investment of surplus funds by appointed guardians and conservators of minor and incompetent beneficiaries of the veterans administration.
Source: L. 51: p. 841, § 6. CSA: C. 176, § 126(10). CRS 53: § 57-3-6. C.R.S. 1963: § 57-3-6.
15-1-304. Standard for investments.
In acquiring, investing, reinvesting, exchanging, retaining, selling, and managing property for the benefit of others, fiduciaries shall be required to have in mind the responsibilities which are attached to such offices and the size, nature, and needs of the estates entrusted to their care and shall exercise the judgment and care, under the circumstances then prevailing, which men of prudence, discretion, and intelligence exercise in the management of the property of another, not in regard to speculation but in regard to the permanent disposition of funds, considering the probable income as well as the probable safety of capital. Within the limitations of the foregoing standard, fiduciaries are authorized to acquire and retain every kind of property, real, personal, and mixed, and every kind of investment, specifically including, but not by way of limitation, bonds, debentures, and other corporate obligations, stocks, preferred or common, securities of any open-end or closed-end management type investment company or investment trust, and participations in common trust funds, which men of prudence, discretion, and intelligence would acquire or retain for the account of another.
Source: L. 51: p. 840, § 1. CSA: C. 176, § 126(5). CRS 53: § 57-3-1. C.R.S. 1963: § 57-3-1. L. 75: Entire section amended, p. 588, § 6, effective July 1.
Cross references: For investments by custodians under the "Colorado Uniform Transfers to Minors Act", see § 11-50-113; for legal investments, see part 6 of article 75 of title 24; for investments of police and fire pension funds, see § 31-31-302.
ANNOTATION
Law reviews. For article, "The 'Prudent Man Rule' Now Applies to Investments by Fiduciaries", see 28 Dicta 213 (1951). For article, "Problems in the Administration of Estates of Mental Incompetents", see 29 Dicta 286 (1952). For article, "On the Prudent Man Rule", see 30 Dicta 107 (1953). For article, "The Prudent Man: Charge and Surcharge", see 35 Dicta 69 (1958). For note, "Advice for Advisors - Trust Investments", see 37 Dicta 306 (1960). For comment on Rippey v. Denver United States Nat'l Bank, appearing below, see 45 Den. L.J. 483 (1968). For article, "Standards of Prudent Investment for Minors Act Custodians", see 19 Colo. Law. 39 (1990). For article, "The 'New' Prudent Investor Rule", see 20 Colo. Law. 713 (1991). For article, "The Prudent Investor Rule as it Affects Fiduciary Investments", see 21 Colo. Law. 1883 (1992).
Within the limits and scope of their fiduciary duty, directors and officers have the power, the duty, and the discretion to exercise their best judgment when making business decisions for corporate purposes, and such decisions are primarily matters for the judgment of such officers and directors, or the stockholders in exercise of their stockholder powers, and not the court. It is only under special circumstances that the court scrutinizes these decisions. Herald Co. v. Bonfils, 315 F. Supp. 497 (D. Colo. 1970).
The standard of care imposed by this section applies to all fiduciaries except custodians. Buder v. Sartore, 774 P.2d 1383 (Colo. 1989).
Ex-husband had fiduciary duty to ex-wife since he retained complete control over her share of stock. Despite having the power to sell the stock within his sole discretion, the husband still was required to operate within the bounds of prudent judgment, reasonableness, and equity. Marshall v. Grauberger, 796 P.2d 34 (Colo. App. 1990).
As a matter of law, the husband owed the wife a fiduciary duty to deal with her interest with the utmost good faith. Marshall v. Grauberger, 796 P.2d 34 (Colo. App. 1990).
The "reasonable prudence" standard applies to protecting and caring for the property and does not permit one to prudently speculate. The trustee may not subject his trust property to hazards which a man dealing with his own property might consider warranted if to do so would create danger to the trust estate. Rippey v. Denver United States Nat'l Bank, 273 F. Supp. 718 (D. Colo. 1967).
A trustee owes a duty to his beneficiaries to exercise such care and skill as a man of ordinary prudence would exercise in safeguarding and preserving his own property. This rule obtained at common law and has been codified in Colorado. Rippey v. Denver United States Nat'l Bank, 273 F. Supp. 718 (D. Colo. 1967).
The trustee should do his best to secure competitive bidding and to surround the sale with such other factors as will tend to cause the property to sell to the greatest advantage. Rippey v. Denver United States Nat'l Bank, 273 F. Supp. 718 (D. Colo. 1967 ); Murphy v. Cent. Bank & Trust Co., 699 P.2d 13 (Colo. App. 1985).
The trustee's duty of loyalty and of reasonable care dictate that he must seek to obtain the best price obtainable for the property which he is selling. The rule is that a trustee has a duty to determine the fair value of trust property before selling it, and any sale of it for an inadequate consideration measured against its fair value may be subject to being set aside as a constructive fraud upon proper complaint being made. Rippey v. Denver United States Nat'l Bank, 273 F. Supp. 718 (D. Colo. 1967 ); Murphy v. Cent. Bank & Trust Co., 699 P.2d 13 (Colo. App. 1985).
A trustee's duty of loyalty and of reasonable care dictates that he must seek to obtain the best price for trust property he is selling. If a trust has been damaged but there is uncertainty as to the extent of the damage, damages are to be closely approximated by drawing reasonable and probable inferences from the facts proven. Marshall v. Grauberger, 796 P.2d 34 (Colo. App. 1990).
Trustee owes a fiduciary duty to the beneficiaries of the trust and he may not allow personal motives to interfere with the discharge of those duties. Wright v. Wright, 182 Colo. 425 , 514 P.2d 73 (1973); Vento v. Colo. Nat'l Bank-Pueblo, 907 P.2d 642 (Colo. App. 1995).
Court may not review with advantages of hindsight. When reviewing investments made by a trustee, a court may not use the advantages of hindsight. Heller v. First Nat'l Bank, 657 P.2d 992 (Colo. App. 1982).
Applied in Canaday v. Kauffman, 140 Colo. 165 , 342 P.2d 1027 (1959); Kaitz v. Dist. Court, 650 P.2d 553 ( Colo. 1982 ).
15-1-304.1. Standard for investments on and after July 1, 1995 - "Colorado Uniform Prudent Investor Act".
- On and after July 1, 1995, when investing and managing assets, fiduciaries shall be governed by the standard for trustees set forth in the "Colorado Uniform Prudent Investor Act", article 1.1 of this title.
- This section shall not apply to those persons, corporations, entities, or state agencies which were made subject to the provisions of section 15-1-304 by specific reference in another statute in existence prior to July 1, 1995.
Source: L. 95: Entire section added, p. 312, § 2, effective July 1.
15-1-305. Terms of instrument govern.
Nothing in this part 3 shall be construed as authorizing any departure from or variation of the express terms or limitations set forth in any will, agreement, court order, or other instrument creating or defining the fiduciary's duties and powers, but the terms "legal investment" or "authorized investment", or words of similar import as used in any such instrument, shall be taken to mean any investment which is permitted by the terms of section 15-1-304.
Source: L. 51: p. 840, § 2. CSA: C. 176, § 126(6). CRS 53: § 57-3-2. C.R.S. 1963: § 57-3-2.
ANNOTATION
Law reviews. For article, "The Meaning of the Prudent Man Rule", see 24 Rocky Mt. L. Rev. 44 (1951). For comment on Rippey v. Denver United States Nat'l Bank, appearing below, see 45 Den. L.J. 483 (1968).
Despite will's provisions, trustee does not have absolute discretion. In the will the trustee is authorized to sell the trust property (1) in its sole judgment; (2) at private sale; (3) without advertisement or notice to anyone; (4) without the aid or necessity of any court order; (5) without consulting the beneficiaries and without regard to their opinions, desires, or judgment; (6) and at such price and upon such terms as to credit or otherwise as the trustee shall determine. The trustee is not therefore authorized to exercise unlimited or absolute discretion in making a sale of trust property. Rippey v. Denver United States Nat'l Bank, 273 F. Supp. 718 (D. Colo. 1967).
In any event trustee cannot act recklessly. Even if the instrument had contained language granting absolute and uncontrolled discretion, it would not follow that the trustee could act recklessly or in willful abuse of discretion. Rippey v. Denver United States Nat'l Bank, 273 F. Supp. 718 (D. Colo. 1967).
When the bank acts despite a high probability that the beneficiaries would suffer loss, such conduct is in law reckless and is not protected by an exculpatory clause. Rippey v. Denver United States Nat'l Bank, 273 F. Supp. 718 (D. Colo. 1967).
Exculpatory clause does not apply to transaction conducted in unorthodox manner. An exculpatory clause in the will which provides that the trustee shall be free from liability for "depreciation or loss" of trust property "through error of judgment" does not apply to a loss which resulted from a sale which was not conducted in accordance with orthodox trust principles. Such a provision is usually held to add nothing. It does not limit the trustee liability for even negligence. If the exculpatory provision in express terms relieves the trustee from liability merely for errors of judgment, its effect does not go beyond what a court of equity would do in the absence of an exculpatory provision for a trustee is never held to the liability of an insurer. Rippey v. Denver United States Nat'l Bank, 273 F. Supp. 718 (D. Colo. 1967).
15-1-306. Court not restricted.
Nothing in this part 3 shall be construed as restricting the power of a court of proper jurisdiction to permit a fiduciary to deviate from the terms of any will, agreement, or other instrument relating to the acquisition, investment, reinvestment, exchange, retention, sale, or management of estate or trust property.
Source: L. 51: p. 841, § 3. CSA: C. 176, § 126(7). CRS 53: § 57-3-3. C.R.S. 1963: § 57-3-3.
ANNOTATION
A court may not order trustee to deviate from terms of trust unless, because of a change of circumstances, compliance with its terms would defeat or substantially impair the accomplishment of its underlying purposes. Matter of Will of Killin, 703 P.2d 1323 (Colo. App. 1985).
Deviation from the expressed intent of a testator that trust property be retained during trust administration is not warranted solely because of potential increased income to the income beneficiaries. Matter of Will of Killin, 703 P.2d 1323 (Colo. App. 1985).
15-1-307. Powers of investment in persons other than fiduciary. (Repealed)
Source: L. 77: Entire section added, p. 829, § 2, effective July 1. L. 2014: Entire section repealed, (HB 14-1322), ch. 296, p. 1239, § 11, effective August 6.
15-1-308. Investments in United States government obligations.
In the absence of an express provision to the contrary, any fiduciary is authorized, whenever a governing instrument or order requires or permits investment in United States government obligations which are backed by the full faith and credit of the United States government, to invest in such obligations, either directly or in the form of the securities of or other interests in any open-end or closed-end management type investment company or investment trust registered under the federal "Investment Company Act of 1940", 15 U.S.C. sec. 80(a)-1 et seq., if the portfolio of such investment company or investment trust is limited to United States government obligations which are backed by the full faith and credit of the United States government and to repurchase agreements fully collateralized by such obligations and if any such investment company or investment trust actually takes delivery of such collateral, either directly or through an authorized custodian.
Source: L. 88: Entire section added, p. 645, § 1, effective April 6.
PART 4 UNIFORM PRINCIPAL AND INCOME ACT
SUBPART 1 DEFINITIONS AND FIDUCIARY DUTIES
Editor's note: (1) The National Conference of Commissioners on Uniform State Laws organized the Uniform Principal and Income Act (1997) into six separate articles. In C.R.S., all six articles are combined into this part 4. References in the OFFICIAL COMMENTS to specific sections have been changed to reflect the appropriate C.R.S. citation. References in the OFFICIAL COMMENTS to the 1931 Uniform Act and the 1962 Uniform Act refer to the 1931 Uniform Principal and Income Act and to the 1962 Revised Uniform Principal and Income Act, respectively. References in the OFFICIAL COMMENTS to this act refer to the Uniform Principal and Income Act (1997) contained in this part 4.
(2) This part 4 was numbered as article 4 of chapter 57, C.R.S. 1963. The substantive provisions of this part 4 were repealed and reenacted in 2000, resulting in the addition, relocation, and elimination of sections as well as subject matter. For amendments to this part 4 prior to 2000, consult the Colorado statutory research explanatory note and the table itemizing the replacement volumes and supplements to the original volume of C.R.S. 1973 beginning on page vii in the front of this volume. Former C.R.S. section numbers are shown in editor's notes following those sections that were relocated.
Cross references: For information concerning the effective date of this subpart 1, see § 15-1-434.
Law reviews: For article, "Highlights of the 1955 Colorado Legislative Session -- Oil and Gas", see 28 Rocky Mt. L. Rev. 53 (1955); for article, "Highlights of the 1955 Colorado Legislative Session -- Trusts", see 28 Rocky Mt. L. Rev. 74 (1955); for note, "Are Capital Gains Distributions from Regulated Investment Companies Income or Principal to a Colorado Trustee?", see 31 Rocky Mt. L. Rev. 224 (1959); for article, "The Care and Feeding of Individual Trustees", see 39 U. Colo. L. Rev. 205 (1966); for article, "Some Accounting Problems of Colorado Trustees", see 39 U. Colo. L. Rev. 192 (1967); for article, "Fiduciary Accounting -- Are the Ground Rules Clear?", see 11 Colo. Law. 1192 (1982); for article, "Marital Bequest Computations (Pecuniary Bequests)", see 13 Colo. Law. 43 (1984); for article, "Uniform State Laws of Interest to Colorado Probate Lawyers", see 14 Colo. Law. 1961 (1985); for article, "Introduction to Colorado's New Principal and Income Act", see 30 Colo. Law. 55 (March 2001); for article, "Trust Income: New Possibilities and Approaches", see 33 Colo. Law. 77 (Dec. 2004); for article, "Complexities of Pass-Through Entities Held in Trust", see 39 Colo. Law. 59 (June 2010); for article, "The Dangers of Relying on Trust Language", see 45 Colo. Law. 55 (March 2016).
PREFATORY NOTE
This revision of the 1931 Uniform Principal and Income Act and the 1962 Revised Uniform Principal and Income Act has two purposes.
One purpose is to revise the 1931 and the 1962 Uniform Acts. Revision is needed to support the now widespread use of the revocable living trust as a will substitute, to change the rules in those Acts that experience has shown need to be changed, and to establish new rules to cover situations not provided for in the old Acts, including rules that apply to financial instruments invented since 1962.
The other purpose is to provide a means for implementing the transition to an investment regime based on principles embodied in the Uniform Prudent Investor Act, especially the principle of investing for total return rather than a certain level of "income" as traditionally perceived in terms of interest, dividends, and rents.
Revision of the 1931 and 1962 Uniform Acts
The prior Acts and this revision of those Acts deal with four questions affecting the rights of beneficiaries:
- How is income earned during the probate of an estate to be distributed to trusts and to persons who receive outright bequests of specific property, pecuniary gifts, and the residue?
- When an income interest in a trust begins (i.e., when a person who creates the trust dies or when she transfers property to a trust during life), what property is principal that will eventually go to the remainder beneficiaries and what is income?
- When an income interest ends, who gets the income that has been received but not distributed, or that is due but not yet collected, or that has accrued but is not yet due?
- After an income interest begins and before it ends, how should its receipts and disbursements be allocated to or between principal and income?
- The allocation of receipts from discount obligations such as zero-coupon bonds. Section 15-1-416 (2).
- The allocation of net income from harvesting and selling timber between principal and income. Section 15-1-422.
- The allocation between principal and income of receipts from derivatives, options, and asset-backed securities. Sections 15-1-424 and 15-1-425.
- Disbursements made because of environmental laws. Section 15-1-427 (1)(g).
- Income tax obligations resulting from the ownership of S corporation stock and interests in partnerships. Section 15-1-430.
- The power to make adjustments between principal and income to correct inequities caused by tax elections or peculiarities in the way the fiduciary income tax rules apply. Section 15-1-431.
Changes in the traditional sections are of three types: new rules that deal with situations not covered by the prior Acts, clarification of provisions in the 1962 Uniform Act, and changes to rules in the prior Acts.
New rules. Issues addressed by some of the more significant new rules include:
(1) The application of the probate administration rules to revocable living trusts after the settlor's death and to other terminating trusts. Sections 15-1-406 through 15-1-410.
(2) The payment of interest or some other amount on the delayed payment of an outright pecuniary gift that is made pursuant to a trust agreement instead of a will when the agreement or state law does not provide for such a payment. Section 15-1-406 (1)(c).
(3) The allocation of net income from partnership interests acquired by the trustee other than from a decedent (the old Acts deal only with partnership interests acquired from a decedent). Section 15-1-411.
(4) An "unincorporated entity" concept has been introduced to deal with businesses operated by a trustee, including farming and livestock operations, and investment activities in rental real estate, natural resources, timber, and derivatives. Section 15-1-413.
Clarifications and changes in existing rules. A number of matters provided for in the prior Acts have been changed or clarified in this revision, including the following:
(1) An income beneficiary's estate will be entitled to receive only net income actually received by a trust before the beneficiary's death and not items of accrued income. Section 15-1-410.
(2) Income from a partnership is based on actual distributions from the partnership, in the same manner as corporate distributions. Section 15-1-411.
(3) Distributions from corporations and partnerships that exceed 20% of the entity's gross assets will be principal whether or not intended by the entity to be a partial liquidation. Section 15-1-411 (4)(b).
(4) Deferred compensation is dealt with in greater detail in a separate section. Section 15-1-419.
(5) The 1962 Uniform Act rule for "property subject to depletion," (patents, copyrights, royalties, and the like), which provides that a trustee may allocate up to 5% of the asset's inventory value to income and the balance to principal, has been replaced by a rule that allocates 90% of the amounts received to principal and the balance to income. Section 15-1-420.
(6) The percentage used to allocate amounts received from oil and gas has been changed 90% of those receipts are allocated to principal and the balance to income. Section 15-1-421.
(7) The unproductive property rule has been eliminated for trusts other than marital deduction trusts. Section 15-1-423.
(8) Charging depreciation against income is no longer mandatory, and is left to the discretion of the trustee. Section 15-1-428.
Coordination with the Uniform Prudent Investor Act
The law of trust investment has been modernized. See Uniform Prudent Investor Act (1994); Restatement (Third) of Trusts: Prudent Investor Rule (1992) (hereinafter Restatement of Trusts 3d: Prudent Investor Rule). Now it is time to update the principal and income allocation rules so the two bodies of doctrine can work well together. This revision deals conservatively with the tension between modern investment theory and traditional income allocation. The starting point is to use the traditional system. If prudent investing of all the assets in a trust viewed as a portfolio and traditional allocation effectuate the intent of the settlor, then nothing need be done. The Act, however, helps the trustee who has made a prudent, modern portfolio-based investment decision that has the initial effect of skewing return from all the assets under management, viewed as a portfolio, as between income and principal beneficiaries. The Act gives that trustee a power to reallocate the portfolio return suitably. To leave a trustee constrained by the traditional system would inhibit the trustee's ability to fully implement modern portfolio theory.
As to modern investing see, e.g., the Preface to, terms of, and Comments to the Uniform Prudent Investor Act (1994); the discussion and reporter's note by Edward C. Halbach, Jr. in Restatement of Trusts 3d: Prudent Investor Rule; John H. Langbein, The Uniform Prudent Investor Act and the Future of Trust Investing, 81 Iowa L. Rev. 641 (1996); Bevis Longstreth, Modern Investment Management and the Prudent Man Rule (1986); John H. Langbein & Richard A. Posner, The Revolution in Trust Investment Law, 62 A.B.A.J. 887 (1976); and Jeffrey N. Gordon, The Puzzling Persistence of the Constrained Prudent Man Rule, 62 N.Y.U. L. Rev. 52 (1987). See also R.A. Brearly, An Introduction to Risk and Return from Common Stocks (2d ed. 1983); Jonathan R. Macey, An Introduction to Modern Financial Theory (2d ed. 1998). As to the need for principal and income reform see, e.g., Joel C. Dobris, Real Return, Modern Portfolio Theory and College, University and Foundation Decisions on Annual Spending From Endowments: A Visit to the World of Spending Rules, 28 Real Prop., Prob., & Tr. J. 49 (1993); Joel C. Dobris, The Probate World at the End of the Century: Is a New Principal and Income Act in Your Future?, 28 Real Prop., Prob., & Tr. J. 393 (1993); and Kenneth L. Hirsch, Inflation and the Law of Trusts, 18 Real Prop., Prob., & Tr. J. 601 (1983). See also, Jerold I. Horn, The Prudent Investor Rule -- Impact on Drafting and Administration of Trusts, 20 ACTEC Notes 26 (Summer 1994).
15-1-401. Short title.
Subparts 1 through 6 of this part 4 shall be known and may be cited as the "Uniform Principal and Income Act".
Source: L. 2000: Entire part R&RE, p. 1128, § 1, effective July 1, 2001. L. 2009: Entire section amended, (HB 09-1241), ch. 169, p. 742, § 1, effective April 22.
Editor's note: This section is similar to former § 15-1-401 as it existed prior to 2001.
15-1-402. Definitions.
As used in this part 4, unless the context otherwise requires:
- "Accounting period" means a calendar year unless another twelve-month period is selected by a fiduciary. The term includes a portion of a calendar year or other twelve-month period that begins when an income interest begins or ends when an income interest ends.
- "Beneficiary" includes, in the case of a decedent's estate, an heir and devisee and, in the case of a trust, an income beneficiary and a remainder beneficiary.
- "Fiduciary" means a personal representative or a trustee. The term includes an executor, administrator, successor personal representative, special administrator, and a person performing substantially the same function.
- "Income" means money or property that a fiduciary receives as current return from a principal asset. The term includes a portion of receipts from a sale, exchange, or liquidation of a principal asset, to the extent provided in subpart 4 of this part 4.
- "Income beneficiary" means a person to whom net income of a trust is or may be payable.
- "Income interest" means the right of an income beneficiary to receive all or part of net income, whether the terms of the trust require it to be distributed or authorize it to be distributed in the trustee's discretion.
- "Mandatory income interest" means the right of an income beneficiary to receive net income that the terms of the trust require the fiduciary to distribute.
- "Net income" means the total receipts allocated to income during an accounting period minus the disbursements made from income during the period, plus or minus transfers under this part 4 to or from income during the period.
- "Person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government; governmental subdivision, agency, or instrumentality; public corporation, or any other legal or commercial entity.
-
"Principal" means property held in trust for distribution to a remainder beneficiary when the trust terminates.
(10.5) "Qualified beneficiary" means a beneficiary who, on the date the beneficiary's qualification is determined:
- Is a distributee or a permissible distributee of trust income or principal;
- Would be a distributee or permissible distributee of trust income or principal if the interest of the distributees described in paragraph (a) of this subsection (10.5) terminated on that date; or
- Would be a distributee or permissible distributee of trust income or principal if the trust terminated on said date.
- "Remainder beneficiary" means a person entitled to receive principal when an income interest ends.
-
"Terms of a trust" means the manifestation of the intent of a settlor or decedent with respect to the trust, expressed in a manner that admits of its proof in a judicial proceeding, whether by written or spoken words or by conduct.
(12.5) "Total return trust" means a trust that is converted to a total return trust pursuant to section 15-1-404.5 or a trust the terms of which manifest the settlor's intent that the trustee will administer the trust in accordance with section 15-1-404.5 (4) and (4.5).
- "Trustee" includes an original, additional, or successor trustee, whether or not appointed or confirmed by a court.
Source: L. 2000: Entire part R&RE, p. 1128, § 1, effective July 1, 2001. L. 2003: (10.5) and (12.5) added, p. 2102, § 1, effective May 22.
Editor's note: This section is similar to former § 15-1-403 as it existed prior to 2001.
OFFICIAL COMMENT
"Income beneficiary." The definitions of income beneficiary (Section 15-1-402 (5)) and income interest (Section 15-1-402 (6)) cover both mandatory and discretionary beneficiaries and interests. There are no definitions for "discretionary income beneficiary" or "discretionary income interest" because those terms are not used in the Act.
Inventory value. There is no definition for inventory value in this Act because the provisions in which that term was used in the 1962 Uniform Act have either been eliminated (in the case of the underproductive property provision) or changed in a way that eliminates the need for the term (in the case of bonds and other money obligations, property subject to depletion, and the method for determining entitlement to income distributed from a probate estate).
"Net income." The reference to "transfers under this part 4 to or from income" means transfers made under Sections 15-4-404 (1), 15-1-422 (2), 15-1-427 (2), 15-1-428 (2), 15-1-429 (1), and 15-1-431.
"Terms of a trust." This term was chosen in preference to "terms of the trust instrument" (the phrase used in the 1962 Uniform Act) to make it clear that the Act applies to oral trusts as well as those whose terms are expressed in written documents. The definition is based on the Restatement (Second) of Trusts § 4 (1959) and the Restatement (Third) of Trusts § 4 (Tent. Draft No. 1, 1996). Constructional preferences or rules would also apply, if necessary, to determine the terms of the trust.
ANNOTATION
Army retirement pension is not a "return derived from principal" as is ordinary unearned income. In re Ellis, 36 Colo. App. 234, 538 P.2d 1347 (1975), aff'd, 191 Colo. 317 , 552 P.2d 506 (1976) (decided prior to 2000 repeal and reenactment).
15-1-403. Fiduciary duties - general principles.
-
In allocating receipts and disbursements to or between principal and income, and with respect to any matter within the scope of subparts 2 and 3 of this part 4, a fiduciary:
- Shall administer a trust or estate in accordance with the terms of the trust or the will, even if there is a different provision in subparts 1 through 6 of this part 4;
- May administer a trust or estate by the exercise of a discretionary power of administration given to the fiduciary by the terms of the trust or the will, even if the exercise of the power produces a result different from a result required or permitted by subparts 1 through 6 of this part 4;
- Shall administer a trust or estate in accordance with subparts 1 through 6 of this part 4 if the terms of the trust or the will do not contain a different provision or do not give the fiduciary a discretionary power of administration; and
- Shall add a receipt or charge a disbursement to principal to the extent that the terms of the trust and subparts 1 through 6 of this part 4 do not provide a rule for allocating the receipt or disbursement to or between principal and income.
- In exercising the power to adjust under section 15-1-404 (1) or a discretionary power of administration regarding a matter within the scope of subparts 1 through 6 of this part 4, whether granted by the terms of a trust, a will, or subparts 1 through 6 of this part 4, a fiduciary shall administer a trust or estate impartially, based on what is fair and reasonable to all of the beneficiaries, except to the extent that the terms of the trust or the will clearly manifest an intention that the fiduciary shall or may favor one or more of the beneficiaries. A determination in accordance with subparts 1 through 6 of this part 4 is presumed to be fair and reasonable to all of the beneficiaries.
- The terms and conditions of a trust or a will shall govern all actions taken by a fiduciary with respect to any matter within the scope of subparts 1 through 6 of this part 4. The provisions of subparts 1 through 6 of this part 4 are default provisions and may be expanded, restricted, eliminated, or otherwise altered by the provisions of a trust or a will. The provisions of subparts 1 through 6 of this part 4 shall govern the administration of a trust or will by a fiduciary only if such trust or will contains no conflicting provision.
- Nothing in subparts 1 through 6 of this part 4 shall be construed to limit or restrict a maker of a trust or will from making provisions in such trust or will that are different from the provisions in subparts 1 through 6 of this part 4.
Source: L. 2000: Entire part R&RE, p. 1129, § 1, effective July 1, 2001. L. 2009: Entire section amended, (HB 09-1241), ch. 169, p. 742, § 2, effective April 22.
OFFICIAL COMMENT
Prior Act. The rule in Section 2(a) of the 1962 Uniform Act is restated in Section 15-1-403 (1), without changing its substance, to emphasize that the Act contains only default rules and that provisions in the terms of the trust are paramount. However, Section 2(a) of the 1962 Uniform Act applies only to the allocation of receipts and disbursements to or between principal and income. In this Act, the first sentence of Section 15-1-403 (1) states that it also applies to matters within the scope of sections 15-1-406 to 15-1-410. Section 15-1-403 (1)(b) incorporates the rule in Section 2(b) of the 1962 Uniform Act that a discretionary allocation made by the trustee that is contrary to a rule in the Act should not give rise to an inference of imprudence or partiality by the trustee.
The Act deletes the language that appears at the end of 1962 Uniform Act Section 2(a)(3) -- "and in view of the manner in which men of ordinary prudence, discretion and judgment would act in the management of their affairs" -- because persons of ordinary prudence, discretion and judgment, acting in the management of their own affairs do not normally think in terms of the interests of successive beneficiaries. If there is an analogy to an individual's decision-making process, it is probably the individual's decision to spend or to save, but this is not a useful guideline for trust administration. No case has been found in which a court has relied on the "prudent man" rule of the 1962 Uniform Act.
Fiduciary discretion. The general rule is that if a discretionary power is conferred upon a trustee, the exercise of that power is not subject to control by a court except to prevent an abuse of discretion. Restatement (Second) of Trusts § 187. The situations in which a court will control the exercise of a trustee's discretion are discussed in the comments to § 187. See also id. § 233 Comment p .
Questions for which there is no provision. Section 15-1-403 (1)(d) allocates receipts and disbursements to principal when there is no provision for a different allocation in the terms of the trust, the will, or the Act. This may occur because money is received from a financial instrument not available at the present time (inflation-indexed bonds might have fallen into this category had they been announced after this Act was approved by the Commissioners on Uniform State Laws) or because a transaction is of a type or occurs in a manner not anticipated by the Drafting Committee for this Act or the drafter of the trust instrument.
Allocating to principal a disbursement for which there is no provision in the Act or the terms of the trust preserves the income beneficiary's level of income in the year it is allocated to principal, but thereafter will reduce the amount of income produced by the principal. Allocating to principal a receipt for which there is no provision will increase the income received by the income beneficiary in subsequent years, and will eventually, upon termination of the trust, also favor the remainder beneficiary. Allocating these items to principal implements the rule that requires a trustee to administer the trust impartially, based on what is fair and reasonable to both income and remainder beneficiaries. However, if the trustee decides that an adjustment between principal and income is needed to enable the trustee to comply with Section 15-1-403 (2), after considering the return from the portfolio as a whole, the trustee may make an appropriate adjustment under Section 15-1-404 (1).
Duty of impartiality. Whenever there are two or more beneficiaries, a trustee is under a duty to deal impartially with them. Restatement of Trusts 3d: Prudent Investor Rule § 183 (1992). This rule applies whether the beneficiaries' interests in the trust are concurrent or successive. If the terms of the trust give the trustee discretion to favor one beneficiary over another, a court will not control the exercise of such discretion except to prevent the trustee from abusing it. Id. § 183, Comment a . "The precise meaning of the trustee's duty of impartiality and the balancing of competing interests and objectives inevitably are matters of judgment and interpretation. Thus, the duty and balancing are affected by the purposes, terms, distribution requirements, and other circumstances of the trust, not only at the outset but as they may change from time to time." Id. § 232, Comment c.
The terms of a trust may provide that the trustee, or an accountant engaged by the trustee, or a committee of persons who may be family members or business associates, shall have the power to determine what is income and what is principal. If the terms of a trust provide that this Act specifically or principal and income legislation in general does not apply to the trust but fail to provide a rule to deal with a matter provided for in this Act, the trustee has an implied grant of discretion to decide the question. Section 15-1-403 (2) provides that the rule of impartiality applies in the exercise of such a discretionary power to the extent that the terms of the trust do not provide that one or more of the beneficiaries are to be favored. The fact that a person is named an income beneficiary or a remainder beneficiary is not by itself an indication of partiality for that beneficiary.
15-1-404. Trustee's power to adjust.
- A trustee may adjust between principal and income to the extent the trustee considers necessary if the trustee invests and manages trust assets as a prudent investor, the terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust's income, and the trustee determines, after applying the rules in section 15-1-403 (1), that the trustee is unable to comply with section 15-1-403 (2).
-
In deciding whether and to what extent to exercise the power conferred by subsection (1) of this section, a trustee shall consider all factors relevant to the trust and its beneficiaries, including the following factors to the extent they are relevant:
- The nature, purpose, and expected duration of the trust;
- The intent of the settlor;
- The identity and circumstances of the beneficiaries;
- The needs for liquidity, regularity of income, and preservation and appreciation of capital;
- The assets held in the trust; the extent to which they consist of financial assets, interests in closely held enterprises, tangible and intangible personal property, or real property; the extent to which an asset is used by a beneficiary; and whether an asset was purchased by the trustee or received from the settlor;
- The net amount allocated to income under the other sections of subparts 1 through 6 of this part 4 and the increase or decrease in the value of the principal assets, which the trustee may estimate as to assets for which market values are not readily available;
- Whether and to what extent the terms of the trust give the trustee the power to invade principal or accumulate income or prohibit the trustee from invading principal or accumulating income, and the extent to which the trustee has exercised a power from time to time to invade principal or accumulate income;
- The actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation; and
- The anticipated tax consequences of an adjustment.
-
A trustee may not make an adjustment:
- That diminishes the income interest in a trust that requires all of the income to be paid at least annually to a spouse and for which an estate tax or gift tax marital deduction would be allowed, in whole or in part, if the trustee did not have the power to make the adjustment;
- That reduces the actuarial value of the income interest in a trust to which a person transfers property with the intent to qualify for a gift tax exclusion;
- That changes the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets;
- From any amount that is permanently set aside for charitable purposes under a will or the terms of a trust unless both income and principal are so set aside;
- If possessing or exercising the power to make an adjustment causes an individual to be treated as the owner of all or part of the trust for income tax purposes, and the individual would not be treated as the owner if the trustee did not possess the power to make an adjustment;
- If possessing or exercising the power to make an adjustment causes all or part of the trust assets to be included for estate tax purposes in the estate of an individual who has the power to remove a trustee or appoint a trustee, or both, and the assets would not be included in the estate of the individual if the trustee did not possess the power to make an adjustment;
- If the trustee is a beneficiary of the trust;
- If the trustee is not a beneficiary, but the adjustment would benefit the trustee directly or indirectly; or
- If the trust is a unitrust.
- If the provisions of paragraph (e), (f), (g), or (h) of subsection (3) of this section apply to a trustee and there is more than one trustee, a cotrustee to whom the provision does not apply may make the adjustment unless the exercise of the power by the remaining trustee or trustees is not permitted by the terms of the trust.
- A trustee may release the entire power conferred by subsection (1) of this section or may release only the power to adjust from income to principal or the power to adjust from principal to income if the trustee is uncertain about whether possessing or exercising the power will cause a result described in paragraph (a), (b), (c), (d), (e), (f), or (h) of subsection (3) of this section, or if the trustee determines that possessing or exercising the power will or may deprive the trust of a tax benefit or impose a tax burden not described in subsection (3) of this section. The release may be permanent or for a specified period, including a period measured by the life of an individual.
- Terms of a trust that limit the power of a trustee to make an adjustment between principal and income do not affect the application of this section unless it is clear from the terms of the trust that the terms are intended to deny the trustee the power of adjustment conferred by subsection (1) of this section.
- Nothing in this section or in subparts 1 through 6 of this part 4 is intended to create or imply a duty to make an adjustment, and a trustee is not liable for not considering whether to make an adjustment or for choosing not to make an adjustment. In a proceeding with respect to a trustee's exercise or nonexercise of the power to make an adjustment under this section, the sole remedy is to direct, deny, or revise an adjustment between principal and income.
Source: L. 2000: Entire part R&RE, p. 1130, § 1, effective July 1, 2001. L. 2003: (3)(g) and (3)(h) amended and (3)(i) added, p. 2102, § 2, effective May 22. L. 2006: (3)(i) amended, p. 388, § 16, effective July 1. L. 2009: (2)(f) and (7) amended, (HB 09-1241), ch. 169, p. 743, § 3, effective April 22.
OFFICIAL COMMENT
Purpose and Scope of Provision. The purpose of Section 15-1-404 is to enable a trustee to select investments using the standards of a prudent investor without having to realize a particular portion of the portfolio's total return in the form of traditional trust accounting income such as interest, dividends, and rents. Section 15-1-404 (1) authorizes a trustee to make adjustments between principal and income if three conditions are met: (1) the trustee must be managing the trust assets under the prudent investor rule; (2) the terms of the trust must express the income beneficiary's distribution rights in terms of the right to receive "income" in the sense of traditional trust accounting income; and (3) the trustee must determine, after applying the rules in Section 15-1-403 (1), that he is unable to comply with Section 15-1-403 (2). In deciding whether and to what extent to exercise the power to adjust, the trustee is required to consider the factors described in Section 15-1-404 (2), but the trustee may not make an adjustment in circumstances described in Section 15-4-404 (3).
Section 15-1-404 does not empower a trustee to increase or decrease the degree of beneficial enjoyment to which a beneficiary is entitled under the terms of the trust; rather, it authorizes the trustee to make adjustments between principal and income that may be necessary if the income component of a portfolio's total return is too small or too large because of investment decisions made by the trustee under the prudent investor rule. The paramount consideration in applying Section 15-1-404 (1) is the requirement in Section 15-1-403 (2) that "a fiduciary must administer a trust or estate impartially, based on what is fair and reasonable to all of the beneficiaries, except to the extent that the terms of the trust or the will clearly manifest an intention that the fiduciary shall or may favor one or more of the beneficiaries." The power to adjust is subject to control by the court to prevent an abuse of discretion. Restatement (Second) of Trusts § 187 (1959). See also id. §§ 183, 232, 233, Comment p (1959).
Section 15-1-404 will be important for trusts that are irrevocable when a State adopts the prudent investor rule by statute or judicial approval of the rule in Restatement of Trusts 3d: Prudent Investor Rule. Wills and trust instruments executed after the rule is adopted can be drafted to describe a beneficiary's distribution rights in terms that do not depend upon the amount of trust accounting income, but to the extent that drafters of trust documents continue to describe an income beneficiary's distribution rights by referring to trust accounting income, Section 15-1-404 will be an important tool in trust administration.
Three conditions to the exercise of the power to adjust. The first of the three conditions that must be met before a trustee can exercise the power to adjust -- that the trustee invest and manage trust assets as a prudent investor -- is expressed in this Act by language derived from the Uniform Prudent Investor Act, but the condition will be met whether the prudent investor rule applies because the Uniform Act or other prudent investor legislation has been enacted, the prudent investor rule has been approved by the courts, or the terms of the trust require it. Even if a State's legislature or courts have not formally adopted the rule, the Restatement establishes the prudent investor rule as an authoritative interpretation of the common law prudent man rule, referring to the prudent investor rule as a "modest reformulation of the Harvard College dictum and the basic rule of prior Restatements." Restatement of Trusts 3d: Prudent Investor Rule, Introduction, at 5. As a result, there is a basis for concluding that the first condition is satisfied in virtually all States except those in which a trustee is permitted to invest only in assets set forth in a statutory "legal list."
The second condition will be met when the terms of the trust require all of the "income" to be distributed at regular intervals; or when the terms of the trust require a trustee to distribute all of the income, but permit the trustee to decide how much to distribute to each member of a class of beneficiaries; or when the terms of a trust provide that the beneficiary shall receive the greater of the trust accounting income and a fixed dollar amount (an annuity), or of trust accounting income and a fractional share of the value of the trust assets (a unitrust amount). If the trust authorizes the trustee in its discretion to distribute the trust's income to the beneficiary or to accumulate some or all of the income, the condition will be met because the terms of the trust do not permit the trustee to distribute more than the trust accounting income.
To meet the third condition, the trustee must first meet the requirements of Section 15-1-403 (1), i.e., she must apply the terms of the trust, decide whether to exercise the discretionary powers given to the trustee under the terms of the trust, and must apply the provisions of the Act if the terms of the trust do not contain a different provision or give the trustee discretion. Second, the trustee must determine the extent to which the terms of the trust clearly manifest an intention by the settlor that the trustee may or must favor one or more of the beneficiaries. To the extent that the terms of the trust do not require partiality, the trustee must conclude that she is unable to comply with the duty to administer the trust impartially. To the extent that the terms of the trust do require or permit the trustee to favor the income beneficiary or the remainder beneficiary, the trustee must conclude that she is unable to achieve the degree of partiality required or permitted. If the trustee comes to either conclusion -- that she is unable to administer the trust impartially or that she is unable to achieve the degree of partiality required or permitted -- she may exercise the power to adjust under Section 15-1-404 (1).
Impartiality and productivity of income. The duty of impartiality between income and remainder beneficiaries is linked to the trustee's duty to make the portfolio productive of trust accounting income whenever the distribution requirements are expressed in terms of distributing the trust's "income." The 1962 Uniform Act implies that the duty to produce income applies on an asset by asset basis because the right of an income beneficiary to receive "delayed income" from the sale proceeds of underproductive property under Section 12 of that Act arises if "any part of principal ... has not produced an average net income of a least 1% per year of its inventory value for more than a year ... ." Under the prudent investor rule, "[t]o whatever extent a requirement of income productivity exists, ... the requirement applies not investment by investment but to the portfolio as a whole." Restatement of Trusts 3d: Prudent Investor Rule § 227, Comment i , at 34. The power to adjust under Section 15-1-404 (1) is also to be exercised by considering net income from the portfolio as a whole and not investment by investment. Section 15-1-423 (2) of this Act eliminates the underproductive property rule in all cases other than trusts for which a marital deduction is allowed; the rule applies to a marital deduction trust if the trust's assets "consist substantially of property that does not provide the spouse with sufficient income from or use of the trust assets ..." -- in other words, the section applies by reference to the portfolio as a whole.
While the purpose of the power to adjust in Section 15-1-404 (1) is to eliminate the need for a trustee who operates under the prudent investor rule to be concerned about the income component of the portfolio's total return, the trustee must still determine the extent to which a distribution must be made to an income beneficiary and the adequacy of the portfolio's liquidity as a whole to make that distribution.
For a discussion of investment considerations involving specific investments and techniques under the prudent investor rule, see Restatement of Trusts 3d: Prudent Investor Rule § 227, Comments k-p .
Factors to consider in exercising the power to adjust. Section 15-1-404 (2) requires a trustee to consider factors relevant to the trust and its beneficiaries in deciding whether and to what extent the power to adjust should be exercised. Section 2(c) of the Uniform Prudent Investor Act sets forth circumstances that a trustee is to consider in investing and managing trust assets. The circumstances in Section 2(c) of the Uniform Prudent Investor Act are the source of the factors in paragraphs (a) through (f) and (h) of Section 15-1-404 (2) (modified where necessary to adapt them to the purposes of this Act) so that, to the extent possible, comparable factors will apply to investment decisions and decisions involving the power to adjust. If a trustee who is operating under the prudent investor rule decides that the portfolio should be composed of financial assets whose total return will result primarily from capital appreciation rather than dividends, interest, and rents, the trustee can decide at the same time the extent to which an adjustment from principal to income may be necessary under Section 15-1-404. On the other hand, if a trustee decides that the risk and return objectives for the trust are best achieved by a portfolio whose total return includes interest and dividend income that is sufficient to provide the income beneficiary with the beneficial interest to which the beneficiary is entitled under the terms of the trust, the trustee can decide that it is unnecessary to exercise the power to adjust.
Assets received from the settlor. Section 3 of the Uniform Prudent Investor Act provides that "[a] trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying." The special circumstances may include the wish to retain a family business, the benefit derived from deferring liquidation of the asset in order to defer payment of income taxes, or the anticipated capital appreciation from retaining an asset such as undeveloped real estate for a long period. To the extent the trustee retains assets received from the settlor because of special circumstances that overcome the duty to diversify, the trustee may take these circumstances into account in determining whether and to what extent the power to adjust should be exercised to change the results produced by other provisions of this Act that apply to the retained assets. See Section 15-1-404 (2)(e); Uniform Prudent Investor Act § 3, Comment, 7B U.L.A. 18, at 25-26 (Supp. 1997); Restatement of Trusts 3d: Prudent Investor Rule § 229 and Comments a-e .
Limitations on the power to adjust. The purpose of subsections (3)(a) through (d) is to preserve tax benefits that may have been an important purpose for creating the trust. Subsections (3)(e), (f), and (h) deny the power to adjust in the circumstances described in those subsections in order to prevent adverse tax consequences, and subsection (3)(g) denies the power to adjust to any beneficiary, whether or not possession of the power may have adverse tax consequences.
Under subsection (3)(a), a trustee cannot make an adjustment that diminishes the income interest in a trust that requires all of the income to be paid at least annually to a spouse and for which an estate tax or gift tax marital deduction is allowed; but this subsection does not prevent the trustee from making an adjustment that increases the amount of income paid from a marital deduction trust to the spouse. Subsection (3)(a) applies to a trust that qualifies for the marital deduction because the spouse has a general power of appointment over the trust, but it applies to a qualified terminable interest property (QTIP) trust only if and to the extent that the fiduciary makes the election required to obtain the tax deduction. Subsection (3)(a) does not apply to a so-called "estate" trust. This type of trust qualifies for the marital deduction because the terms of the trust require the principal and undistributed income to be paid to the surviving spouse's estate when the spouse dies; it is not necessary for the terms of an estate trust to require the income to be distributed annually. Reg. § 20.2056(c)-2(b)(1)(iii).
Subsection (3)(c) applies to annuity trusts and unitrusts with no charitable beneficiaries as well as to trusts with charitable income or remainder beneficiaries; its purpose is to make it clear that a beneficiary's right to receive a fixed annuity or a fixed fraction of the value of a trust's assets is not subject to adjustment under Section 15-1-404 (1). Subsection (3)(c) does not apply to any additional amount to which the beneficiary may be entitled that is expressed in terms of a right to receive income from the trust. For example, if a beneficiary is to receive a fixed annuity or the trust's income, whichever is greater, subsection (3)(c) does not prevent a trustee from making an adjustment under Section 15-1-404 (1) in determining the amount of the trust's income.
If subsection (3)(e), (f), (g), or (h), prevents a trustee from exercising the power to adjust, subsection (4) permits a cotrustee who is not subject to the provision to exercise the power unless the terms of the trust do not permit the cotrustee to do so.
Release of the power to adjust. Section 15-1-404 (5) permits a trustee to release all or part of the power to adjust in circumstances in which the possession or exercise of the power might deprive the trust of a tax benefit or impose a tax burden. For example, if possessing the power would diminish the actuarial value of the income interest in a trust for which the income beneficiary's estate may be eligible to claim a credit for property previously taxed if the beneficiary dies within ten years after the death of the person creating the trust, the trustee is permitted under subsection (5) to release just the power to adjust from income to principal.
Trust terms that limit a power to adjust. Section 15-1-404 (6) applies to trust provisions that limit a trustee's power to adjust. Since the power is intended to enable trustees to employ the prudent investor rule without being constrained by traditional principal and income rules, an instrument executed before the adoption of this Act whose terms describe the amount that may or must be distributed to a beneficiary by referring to the trust's income or that prohibit the invasion of principal or that prohibit equitable adjustments in general should not be construed as forbidding the use of the power to adjust under Section 15-1-404 (1) if the need for adjustment arises because the trustee is operating under the prudent investor rule. Instruments containing such provisions that are executed after the adoption of this Act should specifically refer to the power to adjust if the settlor intends to forbid its use. See generally, Joel C. Dobris, Limits on the Doctrine of Equitable Adjustment in Sophisticated Postmortem Tax Planning, 66 Iowa L. Rev. 273 (1981).
Examples. The following examples illustrate the application of Section 15-1-404:
Example (1) -- T is the successor trustee of a trust that provides income to A for life, remainder to B. T has received from the prior trustee a portfolio of financial assets invested 20% in stocks and 80% in bonds. Following the prudent investor rule, T determines that a strategy of investing the portfolio 50% in stocks and 50% in bonds has risk and return objectives that are reasonably suited to the trust, but T also determines that adopting this approach will cause the trust to receive a smaller amount of dividend and interest income. After considering the factors in Section 15-1-404 (2), T may transfer cash from principal to income to the extent T considers it necessary to increase the amount distributed to the income beneficiary.
Example (2) -- T is the trustee of a trust that requires the income to be paid to the settlor's son C for life, remainder to C's daughter D. In a period of very high inflation, T purchases bonds that pay double-digit interest and determines that a portion of the interest, which is allocated to income under Section 15-1-416 of this Act, is a return of capital. In consideration of the loss of value of principal due to inflation and other factors that T considers relevant, T may transfer part of the interest to principal.
Example (3) -- T is the trustee of a trust that requires the income to be paid to the settlor's sister E for life, remainder to charity F. E is a retired schoolteacher who is single and has no children. E's income from her social security, pension, and savings exceeds the amount required to provide for her accustomed standard of living. The terms of the trust permit T to invade principal to provide for E's health and to support her in her accustomed manner of living, but do not otherwise indicate that T should favor E or F. Applying the prudent investor rule, T determines that the trust assets should be invested entirely in growth stocks that produce very little dividend income. Even though it is not necessary to invade principal to maintain E's accustomed standard of living, she is entitled to receive from the trust the degree of beneficial enjoyment normally accorded a person who is the sole income beneficiary of a trust, and T may transfer cash from principal to income to provide her with that degree of enjoyment.
Example (4) -- T is the trustee of a trust that is governed by the law of State X. The trust became irrevocable before State X adopted the prudent investor rule. The terms of the trust require all of the income to be paid to G for life, remainder to H, and also give T the power to invade principal for the benefit of G for "dire emergencies only." The terms of the trust limit the aggregate amount that T can distribute to G from principal during G's life to 6% of the trust's value at its inception. The trust's portfolio is invested initially 50% in stocks and 50% in bonds, but after State X adopts the prudent investor rule T determines that, to achieve suitable risk and return objectives for the trust, the assets should be invested 90% in stocks and 10% in bonds. This change increases the total return from the portfolio and decreases the dividend and interest income. Thereafter, even though G does not experience a dire emergency, T may exercise the power to adjust under Section 15-1-404 (1) to the extent that T determines that the adjustment is from only the capital appreciation resulting from the change in the portfolio's asset allocation. If T is unable to determine the extent to which capital appreciation resulted from the change in asset allocation or is unable to maintain adequate records to determine the extent to which principal distributions to G for dire emergencies do not exceed the 6% limitation, T may not exercise the power to adjust. See Joel C. Dobris, Limits on the Doctrine of Equitable Adjustment in Sophisticated Postmortem Tax Planning, 66 Iowa L. Rev. 273 (1981).
Example (5) -- T is the trustee of a trust for the settlor's child. The trust owns a diversified portfolio of marketable financial assets with a value of $600,000, and is also the sole beneficiary of the settlor's IRA, which holds a diversified portfolio of marketable financial assets with a value of $900,000. The trust receives a distribution from the IRA that is the minimum amount required to be distributed under the Internal Revenue Code, and T allocates 10% of the distribution to income under Section 15-1-419 (3) of this Act. The total return on the IRA's assets exceeds the amount distributed to the trust, and the value of the IRA at the end of the year is more than its value at the beginning of the year. Relevant factors that T may consider in determining whether to exercise the power to adjust and the extent to which an adjustment should be made to comply with Section 15-1-403 (2) include the total return from all of the trust's assets, those owned directly as well as its interest in the IRA, the extent to which the trust will be subject to income tax on the portion of the IRA distribution that is allocated to principal, and the extent to which the income beneficiary will be subject to income tax on the amount that T distributes to the income beneficiary.
Example (6) -- T is the trustee of a trust whose portfolio includes a large parcel of undeveloped real estate. T pays real property taxes on the undeveloped parcel from income each year pursuant to Section 15-1-426 (c). After considering the return from the trust's portfolio as a whole and other relevant factors described in Section 15-1-404 (2), T may exercise the power to adjust under Section 15-1-404 (1) to transfer cash from principal to income in order to distribute to the income beneficiary an amount that T considers necessary to comply with Section 15-1-403 (2).
Example (7) -- T is the trustee of a trust whose portfolio includes an interest in a mutual fund that is sponsored by T. As the manager of the mutual fund, T charges the fund a management fee that reduces the amount available to distribute to the trust by $2,000. If the fee had been paid directly by the trust, one-half of the fee would have been paid from income under Section 15-1-426 (1)(a) and the other one-half would have been paid from principal under Section 15-1-427 (1)(a). After considering the total return from the portfolio as a whole and other relevant factors described in Section 15-1-404 (2), T may exercise its power to adjust under Section 15-1-404 (1) by transferring $1,000, or half of the trust's proportionate share of the fee, from principal to income.
15-1-404.5. Conversion - unitrusts - administration.
-
Conversion by trustee. Unless expressly prohibited by the governing instrument, a trustee may release the power to adjust described in section 15-1-404 and convert a trust to a unitrust as described in this section if all of the following apply:
- The trust describes the amount that may or must be distributed to a beneficiary by referring to the trust's income and the trustee determines that conversion to a unitrust will enable the trustee to better carry out the purposes of the trust;
- The trustee sends a written notice of the trustee's decision to convert the trust to a unitrust specifying a prospective effective date for the conversion, which may not be sooner than sixty days after the notice is sent, and including a copy of this section to the qualified beneficiaries, determined as of the date the notice is sent and assuming nonexercise of all powers of appointment;
- There are one or more legally competent beneficiaries described in section 15-1-402 (10.5)(a), and one or more legally competent remainder beneficiaries described in either section 15-1-402 (10.5)(b) or 15-1-402 (10.5)(c), determined as of the date the notice is sent; and
- No beneficiary has objected in writing to the conversion to a unitrust and delivered such objection to the trustee within sixty days after the notice was sent.
- Conversion, reconversion, and adjustment of the distribution percentage by agreement. Conversion to a unitrust or reconversion to an income trust may be made by agreement between the trustee and all qualified beneficiaries of the trust. The trustee and all qualified beneficiaries may also agree to modify the distribution percentage; except that the trustee and the qualified beneficiaries may not agree to a distribution percentage less than three percent or greater than five percent. The agreement may include any other actions a court could properly order pursuant to subsection (7) of this section.
-
Conversion or reconversion by court.
-
The trustee may, for any reason, elect to petition the court to order conversion to a unitrust, including without limitation the reason that conversion under subsection (1) of this section is unavailable because:
- A beneficiary timely objects to the conversion to a unitrust;
- There are no legally competent beneficiaries described in section 15-1-402 (10.5)(a); or
- There are no legally competent beneficiaries described in section 15-1-402 (10.5)(b) or (10.5)(c).
- A beneficiary may request the trustee to convert to a unitrust or adjust the distribution percentage pursuant to this subsection (3). If the trustee declines or fails to act within six months after receiving a written request from a beneficiary to do so, the beneficiary may petition the court to order the conversion or adjustment.
- The trustee may petition the court prospectively to convert from a unitrust to an income trust or to adjust the distribution percentage if the trustee determines that the reconversion or adjustment will enable the trustee to better carry out the purposes of the trust. A beneficiary may request the trustee to petition the court prospectively to reconvert from a unitrust to an income trust or adjust the distribution percentage. If the trustee declines or fails to act within six months after receiving a written request from a beneficiary to do so, the beneficiary may petition the court to order the reconversion or adjustment.
-
-
In a judicial proceeding instituted under this subsection (3), the trustee may present opinions and reasons concerning:
- The trustee's support for, or opposition to, a conversion to a unitrust, a reconversion from a unitrust to an income trust, or an adjustment of the distribution percentage of a unitrust, including whether the trustee believes conversion, reconversion, or adjustment of the distribution percentage would enable the trustee to better carry out the purposes of the trust; and
- Any other matter relevant to the proposed conversion, reconversion, or adjustment of the distribution percentage.
- A trustee's actions undertaken in accordance with this subsection (3) shall not be deemed improper or inconsistent with the trustee's duty of impartiality unless the court finds from all the evidence that the trustee acted in bad faith.
-
In a judicial proceeding instituted under this subsection (3), the trustee may present opinions and reasons concerning:
- The court shall order conversion to a unitrust, reconversion prospectively from a unitrust to an income trust, or adjustment of the distribution percentage of a unitrust if the court determines that the conversion, reconversion, or adjustment of the distribution percentage will enable the trustee to better carry out the purposes of the trust.
-
If a conversion to a unitrust is made pursuant to a court order, the trustee may reconvert the unitrust to an income trust only:
- Pursuant to a subsequent court order; or
- By filing with the court an agreement made pursuant to subsection (2) of this section to reconvert to an income trust.
- Upon a reconversion, the power to adjust, as described in section 15-1-404 and as it existed before the conversion, shall be revived.
- An action may be taken under this subsection (3) no more frequently than every two years, unless the court for good cause orders otherwise.
-
The trustee may, for any reason, elect to petition the court to order conversion to a unitrust, including without limitation the reason that conversion under subsection (1) of this section is unavailable because:
-
Administration of a unitrust. During the time that a trust is a unitrust, the trustee shall administer the trust in accordance with the provisions of this subsection (4) as follows, unless otherwise expressly provided by the terms of the trust:
- The trustee shall invest the trust assets seeking a total return without regard to whether the return is from income or appreciation of principal;
- The trustee shall make income distributions in accordance with the governing instrument subject to the provisions of this section;
- The distribution percentage for any trust converted to a unitrust by a trustee in accordance with subsection (1) of this section shall be four percent, unless a different percentage has been determined in an agreement made pursuant to subsection (2) of this section or ordered by the court pursuant to subsection (3) of this section;
-
-
The trustee shall pay to a beneficiary in the case of an underpayment within a reasonable time, and shall recover from a beneficiary in the case of an overpayment, either by repayment by the beneficiary or by withholding from future distributions to the
beneficiary:
- An amount equal to the difference between the amount properly payable and the amount actually paid; and
- Interest compounded annually at a rate per annum equal to the distribution percentage in the year or years during which the underpayment or overpayment occurs.
- For purposes of this paragraph (d), accrual of interest may not commence until the beginning of the trust year following the year in which the underpayment or overpayment occurs.
-
The trustee shall pay to a beneficiary in the case of an underpayment within a reasonable time, and shall recover from a beneficiary in the case of an overpayment, either by repayment by the beneficiary or by withholding from future distributions to the
beneficiary:
- A change in the method of determining a reasonable current return by converting to a unitrust in accordance with this section and substituting the distribution amount for net trust accounting income is a proper change in the definition of trust income and shall be given effect notwithstanding any contrary provision of subparts 1 through 6 of this part 4. The distribution amount shall in all cases be deemed a reasonable current return that fairly apportions the total return of a unitrust.
(4.5) For purposes of subsection (4) of this section:
- "Income", as that term appears in the governing instrument, shall be deemed to mean the distribution amount.
-
- The "distribution amount" shall be an annual amount equal to the distribution percentage multiplied by the average net fair market value of the trust's assets.
-
For purposes of this paragraph (b), the average net fair market value of the trust's assets shall be the net fair market value of the trust's assets averaged over the lesser of:
- The three preceding years; or
- The period during which the trust has been in existence.
-
Determination of matters in administration of unitrust. The trustee may determine any of the following matters in administering a unitrust as the trustee deems necessary or helpful for the proper functioning of the trust:
- The effective date of a conversion to a unitrust pursuant to subsection (1) of this section;
- The manner of prorating the distribution amount for a short year in which a beneficiary's interest commences or ceases, or if the trust is a unitrust for only part of the year, or the trustee may elect to treat the trust year as two separate years, the first of which ends at the close of the day on which the conversion or reconversion occurs and the second of which ends at the close of the trust year;
- Whether distributions are made in cash or in kind;
- The manner of adjusting valuations and calculations of the distribution amount to account for other payments from, or contributions to, the trust;
- Whether to value the trust's assets annually or more frequently;
- Which valuation dates to use and how many valuation dates to use;
-
Valuation decisions concerning any asset for which there is no readily available market value, including:
- How frequently to value such an asset;
- Whether and how often to engage a professional appraiser to value such an asset; and
-
Whether to exclude the value of such an asset from the net fair market value of the trust's assets for purposes of determining the distribution amount. For purposes of this section, any such asset so excluded shall be referred to as an "excluded asset",
and the trustee shall distribute any net income received from the excluded asset as provided for in the governing instrument, subject to the following principles:
- The trustee shall treat each asset for which there is no readily available market value as an excluded asset unless the trustee determines that there are compelling reasons not to do so and the trustee considers all relevant factors including the best interests of the beneficiaries;
- If tangible personal property or real property is possessed or occupied by a beneficiary, the trustee may not limit or restrict any right of the beneficiary to use the property in accordance with the governing instrument regardless of whether the trustee treats the property as an excluded asset; and
- By way of example and not by way of limitation, assets for which there is a readily available market value include cash and cash equivalents; stocks, bonds, and other securities and instruments for which there is an established market on a stock exchange, in an over-the-counter market, or otherwise; and any other property that can reasonably be expected to be sold within one week of the decision to sell without extraordinary efforts by the seller. By way of example and not by way of limitation, assets for which there is no readily available market value include stocks, bonds, and other securities and instruments for which there is no established market on a stock exchange, in an over-the-counter market, or otherwise; real property; tangible personal property; and artwork and other collectibles.
- Any other administrative matter that the trustee determines is necessary or helpful for the proper functioning of the unitrust.
-
Allocations.
- Expenses, taxes, and other charges that would otherwise be deducted from income if the trust was not a unitrust may not be deducted from the distribution amount.
-
Unless otherwise provided by the governing instrument, the distribution amount each year shall be deemed to be paid from the following sources for that year in the following order:
- Net income determined as if the trust was not a unitrust;
- Other ordinary income as determined for federal income tax purposes;
- Net realized short-term capital gains as determined for federal income tax purposes;
- Net realized long-term capital gains as determined for federal income tax purposes;
- Trust principal comprising assets for which there is a readily available market value; and
- Other trust principal.
-
Court orders.
-
The court may order any of the following actions in a proceeding brought by a trustee or a beneficiary pursuant to paragraph (a), (b), or (c) of subsection (3) of this section:
- Select a distribution percentage other than four percent, except that the court may not order a distribution percentage less than three percent or greater than five percent;
- Average the valuation of the trust's net assets over a period other than three years;
- Reconvert prospectively from a unitrust, or adjust the distribution percentage of a unitrust;
- Direct the distribution of net income, determined as if the trust were not a unitrust, in excess of the distribution amount as to any or all trust assets if the distribution is necessary to preserve a tax benefit; or
- Change or direct any administrative procedure as the court determines is necessary or helpful for the proper functioning of the unitrust.
- Nothing in this subsection (7) shall be construed to limit the equitable jurisdiction of the court to grant other relief as the court deems proper.
-
The court may order any of the following actions in a proceeding brought by a trustee or a beneficiary pursuant to paragraph (a), (b), or (c) of subsection (3) of this section:
-
Restrictions. Conversion to a unitrust shall not affect any provision in the governing instrument that:
- Directs or authorizes the trustee to distribute the principal;
- Directs or authorizes the trustee to distribute a fixed annuity or a fixed fraction of the value of trust assets;
- Authorizes a beneficiary to withdraw a portion or all of the principal; or
- Diminishes in any manner an amount permanently set aside for charitable purposes under the governing instrument unless both income and principal are set aside.
-
Tax limitations. If a particular trustee is also a beneficiary of the trust and conversion or failure to convert would enhance or diminish the beneficial interest of that trustee, or if possession or exercise of the conversion power by a particular trustee
alone would cause any individual to be treated as owner of a part of the trust for federal income tax purposes or cause a part of the trust to be included in the gross estate of any individual for federal estate tax purposes,
then that particular trustee may not participate as a trustee in the exercise of the conversion power; except that:
- The trustee may petition the court under paragraph (a) of subsection (3) of this section to order conversion in accordance with this section; and
- A co-trustee or co-trustees to whom this subsection (9) does not apply may convert the trust to a unitrust in accordance with subsection (1) or (2) of this section.
- Releases. A trustee may irrevocably release the power granted by this section if the trustee reasonably believes the release is in the best interests of the trust and its beneficiaries. The release may be personal to the releasing trustee or it may apply generally to some or all subsequent trustees. The release may be for any specified period, including a period measured by the life of an individual.
-
Remedies.
- A trustee who reasonably and in good faith takes any action or omits to take any action under this section is not liable to any person interested in the trust. An act or omission by a trustee under this section shall be presumed to be reasonable and undertaken in good faith unless the act or omission is determined by the court to have been an abuse of discretion.
-
If a trustee reasonably and in good faith takes or omits to take any action under this section and a person interested in the trust opposes the act or omission, the person's exclusive remedy shall be to seek an order of the court directing the trustee
to:
- Convert the trust to a unitrust;
- Reconvert from a unitrust;
- Change the distribution percentage; or
- Order any administrative procedures the court determines are necessary or helpful for the proper functioning of the trust.
- A claim for relief under this subsection (11) that is not barred by adjudication, consent, or limitation, is nevertheless barred as to any beneficiary who has received a statement fully disclosing the matter unless a proceeding to assert the claim is commenced within six months after receipt of the statement. A beneficiary is deemed to have received a statement if it is received by the beneficiary or the beneficiary's representative in a manner described in section 15-10-403 or 15-1-405.
- No duty. A trustee has no duty to inform a beneficiary about the availability and provisions of this section. A trustee has no duty to review the trust to determine whether any action should be taken under this section unless the trustee is requested in writing by a qualified beneficiary to do so.
-
Application.
- This section shall apply to trusts in existence on May 22, 2003, and to trusts created on or after that date.
-
This section shall be construed to apply to the administration of a trust that is administered in Colorado under Colorado law or that is governed by Colorado law with respect to the meaning and effect of its terms unless:
- The trust is a trust described in the federal "Internal Revenue Code of 1986", section 642 (c)(5), 664 (d), or 2702 (a)(3);
- The governing instrument expressly prohibits the use of this section by specific reference to one or more provisions of subparts 1 through 6 of this part 4;
- The terms of a trust in existence on May 22, 2003, incorporate provisions that operate as a unitrust. The trustee or a beneficiary of such a trust may proceed under section 15-1-405 to adopt provisions in this section that do not contradict provisions in the governing instrument.
-
Application to express trusts.
- This subsection (14) does not apply to a charitable remainder unitrust as defined by section 664 (d), federal "Internal Revenue Code of 1986", 26 U.S.C. sec. 664, as amended.
-
As used in this section:
- "Unitrust" means a trust, the terms of which require or permit distribution of a unitrust amount, without regard to whether the trust has been converted to a unitrust in accordance with this section or whether the trust is established by express terms of the governing instrument.
- "Unitrust amount" means an amount equal to a percentage of a unitrust's assets that may or are required to be distributed to one or more beneficiaries annually in accordance with the terms of the unitrust. The unitrust amount may be determined by reference to the net fair market value of the unitrust's assets as of a particular date each year or as an average determined on a multiple-year basis.
Source: L. 2003: Entire section added, p. 2103, § 3, effective May 22. L. 2006: (1), (2), (3), (4), IP(5), (5)(a), (5)(b), (5)(g)(III)(C), (5)(h), (6)(a), (6)(b)(I), (7)(a), (8), (9), (11)(b), and (13) amended and (14) added, p. 382, § 15, effective July 1. L. 2009: (4)(e) and (13)(b)(II) amended, (HB 09-1241), ch. 169, p. 743, § 4, effective April 22.
ANNOTATION
Law reviews. For article, "Colorado Unitrust Conversion: A Tool for Trustees and Estate Planning Attorneys", see 40 Colo. Law. 57 (March 2011).
15-1-405. Notice of action.
- A trustee may give a notice of proposed action regarding a matter governed by subparts 1 through 6 of this part 4 as provided in this section. For the purpose of this section, a proposed action includes a course of action and a decision not to take action.
- The trustee shall mail notice of the proposed action to all adult beneficiaries who are receiving, or are entitled to receive, income under the trust or to receive a distribution of principal if the trust were terminated at the time the notice is given. If there are no adult beneficiaries who may receive such notice, then notice shall be given to all beneficiaries who are receiving, or are entitled to receive, income under the trust or to receive a distribution of principal if the trust were terminated at the time notice is given, in accordance with the provisions of section 15-10-403. Notice may be given to any other beneficiary. A person shall be bound under this section with respect to such proposed action if the person receives actual notice, if another person having a substantially identical interest receives notice, or if the person would be bound under the provisions of section 15-10-403.
- Notice of proposed action need not be given to any person who consents in writing to the proposed action. The consent may be executed at any time before or after the proposed action is taken.
-
The notice of proposed action shall state that it is given pursuant to this section and shall state all of the following:
- The name and mailing address of the trustee;
- The name and telephone number of a person who may be contacted for additional information;
- A description of the action proposed to be taken and an explanation of the reasons for the action;
- The time within which objections to the proposed action can be made, which shall be at least thirty days from the mailing of the notice of proposed action;
- The date on or after which the proposed action may be taken or is effective.
- A beneficiary may object to the proposed action by mailing a written objection to the trustee at the address stated in the notice of proposed action within the time period specified in the notice of proposed action.
- A trustee is not liable to a beneficiary for an action regarding a matter governed by this chapter if the trustee does not receive a written objection to the proposed action from the beneficiary within the applicable period and the other requirements of this section are satisfied. If no beneficiary entitled to notice objects under this section, the trustee is not liable to any current or future beneficiary with respect to the proposed action.
- If the trustee receives a written objection within the applicable time period, either the trustee or a beneficiary may petition the court to have the proposed action performed as proposed, performed with modifications, or denied. In the proceeding, a beneficiary objecting to the proposed action has the burden of proving that the trustee's proposed action should not be performed. A beneficiary who has not objected is not estopped from opposing the proposed action in the proceeding. If the trustee decides not to implement the proposed action, the trustee shall notify the beneficiaries of the decision not to take the action and the reasons for the decision, and the trustee's decision not to implement the proposed action does not itself give rise to liability to any current or future beneficiary. A beneficiary may petition the court to have the action performed, and has the burden of proving that it should be performed.
Source: L. 2000: Entire part R&RE, p. 1132, § 1, effective July 1, 2001. L. 2009: (1) amended, (HB 09-1241), ch. 169, p. 744, § 5, effective April 22.
SUBPART 2 DECEDENT'S ESTATE OR TERMINATING INCOME INTEREST
Cross references: For information concerning the effective date of this subpart 2, see § 15-1-434.
15-1-406. Determination and distribution of net income.
-
After a decedent dies, in the case of an estate, or after an income interest in a trust ends, the following rules shall apply:
- A fiduciary of an estate or of a terminating income interest shall determine the amount of net income and net principal receipts received from property specifically given to a beneficiary under the rules in subparts 3 to 5 of this part 4 that apply to trustees and the rules in paragraph (e) of this subsection (1). The fiduciary shall distribute the net income and net principal receipts to the beneficiary who is to receive the specific property.
-
A fiduciary shall determine the remaining net income of a decedent's estate or a terminating income interest under the rules in subparts 3 to 5 of this part 4 that apply to trustees and by:
- Including in net income all income from property used to discharge liabilities;
- Paying from income or principal, in the fiduciary's discretion, fees of attorneys, accountants, and fiduciaries; court costs and other expenses of administration; and interest on death taxes, but the fiduciary may pay those expenses from income of property passing to a trust for which the fiduciary claims an estate tax, marital, or charitable deduction only to the extent that the payment of those expenses from income will not cause the reduction or loss of the deduction; and
- Paying from principal all other disbursements made or incurred in connection with the settlement of a decedent's estate or the winding up of a terminating income interest, including debts, funeral expenses, disposition of remains, family allowances, and death taxes and related penalties that are apportioned to the estate or terminating income interest by the will, the terms of the trust, or applicable law.
- A fiduciary shall distribute to a beneficiary who receives a pecuniary amount outright the interest or any other amount provided by the will, the terms of the trust, or applicable law from net income determined under paragraph (b) of this subsection (1) or from principal to the extent that net income is insufficient. If a beneficiary is to receive a pecuniary amount outright from a trust after an income interest ends and no interest or other amount is provided for by the terms of the trust or applicable law, the fiduciary shall distribute the interest or other amount to which the beneficiary would be entitled under applicable law if the pecuniary amount were required to be paid under a will.
- A fiduciary shall distribute the net income remaining after distributions required by paragraph (c) of this subsection (1) in the manner described in section 15-1-407 to all other beneficiaries, including a beneficiary who receives a pecuniary amount in trust, even if the beneficiary holds an unqualified power to withdraw assets from the trust or other presently exercisable general power of appointment over the trust.
- A fiduciary may not reduce principal or income receipts from property described in paragraph (a) of this subsection (1) because of a payment described in section 15-1-426 or 15-1-427 to the extent that the will, the terms of the trust, or applicable law requires the fiduciary to make the payment from assets other than the property or to the extent that the fiduciary recovers or expects to recover the payment from a third party. The net income and principal receipts from the property are determined by including all of the amounts the fiduciary receives or pays with respect to the property, whether those amounts accrued or became due before, on, or after the date of a decedent's death or an income interest's terminating event, and by making a reasonable provision for amounts that the fiduciary believes the estate or terminating income interest may become obligated to pay after the property is distributed.
Source: L. 2000: Entire part R&RE, p. 1134, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Terminating income interests and successive income interests. A trust that provides for a single income beneficiary and an outright distribution of the remainder ends when the income interest ends. A more complex trust may have a number of income interests, either concurrent or successive, and the trust will not necessarily end when one of the income interests ends. For that reason, the Act speaks in terms of income interests ending and beginning rather than trusts ending and beginning. When an income interest in a trust ends, the trustee's powers continue during the winding up period required to complete its administration. A terminating income interest is one that has ended but whose administration is not complete.
If two or more people are given the right to receive specified percentages or fractions of the income from a trust concurrently and one of the concurrent interests ends, e.g., when a beneficiary dies, the beneficiary's income interest ends but the trust does not. Similarly, when a trust with only one income beneficiary ends upon the beneficiary's death, the trust instrument may provide that part or all of the trust assets shall continue in trust for another income beneficiary. While it is common to think and speak of this (and even to characterize it in a trust instrument) as a "new" trust, it is a continuation of the original trust for a remainder beneficiary who has an income interest in the trust assets instead of the right to receive them outright. For purposes of this Act, this is a successive income interest in the same trust. The fact that a trust may or may not end when an income interest ends is not significant for purposes of this Act.
If the assets that are subject to a terminating income interest pass to another trust because the income beneficiary exercises a general power of appointment over the trust assets, the recipient trust would be a new trust; and if they pass to another trust because the beneficiary exercises a nongeneral power of appointment over the trust assets, the recipient trust might be a new trust in some States (see 5A Austin W. Scott & William F. Fratcher, The Law of Trusts § 640, at 483 (4th ed. 1989)); but for purposes of this Act a new trust created in these circumstances is also a successive income interest.
Gift of a pecuniary amount. Section 15-1-406 (c) and (d) provide different rules for an outright gift of a pecuniary amount and a gift in trust of a pecuniary amount; this is the same approach used in Section 5(b)(2) of the 1962 Uniform Act.
Interest on pecuniary amounts. Section 15-1-406 (1)(c) provides that the beneficiary of an outright pecuniary amount is to receive the interest or other amount provided by applicable law if there is no provision in the will or the terms of the trust. Many States have no applicable law that provides for interest or some other amount to be paid on an outright pecuniary gift under an inter vivos trust; this section provides that in such a case the interest or other amount to be paid shall be the same as the interest or other amount required to be paid on testamentary pecuniary gifts. This provision is intended to accord gifts under inter vivos instruments the same treatment as testamentary gifts. The various state authorities that provide for the amount that a beneficiary of an outright pecuniary amount is entitled to receive are collected in Richard B. Covey, Marital Deduction and Credit Shelter Dispositions and the Use of Formula Provisions, App. B (4th ed. 1997).
Administration expenses and interest on death taxes. Under Section 15-1-406 (1)(b)(II) a fiduciary may pay administration expenses and interest on death taxes from either income or principal. An advantage of permitting the fiduciary to choose the source of the payment is that, if the fiduciary's decision is consistent with the decision to deduct these expenses for income tax purposes or estate tax purposes, it eliminates the need to adjust between principal and income that may arise when, for example, an expense that is paid from principal is deducted for income tax purposes or an expense that is paid from income is deducted for estate tax purposes.
The United States Supreme Court has considered the question of whether an estate tax marital deduction or charitable deduction should be reduced when administration expenses are paid from income produced by property passing in trust for a surviving spouse or for charity and deducted for income tax purposes. The Court rejected the IRS position that administration expenses properly paid from income under the terms of the trust or state law must reduce the amount of a marital or charitable transfer, and held that the value of the transferred property is not reduced for estate tax purposes unless the administration expenses are material in light of the income the trust corpus could have been expected to generate. Commissioner v. Estate of Otis C. Hubert, 117 S. Ct. 1124 (1997). The provision in Section 15-1-406 (1)(b)(II) permits a fiduciary to pay and deduct administration expenses from income only to the extent that it will not cause the reduction or loss of an estate tax marital or charitable contributions deduction, which means that the limit on the amount payable from income will be established eventually by Treasury Regulations.
Interest on estate taxes. The IRS agrees that interest on estate and inheritance taxes may be deducted for income tax purposes without having to reduce the estate tax deduction for amounts passing to a charity or surviving spouse, whether the interest is paid from principal or income. Rev. Rul. 93-48, 93-2 C.B. 270. For estates of persons who died before 1998, a fiduciary may not want to deduct for income tax purposes interest on estate tax that is deferred under Section 6166 or 6163 because deducting that interest for estate tax purposes may produce more beneficial results, especially if the estate has little or no income or the income tax bracket is significantly lower than the estate tax bracket. For estates of persons who die after 1997, no estate tax or income tax deduction will be allowed for interest paid on estate tax that is deferred under Section 6166. However, interest on estate tax deferred under Section 6163 will continue to be deductible for both purposes, and interest on estate tax deficiencies will continue to be deductible for estate tax purposes if an election under Section 6166 is not in effect.
Under the 1962 Uniform Act, Section 13(c)(5) charges interest on estate and inheritance taxes to principal. The 1931 Uniform Act has no provision. Section 15-1-426 (1)(c) of this Act provides that, except to the extent provided in Section 15-1-406 (1)(b)(II) or (III), all interest must be paid from income.
ANNOTATION
In enacting this act, the general assembly departed from the uniform act and rejected the approach that all trustee fees and expenses had to be paid out of income. The court, therefore, has discretion to determine how much of the fees and expenses will be paid out of income. In this case, there was no demonstration that the court's allocation was unreasonable or an abuse of discretion. Matter of Trust by Cannady, 926 P.2d 191 (Colo. App. 1996) (decided prior to 2000 repeal and reenactment).
15-1-407. Distribution to residuary and remainder beneficiaries.
- Each beneficiary described in section 15-1-406 (1)(d) is entitled to receive a portion of the net income equal to the beneficiary's fractional interest in undistributed principal assets, using values as of the distribution date. If a fiduciary makes more than one distribution of assets to beneficiaries to whom this section applies, each beneficiary, including one who does not receive part of the distribution, is entitled, as of each distribution date, to the net income the fiduciary has received after the date of death or terminating event or earlier distribution date but has not distributed as of the current distribution date.
-
In determining a beneficiary's share of net income, the following rules shall apply:
- The beneficiary is entitled to receive a portion of the net income equal to the beneficiary's fractional interest in the undistributed principal assets immediately before the distribution date, including assets that later may be sold to meet principal obligations.
- The beneficiary's fractional interest in the undistributed principal assets must be calculated without regard to property specifically given to a beneficiary and property required to pay pecuniary amounts not in trust.
- The beneficiary's fractional interest in the undistributed principal assets must be calculated on the basis of the aggregate value of those assets as of the distribution date without reducing the value by any unpaid principal obligation.
- The distribution date for purposes of this section may be the date as of which the fiduciary calculates the value of the assets if that date is reasonably near the date on which assets are actually distributed.
- If a fiduciary does not distribute all of the collected but undistributed net income to each person as of a distribution date, the fiduciary shall maintain appropriate records showing the interest of each beneficiary in that net income.
- A fiduciary may apply the rules in this section, to the extent that the fiduciary considers it appropriate, to net gain or loss realized after the date of death or terminating event or earlier distribution date from the disposition of a principal asset if this section applies to the income from the asset.
Source: L. 2000: Entire part R&RE, p. 1135, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Relationship to prior Acts. Section 15-1-407 retains the concept in Section 5(b)(2) of the 1962 Uniform Act that the residuary legatees of estates are to receive net income earned during the period of administration on the basis of their proportionate interests in the undistributed assets when distributions are made. It changes the basis for determining their proportionate interests by using asset values as of a date reasonably near the time of distribution instead of inventory values; it extends the application of these rules to distributions from terminating trusts; and it extends these rules to gain or loss realized from the disposition of assets during administration, an omission in the 1962 Uniform Act that has been noted by several commentators. See, e.g., Richard B. Covey, Marital Deduction and Credit Shelter Dispositions and the Use of Formula Provisions 91 (4th ed. 1998); Thomas H. Cantrill, Fractional or Percentage Residuary Bequests: Allocation of Postmortem Income, Gain and Unrealized Appreciation, 10 Prob. Notes 322, 327 (1985).
SUBPART 3 APPORTIONMENT AT BEGINNING AND END OF INCOME INTEREST
Cross references: For information concerning the effective date of this subpart 3, see § 15-1-434.
15-1-408. When right to income begins and ends.
- An income beneficiary is entitled to net income from the date on which the income interest begins. An income interest begins on the date specified in the terms of the trust or, if no date is specified, on the date an asset becomes subject to a trust or successive income interest.
-
An asset becomes subject to a trust:
- On the date it is transferred to the trust in the case of an asset that is transferred to a trust during the transferor's life;
- On the date of a testator's death in the case of an asset that becomes subject to a trust by reason of a will, even if there is an intervening period of administration of the testator's estate; or
- On the date of an individual's death in the case of an asset that is transferred to a fiduciary by a third party because of the individual's death.
- An asset becomes subject to a successive income interest on the day after the preceding income interest ends, as determined under subsection (4) of this section, even if there is an intervening period of administration to wind up the preceding income interest.
- An income interest ends on the day before an income beneficiary dies or another terminating event occurs, or on the last day of a period during which there is no beneficiary to whom a trustee may distribute income.
Source: L. 2000: Entire part R&RE, p. 1136, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Period during which there is no beneficiary. The purpose of the second part of subsection (4) is to provide that, at the end of a period during which there is no beneficiary to whom a trustee may distribute income, the trustee must apply the same apportionment rules that apply when a mandatory income interest ends. This provision would apply, for example, if a settlor creates a trust for grandchildren before any grandchildren are born. When the first grandchild is born, the period preceding the date of birth is treated as having ended, followed by a successive income interest, and the apportionment rules in Sections 15-1-409 and 15-1-410 apply accordingly if the terms of the trust do not contain different provisions.
15-1-409. Apportionment of receipts and disbursements when decedent dies or income interest begins.
- A trustee shall allocate an income receipt or disbursement, other than one to which section 15-1-406 (1)(a) applies, to principal if its due date occurs before a decedent dies in the case of an estate or before an income interest begins in the case of a trust or successive income interest.
- A trustee shall allocate an income receipt or disbursement to income if its due date occurs on or after the date on which a decedent dies or an income interest begins and it is a periodic due date. An income receipt or disbursement must be treated as accruing from day to day if its due date is not periodic or it has no due date. The portion of the receipt or disbursement accruing before the date on which a decedent dies or an income interest begins must be allocated to principal and the balance must be allocated to income.
- An item of income or an obligation is due on the date the payer is required to make a payment. If a payment date is not stated, there is no due date for the purposes of subparts 1 through 6 of this part 4. Distributions to shareholders or other owners from an entity to which section 15-1-411 applies are deemed to be due on the date fixed by the entity for determining who is entitled to receive the distribution or, if no date is fixed, on the declaration date for the distribution. A due date is periodic for receipts or disbursements that must be paid at regular intervals under a lease or an obligation to pay interest or if an entity customarily makes distributions at regular intervals.
Source: L. 2000: Entire part R&RE, p. 1137, § 1, effective July 1, 2001. L. 2009: (3) amended, (HB 09-1241), ch. 169, p. 744, § 6, effective April 22.
OFFICIAL COMMENT
Prior Acts. Professor Bogert stated that "Section 4 of the [1962] Act makes a change with respect to the apportionment of the income of trust property not due until after the trust began but which accrued in part before the commencement of the trust. It treats such income as to be credited entirely to the income account in the case of a living trust, but to be apportioned between capital and income in the case of a testamentary trust. The [1931] Act apportions such income in the case of both types of trusts, except in the case of corporate dividends." George G. Bogert, The Revised Uniform Principal and Income Act, 38 Notre Dame Law. 50, 52 (1962). The 1962 Uniform Act also provides that an asset passing to an inter vivos trust by a bequest in the settlor's will is governed by the rule that applies to a testamentary trust, so that different rules apply to assets passing to an inter vivos trust depending upon whether they were transferred to the trust during the settlor's life or by his will.
Having several different rules that apply to similar transactions is confusing. In order to simplify administration, Section 15-1-409 applies the same rule to inter vivos trusts (revocable and irrevocable), testamentary trusts, and assets that become subject to an inter vivos trust by a testamentary bequest.
Periodic payments. Under Section 15-1-402, a periodic payment is principal if it is due but unpaid before a decedent dies or before an asset becomes subject to a trust, but the next payment is allocated entirely to income and is not apportioned. Thus, periodic receipts such as rents, dividends, interest, and annuities, and disbursements such as the interest portion of a mortgage payment, are not apportioned. This is the original common law rule. Edwin A. Howes, Jr., The American Law Relating to Income and Principal 70 (1905). In trusts in which a surviving spouse is dependent upon a regular flow of cash from the decedent's securities portfolio, this rule will help to maintain payments to the spouse at the same level as before the settlor's death. Under the 1962 Uniform Act, the pre-death portion of the first periodic payment due after death is apportioned to principal in the case of a testamentary trust or securities bequeathed by will to an inter vivos trust.
Nonperiodic payments. Under the second sentence of Section 15-1-409 (2), interest on an obligation that does not provide a due date for the interest payment, such as interest on an income tax refund, would be apportioned to principal to the extent it accrues before a person dies or an income interest begins unless the obligation is specifically given to a devisee or remainder beneficiary, in which case all of the accrued interest passes under Section 15-1-406 (1)(a) to the person who receives the obligation. The same rule applies to interest on an obligation that has a due date but does not provide for periodic payments. If there is no stated interest on the obligation, such as a zero coupon bond, and the proceeds from the obligation are received more than one year after it is purchased or acquired by the trustee, the entire amount received is principal under Section 15-1-416.
15-1-410. Apportionment when income interest ends.
- For the purposes of this section, "undistributed income" means net income received before the date on which an income interest ends. The term does not include an item of income or expense that is due or accrued or net income that has been added or is required to be added to principal under the terms of the trust.
- When a mandatory income interest ends, the trustee shall pay to a mandatory income beneficiary who survives that date, or the estate of a deceased mandatory income beneficiary whose death causes the interest to end, the beneficiary's share of the undistributed income that is not disposed of under the terms of the trust unless the beneficiary has an unqualified power to revoke more than five percent of the trust immediately before the income interest ends. In the latter case, the undistributed income from the portion of the trust that may be revoked must be added to principal.
- When a trustee's obligation to pay a fixed annuity or a fixed fraction of the value of the trust's assets ends, the trustee shall prorate the final payment if and to the extent required by applicable law to accomplish a purpose of the trust or its settlor relating to income, gift, estate, or other tax requirements.
Source: L. 2000: Entire part R&RE, p. 1137, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Prior Acts. Both the 1931 Uniform Act (Section 4) and the 1962 Uniform Act (Section 4(d)) provide that a deceased income beneficiary's estate is entitled to the undistributed income. The Drafting Committee concluded that this is probably not what most settlors would want, and that, with respect to undistributed income, most settlors would favor the income beneficiary first, the remainder beneficiaries second, and the income beneficiary's heirs last, if at all. However, it decided not to eliminate this provision to avoid causing disputes about whether the trustee should have distributed collected cash before the income beneficiary died.
Accrued periodic payments. Under the prior Uniform Acts, an income beneficiary or his estate is entitled to receive a portion of any payments, other than dividends, that are due or that have accrued when the income interest terminates. The last sentence of subsection (1) changes that rule by providing that such items are not included in undistributed income. The items affected include periodic payments of interest, rent, and dividends, as well as items of income that accrue over a longer period of time; the rule also applies to expenses that are due or accrued.
Example -- accrued periodic payments. The rules in Section 15-1-409 and Section 15-1-410 work in the following manner: Assume that a periodic payment of rent that is due on July 20 has not been paid when an income interest ends on July 30; the successive income interest begins on July 31, and the rent payment that was due on July 20 is paid on August 3. Under Section 15-1-409 (1), the July 20 payment is added to the principal of the successive income interest when received. Under Section 15-1-409 (2), the entire periodic payment of rent that is due on August 20 is income when received by the successive income interest. Under Section 15-1-410, neither the income beneficiary of the terminated income interest nor the beneficiary's estate is entitled to any part of either the July 20 or the August 20 payments because neither one was received before the income interest ended on July 30. The same principles apply to expenses of the trust.
Beneficiary with an unqualified power to revoke. The requirement in subsection (2) to pay undistributed income to a mandatory income beneficiary or her estate does not apply to the extent the beneficiary has an unqualified power to revoke more than five percent of the trust immediately before the income interest ends. Without this exception, subsection (2) would apply to a revocable living trust whose settlor is the mandatory income beneficiary during her lifetime, even if her will provides that all of the assets in the probate estate are to be distributed to the trust.
If a trust permits the beneficiary to withdraw all or a part of the trust principal after attaining a specified age and the beneficiary attains that age but fails to withdraw all of the principal that she is permitted to withdraw, a trustee is not required to pay her or her estate the undistributed income attributable to the portion of the principal that she left in the trust. The assumption underlying this rule is that the beneficiary has either provided for the disposition of the trust assets (including the undistributed income) by exercising a power of appointment that she has been given or has not withdrawn the assets because she is willing to have the principal and undistributed income be distributed under the terms of the trust. If the beneficiary has the power to withdraw 25% of the trust principal, the trustee must pay to her or her estate the undistributed income from the 75% that she cannot withdraw.
SUBPART 4 ALLOCATION OF RECEIPTS DURING ADMINISTRATION OF TRUST
Cross references: For information concerning the effective date of this subpart 4, see § 15-1-434.
15-1-411. Character of receipts.
- For the purposes of this section, "entity" means a corporation, partnership, limited liability company, regulated investment company, real estate investment trust, common trust fund, or any other organization in which a trustee has an interest other than a trust or estate governed by section 15-1-412, a business or activity governed by section 15-1-413, or an asset-backed security governed by section 15-1-425.
- Except as otherwise provided in this section, a trustee shall allocate to income money received from an entity.
-
A trustee shall allocate the following receipts from an entity to principal:
- Property other than money;
- Money received in one distribution or a series of related distributions in exchange for part or all of a trust's interest in the entity;
- Money received in total or partial liquidation of the entity; and
- Money received from an entity that is a regulated investment company or a real estate investment trust if the money distributed is a capital gain dividend for federal income tax purposes.
-
Money is received in partial liquidation:
- To the extent that the entity, at or near the time of a distribution, indicates that it is a distribution in partial liquidation; or
- If the total amount of money and property received in a distribution or series of related distributions is greater than twenty percent of the entity's gross assets, as shown by the entity's year-end financial statements immediately preceding the initial receipt.
- Money is not received in partial liquidation, nor may it be taken into account under paragraph (b) of subsection (4) of this section, to the extent that it does not exceed the amount of income tax that a trustee or beneficiary must pay on taxable income of the entity that distributes the money.
- A trustee may rely upon a statement made by an entity about the source or character of a distribution if the statement is made at or near the time of distribution by the entity's board of directors or other person or group of persons authorized to exercise powers to pay money or transfer property comparable to those of a corporation's board of directors.
Source: L. 2000: Entire part R&RE, p. 1138, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Entities to which Section 15-1-411 applies. The reference to partnerships in Section 15-1-411 (1) is intended to include all forms of partnerships, including limited partnerships, limited liability partnerships, and variants that have slightly different names and characteristics from State to State. The section does not apply, however, to receipts from an interest in property that a trust owns as a tenant in common with one or more co-owners, nor would it apply to an interest in a joint venture if, under applicable law, the trust's interest is regarded as that of a tenant in common.
Capital gain dividends. Under the Internal Revenue Code and the Income Tax Regulations, a "capital gain dividend" from a mutual fund or real estate investment trust is the excess of the fund's or trust's net long-term capital gain over its net short-term capital loss. As a result, a capital gain dividend does not include any net short-term capital gain, and cash received by a trust because of a net short-term capital gain is income under this Act.
Reinvested dividends. If a trustee elects (or continues an election made by its predecessor) to reinvest dividends in shares of stock of a distributing corporation or fund, whether evidenced by new certificates or entries on the books of the distributing entity, the new shares would be principal. Making or continuing such an election would be equivalent to deciding under Section 15-1-404 to transfer income to principal in order to comply with Section 15-1-403 (2). However, if the trustee makes or continues the election for a reason other than to comply with Section 15-1-403 (2), e.g., to make an investment without incurring brokerage commissions, the trustee should transfer cash from principal to income in an amount equal to the reinvested dividends.
Distribution of property. The 1962 Uniform Act describes a number of types of property that would be principal if distributed by a corporation. This becomes unwieldy in a section that applies to both corporations and all other entities. By stating that principal includes the distribution of any property other than money, Section 15-1-411 embraces all of the items enumerated in Section 6 of the 1962 Uniform Act as well as any other form of nonmonetary distribution not specifically mentioned in that Act.
Partial liquidations. Under subsection (4)(a), any distribution designated by the entity as a partial liquidating distribution is principal regardless of the percentage of total assets that it represents. If a distribution exceeds 20% of the entity's gross assets, the entire distribution is a partial liquidation under subsection (4)(b) whether or not the entity describes it as a partial liquidation. In determining whether a distribution is greater than 20% of the gross assets, the portion of the distribution that does not exceed the amount of income tax that the trustee or a beneficiary must pay on the entity's taxable income is ignored.
Other large distributions. A cash distribution may be quite large (for example, more than 10% but not more than 20% of the entity's gross assets) and have characteristics that suggest it should be treated as principal rather than income. For example, an entity may have received cash from a source other than the conduct of its normal business operations because it sold an investment asset; or because it sold a business asset other than one held for sale to customers in the normal course of its business and did not replace it; or it borrowed a large sum of money and secured the repayment of the loan with a substantial asset; or a principal source of its cash was from assets such as mineral interests, 90% of which would have been allocated to principal if the trust had owned the assets directly. In such a case the trustee, after considering the total return from the portfolio as a whole and the income component of that return, may decide to exercise the power under Section 15-1-404 (1) to make an adjustment between income and principal, subject to the limitations in Section 15-1-404 (3).
15-1-412. Distribution from trust or estate.
A trustee shall allocate to income an amount received as a distribution of income from a trust or an estate in which the trust has an interest other than a purchased interest, and shall allocate to principal an amount received as a distribution of principal from such a trust or estate. If a trustee purchases an interest in a trust that is an investment entity, or a decedent or donor transfers an interest in such a trust to a trustee, section 15-1-411 or section 15-1-425 shall apply to a receipt from the trust.
Source: L. 2000: Entire part R&RE, p. 1139, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Terms of the distributing trust or estate. Under Section 15-1-403 (1), a trustee is to allocate receipts in accordance with the terms of the recipient trust or, if there is no provision, in accordance with this Act. However, in determining whether a distribution from another trust or an estate is income or principal, the trustee should also determine what the terms of the distributing trust or estate say about the distribution -- for example, whether they direct that the distribution, even though made from the income of the distributing trust or estate, is to be added to principal of the recipient trust. Such a provision should override the terms of this Act, but if the terms of the recipient trust contain a provision requiring such a distribution to be allocated to income, the trustee may have to obtain a judicial resolution of the conflict between the terms of the two documents.
Investment trusts. An investment entity to which the second sentence of this section applies includes a mutual fund, a common trust fund, a business trust or other entity organized as a trust for the purpose of receiving capital contributed by investors, investing that capital, and managing investment assets, including asset-backed security arrangements to which Section 15-1-425 applies. See John H. Langbein, The Secret Life of the Trust: The Trust as an Instrument of Commerce, 107 Yale L.J. 165 (1997).
15-1-413. Business and other activities conducted by trustee.
- If a trustee who conducts a business or other activity determines that it is in the best interest of all the beneficiaries to account separately for the business or activity instead of accounting for it as part of the trust's general accounting records, the trustee may maintain separate accounting records for its transactions, whether or not its assets are segregated from other trust assets.
- A trustee who accounts separately for a business or other activity may determine the extent to which its net cash receipts must be retained for working capital, the acquisition or replacement of fixed assets, and other reasonably foreseeable needs of the business or activity, and the extent to which the remaining net cash receipts are accounted for as principal or income in the trust's general accounting records. If a trustee sells assets of the business or other activity, other than in the ordinary course of the business or activity, the trustee shall account for the net amount received as principal in the trust's general accounting records to the extent the trustee determines that the amount received is no longer required in the conduct of the business.
-
Activities for which a trustee may maintain separate accounting records include:
- Retail, manufacturing, service, and other traditional business activities;
- Farming;
- Raising and selling livestock and other animals;
- Management of rental properties;
- Extraction of minerals and other natural resources;
- Timber operations; and
- Activities governed by section 15-1-424.
Source: L. 2000: Entire part R&RE, p. 1139, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Purpose and scope. The provisions in Section 15-1-413 are intended to give greater flexibility to a trustee who operates a business or other activity in proprietorship form rather than in a wholly-owned corporation (or, where permitted by state law, a single-member limited liability company), and to facilitate the trustee's ability to decide the extent to which the net receipts from the activity should be allocated to income, just as the board of directors of a corporation owned entirely by the trust would decide the amount of the annual dividend to be paid to the trust. It permits a trustee to account for farming or livestock operations, rental properties, oil and gas properties, timber operations, and activities in derivatives and options as though they were held by a separate entity. It is not intended, however, to permit a trustee to account separately for a traditional securities portfolio to avoid the provisions of this Act that apply to such securities.
Section 15-1-413 permits the trustee to account separately for each business or activity for which the trustee determines separate accounting is appropriate. A trustee with a computerized accounting system may account for these activities in a "subtrust"; an individual trustee may continue to use the business and record-keeping methods employed by the decedent or transferor who may have conducted the business under an assumed name. The intent of this section is to give the trustee broad authority to select business record-keeping methods that best suit the activity in which the trustee is engaged.
If a fiduciary liquidates a sole proprietorship or other activity to which Section 15-1-413 applies, the proceeds would be added to principal, even though derived from the liquidation of accounts receivable, because the proceeds would no longer be needed in the conduct of the business. If the liquidation occurs during probate or during an income interest's winding up period, none of the proceeds would be income for purposes of Section 15-1-406.
Separate accounts. A trustee may or may not maintain separate bank accounts for business activities that are accounted for under Section 15-1-413. A professional trustee may decide not to maintain separate bank accounts, but an individual trustee, especially one who has continued a decedent's business practices, may continue the same banking arrangements that were used during the decedent's lifetime. In either case, the trustee is authorized to decide to what extent cash is to be retained as part of the business assets and to what extent it is to be transferred to the trust's general accounts, either as income or principal.
15-1-414. Principal receipts.
-
A trustee shall allocate to principal:
- To the extent not allocated to income under subparts 1 through 6 of this part 4, assets received from a transferor during the transferor's lifetime, a decedent's estate, a trust with a terminating income interest, or a payer under a contract naming the trust or its trustee as beneficiary;
- Money or other property received from the sale, exchange, liquidation, or change in form of a principal asset, including realized profit, subject to this subpart 4;
- Amounts recovered from third parties to reimburse the trust because of disbursements described in section 15-1-427 (1)(g) or for other reasons to the extent not based on the loss of income;
- Proceeds of property taken by eminent domain, but a separate award made for the loss of income with respect to an accounting period during which a current income beneficiary had a mandatory income interest is income;
- Net income received in an accounting period during which there is no beneficiary to whom a trustee may or must distribute income; and
- Other receipts as provided in sections 15-1-418 to 15-1-425.
Source: L. 2000: Entire part R&RE, p. 1139, § 1, effective July 1, 2001. L. 2009: (1)(a) amended, (HB 09-1241), ch. 169, p. 744, § 7, effective April 22.
OFFICIAL COMMENT
Eminent domain awards. Even though the award in an eminent domain proceeding may include an amount for the loss of future rent on a lease, if that amount is not separately stated the entire award is principal. The rule is the same in the 1931 and 1962 Uniform Acts.
15-1-415. Rental property.
To the extent that a trustee accounts for receipts from rental property pursuant to this section, the trustee shall allocate to income an amount received as rent of real or personal property, including an amount received for cancellation or renewal of a lease. An amount received as a refundable deposit, including a security deposit or a deposit that is to be applied as rent for future periods, must be added to principal and held subject to the terms of the lease and is not available for distribution to a beneficiary until the trustee's contractual obligations have been satisfied with respect to that amount.
Source: L. 2000: Entire part R&RE, p. 1140, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Application of Section 15-1-415. This section applies to the extent that the trustee does not account separately under Section 15-1-415 for the management of rental properties owned by the trust.
Receipts that are capital in nature. A portion of the payment under a lease may be a reimbursement of principal expenditures for improvements to the leased property that is characterized as rent for purposes of invoking contractual or statutory remedies for nonpayment. If the trustee is accounting for rental income under Section 15-1-415, a transfer from income to reimburse principal may be appropriate under Section 15-1-429 to the extent that some of the "rent" is really a reimbursement for improvements. This set of facts could also be a relevant factor for a trustee to consider under Section 15-1-404 (2) in deciding whether and to what extent to make an adjustment between principal and income under Section 15-1-404 (2) after considering the return from the portfolio as a whole.
15-1-416. Obligation to pay money.
- An amount received as interest, whether determined at a fixed, variable, or floating rate, on an obligation to pay money to the trustee, including an amount received as consideration for prepaying principal, must be allocated to income without any provision for amortization of premium.
- A trustee shall allocate to principal an amount received from the sale, redemption, or other disposition of an obligation to pay money to the trustee more than one year after it is purchased or acquired by the trustee, including an obligation whose purchase price or value when it is acquired is less than its value at maturity. If the obligation matures within one year after it is purchased or acquired by the trustee, an amount received in excess of its purchase price or its value when acquired by the trust must be allocated to income.
- This section shall not apply to an obligation to which the provisions of section 15-1-419, 15-1-420, 15-1-421, 15-1-422, 15-1-424, or 15-1-425 applies.
Source: L. 2000: Entire part R&RE, p. 1140, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Variable or floating interest rates. The reference in subsection (1) to variable or floating interest rate obligations is intended to clarify that, even though an obligation's interest rate may change from time to time based upon changes in an index or other market indicator, an obligation to pay money containing a variable or floating rate provision is subject to this section and is not to be treated as a derivative financial instrument under Section 15-1-424.
Discount obligations. Subsection (2) applies to all obligations acquired at a discount, including short-term obligations such as U.S. Treasury Bills, long-term obligations such as U.S. Savings Bonds, zero-coupon bonds, and discount bonds that pay interest during part, but not all, of the period before maturity. Under subsection (2), the entire increase in value of these obligations is principal when the trustee receives the proceeds from the disposition unless the obligation, when acquired, has a maturity of less than one year. In order to have one rule that applies to all discount obligations, the Act eliminates the provision in the 1962 Uniform Act for the payment from principal of an amount equal to the increase in the value of U.S. Series E bonds. The provision for bonds that mature within one year after acquisition by the trustee is derived from the Illinois act. 760 ILCS 15/8 (1996).
Subsection (2) also applies to inflation-indexed bonds -- any increase in principal due to inflation after issuance is principal upon redemption if the bond matures more than one year after the trustee acquires it; if it matures within one year, all of the increase, including any attributable to an inflation adjustment, is income.
Effect of Section 15-1-404. In deciding whether and to what extent to exercise the power to adjust between principal and income granted by Section 15-1-404 (1), a relevant factor for the trustee to consider is the effect on the portfolio as a whole of having a portion of the assets invested in bonds that do not pay interest currently.
15-1-417. Insurance policies and similar contracts.
- Except as otherwise provided in subsection (2) of this section, a trustee shall allocate to principal the proceeds of a life insurance policy or other contract in which the trust or its trustee is named as beneficiary, including a contract that insures the trust or its trustee against loss for damage to, destruction of, or loss of title to a trust asset. The trustee shall allocate dividends on an insurance policy to income if the premiums on the policy are paid from income, and to principal if the premiums are paid from principal.
- A trustee shall allocate to income proceeds of a contract that insures the trustee against loss of occupancy or other use by an income beneficiary, loss of income, or, subject to section 15-1-413, loss of profits from a business.
- This section shall not apply to a contract governed by the provisions of section 15-1-419.
Source: L. 2000: Entire part R&RE, p. 1140, § 1, effective July 1, 2001.
15-1-418. Insubstantial allocations not required.
-
If a trustee determines that an allocation between principal and income required by the provisions of sections 15-1-419 to 15-1-422 or section 15-1-425 is insubstantial, the trustee may allocate the entire amount to principal unless one of the circumstances
described in section 15-1-404 (3) applies to the allocation. This power may be exercised by a cotrustee in the circumstances described in section 15-1-404 (4) and may be released for the reasons and in the manner described in section
15-1-404 (5). An allocation is presumed to be insubstantial if:
- The amount of the allocation would increase or decrease net income in an accounting period, as determined before the allocation, by less than ten percent; or
- The value of the asset producing the receipt for which the allocation would be made is less than ten percent of the total value of the trust's assets at the beginning of the accounting period.
Source: L. 2000: Entire part R&RE, p. 1141, § 1, effective July 1, 2001.
OFFICIAL COMMENT
This section is intended to relieve a trustee from making relatively small allocations while preserving the trustee's right to do so if an allocation is large in terms of absolute dollars.
For example, assume that a trust's assets, which include a working interest in an oil well, have a value of $1,000,000; the net income from the assets other than the working interest is $40,000; and the net receipts from the working interest are $400. The trustee may allocate all of the net receipts from the working interest to principal instead of allocating 10%, or $40, to income under Section 15-1-421. If the net receipts from the working interest are $35,000, so that the amount allocated to income under Section 15-1-421 would be $3,500, the trustee may decide that this amount is sufficiently significant to the income beneficiary that the allocation provided for by Section 15-1-421 should be made, even though the trustee is still permitted under Section 15-1-418 to allocate all of the net receipts to principal because the $3,500 would increase the net income of $40,000, as determined before making an allocation under Section 15-1-421, by less than 10%. Section 15-1-418 will also relieve a trustee from having to allocate net receipts from the sale of trees in a small woodlot between principal and income.
While the allocation to principal of small amounts under this section should not be a cause for concern for tax purposes, allocations are not permitted under this section in circumstances described in Section 15-1-404 (3) to eliminate claims that the power in this section has adverse tax consequences.
15-1-419. Deferred compensation, annuities, and similar payments.
-
For purposes of this section:
- "Payment" means a payment that a trustee may receive over a fixed number of years or during the life of one or more individuals because of services rendered or property transferred to the payer in exchange for future payments. The term includes a payment made in money or property from the payer's general assets or from a separate fund created by the payer. For purposes of subsections (4) to (7) of this section, "payment" also includes any payment from any separate fund, regardless of the reason for the payment.
- "Separate fund" includes a private or commercial annuity, an individual retirement account, and a pension, profit-sharing, stock-bonus, or stock-ownership plan.
- To the extent that a payment is characterized as interest, a dividend, or a payment made in lieu of interest or a dividend, a trustee shall allocate the payment to income. The trustee shall allocate to principal the balance of the payment and any other payment received in the same accounting period that is not characterized as interest, a dividend, or an equivalent payment.
- If no part of a payment is characterized as interest, a dividend, or an equivalent payment, and all or part of the payment is required to be made, a trustee shall allocate to income ten percent of the part that is required to be made during the accounting period and the balance to principal. If no part of a payment is required to be made or the payment received is the entire amount to which the trustee is entitled, the trustee shall allocate the entire payment to principal. For purposes of this subsection (3), a payment is not required to be made to the extent that it is made because the trustee exercises a right of withdrawal.
-
Except as otherwise provided in subsection (5) of this section, subsections (6) and (7) of this section apply, and subsections (2) and (3) do not apply, in determining the allocation of a payment made from a separate fund to:
- A trust to which an election to qualify for a marital deduction under 26 U.S.C. sec. 2056 (b)(7), as amended, has been made; or
- A trust that qualifies for the marital deduction under 26 U.S.C. sec. 2056 (b)(5), as amended.
- Subsections (4), (6), and (7) of this section do not apply if and to the extent that the series of payments would, without application of said subsection (4), qualify for the marital deduction under 26 U.S.C. sec. 2056 (b)(7)(C), as amended.
- A trustee shall determine the internal income of each separate fund for the accounting period as if the separate fund were a trust subject to this part 4. Upon request of the surviving spouse, the trustee shall demand that the person administering the separate fund distribute the internal income to the trust. The trustee shall allocate a payment from the separate fund to income to the extent of the internal income of the separate fund and distribute that amount to the surviving spouse. The trustee shall allocate the balance of the payment to principal. Upon request of the surviving spouse, the trustee shall allocate principal to income to the extent the internal income of the separate fund exceeds payments made from the separate fund to the trust during the accounting period.
- If a trustee cannot determine the internal income of a separate fund but can determine the value of the separate fund, the internal income of the separate fund is deemed to equal four percent of the fund's value, according to the most recent statement of value preceding the beginning of the accounting period. If the trustee can determine neither the internal income of the separate fund nor the fund's value, the internal income of the fund is deemed to equal the product of the interest rate and the present value of the expected future payments, as determined under 26 U.S.C. sec. 7520, as amended, for the month preceding the accounting period for which the computation is made.
- This section does not apply to a payment governed by the provisions of section 15-1-420.
Source: L. 2000: Entire part R&RE, p. 1141, § 1, effective July 1, 2001. L. 2009: Entire section amended, (SB 09-139), ch. 131, p. 565, § 1, effective April 16.
OFFICIAL COMMENT
Scope. Section 15-1-419 applies to amounts received under contractual arrangements that provide for payments to a third party beneficiary as a result of services rendered or property transferred to the payer. While the right to receive such payments is a liquidating asset of the kind described in Section 15-1-420 (i.e., "an asset whose value will diminish or terminate because the asset is expected to produce receipts for a period of limited duration"), these payment rights are covered separately in Section 15-1-419 because of their special characteristics.
Section 15-1-419 applies to receipts from all forms of annuities and deferred compensation arrangements, whether the payment will be received by the trust in a lump sum or in installments over a period of years. It applies to bonuses that may be received over two or three years and payments that may last for much longer periods, including payments from an individual retirement account (IRA), deferred compensation plan (whether qualified or not qualified for special federal income tax treatment), and insurance renewal commissions. It applies to a retirement plan to which the settlor has made contributions, just as it applies to an annuity policy that the settlor may have purchased individually, and it applies to variable annuities, deferred annuities, annuities issued by commercial insurance companies, and "private annuities" arising from the sale of property to another individual or entity in exchange for payments that are to be made for the life of one or more individuals. The section applies whether the payments begin when the payment right becomes subject to the trust or are deferred until a future date, and it applies whether payments are made in cash or in kind, such as employer stock (in-kind payments usually will be made in a single distribution that will be allocated to principal under the second sentence of subsection (3)).
The 1962 Uniform Act. Under Section 12 of the 1962 Uniform Act, receipts from "rights to receive payments on a contract for deferred compensation" are allocated to income each year in an amount "not in excess of 5% per year" of the property's inventory value. While "not in excess of 5%" suggests that the annual allocation may range from zero to 5% of the inventory value, in practice the rule is usually treated as prescribing a 5% allocation. The inventory value is usually the present value of all the future payments, and since the inventory value is determined as of the date on which the payment right becomes subject to the trust, the inventory value, and thus the amount of the annual income allocation, depends significantly on the applicable interest rate on the decedent's date of death. That rate may be much higher or lower than the average long-term interest rate. The amount determined under the 5% formula tends to become fixed and remain unchanged even though the amount received by the trust increases or decreases.
Allocations Under Section 15-1-419 (2). Section 15-1-419 (2) applies to plans whose terms characterize payments made under the plan as dividends, interest, or payments in lieu of dividends or interest. For example, some deferred compensation plans that hold debt obligations or stock of the plan's sponsor in an account for future delivery to the person rendering the services provide for the annual payment to that person of dividends received on the stock or interest received on the debt obligations. Other plans provide that the account of the person rendering the services shall be credited with "phantom" shares of stock and require an annual payment that is equivalent to the dividends that would be received on that number of shares if they were actually issued; or a plan may entitle the person rendering the services to receive a fixed dollar amount in the future and provide for the annual payment of interest on the deferred amount during the period prior to its payment. Under Section 15-1-419 (2), payments of dividends, interest or payments in lieu of dividends or interest under plans of this type are allocated to income; all other payments received under these plans are allocated to principal.
Section 15-1-419 (2) does not apply to an IRA or an arrangement with payment provisions similar to an IRA. IRAs and similar arrangements are subject to the provisions in Section 15-1-419 (3).
Allocations Under Section 15-1-419 (3). The focus of Section 15-1-419, for purposes of allocating payments received by a trust to or between principal and income, is on the payment right rather than on assets that may be held in a fund from which the payments are made. Thus, if an IRA holds a portfolio of marketable stocks and bonds, the amount received by the IRA as dividends and interest is not taken into account in determining the principal and income allocation except to the extent that the Internal Revenue Service may require them to be taken into account when the payment is received by a trust that qualifies for the estate tax marital deduction (a situation that is provided for in Section 15-1-419 (4)). An IRA is subject to federal income tax rules that require payments to begin by a particular date and be made over a specific number of years or a period measured by the lives of one or more persons. The payment right of a trust that is named as a beneficiary of an IRA is not a right to receive particular items that are paid to the IRA, but is instead the right to receive an amount determined by dividing the value of the IRA by the remaining number of years in the payment period. This payment right is similar to the right to receive a unitrust amount, which is normally expressed as an amount equal to a percentage of the value of the unitrust assets without regard to dividends or interest that may be received by the unitrust.
An amount received from an IRA or a plan with a payment provision similar to that of an IRA is allocated under Section 15-1-419 (3), which differentiates between payments that are required to be made and all other payments. To the extent that a payment is required to be made (either under federal income tax rules or, in the case of a plan that is not subject to those rules, under the terms of the plan), 10% of the amount received is allocated to income and the balance is allocated to principal. All other payments are allocated to principal because they represent a change in the form of a principal asset; Section 15-1-419 follows the rule in Section 15-1-414 (1)(b), which provides that money or property received from a change in the form of a principal asset be allocated to principal.
Section 15-1-419 (3) produces an allocation to income that is similar to the allocation under the 1962 Uniform Act formula if the annual payments are the same throughout the payment period, and it is simpler to administer. The amount allocated to income under Section 15-1-419 is not dependent upon the interest rate that is used for valuation purposes when the decedent dies, and if the payments received by the trust increase or decrease from year to year because the fund from which the payment is made increases or decreases in value, the amount allocated to income will also increase or decrease.
Marital deduction requirements. When an IRA is payable to a QTIP marital deduction trust, the IRS treats the IRA as separate terminable interest property and requires that a QTIP election be made for it. In order to qualify for QTIP treatment, an IRS ruling states that all of the IRA's income must be distributed annually to the QTIP marital deduction trust and then must be allocated to trust income for distribution to the spouse. Rev. Rul. 89-89, 1989-2 C.B. 231. If an allocation to income under this Act of 10% of the required distribution from the IRA does not meet the requirement that all of the IRA's income be distributed from the trust to the spouse, the provision in subsection (4) requires the trustee to make a larger allocation to income to the extent necessary to qualify for the marital deduction. The requirement of Rev. Rul. 89-89 should also be satisfied if the IRA beneficiary designation permits the spouse to require the trustee to withdraw the necessary amount from the IRA and distribute it to her, even though the spouse never actually requires the trustee to do so. If such a provision is in the beneficiary designation, a distribution under subsection (4) should not be necessary.
Application of Section 15-1-414. Section 15-1-414 (1) of this Act gives a trustee who is acting under the prudent investor rule the power to adjust from principal to income if, considering the portfolio as a whole and not just receipts from deferred compensation, the trustee determines that an adjustment is necessary. See Example (5) in the Comment following Section 15-1-414.
15-1-420. Liquidating asset.
- For purposes of this section, "liquidating asset" means an asset whose value will diminish or terminate because the asset is expected to produce receipts for a period of limited duration. The term includes a leasehold, patent, copyright, royalty right, and right to receive payments during a period of more than one year under an arrangement that does not provide for the payment of interest on the unpaid balance. The term does not include a payment subject to section 15-1-419, resources subject to section 15-1-421, timber subject to section 15-1-422, an activity subject to section 15-1-424, an asset subject to section 15-1-425, or any asset for which the trustee establishes a reserve for depreciation under section 15-1-428.
- A trustee shall allocate to income ten percent of the receipts from a liquidating asset and the balance to principal.
Source: L. 2000: Entire part R&RE, p. 1142, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Prior Acts. Section 11 of the 1962 Uniform Act allocates receipts from "property subject to depletion" to income in an amount "not in excess of 5%" of the asset's inventory value. The 1931 Uniform Act has a similar 5% rule that applies when the trustee is under a duty to change the form of the investment. The 5% rule imposes on a trust the obligation to pay a fixed annuity to the income beneficiary until the asset is exhausted. Under both the 1931 and 1962 Uniform Acts the balance of each year's receipts is added to principal. A fixed payment can produce unfair results. The remainder beneficiary receives all of the receipts from unexpected growth in the asset, e.g., if royalties on a patent or copyright increase significantly. Conversely, if the receipts diminish more rapidly than expected, most of the amount received by the trust will be allocated to income and little to principal. Moreover, if the annual payments remain the same for the life of the asset, the amount allocated to principal will usually be less than the original inventory value. For these reasons, Section 15-1-420 abandons the annuity approach under the 5% rule.
Lottery payments. The reference in subsection (1) to rights to receive payments under an arrangement that does not provide for the payment of interest includes state lottery prizes and similar fixed amounts payable over time that are not deferred compensation arrangements covered by Section 15-1-419.
15-1-421. Minerals, water, and other natural resources.
-
To the extent that a trustee accounts for receipts from an interest in minerals or other natural resources pursuant to this section, the trustee shall allocate them as follows:
- If received as nominal delay rental or nominal annual rent on a lease, a receipt must be allocated to income.
- If received from a production payment, a receipt must be allocated to income if and to the extent that the agreement creating the production payment provides a factor for interest or its equivalent. The balance must be allocated to principal.
- If an amount received as a royalty, shut-in-well payment, take-or-pay payment, bonus, or delay rental is more than nominal, ninety percent must be allocated to principal and the balance to income.
- If an amount is received from a working interest or any other interest not provided for in paragraph (a), (b), or (c) of this subsection (1), ninety percent of the net amount received must be allocated to principal and the balance to income.
- An amount received on account of an interest in water that is renewable must be allocated to income. If the water is not renewable, ninety percent of the amount must be allocated to principal and the balance to income.
- Subparts 1 through 6 of this part 4 apply whether or not a decedent or donor was extracting minerals, water, or other natural resources before the interest became subject to the trust.
- If a trust owns an interest in minerals, water, or other natural resources on July 1, 2001, the trustee may allocate receipts from the interest as provided in subparts 1 through 6 of this part 4 or in the manner used by the trustee before July 1, 2001. If the trust acquires an interest in minerals, water, or other natural resources after July 1, 2001, the trustee shall allocate receipts from the interest as provided in subparts 1 through 6 of this part 4.
Source: L. 2000: Entire part R&RE, p. 1142, § 1, effective July 1, 2001. L. 2009: (3) and (4) amended, (HB 09-1241), ch. 169, p. 744, § 8, effective April 22.
Editor's note: This section is similar to former § 15-1-414 as it existed prior to 2001.
OFFICIAL COMMENT
Prior Acts. The 1962 Uniform Act allocates to principal as a depletion allowance, 27-1/2% of the gross receipts, but not more than 50% of the net receipts after paying expenses. The Internal Revenue Code no longer provides for a 27-1/2% depletion allowance, although the major oil-producing States have retained the 27-1/2% provision in their principal and income acts (Texas amended its Act in 1993, but did not change the depletion provision). Section 9 of the 1931 Uniform Act allocates all of the net proceeds received as consideration for the "permanent severance of natural resources from the lands" to principal.
Section 15-1-421 allocates 90% of the net receipts to principal and 10% to income. A depletion provision that is tied to past or present Code provisions is undesirable because it causes a large portion of the oil and gas receipts to be paid out as income. As wells are depleted, the amount received by the income beneficiary falls drastically. Allocating a larger portion of the receipts to principal enables the trustee to acquire other income producing assets that will continue to produce income when the mineral reserves are exhausted.
Application of Sections 15-1-413 and 15-1-418. This section applies to the extent that the trustee does not account separately for receipts from minerals and other natural resources under Section 15-1-413 or allocate all of the receipts to principal under Section 15-1-418.
Open mine doctrine. The purpose of Section 15-1-421 (3) is to abolish the "open mine doctrine" as it may apply to the rights of an income beneficiary and a remainder beneficiary in receipts from the production of minerals from land owned or leased by a trust. Instead, such receipts are to be allocated to or between principal and income in accordance with the provisions of this Act. For a discussion of the open mine doctrine, see generally 3A Austin W. Scott & William F. Fratcher, The Law of Trusts § 239.3 (4th ed. 1988), and Nutter v. Stockton , 626 P.2d 861 (Okla. 1981).
Effective date provision. Section 9(b) of the 1962 Uniform Act provides that the natural resources provision does not apply to property interests held by the trust on the effective date of the Act, which reflects concerns about the constitutionality of applying a retroactive administrative provision to interests in real estate, based on the opinion in the Oklahoma case of Franklin v. Margay Oil Corporation , 153 P.2d 486, 501 (Okla. 1944). Section 15-1-421 (4) permits a trustee to use either the method provided for in this Act or the method used before the Act takes effect. Lawyers in jurisdictions other than Oklahoma may conclude that retroactivity is not a problem as to property situated in their States, and this provision permits trustees to decide, based on advice from counsel in States whose law may be different from that of Oklahoma, whether they may apply this provision retroactively if they conclude that to do so is in the best interests of the beneficiaries.
If the property is in a State other than the State where the trust is administered, the trustee must be aware that the law of the property's situs may control this question. The outcome turns on a variety of questions: whether the terms of the trust specify that the law of a State other than the situs of the property shall govern the administration of the trust, and whether the courts will follow the terms of the trust; whether the trust's asset is the land itself or a leasehold interest in the land (as it frequently is with oil and gas property); whether a leasehold interest or its proceeds should be classified as real property or personal property, and if as personal property, whether applicable state law treats it as a movable or an immovable for conflict of laws purposes. See 5A Austin W. Scott & William F. Fratcher, The Law of Trusts §§ 648, at 531, 533-534; § 657, at 600 (4th ed. 1989).
15-1-421.5. Disposition of natural resources.
-
If any part of the principal consists of a right to receive royalties, overriding or limited royalties, working interests, production payments, net profit interests, or other interests in minerals or other natural resources in, on, or under land, the
receipts from taking the natural resources from the land shall be allocated as follows:
- If received as rent on a lease or extension payments on a lease, the receipts are income;
- If received from a production payment, the receipts are income to the extent of any factor for interest or its equivalent provided in the governing instrument. There shall be allocated to principal the fraction of the balance of the receipts that the unrecovered cost of the production payment bears to the balance owed on the production payment, exclusive of any factor for interest or its equivalent. The receipts not allocated to principal are income.
- If received as a royalty, overriding or limited royalty, or bonus, or from a working, net profit, or any other interest in minerals or other natural resources, receipts not provided for in paragraph (a) or (b) of this subsection (1) shall be apportioned on a yearly basis in accordance with this paragraph (c) regardless of whether any natural resource was being taken from the land at the time the trust was established. Fifteen percent of the gross receipts, but not to exceed fifty percent of the net receipts remaining after payment of all expenses, direct and indirect, computed without allowance for depletion, shall be added to principal as an allowance for depletion. The balance of the gross receipts after payment therefrom of all expenses, direct and indirect, is income.
- If a trustee, on April 22, 2009, held an item of depletable property of a type specified in this section, he or she shall allocate receipts from the property in the manner used before April 22, 2009, but as to all depletable property acquired after April 22, 2009, by an existing or new trust, the method of allocation provided herein shall be used.
- This section does not apply to timber, water, soil, sod, dirt, turf, or mosses.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 745, § 9, effective April 22.
15-1-422. Timber.
-
To the extent that a trustee accounts for receipts from the sale of timber and related products pursuant to this section, the trustee shall allocate the net receipts:
- To income to the extent that the amount of timber removed from the land does not exceed the rate of growth of the timber during the accounting periods in which a beneficiary has a mandatory income interest;
- To principal to the extent that the amount of timber removed from the land exceeds the rate of growth of the timber or the net receipts are from the sale of standing timber;
- To or between income and principal if the net receipts are from the lease of timberland or from a contract to cut timber from land owned by a trust, by determining the amount of timber removed from the land under the lease or contract and applying the rules in paragraphs (a) and (b) of this subsection (1); or
- To principal to the extent that advance payments, bonuses, and other payments are not allocated pursuant to paragraph (a), (b), or (c) of this subsection (1).
- In determining net receipts to be allocated pursuant to subsection (1) of this section, a trustee shall deduct and transfer to principal a reasonable amount for depletion.
- Subparts 1 through 6 of this part 4 apply whether or not a decedent or transferor was harvesting timber from the property before it became subject to the trust.
- If a trust owns an interest in timberland on July 1, 2001, the trustee may allocate net receipts from the sale of timber and related products as provided in subparts 1 through 6 of this part 4 or in the manner used by the trustee before July 1, 2001. If the trust acquires an interest in timberland after July 1, 2001, the trustee shall allocate net receipts from the sale of timber and related products as provided in subparts 1 through 6 of this part 4.
Source: L. 2000: Entire part R&RE, p. 1143, § 1, effective July 1, 2001. L. 2009: (3) and (4) amended, (HB 09-1241), ch. 169, p. 746, § 10, effective April 22.
OFFICIAL COMMENT
Scope of section. The rules in Section 15-1-422 are intended to apply to net receipts from the sale of trees and by-products from harvesting and processing trees without regard to the kind of trees that are cut or whether the trees are cut before or after a particular number of years of growth. The rules apply to the sale of trees that are expected to produce lumber for building purposes, trees sold as pulpwood, and Christmas and other ornamental trees. Subsection (1) applies to net receipts from property owned by the trustee and property leased by the trustee. The Act is not intended to prevent a tenant in possession of the property from using wood that he cuts on the property for personal, noncommercial purposes, such as a Christmas tree, firewood, mending old fences or building new fences, or making repairs to structures on the property.
Under subsection (1), the amount of net receipts allocated to income depends upon whether the amount of timber removed is more or less than the rate of growth. The method of determining the amount of timber removed and the rate of growth is up to the trustee, based on methods customarily used for the kind of timber involved.
Application of Sections 15-1-413 and 15-1-418. This section applies to the extent that the trustee does not account separately for net receipts from the sale of timber and related products under Section 15-1-413 or allocate all of the receipts to principal under Section 15-1-418. The option to account for net receipts separately under Section 15-1-413 takes into consideration the possibility that timber harvesting operations may have been conducted before the timber property became subject to the trust, and that it may make sense to continue using accounting methods previously established for the property. It also permits a trustee to use customary accounting practices for timber operations even if no harvesting occurred on the property before it became subject to the trust.
15-1-423. Property not productive of income.
- If a marital deduction is allowed for all or part of a trust whose assets consist substantially of property that does not provide the spouse with sufficient income from or use of the trust assets, and if the amounts that the trustee transfers from principal to income under section 15-1-404 and distributes to the spouse from principal pursuant to the terms of the trust are insufficient to provide the spouse with the beneficial enjoyment required to obtain the marital deduction, the spouse may require the trustee to make property productive of income, convert property within a reasonable time, or exercise the power conferred by section 15-1-404 (1). The trustee may decide which action or combination of actions to take.
- In cases not governed by the provisions of subsection (1) of this section, proceeds from the sale or other disposition of an asset are principal without regard to the amount of income the asset produces during any accounting period.
Source: L. 2000: Entire part R&RE, p. 1144, § 1, effective July 1, 2001.
Editor's note: This section is similar to former § 15-1-413 as it existed prior to 2001.
OFFICIAL COMMENT
Prior Acts' Conflict with Uniform Prudent Investor Act. Section 2(b) of the Uniform Prudent Investor Act provides that "[a] trustee's investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole ... ." The underproductive property provisions in Section 12 of the 1962 Uniform Act and Section 11 of the 1931 Uniform Act give the income beneficiary a right to receive a portion of the proceeds from the sale of underproductive property as "delayed income." In each Uniform Act the provision applies on an asset by asset basis and not by taking into consideration the trust portfolio as a whole, which conflicts with the basic precept in Section 2(b) of the Prudent Investor Act. Moreover, in determining the amount of delayed income, the prior Uniform Acts do not permit a trustee to take into account the extent to which the trustee may have distributed principal to the income beneficiary, under principal invasion provisions in the terms of the trust, to compensate for insufficient income from the unproductive asset. Under Section 15-1-404 (2)(g) of this Act, a trustee must consider prior distributions of principal to the income beneficiary in deciding whether and to what extent to exercise the power to adjust conferred by Section 15-1-404 (1).
Duty to make property productive of income. In order to implement the Uniform Prudent Investor Act, this Act abolishes the right to receive delayed income from the sale proceeds of an asset that produces little or no income, but it does not alter existing state law regarding the income beneficiary's right to compel the trustee to make property productive of income. As the law continues to develop in this area, the duty to make property productive of current income in a particular situation should be determined by taking into consideration the performance of the portfolio as a whole and the extent to which a trustee makes principal distributions to the income beneficiary under the terms of the trust and adjustments between principal and income under Section 15-1-404 of this Act.
Trusts for which the value of the right to receive income is important for tax reasons may be affected by Reg. § 1.7520-3(b)(2)(v) Example (1) , § 20.7520-3(b)(2)(v) Examples (1) and (2) , and § 25.7520-3(b)(2)(v) Examples (1) and (2) , which provide that if the income beneficiary does not have the right to compel the trustee to make the property productive, the income interest is considered unproductive and may not be valued actuarially under those sections.
Marital deduction trusts. Subsection (1) draws on language in Reg. § 20.2056(b)-5(f)(4) and (5) to enable a trust for a spouse to qualify for a marital deduction if applicable state law is unclear about the spouse's right to compel the trustee to make property productive of income. The trustee should also consider the application of Section 15-1-404 of this Act and the provisions of Restatement of Trusts 3d: Prudent Investor Rule § 240, at 186, app. § 240, at 252 (1992). Example (6) in the Comment to Section 15-1-404 describes a situation involving the payment from income of carrying charges on unproductive real estate in which Section 15-1-404 may apply.
Once the two conditions have occurred -- insufficient beneficial enjoyment from the property and the spouse's demand that the trustee take action under this section -- the trustee must act; but instead of the formulaic approach of the 1962 Uniform Act, which is triggered only if the trustee sells the property, this Uniform Act permits the trustee to decide whether to make the property productive of income, convert it, transfer funds from principal to income, or to take some combination of those actions. The trustee may rely on the power conferred by Section 15-1-404 (1) to adjust from principal to income if the trustee decides that it is not feasible or appropriate to make the property productive of income or to convert the property. Given the purpose of Section 15-1-423, the power under Section 15-1-404 (1) would be exercised to transfer principal to income and not to transfer income to principal.
Section 15-1-423 does not apply to a so-called "estate" trust, which will qualify for the marital deduction, even though the income may be accumulated for a term of years or for the life of the surviving spouse, if the terms of the trust require the principal and undistributed income to be paid to the surviving spouse's estate when the spouse dies. Reg. § 20.2056(c)-2(b)(1)(iii).
15-1-424. Derivatives and options.
- For purposes of this section, "derivative" means a contract or financial instrument or a combination of contracts and financial instruments that gives a trust the right or obligation to participate in some or all changes in the price of a tangible or intangible asset or group of assets, or changes in a rate, an index of prices or rates, or other market indicator for an asset or a group of assets.
- To the extent that a trustee does not account under section 15-1-413 for transactions in derivatives, the trustee shall allocate to principal receipts from and disbursements made in connection with those transactions.
- If a trustee grants an option to buy property from the trust, whether or not the trust owns the property when the option is granted, grants an option that permits another person to sell property to the trust, or acquires an option to buy property for the trust or an option to sell an asset owned by the trust, and the trustee or other owner of the asset is required to deliver the asset if the option is exercised, an amount received for granting the option must be allocated to principal. An amount paid to acquire the option must be paid from principal. A gain or loss realized upon the exercise of an option, including an option granted to a settlor of the trust for services rendered, must be allocated to principal.
Source: L. 2000: Entire part R&RE, p. 1144, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Scope and application. It is difficult to predict how frequently and to what extent trustees will invest directly in derivative financial instruments rather than participating indirectly through investment entities that may utilize these instruments in varying degrees. If the trust participates in derivatives indirectly through an entity, an amount received from the entity will be allocated under Section 15-1-411 and not Section 15-1-424. If a trustee invests directly in derivatives to a significant extent, the expectation is that receipts and disbursements related to derivatives will be accounted for under Section 15-1-413; if a trustee chooses not to account under Section 15-1-413, Section 15-1-424 (2) provides the default rule. Certain types of option transactions in which trustees may engage are dealt with in subsection (3) to distinguish those transactions from ones involving options that are embedded in derivative financial instruments.
Definition of "derivative." "Derivative" is a difficult term to define because new derivatives are invented daily as dealers tailor their terms to achieve specific financial objectives for particular clients. Since derivatives are typically contract-based, a derivative can probably be devised for almost any set of objectives if another party can be found who is willing to assume the obligations required to meet those objectives.
The most comprehensive definition of derivative is in the Exposure Draft of a Proposed Statement of Financial Accounting Standards titled "Accounting for Derivative and Similar Financial Instruments and for Hedging Activities," which was released by the Financial Accounting Standards Board (FASB) on June 20, 1996 (No. 162-B). The definition in Section 15-1-424 (1) is derived in part from the FASB definition. The purpose of the definition in subsection (1) is to implement the substantive rule in subsection (2) that provides for all receipts and disbursements to be allocated to principal to the extent the trustee elects not to account for transactions in derivatives under Section 15-1-413. As a result, it is much shorter than the FASB definition, which serves much more ambitious objectives.
A derivative is frequently described as including futures, forwards, swaps and options, terms that also require definition, and the definition in this Act avoids these terms. FASB used the same approach, explaining in paragraph 65 of the Exposure Draft:
The definition of derivative financial instrument in this Statement includes those financial instruments generally considered to be derivatives, such as forwards, futures, swaps, options, and similar instruments. The Board considered defining a derivative financial instrument by merely referencing those commonly understood instruments, similar to paragraph 5 of Statement 119, which says that "... a derivative financial instrument is a futures, forward, swap, or option contract, or other financial instrument with similar characteristics." However, the continued development of financial markets and innovative financial instruments could ultimately render a definition based on examples inadequate and obsolete. The Board, therefore, decided to base the definition of a derivative financial instrument on a description of the common characteristics of those instruments in order to accommodate the accounting for newly developed derivatives. (Footnote omitted.)
Marking to market. A gain or loss that occurs because the trustee marks securities to market or to another value during an accounting period is not a transaction in a derivative financial instrument that is income or principal under the Act -- only cash receipts and disbursements, and the receipt of property in exchange for a principal asset, affect a trust's principal and income accounts.
Receipt of property other than cash. If a trustee receives property other than cash upon the settlement of a derivatives transaction, that property would be principal under Section 15-1-414 (1)(b).
Options. Options to which subsection (3) applies include an option to purchase real estate owned by the trustee and a put option purchased by a trustee to guard against a drop in value of a large block of marketable stock that must be liquidated to pay estate taxes. Subsection (3) would also apply to a continuing and regular practice of selling call options on securities owned by the trust if the terms of the option require delivery of the securities. It does not apply if the consideration received or given for the option is something other than cash or property, such as cross-options granted in a buy-sell agreement between owners of an entity.
15-1-425. Asset-backed securities.
- For purposes of this section, "asset-backed security" means an asset whose value is based upon the right it gives the owner to receive distributions from the proceeds of financial assets that provide collateral for the security. The term includes an asset that gives the owner the right to receive from the collateral financial assets only the interest or other current return or only the proceeds other than interest or current return. The term does not include an asset governed by the provisions of section 15-1-411 or 15-1-419.
- If a trust receives a payment from interest or other current return and from other proceeds of the collateral financial assets, the trustee shall allocate to income the portion of the payment that the payer identifies as being from interest or other current return and shall allocate the balance of the payment to principal.
- If a trust receives one or more payments in exchange for the trust's entire interest in an asset-backed security in one accounting period, the trustee shall allocate the payments to principal. If a payment is one of a series of payments that will result in the liquidation of the trust's interest in the security over more than one accounting period, the trustee shall allocate ten percent of the payment to income and the balance to principal.
Source: L. 2000: Entire part R&RE, p. 1144, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Scope of section. Typical asset-backed securities include arrangements in which debt obligations such as real estate mortgages, credit card receivables and auto loans are acquired by an investment trust and interests in the trust are sold to investors. The source for payments to an investor is the money received from principal and interest payments on the underlying debt. An asset-backed security includes an "interest only" or a "principal only" security that permits the investor to receive only the interest payments received from the bonds, mortgages or other assets that are the collateral for the asset-backed security, or only the principal payments made on those collateral assets. An asset-backed security also includes a security that permits the investor to participate in either the capital appreciation of an underlying security or in the interest or dividend return from such a security, such as the "Primes" and "Scores" issued by Americus Trust. An asset-backed security does not include an interest in a corporation, partnership, or an investment trust described in the Comment to Section 15-1-412, whose assets consist significantly or entirely of investment assets. Receipts from an instrument that do not come within the scope of this section or any other section of the Act would be allocated entirely to principal under the rule in Section 15-1-403 (1)(d), and the trustee may then consider whether and to what extent to exercise the power to adjust in Section 15-1-404, taking into account the return from the portfolio as whole and other relevant factors.
SUBPART 5 ALLOCATION OF DISBURSEMENTS DURING ADMINISTRATION OF TRUST
Cross references: For information concerning the effective date of this subpart 5, see § 15-1-434.
15-1-426. Disbursements from income.
-
A trustee shall make the following disbursements from income to the extent that they are not disbursements governed by the provisions of section 15-1-406 (1)(b)(II) or (1)(b)(III):
- One-half of the regular compensation of the trustee and of any person providing investment advisory or custodial services to the trustee;
- One-half of all expenses for accountings, judicial proceedings, or other matters that involve both the income and remainder interests;
- All of the other ordinary expenses incurred in connection with the administration, management, or preservation of trust property and the distribution of income, including interest, ordinary repairs, regularly recurring taxes assessed against principal, and expenses of a proceeding or other matter that concerns primarily the income interest; and
- Recurring premiums on insurance covering the loss of a principal asset or the loss of income from or use of the asset.
Source: L. 2000: Entire part R&RE, p. 1145, § 1, effective July 1, 2001.
Editor's note: This section is similar to former § 15-1-415 as it existed prior to 2001.
OFFICIAL COMMENT
Trustee fees. The regular compensation of a trustee or the trustee's agent includes compensation based on a percentage of either principal or income or both.
Insurance premiums. The reference in paragraph (1)(d) to "recurring" premiums is intended to distinguish premiums paid annually for fire insurance from premiums on title insurance, each of which covers the loss of a principal asset. Title insurance premiums would be a principal disbursement under Section 15-1-427 (1)(e).
Regularly recurring taxes. The reference to "regularly recurring taxes assessed against principal" includes all taxes regularly imposed on real property and tangible and intangible personal property.
15-1-427. Disbursements from principal.
-
A trustee shall make the following disbursements from principal:
- The remaining one-half of the disbursements described in section 15-1-426 (1)(a) and section 15-1-426 (1)(b);
- All of the trustee's compensation calculated on principal as a fee for acceptance, distribution, or termination, and disbursements made to prepare property for sale;
- Payments on the principal of a trust debt;
- Expenses of a proceeding that concerns primarily principal, including a proceeding to construe the trust or to protect the trust or its property;
- Premiums paid on a policy of insurance not described in section 15-1-426 (1)(d) of which the trust is the owner and beneficiary;
- Estate, inheritance, and other transfer taxes, including penalties, apportioned to the trust; and
- Disbursements related to environmental matters, including reclamation, assessing environmental conditions, remedying and removing environmental contamination, monitoring remedial activities and the release of substances, preventing future releases of substances, collecting amounts from persons liable or potentially liable for the costs of those activities, penalties imposed under environmental laws or regulations and other payments made to comply with those laws or regulations, statutory or common law claims by third parties, and defending claims based on environmental matters.
- If a principal asset is encumbered with an obligation that requires income from that asset to be paid directly to the creditor, the trustee shall transfer from principal to income an amount equal to the income paid to the creditor in reduction of the principal balance of the obligation.
Source: L. 2000: Entire part R&RE, p. 1145, § 1, effective July 1, 2001.
Editor's note: This section is similar to former § 15-1-415 as it existed prior to 2001.
OFFICIAL COMMENT
Environmental expenses. All environmental expenses are payable from principal, subject to the power of the trustee to transfer funds to principal from income under Section 15-1-429. However, the Drafting Committee decided that it was not necessary to broaden this provision to cover other expenditures made under compulsion of governmental authority. See generally the annotation at 43 A.L.R.4th 1012 (Duty as Between Life Tenant and Remainderman with Respect to Cost of Improvements or Repairs Made Under Compulsion of Governmental Authority).
Environmental expenses paid by a trust are to be paid from principal under Section 15-1-502 (1)(g) on the assumption that they will usually be extraordinary in nature. Environmental expenses might be paid from income if the trustee is carrying on a business that uses or sells toxic substances, in which case environmental cleanup costs would be a normal cost of doing business and would be accounted for under Section 15-1-413. In accounting under that Section, environmental costs will be a factor in determining how much of the net receipts from the business is trust income. Paying all other environmental expenses from principal is consistent with this Act's approach regarding receipts -- when a receipt is not clearly a current return on a principal asset, it should be added to principal because over time both the income and remainder beneficiaries benefit from this treatment. Here, allocating payments required by environmental laws to principal imposes the detriment of those payments over time on both the income and remainder beneficiaries.
Under Sections 15-1-429 (1) and 15-1-429 (2)(e), a trustee who makes or expects to make a principal disbursement for an environmental expense described in Section 15-1-427 (1)(g) is authorized to transfer an appropriate amount from income to principal to reimburse principal for disbursements made or to provide a reserve for future principal disbursements.
The first part of Section 15-1-427 (1)(g) is based upon the definition of an "environmental remediation trust" in Treas. Reg. § 301.7701-4(e)(as amended in 1996). This is not because the Act applies to an environmental remediation trust, but because the definition is a useful and thoroughly vetted description of the kinds of expenses that a trustee owning contaminated property might incur. Expenses incurred to comply with environmental laws include the cost of environmental consultants, administrative proceedings and burdens of every kind imposed as the result of an administrative or judicial proceeding, even though the burden is not formally characterized as a penalty.
Title proceedings. Disbursements that are made to protect a trust's property, referred to in Section 15-1-427 (1)(d), include an "action to assure title" that is mentioned in Section 13(c)(2) of the 1962 Uniform Act.
Insurance premiums. Insurance premiums referred to in Section 15-1-427 (1)(e) include title insurance premiums. They also include premiums on life insurance policies owned by the trust, which represent the trust's periodic investment in the insurance policy. There is no provision in the 1962 Uniform Act for life insurance premiums.
Taxes. Generation-skipping transfer taxes are payable from principal under subsection (1)(f).
15-1-428. Transfers from income to principal for depreciation.
- For purposes of this section, "depreciation" means a reduction in value due to wear, tear, decay, corrosion, or gradual obsolescence of a fixed asset having a useful life of more than one year.
-
A trustee may transfer to principal a reasonable amount of the net cash receipts from a principal asset that is subject to depreciation, but may not transfer any amount for depreciation:
- Of that portion of real property used or available for use by a beneficiary as a residence or of tangible personal property held or made available for the personal use or enjoyment of a beneficiary;
- During the administration of a decedent's estate; or
- Under this section if the trustee is accounting under section 15-1-413 for the business or activity in which the asset is used.
- An amount transferred to principal need not be held as a separate fund.
Source: L. 2000: Entire part R&RE, p. 1145, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Prior Acts. The 1931 Uniform Act has no provision for depreciation. Section 13(a)(2) of the 1962 Uniform Act provides that a charge shall be made against income for "... a reasonable allowance for depreciation on property subject to depreciation under generally accepted accounting principles ... ." That provision has been resisted by many trustees, who do not provide for any depreciation for a variety of reasons. One reason relied upon is that a charge for depreciation is not needed to protect the remainder beneficiaries if the value of the land is increasing; another is that generally accepted accounting principles may not require depreciation to be taken if the property is not part of a business. The Drafting Committee concluded that the decision to provide for depreciation should be discretionary with the trustee. The power to transfer funds from income to principal that is granted by this section is a discretionary power of administration referred to in Section 15-1-403 (2), and in exercising the power a trustee must comply with Section 15-1-403 (2).
One purpose served by transferring cash from income to principal for depreciation is to provide funds to pay the principal of an indebtedness secured by the depreciable property. Section 15-1-429 (2)(d) permits the trustee to transfer additional cash from income to principal for this purpose to the extent that the amount transferred from income to principal for depreciation is less than the amount of the principal payments.
15-1-429. Transfers from income to reimburse principal.
- If a trustee makes or expects to make a principal disbursement described in this section, the trustee may transfer an appropriate amount from income to principal in one or more accounting periods to reimburse principal or to provide a reserve for future principal disbursements.
-
Principal disbursements governed by the provisions of subsection (1) of this section include the following, but only to the extent that the trustee has not been and does not expect to be reimbursed by a third party:
- An amount chargeable to income but paid from principal because it is unusually large, including extraordinary repairs;
- A capital improvement to a principal asset, whether in the form of changes to an existing asset or the construction of a new asset, including special assessments;
- Disbursements made to prepare property for rental, including tenant allowances, leasehold improvements, and broker's commissions;
- Periodic payments on an obligation secured by a principal asset to the extent that the amount transferred from income to principal for depreciation is less than the periodic payments; and
- Disbursements described in section 15-1-427 (1)(g).
- If the asset whose ownership gives rise to the disbursements becomes subject to a successive income interest after an income interest ends, a trustee may continue to transfer amounts from income to principal as provided in subsection (1) of this section.
Source: L. 2000: Entire part R&RE, p. 1147, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Prior Acts. The sources of Section 15-1-429 are Section 13(b) of the 1962 Uniform Act, which permits a trustee to "regularize distributions," if charges against income are unusually large, by using "reserves or other reasonable means" to withhold sums from income distributions; Section 13(c)(3) of the 1962 Uniform Act, which authorizes a trustee to establish an allowance for depreciation out of income if principal is used for extraordinary repairs, capital improvements and special assessments; and Section 12(3) of the 1931 Uniform Act, which permits the trustee to spread income expenses of unusual amount "throughout a series of years." Section 15-1-429 contains a more detailed enumeration of the circumstances in which this authority may be used, and includes in subsection (2)(d) the express authority to use income to make principal payments on a mortgage if the depreciation charge against income is less than the principal payments on the mortgage.
15-1-430. Income taxes.
- A tax required to be paid by a trustee based on receipts allocated to income must be paid from income.
- A tax required to be paid by a trustee based on receipts allocated to principal must be paid from principal, even if the tax is called an income tax by the taxing authority.
-
A tax required to be paid by a trustee on the trust's share of an entity's taxable income must be paid:
- From income to the extent that receipts from the entity are allocated only to income;
- From principal to the extent that receipts from the entity are allocated only to principal;
- Proportionately from principal and income to the extent that receipts from the entity are allocated to both income and principal; and
- From principal to the extent that the tax exceeds the total receipts from the entity.
- After applying subsections (1) to (3) of this section, the trustee shall adjust income or principal receipts to the extent that the trust's taxes are reduced because the trust receives a deduction for payments made to a beneficiary.
Source: L. 2000: Entire part R&RE, p. 1147, § 1, effective July 1, 2001. L. 2009: Entire section amended, (SB 09-139), ch. 131, p. 567, § 2, effective April 16.
OFFICIAL COMMENT
Electing Small Business Trusts. An Electing Small Business Trust (ESBT) is a creature created by Congress in the Small Business Job Protection Act of 1996 (P.L. 104-188). For years beginning after 1996, an ESBT may qualify as an S corporation stockholder even if the trustee does not distribute all of the trust's income annually to its beneficiaries. The portion of an ESBT that consists of the S corporation stock is treated as a separate trust for tax purposes (but not for trust accounting purposes), and the S corporation income is taxed directly to that portion of the trust even if some or all of that income is distributed to the beneficiaries.
A trust normally receives a deduction for distributions it makes to its beneficiaries. Subsection (4) takes into account the possibility that an ESBT may not receive a deduction for trust accounting income that is distributed to the beneficiaries. Only limited guidance has been issued by the Internal Revenue Service, and it is too early to anticipate all of the technical questions that may arise, but the powers granted to a trustee in Sections 15-1-431 and 15-1-404 to make adjustments are probably sufficient to enable a trustee to correct inequities that may arise because of technical problems.
15-1-431. Adjustments between principal and income because of taxes.
-
A fiduciary may make adjustments between principal and income to offset the shifting of economic interests or tax benefits between income beneficiaries and remainder beneficiaries that arise from:
- Elections and decisions, other than those described in subsection (2) of this section, that the fiduciary makes from time to time regarding tax matters;
- An income tax or any other tax that is imposed upon the fiduciary or a beneficiary as a result of a transaction involving or a distribution from the estate or trust; or
- The ownership by an estate or trust of an interest in an entity whose taxable income, whether or not distributed, is includable in the taxable income of the estate, trust, or a beneficiary.
- If the amount of an estate tax marital deduction or charitable contribution deduction is reduced because a fiduciary deducts an amount paid from principal for income tax purposes instead of deducting it for estate tax purposes, and as a result estate taxes paid from principal are increased and income taxes paid by an estate, trust, or beneficiary are decreased, each estate, trust, or beneficiary that benefits from the decrease in income tax shall reimburse the principal from which the increase in estate tax is paid. The total reimbursement must equal the increase in the estate tax to the extent that the principal used to pay the increase would have qualified for a marital deduction or charitable contribution deduction but for the payment. The proportionate share of the reimbursement for each estate, trust, or beneficiary whose income taxes are reduced must be the same as its proportionate share of the total decrease in income tax. An estate or trust shall reimburse principal from income.
Source: L. 2000: Entire part R&RE, p. 1148, § 1, effective July 1, 2001.
OFFICIAL COMMENT
Discretionary adjustments. Section 15-1-431 (1) permits the fiduciary to make adjustments between income and principal because of tax law provisions. It would permit discretionary adjustments in situations like these: (1) A fiduciary elects to deduct administration expenses that are paid from principal on an income tax return instead of on the estate tax return; (2) a distribution of a principal asset to a trust or other beneficiary causes the taxable income of an estate or trust to be carried out to the distributee and relieves the persons who receive the income of any obligation to pay income tax on the income; or (3) a trustee realizes a capital gain on the sale of a principal asset and pays a large state income tax on the gain, but under applicable federal income tax rules the trustee may not deduct the state income tax payment from the capital gain in calculating the trust's federal capital gain tax, and the income beneficiary receives the benefit of the deduction for state income tax paid on the capital gain. See generally Joel C. Dobris, Limits on the Doctrine of Equitable Adjustment in Sophisticated Postmortem Tax Planning, 66 Iowa L. Rev. 273 (1981).
Section 15-1-431 (1)(c) applies to a qualified Subchapter S trust (QSST) whose income beneficiary is required to include a pro rata share of the S corporation's taxable income in his return. If the QSST does not receive a cash distribution from the corporation that is large enough to cover the income beneficiary's tax liability, the trustee may distribute additional cash from principal to the income beneficiary. In this case the retention of cash by the corporation benefits the trust principal. This situation could occur if the corporation's taxable income includes capital gain from the sale of a business asset and the sale proceeds are reinvested in the business instead of being distributed to shareholders.
Mandatory adjustment. Subsection (2) provides for a mandatory adjustment from income to principal to the extent needed to preserve an estate tax marital deduction or charitable contributions deduction. It is derived from New York's EPTL § 11-1.2(A), which requires principal to be reimbursed by those who benefit when a fiduciary elects to deduct administration expenses on an income tax return instead of the estate tax return. Unlike the New York provision, subsection (2) limits a mandatory reimbursement to cases in which a marital deduction or a charitable contributions deduction is reduced by the payment of additional estate taxes because of the fiduciary's income tax election. It is intended to preserve the result reached in Estate of Britenstool v. Commissioner , 46 T.C. 711 (1966), in which the Tax Court held that a reimbursement required by the predecessor of EPTL § 11-1.2(A) resulted in the estate receiving the same charitable contributions deduction it would have received if the administration expenses had been deducted for estate tax purposes instead of for income tax purposes. Because a fiduciary will elect to deduct administration expenses for income tax purposes only when the income tax reduction exceeds the estate tax reduction, the effect of this adjustment is that the principal is placed in the same position it would have occupied if the fiduciary had deducted the expenses for estate tax purposes, but the income beneficiaries receive an additional benefit. For example, if the income tax benefit from the deduction is $30,000 and the estate tax benefit would have been $20,000, principal will be reimbursed $20,000 and the net benefit to the income beneficiaries will be $10,000.
Irrevocable grantor trusts. Under Sections 671-679 of the Internal Revenue Code (the "grantor trust" provisions), a person who creates an irrevocable trust for the benefit of another person may be subject to tax on the trust's income or capital gains, or both, even though the settlor is not entitled to receive any income or principal from the trust. Because this is now a well-known tax result, many trusts have been created to produce this result, but there are also trusts that are unintentionally subject to this rule. The Act does not require or authorize a trustee to distribute funds from the trust to the settlor in these cases because it is difficult to establish a rule that applies only to trusts where this tax result is unintended and does not apply to trusts where the tax result is intended. Settlors who intend this tax result rarely state it as an objective in the terms of the trust, but instead rely on the operation of the tax law to produce the desired result. As a result it may not be possible to determine from the terms of the trust if the result was intentional or unintentional. If the drafter of such a trust wants the trustee to have the authority to distribute principal or income to the settlor to reimburse the settlor for taxes paid on the trust's income or capital gains, such a provision should be placed in the terms of the trust. In some situations the Internal Revenue Service may require that such a provision be placed in the terms of the trust as a condition to issuing a private letter ruling.
SUBPART 6 MISCELLANEOUS PROVISIONS
Cross references: For information concerning the effective date of this subpart 6, see § 15-1-434.
15-1-432. Uniformity of application - construction.
In applying and construing this uniform act, consideration shall be given to the need to promote uniformity of the law with respect to its subject matter among states that enact it.
Source: L. 2000: Entire part R&RE, p. 1148, § 1, effective July 1, 2001.
15-1-433. Severability.
If any provision of subparts 1 through 6 of this part 4 or its application to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of subparts 1 through 6 of this part 4 that can be given effect without the invalid provision or application, and to this end the provisions of subparts 1 through 6 of this part 4 are severable.
Source: L. 2000: Entire part R&RE, p. 1148, § 1, effective July 1, 2001. L. 2009: Entire section amended, (HB 09-1241), ch. 169, p. 746, § 11, effective April 22.
15-1-434. Effective date - application to existing trusts and estates - election.
- Subparts 1 through 6 of this part 4 shall take effect July 1, 2001.
- Subparts 1 through 6 of this part 4 shall apply to every trust or decedent's estate existing on and after July 1, 2001, except as otherwise expressly provided in the will or terms of the trust or in subparts 1 through 6 of this part 4. For each trust established under a will or trust agreement existing and irrevocable on July 1, 2001, the trustee may elect to apply the "Uniform Principal and Income Act" of this state in effect on June 30, 2001. The trustee shall make such election by July 1, 2002.
- Notwithstanding the provisions of subsection (2) of this section, subparts 1 through 6 of this part 4 shall not apply to any trust or decedent's estate existing on July 1, 2001, in which no trustee has the authority to act under section 15-1-404 unless the trustees elect to apply subparts 1 through 6 of this part 4. The trustees may make this election at any time.
- Once an election is made pursuant to this section, the election shall be irrevocable. The trustee shall give notice of such an election to the beneficiaries of the trust in accordance with section 15-1-405. If such notice complies with section 15-1-405, the provisions of said section shall apply to such election.
Source: L. 2000: Entire part R&RE, p. 1149, § 1, effective July 1, 2001. L. 2009: (1), (2), and (3) amended, (HB 09-1241), ch. 169, p. 746, § 12, effective April 22.
15-1-435. Application of certain provisions - notice of election.
- Section 15-1-421.5 shall apply to all trusts and estates executed on or after July 1, 2009, unless the qualified beneficiaries elect not to apply said section.
- The provisions of section 15-1-421.5 shall not apply to the determination of income from the disposition of natural resources in a trust or estate created before July 1, 2009, unless the qualified beneficiaries elect to apply section 15-1-421.5 as provided in this section.
- If the qualified beneficiaries elect under subsection (1) or (2) of this section, notice of the election to apply or not to apply section 15-1-421.5 shall be given by the trustee in accordance with section 15-1-405, and the provisions of such section shall apply to the election.
- An election to apply section 15-1-421.5 is irrevocable.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 746, § 13, effective April 22.
15-1-436. Transitional matters.
-
Section 15-1-419, as amended by Senate Bill 09-139, enacted in 2009, applies to a trust described in section 15-1-419 (4) on and after the following dates:
- If the trust is not funded as of April 16, 2009, the date of the decedent's death;
- If the trust is initially funded in the calendar year beginning January 1, 2009, the date of the decedent's death; or
- If the trust is not described in either paragraph (a) or (b) of this subsection (1), January 1, 2009.
Source: L. 2009: Entire section added, (SB 09-139), ch. 131, p. 567, § 3, effective April 16.
SUBPART 7 UNIFORM PRINCIPAL AND INCOME ACT OF 1955
15-1-451. Short title.
This subpart 7 shall be known and may be cited as the "Uniform Principal and Income Act of 1955".
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 747, § 14, effective April 22.
15-1-452. Source and prior enactment - uniform application.
- This subpart 7 is derived from the "Uniform Principal and Income Act" promulgated in 1931 by the national conference of commissioners on uniform state laws and enacted in this state effective September 1, 1955. The reenactment of such act in this subpart 7 includes the amendments to such act enacted in this state through June 30, 2001, and additional amendments to accommodate its reenactment.
- This subpart 7 shall be construed and interpreted as to effectuate the general purpose of the act as promulgated by such commissioners to make uniform the law of those jurisdictions which enacted such act taking into account the case law of such jurisdictions with respect to such act.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 747, § 14, effective April 22.
15-1-453. Definitions - construction of terms.
-
As used in this subpart 7, unless the context otherwise requires:
- "Executor" means the executor named in a will and any successor executor and includes an administrator with the will annexed.
- "Income" means the return derived from principal.
- "Net probate income" means the income derived from property passing to the executor by will or by the execution of a power of appointment or from any substitute for such property acquired by purchase, exchange, or otherwise, including income derived from property which is used to discharge liabilities of the testator or of the executor in his or her representative capacity, and legacies payable in money, less any income taxes paid by the executor which are attributable to such income and less that share of administration expenses properly chargeable to income.
- "Principal" means any realty or personalty which has been so set aside or limited by the owner thereof or a person thereto legally empowered that it and any substitutions for it are eventually to be conveyed, delivered, or paid to a person, while the return therefrom or use thereof or any part of such return or use is in the meantime to be taken or received by or held for accumulation for the same or another person.
- "Remainderman" means the person ultimately entitled to the principal, whether named or designated by the terms of the transaction by which the principal was established or determined by operation of law.
- "Tenant" means the person to whom income is presently or currently payable or for whom it is accumulated or who is entitled to the beneficial use of the principal presently and for a time prior to its distribution.
- "Trustee" includes the original trustee of any trust to which the principal may be subject and also any succeeding or added trustee.
- This section shall be effective with respect to wills the testators of which die on or after April 18, 1961, to revocable inter vivos trusts the settlors of which die after said date, and to irrevocable inter vivos trusts which are created after said date.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 747, § 14, effective April 22.
15-1-454. Applicability.
-
Except as specifically provided by the person establishing the principal, this subpart 7 shall apply:
- To life estates, estates for a term, remainders, reversions, and other legal estates created before July 1, 2001, or after July 1, 2010;
-
Except as provided in paragraph (b) of subsection (2) of this section, to trusts in existence before July 1, 2001, that have elected:
- Not to have subparts 1 through 6 of this part 4 apply to such trust, in accordance with section 15-1-434 (2); or
- To have the prior laws apply in accordance with section 15-1-434 (3); and
- To trusts in existence before July 1, 2001, that are subject to section 15-1-434 (3) and that have not elected to have subparts 1 through 6 of this part 4 apply to the trust, in accordance with section 15-1-434 (3).
-
- This subpart 7 shall apply retroactively to a life estate or estate for term in principal, which estate was created during the period beginning on July 1, 2001, and before July 1, 2010, and also to the remainder or reversion that commences in possession upon the termination of such life estate or estate for a term unless a tenant or a remainderman of such principal, or any part of such principal, elects to apply and complies with the provisions of subsection (3) of this section.
- This subpart 7 shall apply retroactively to trusts described in paragraphs (b) and (c) of subsection (1) of this section beginning on July 1, 2001, unless the qualified beneficiaries of the trust elect to apply and comply with the provisions of section 15-1-405.
-
- A tenant or a remainderman of principal, or any part of such principal, may make and deliver and, if required, record a notice of election as provided in this subsection (3) on or before July 1, 2009.
- The notice of election shall be a written statement of the election by such tenant or remainderman, against the retroactive application of this subpart 7 to such estates in such principal. The notice of election shall include a reference to this subsection (3); the dates of the instruments creating the present and future legal estates in such principal; the names of the persons creating such estates; a description of the principal, including the location of such principal; a description of such estates and the names or descriptions of the persons who are tenants and remaindermen of such principal; identification of which such persons are tenants and which are remaindermen; and the name and address of the person making the election. The notice of election shall be signed and acknowledged by the person making the election.
-
- In the case of an election made by a tenant, notice shall be delivered to the other tenants and to the remaindermen of the principal. In the case of an election made by a remainderman, notice shall be delivered to the other remaindermen and to the tenants of the principal.
- If the estate of the remainderman is unvested, notice may be made by or delivered to the persons then living or in existence who would, if then living or in existence, succeed to the principal upon the termination of the life estate or estate for a term in the principal.
- In the case of a child under the age of eighteen years, such notice may be made by or delivered to a conservator, guardian, or parent of such child. In the case of a person who is not competent to manage his or her affairs, such notice may be made by or delivered to the conservator, guardian, or person acting under a general power of attorney with respect to the business or financial affairs of such individual.
- The notice of election shall be considered delivered to the person to whom delivery is required to be made when the notice of election or a copy thereof is delivered in person or when mailed by registered or certified mail, return receipt requested, to such person.
- The recording of notice as provided in paragraph (d) of this subsection (3) shall fulfill the requirement of delivery of such notice in the case of any unborn, unascertained, or unknown person and in the case of a child who is under the age of eighteen years or an individual who is not competent to manage his or her affairs and for whom there is no person authorized by subparagraph (III) of this paragraph (c) to receive such notice.
-
- In the case that the principal is realty, a copy of the notice of election with an additional statement made as required by this subparagraph (I) shall be recorded with the recorder of the county where such realty is located. The additional statement shall state to whom, when, and by what means the notice was mailed or otherwise delivered and be signed by the person making the election.
- In the case that the principal is not realty, a copy of the notice with such additional statement may be recorded with the recorder of the county where the principal is located or, if the principal is intangible personalty, where the address of the tenant in possession of such principal is located. If such location is not within this state, then such copy and statement shall be recorded with the recorder of the city and county of Denver.
- Such copy of the notice and additional statement when recorded as provided in this paragraph (d) are prima facie evidence of the facts therein stated.
- No fiduciary for any trust, estate, individual, or other person with an interest, right, or power affected by the retroactive application of such amendments shall be required to make such election, nor shall such fiduciary be held responsible for not making such election.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 748, § 14, effective April 22.
15-1-455. Application of this subpart 7 - powers of settlor.
- This subpart 7 shall govern the ascertainment of income and principal and the apportionment of receipts and expenses between tenants and remaindermen in all cases where a principal has been established with or, unless otherwise stated in this subpart 7, without the interposition of a trust; except that, in the establishment of the principal, provision may be made touching all matters covered by this subpart 7, and the person establishing the principal may himself or herself direct the manner of ascertainment of income and principal and the apportionment of receipts and expenses or grant discretion to the trustee or other person to do so, and such provision and direction, where not otherwise contrary to law, shall control notwithstanding this subpart 7.
- If neither this subpart 7 nor the direction of the person establishing the principal states an applicable rule, income and principal shall be determined in accordance with what is reasonable and equitable in view of the interests of those entitled to income as well as those entitled to principal and in view of the manner in which persons of ordinary prudence, discretion, and judgment would determine such matters. If the person establishing the principal grants the trustee or other person discretion in crediting a receipt or charging an expenditure to income or principal or partly to each, no inference of imprudence or partiality arises from the fact that the trustee or other person has made an allocation contrary to the provisions of this subpart 7.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 750, § 14, effective April 22.
15-1-456. Income and principal - disposition.
- All receipts of money or other property paid or delivered as rent of realty or hire of personalty or dividends on corporate shares payable other than in shares of the corporation itself, or interest on money loaned, or interest on or the rental or use value of property wrongfully withheld or tortiously damaged, or otherwise in return for the use of principal, shall be deemed income unless otherwise expressly provided in this subpart 7.
- All receipts of money or other property paid or delivered as the consideration for the sale or other transfer, not a leasing or letting, of property forming a part of the principal, or as a repayment of loans, or in liquidation of the assets of a corporation, or as the proceeds of property taken on eminent domain proceedings where separate awards to tenant and remainderman are not made, or as proceeds of insurance upon property forming a part of the principal except where such insurance has been issued for the benefit of either tenant or remainderman alone, or otherwise as a refund or replacement or change in form of principal, shall be deemed principal, unless otherwise expressly provided in this subpart 7. Any profit or loss resulting upon any change in form of principal shall inure to or fall upon principal.
- All income after payment of expenses properly chargeable to it shall be paid and delivered to the tenant or retained by him or her if already in his or her possession or held for accumulation where legally so directed by the terms of the transaction by which the principal was established; except that the principal shall be held for ultimate distribution as determined by the terms of the transaction by which it was established or by law.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 751, § 14, effective April 22.
15-1-457. Apportionment of income.
- Whenever a tenant shall have the right to income from periodic payments, which shall include rent, interest on loans, and annuities, but shall not include dividends on corporate shares, and such right shall cease and determine by death or in any other manner at a time other than the date when such periodic payments should be paid, the tenant or his or her personal representative shall be entitled to that portion of any such income next payable which amounts to the same percentage thereof as the time elapsed from the last due date of such periodic payments to and including the day of the determination of his or her right is of the total period during which such income would normally accrue.
- The remaining income shall be paid to the person next entitled to income by the terms of the transaction by which the principal was established. But no action shall be brought by the trustee or tenant to recover such apportioned income or any portion thereof until after the day on which it would have become due to the tenant but for the determination of the right of the tenant entitled thereto.
- The provisions of this section shall apply regardless of whether an ultimate remainderman is specifically named. Likewise, when the right of the first tenant accrues at a time other than the payment dates of such periodic payments, he or she shall only receive that portion of such income which amounts to the same percentage thereof as the time during which he or she has been so entitled is of the total period during which such income would normally accrue. The balance shall be a part of the principal.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 751, § 14, effective April 22.
15-1-458. Corporate dividends and share rights.
- All dividends on shares of a corporation forming a part of the principal, which shares are payable in the identical class of the shares of the corporation as the stock on which the dividend is paid, shall be deemed principal. Subject to the provisions of this section, all dividends payable otherwise than in such identical class of the shares of the corporation itself, including ordinary and extraordinary dividends and dividends payable in other shares or in other securities or in obligations of corporations other than the declaring corporation, shall be deemed income. Except with respect to investment trusts, regulated investment companies, and trusts qualifying and electing to be taxed under federal law as real estate investment trusts, where the trustees have the option of receiving a dividend either in cash or in the shares of the declaring corporation, it shall be considered as a cash dividend and deemed income, irrespective of the choice made by the trustee. Distributions made from ordinary income by an investment trust, by a regulated investment company, or by a trust qualifying and electing to be taxed under federal laws as a real estate investment trust shall be deemed income. All other distributions made by the company or trust, including distributions from capital gains, depreciation, or depletion, whether in the form of cash or an option to take new stock or cash or an option to purchase additional shares, shall be deemed principal.
- All rights to subscribe to the shares or other securities or obligations of a corporation accruing on account of the ownership of shares or other securities in such corporation and the proceeds of any sale of such rights shall be deemed principal. All rights to subscribe to the shares or other securities or obligations of a corporation accruing on account of the ownership of shares or other securities in another corporation, and the proceeds of any sale of such rights, shall be deemed income.
- Where the assets of a corporation are wholly or partially liquidated, amounts paid upon corporate shares as cash dividends declared before such liquidation occurred or as arrears of preferred or guaranteed dividends shall be deemed income; all other amounts paid upon corporate shares on disbursement of the corporate assets to the stockholders shall be deemed principal.
- If a corporation succeeds another by merger, consolidation, or reorganization or otherwise acquires its assets and the corporate shares of the succeeding corporation are issued to the shareholders of the original corporation in like proportion to, or in substitution for, their shares of the original corporation, the two corporations shall be considered a single corporation in applying the provisions of this section, but two corporations shall not be considered a single corporation under this section merely because one owns corporate shares of or otherwise controls or directs the other.
- In applying this section, the date when a dividend accrues to the person who is entitled to it shall be held to be the date specified by the corporation as the one on which the stockholders entitled thereto are determined, or, in default thereof, the date of declaration of the dividend.
- All disbursements of corporate assets to the stockholders, whenever made, which are designated by the corporation as a return of capital or division of corporate property shall be deemed principal.
- Any distribution of shares or other securities or obligations of a corporation, other than the distributing corporation, or the proceeds of sale or other disposition thereof, made as a result of a court decree or final administrative order by a governmental agency ordering the distributing corporation to divest itself of the shares, securities, or other obligations, shall be deemed principal unless the distributing corporation designates that the distribution is wholly or partly in lieu of an ordinary cash dividend, in which case the distribution, to the extent that it is in lieu of the ordinary cash dividend, shall be deemed income. The provisions of this subsection (7) shall take effect on or after March 13, 1963, and shall apply to all estates of tenants or remaindermen then legally effective, whenever created, as well as to all estates of tenants or remaindermen which become legally effective thereafter.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 752, § 14, effective April 22.
15-1-459. Premium and discount bonds.
Where any part of the principal consists of bonds or other obligations for the payment of money, they shall be deemed principal at their inventory value, which in the case of a testamentary trust, unless a contrary intention appears from the will, shall be the value at the date of death, or in default thereof at their market value at the time the principal was established, or at their cost where purchased later, regardless of their par or maturity value, and, upon their respective maturities or upon their sale, any loss or gain realized thereon shall fall upon or inure to the principal. If, however, any of such bonds or obligations bears no stated interest but is redeemable at maturity or at a future time at an amount in excess of the amount in consideration of which it was issued, such accretion, as and when realized or realizable, shall be income.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 753, § 14, effective April 22.
15-1-460. Principal used in business.
- Whenever a trustee or a tenant is authorized by the terms of the transaction by which the principal was established, or by law, to use any part of the principal in the continuance of a business that the original owner of the property comprising the principal had carried on, the net profits of such business attributable to such principal shall be deemed income.
- If such business consists of buying and selling property, the net profits for any period shall be ascertained by deducting, from the gross returns during and the inventory value of the property at the end of such period, the expenses during the inventory value of the property at the beginning of such period.
- If such business does not consist of buying and selling property, the net income shall be computed in accordance with the customary practice of such business, but not in such a way as to decrease the principal.
- Any increase in the value of the principal used in such business shall be deemed principal, and all losses in any one calendar year, after the income from such business for that year has been exhausted, shall fall upon the principal.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 753, § 14, effective April 22.
15-1-461. Principal comprising animals.
If any part of the principal consists of animals employed in business, the provisions of section 15-1-460 shall apply; and, in other cases where the animals are held as a part of the principal partly or wholly because of the offspring or increase which they are expected to produce, all offspring or increase shall be deemed principal to the extent necessary to maintain the original number of such animals, and the remainder shall be deemed income; and in all other cases such offspring or increase shall be deemed income.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 754, § 14, effective April 22.
15-1-462. Principal subject to depletion.
If any part of the principal consists of property other than natural resources, subject to depletion, such as leaseholds, patents, copyrights, and royalty rights, and the trustee or tenant in possession is not under a duty to change the form of the investment of the principal, the full amount of rents, royalties, or return from the property shall be income to the tenant; except that, where the trustee or tenant is under a duty, arising either by law or by the terms of the transaction by which the principal was established, to change the form of the investment, either at once or as soon as it may be done without loss, then the return from such property not in excess of four percent per annum of its fair inventory value, which in the case of a testamentary trust, unless a contrary intention appears from the will, shall be the value at date of death, or, in default of same, its market value at the time the principal was established, or at its cost where purchased later, shall be deemed income and the remainder principal.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 754, § 14, effective April 22.
15-1-463. Unproductive estate.
- If any part of a principal in the possession of a trustee consists of realty or personalty that for more than a year and until disposed of as stated in this section has not produced an average net income of at least one percent per annum of its fair inventory value, which in the case of a testamentary trust, unless a contrary intention appears from the will, shall be the value at date of death, or, in default thereof, its market value at the time the principal was established or of its cost where purchased later, and the trustee is under a duty to change the form of the investment as soon as it may be done without sacrifice of value and such change is delayed, but is made before the principal is finally distributed, then the tenant, or, in case of his or her death, his or her personal representative, shall be entitled to share in the net proceeds received from the property as delayed income to the extent stated in this section.
- Such income shall be the difference between the net proceeds received from the property and the amount which, had it been placed at simple interest at the rate of four percent per annum for the period during which the change was delayed, would have produced the net proceeds at the time of change, but in no event shall such income be more than the amount by which the net proceeds exceed the fair inventory value of the property, which in the case of a testamentary trust, unless a contrary intention appears from the will, shall be the value at the date of death, or, in default thereof, its market value at the time the principal was established or its cost where purchased later. The net proceeds shall consist of the gross proceeds received from the property less any expenses incurred in disposing of it and less all carrying charges which have been paid out of principal during the period while it has been unproductive.
-
The time the change is delayed starts when the duty to make it first arose, which shall be presumed, in the absence of evidence to the contrary, to be:
- One year after the trustee first received the property if the property was unproductive at that time; or
- One year after the property became unproductive.
- If the tenant has received any income from the property or has had any beneficial use thereof during the period while the change has been delayed, his or her share of the delayed income shall be reduced by the amount of such income received or the value of the use had.
- In the case of successive tenants, the delayed income shall be divided among them or their representatives according to the length of the period for which each was entitled to income.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 754, § 14, effective April 22.
15-1-464. Disposition of natural resources.
-
If any part of the principal consists of property in lands from which may be taken timber, minerals, oils, gas, or other natural resources, and the trustee or tenant is authorized by law or by the terms of the transaction by which the principal was established
to sell, lease, or otherwise develop such natural resources, and no provision is made for the disposition of the net proceeds thereof after the payment of expenses and carrying charges on such property, such net proceeds, if received
as rent on a lease, shall be deemed income but, if received as consideration, whether as royalties or otherwise, for the permanent severance of such natural resources from the lands, shall be deemed, to the extent provided in this
section, principal to be invested to produce income, and the remainder of such net proceeds shall be deemed income. Of the net proceeds received during any period as consideration for permanent severance of a natural resource,
the amount to be considered as principal for that period shall be the greater of the following:
- The amount that bears the same ratio to the fair inventory value of such natural resource, which in the case of a testamentary trust, unless a contrary intention appears in the will, shall be the value at date of death, or, in default thereof, its market value at the time the principal was established, or its cost if purchased later, as the number of units of the natural resource severed during the period bears to the total number of severable units of the natural resource estimated as having existed at the time the principal was established;
- The amount that bears the same ratio to the estimated value of the natural resource at the time of commencement of severance as the number of units of the natural resources severed during the period bears to the total number of severable units of the natural resource estimated as having existed at the time of commencement of such severance;
- An amount equal to that percentage of the net proceeds received as consideration for such permanent severance that is allowable as a deduction from gross income for depletion purpose under the federal income tax law then in effect at the time of severance or, if the federal income tax law then in effect makes no provision for the deduction of any stated percentage for depletion, or for any reason is not applicable to such natural resource, then fifteen percent of such net proceeds. Such disposition of net proceeds shall apply whether permanent severance commenced before or after the time the principal was established and without regard to the time when the instrument under which severance is being made was executed.
- Nothing in this section shall be construed to abrogate or extend any right which may otherwise have accrued by law to a tenant to develop or work such natural resources for his or her own benefit.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 755, § 14, effective April 22.
15-1-464.5. Disposition of natural resources - special applicability.
-
If any part of the principal consists of a right to receive royalties, overriding or limited royalties, working interests, production payments, net profit interests, or other interests in minerals or other natural resources in, on, or under land, the
receipts from taking the natural resources from the land shall be allocated as follows:
- If received as rent on a lease or extension payments on a lease, the receipts are income;
- If received from a production payment, the receipts are income to the extent of any factor for interest or its equivalent provided in the governing instrument. There shall be allocated to principal the fraction of the balance of the receipts that the unrecovered cost of the production payment bears to the balance owed on the production payment, exclusive of any factor for interest or its equivalent. The receipts not allocated to principal are income.
- If received as a royalty, overriding or limited royalty, or bonus, or from a working, net profit, or any other interest in minerals or other natural resources, receipts not provided for in paragraph (a) or (b) of this subsection (1) shall be apportioned on a yearly basis in accordance with this paragraph (c) regardless of whether any natural resource was being taken from the land at the time the trust was established. Fifteen percent of the gross receipts, but not to exceed fifty percent of the net receipts remaining after payment of all expenses, direct and indirect, computed without allowance for depletion, shall be added to principal as an allowance for depletion. The balance of the gross receipts after payment therefrom of all expenses, direct and indirect, is income.
- If a trustee, on April 22, 2009, held an item of depletable property of a type specified in this section, he or she shall allocate receipts from the property in the manner used before April 22, 2009, but as to all depletable property acquired after April 22, 2009, by an existing or new trust, the method of allocation provided herein shall be used.
- This section does not apply to timber, water, soil, sod, dirt, turf, or mosses.
-
- Except as provided in paragraph (b) of this subsection (4), this section applies to a trust or estate that is subject to this subpart 7 and shall control over the other provisions of this subpart 7 to the extent that any inconsistency exists between such provisions and this section.
-
- In the case of a trust or a probate estate, the trustee or the personal representative may elect to have this section not apply to the trust or the probate estate by giving notice of such election to the beneficiaries of the trust or the probate estate as provided in subsection (5) of this section.
- In the case of an estate other than a trust, a life tenant or the remainderman may elect to have this section not apply to the estate by giving notice of such election in the same time and manner as provided in section 15-1-454 (3) for an election out of the application of this subpart 7 to the estate.
-
- If a trustee or a personal representative makes an election under this section, he or she shall satisfy the requirements set forth in section 15-1-405 for providing notice of the election.
- If a life tenant or a remainderman makes an election under this section, he or she shall satisfy the requirements set forth in section 15-1-454 (3) for providing notice of the election and recording the election.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 756, § 14, effective April 22.
15-1-465. Expenses - trust estates.
- All ordinary expenses incurred in connection with the trust estate or with its administration and management, including regularly recurring taxes assessed against any portion of the principal, water rates, premiums on insurance taken upon the estates of both tenant and remainderman, interest on mortgages on the principal, ordinary repairs, a reasonable portion, but not less than one-half, of the trustees' compensation for current management of principal and application of income to the use of tenant, compensation of assistants, and court costs and attorneys' and other fees on regular accountings shall be paid out of income, but such expenses where incurred in disposing of, or as carrying charges on, an unproductive estate, as defined in section 15-1-463, shall be paid out of principal, subject to the provisions of section 15-1-463 (2).
- All other expenses, including trustees' commissions at trust inception and termination and not more than one-half of trustees' compensation for current management of principal and application of income to the use of the tenant, cost of investing or reinvesting principal, attorneys' fees and other costs incurred in maintaining or defending any action to construe the trust or protect it or the property or assure the title thereof, unless due to the fault or cause of the tenant, and costs of, or assessments for, improvements to property forming part of the principal, shall be paid out of principal. Any tax levied by any authority, federal, state, or foreign, upon profit or gain defined as principal under the terms of section 15-1-466 (2) shall be paid out of principal, notwithstanding that said tax may be denominated a tax upon income by the taxing authority.
- Expenses paid out of income according to subsection (1) of this section that represent regularly recurring charges shall be considered to have accrued from day to day and shall be apportioned on that basis whenever the right of the tenant begins or ends at some date other than the payment date of the expenses. If the expenses to be paid out of income are of an unusual amount, the trustee may distribute them throughout an entire year or part thereof or throughout a series of years. After such distribution, if the right of the tenant ends during the period, the expenses shall be apportioned between tenant and remainderman on the basis of such distribution.
- If the costs of, or special taxes or assessments for, an improvement representing an addition of value to property held by the trustee as part of principal are paid out of principal, as provided in subsection (2) of this section, the trustee shall reserve out of income and add to the principal each year a sum equal to the cost of the improvement divided by the number of years of the reasonably expected duration of the improvement.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 758, § 14, effective April 22.
15-1-466. Expenses - nontrust estates.
- The provisions of section 15-1-465, so far as applicable and excepting those provisions concerning costs of, or special taxes or assessments for, improvements to property, shall govern the apportionment of expenses between tenants and remaindermen where no trust has been created; except that such apportionment shall be subject to any legal agreement of the parties or any specific direction of the taxing or other statutes. If either tenant or remainderman has incurred an expense for the benefit of his or her own estate and without the consent or agreement of the other, he or she shall pay such expense in full.
- Subject to the exceptions described in subsection (1) of this section, the cost of, or special taxes or assessments for, an improvement representing an addition of value to property forming part of the principal shall be paid by the tenant, if such improvement cannot reasonably be expected to outlast the estate of the tenant. In all other cases, a portion thereof only shall be paid by the tenant, while the remainder shall be paid by the remainderman. Such portion shall be ascertained by taking that percentage of the total that is found by dividing the present value of the tenant's estate by the present value of an estate of the same form as that of the tenant; except that, it is limited for a period corresponding to the reasonably expected duration of the improvement. The computation of present values of the estates shall be made on the expectancy basis set forth in the American experience tables of mortality, and no other evidence of duration or expectancy shall be considered.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 758, § 14, effective April 22.
15-1-467. Disposition of net probate income.
-
Subject to the provisions of section 15-1-455, an executor shall, at the time of distribution, pay over to the trustee of any trust, or to any other legatee to whom specific property other than money is bequeathed or devised, the net probate income of
such property and shall pay over all other net probate income to:
- The trustee of any trust created out of residue or to which any portion of residue is added;
- Any legatee for life or years of any portion of the residue;
- Any legatee of a present, legal, possessory interest in any portion of the residue; and
- Any trustee of a sum of money under a trust created or added to by the will but not payable out of the residue, in pro rata shares, in accordance with the respective values of the property bequeathed or devised outright or in trust. The values shall be those finally determined for federal estate tax purposes, or, if no such determination is made, the values shall be those at date of death as determined by the executor. Nothing in this subsection (1) shall prevent a court from ordering distribution of any net probate income directly to the beneficiary of a trust.
- If an executor makes a partial distribution of property to any legatee or trustee, the recipient of such partial distribution shall share in the net probate income collected to the date of distribution, but his or her share in the net probate income later collected by the executor shall be reduced accordingly.
- The amount of any net probate income distributed by the executor to each trustee or other distributee shall be stated in any order of distribution.
- A trustee who receives net probate income from an executor shall treat it as income of the trust for which he or she is acting.
- If net probate income, with respect to which income taxes have been paid by the executor, is distributed, and any of the distributees is a charitable or other tax-exempt organization, and a charitable deduction was allowable on the income tax return of the executor for the taxable year of the executor in which the income was received or accrued, such income taxes paid by the executor shall be allocated among the distributees so that the diminution in such taxes resulting from the charitable deduction allowable to the executor will inure to the benefit of such charitable or exempt organization.
- If net probate income with respect to which income taxes have been paid by the executor is distributed and includes tax-exempt or partially tax-exempt income or income with respect to which a credit or special deduction is allowable and the will requires such tax-exempt or partially tax-exempt income or income with respect to which a credit or special deduction is allowable to be distributed other than proportionately to the distributees of net probate income, such income taxes shall be allocated among the distributees so that the benefit of such tax exemption, partial tax exemption, credit, or special deduction will inure to the benefit of the distributee of such tax-exempt or partially tax-exempt income or of the income with respect to which a credit or special deduction is allowable.
- If a trust, whether inter vivos or testamentary, contains provisions whereby, on the happening or the failure to happen of an event, a gift is made of money in trust, or of specific property other than money, in trust or outright, or of any portion of the residue of such trust in further trust, or for life or years, the income of such trust for the period following the happening or failure to happen of such event shall be disposed of by the trustee thereof in the manner, so far as applicable, that would prevail if the trustee of such trust were an executor acting under the provisions of this section.
- This section shall be effective with respect to wills the testators of which die on or after April 18, 1961, to revocable inter vivos trusts the settlors of which die after said date, and to irrevocable inter vivos trusts which are created after said date.
Source: L. 2009: Entire section added, (HB 09-1241), ch. 169, p. 759, § 14, effective April 22.
PART 5 FIDUCIARY PROPERTY - DEPOSITORY NOMINEES
Editor's note: This part 5 was numbered as article 5 of chapter 57, C.R.S. 1963. The substantive provisions of this part 5 were repealed and reenacted in 1977, resulting in the addition, relocation, and elimination of sections as well as subject matter. For amendments to this part 5 prior to 1977, consult the Colorado statutory research explanatory note and the table itemizing the replacement volumes and supplements to the original volume of C.R.S. 1973 beginning on page vii in the front of this volume. Former C.R.S. section numbers are shown in editor's notes following those sections that were relocated.
Cross references: For deposits by a fiduciary, see §§ 15-1-111 and 15-1-112.
15-1-501. Fiduciary property kept separate.
Every fiduciary shall keep fiduciary property separate and distinct from such fiduciary's own property and shall not invest or deposit the same with any person, association, or corporation in such fiduciary's own name. Except as provided in this part 5, every fiduciary shall keep the property of each fiduciary account separate and distinct from the property of every other fiduciary account, and all transactions shall be conducted in such fiduciary's name as fiduciary.
Source: L. 77: Entire part R&RE, p. 826, § 1, effective July 1.
Editor's note: This section is similar to former § 15-1-501 as it existed prior to 1977.
ANNOTATION
Law reviews. For article, "The Care and Feeding of Individual Trustees", see 39 U. Colo. L. Rev. 205 (1966).
15-1-502. Nominees.
Any fiduciary may register or hold the title to fiduciary property in the name of a nominee.
Source: L. 77: Entire part R&RE, p. 826, § 1, effective July 1.
Editor's note: This section is similar to former § 15-1-501 as it existed prior to 1977.
15-1-503. Fiduciary property deposits.
Any fiduciary may deposit fiduciary property with a bank or trust company, including a federal reserve bank, or with a clearing corporation, as defined in section 4-8-102 (a)(5), C.R.S., as depository, and such fiduciary property so deposited may be registered in such depository's name as nominee for the fiduciary or may be registered in the name of a nominee of such depository.
Source: L. 77: Entire part R&RE, p. 826, § 1, effective July 1. L. 96: Entire section amended, p. 245, § 23, effective July 1.
Editor's note: This section is similar to former § 15-1-502 as it existed prior to 1977.
15-1-504. Holding of securities by fiduciary or depository of fiduciary property.
Any bank or trust company or clearing corporation acting as a fiduciary or depository of fiduciary property may merge and hold securities held as fiduciary property, without certification as to ownership attached, with other securities held as fiduciary property, in one or more certificates representing securities of the same class of the same issuer. Ownership of such securities may be transferred by bookkeeping entry on the books of the fiduciary or of the depository without physical delivery of certificates representing such securities.
Source: L. 77: Entire part R&RE, p. 826, § 1, effective July 1.
Editor's note: This section is similar to former § 15-1-503 as it existed prior to 1977.
15-1-505. Records.
The records of every fiduciary shall at all times show the ownership of any fiduciary property held by such fiduciary or in the name of its nominee or held in a depository.
Source: L. 77: Entire part R&RE, p. 827, § 1, effective July 1.
Editor's note: This section is similar to former § 15-1-505 as it existed prior to 1977.
15-1-506. Liability of issuer.
No issuer of securities or agent thereof shall be liable for registering or causing to be registered on the books of such issuer any securities in the name of any nominee or, when the transfer is made on the authorization of the nominee, for transferring or causing to be transferred on the books of the issuer any securities theretofore registered by the issuer in the name of any nominee.
Source: L. 77: Entire part R&RE, p. 827, § 1, effective July 1.
Editor's note: This section is similar to former § 15-1-506 as it existed prior to 1977.
15-1-507. Custodian as fiduciary.
For purposes of this part 5, a bank or trust company acting as custodian shall be deemed to be a fiduciary, and property held in custody by a bank or trust company shall be deemed to be fiduciary property.
Source: L. 77: Entire part R&RE, p. 827, § 1, effective July 1.
Editor's note: This section is similar to former § 15-1-507 as it existed prior to 1977.
ANNOTATION
Bank acknowledgment of restriction in letters of conservatorship made bank more than a mere custodian; bank became a fiduciary. Pledging collateral consisting of conservatorship funds breached fiduciary duty because bank failed to refrain from involvement in transactions antagonistic to the interests of the protected person. In re Conservatorship of Roth, 804 P.2d 265 (Colo. App. 1990).
15-1-508. Individual and corporate fiduciaries.
- For purposes of this part 5, a bank or trust company acting as a fiduciary, alone or jointly with any cofiduciary, may take any action authorized by this part 5 without regard to the language or provisions, or any limitations, in the will or trust instrument or other instrument establishing the fiduciary relationship.
- For purposes of this part 5, any fiduciary other than a bank or trust company may take any action authorized by this part 5, unless limited by the language or provisions in the will or trust instrument or other instrument establishing the fiduciary relationship expressing a clear intention that an action otherwise authorized by this part 5 shall be denied to such fiduciary.
- Nothing in subsection (2) of this section shall be construed to limit the authority of a bank or trust company serving as a cofiduciary with one or more other fiduciaries or serving as a depository to take any action authorized by this part 5 which it could take if serving as sole fiduciary.
Source: L. 77: Entire part R&RE, p. 827, § 1, effective July 1.
15-1-509. Fiduciary duty.
In the exercise of any of the powers granted in this part 5, a fiduciary has a duty to act reasonably and equitably with due regard for his obligations and responsibilities toward the interests of beneficiaries and creditors and the estate or trust involved and the purposes thereof and with due regard for the manner in which men of prudence, discretion, and intelligence would act in the management of the property of another.
Source: L. 77: Entire part R&RE, p. 827, § 1, effective July 1.
15-1-510. Application.
This part 5 shall apply to every fiduciary, regardless of the date of the agreement, instrument, or court order by which the fiduciary is appointed.
Source: L. 77: Entire part R&RE, p. 827, § 1, effective July 1.
PART 6 UNIFORM FIDUCIARY SECURITY TRANSFERS ACT
15-1-601 to 15-1-611. (Repealed)
Source: L. 96: Entire part repealed, p. 246, § 25, effective July 1.
Editor's note: This part 6 was numbered as article 6 of chapter 57, C.R.S. 1963. For amendments to this part 6 prior to its repeal in 1996, consult the Colorado statutory research explanatory note and the table itemizing the replacement volumes and supplements to the original volume of C.R.S. 1973 beginning on page vii in the front of this volume.
PART 7 FIDUCIARY INTERESTS IN ENTITIES
15-1-701. Power to become partner.
Subject to the terms of the partnership agreement, if permitted by the trust instrument or will under which the fiduciary serves or by order of a court having jurisdiction of the estate or trust, a fiduciary may enter into a partnership agreement and accept the assignment of or otherwise acquire, hold, and dispose of an interest in a partnership and in so doing may become either a general or a limited partner.
Source: L. 63: p. 496, § 1. C.R.S. 1963: § 57-7-1. L. 2002: Entire section amended, p. 650, § 2, effective July 1.
15-1-702. Family business interests - maintenance of entity - formation of successor entity.
-
As used in this section, unless the context otherwise requires:
- "Family" means an individual, such individual's spouse, parents, the descendants of either of such parents or of such spouse, or the spouses of such descendants or any combination of such persons.
- "Family business" means a business enterprise with respect to which the aggregate interests of the family are substantial in relation to the total outstanding interests in the business enterprise.
- "Interest" and "interests" include beneficial interests as beneficiaries of any estate or trust and indirect interests through any other form of entity.
- "Successor entity" includes the entity holding the family business where such entity survives a consolidation, merger, acquisition, or other combination.
- Any fiduciary acting under a will or trust instrument that evidences an intent to retain an interest in a family business may maintain the interest in any form of entity or successor entity. Such a successor entity may be formed by consolidation, merger, acquisition, or other combination and shall be considered the same enterprise for purposes of maintaining the interest in the family business where the interests of the beneficiaries in the successor entity are substantial.
-
Except as otherwise provided in the instrument under which the fiduciary is acting:
- A fiduciary may proceed as provided in this subsection (3) with the formation of such a successor entity where the fiduciary believes in good faith that the formation is on a favorable basis considering only the overall interests of the beneficiaries including the maintenance of a substantial interest on the part of the beneficiaries in the enterprise and the value of such interest in the long term.
- A fiduciary may vote and otherwise deal with respect to interests in the family business as the fiduciary believes in the good faith exercise of the fiduciary's business judgment, under the business judgment rule, to be necessary or appropriate to complete such formation on such a favorable basis.
- A fiduciary may, in the good faith exercise of such judgment, accept a reduced participation in equity, voting, and other rights and preferences including a reduction in voting rights that results in less than voting control of the successor entity.
- A fiduciary may proceed without notice to the beneficiaries where disclosure is forbidden by law or where the fiduciary believes in the good faith exercise of such judgment, that nondisclosure is necessary to complete such formation on such a favorable basis.
- This section shall apply to any interests held by an estate or trust in a family business on or after May 26, 2000, and to the formation of any entity or successor entity completed after May 26, 2000.
Source: L. 2000: Entire section added, p. 1171, § 1, effective May 26.
PART 8 POWERS
15-1-801. Short title.
This part 8 shall be known and may be cited as the "Colorado Fiduciaries' Powers Act".
Source: L. 67: p. 766, § 1. C.R.S. 1963: § 57-8-1.
15-1-802. Definitions.
As used in this part 8, unless the context otherwise requires:
- "Court" means the district or probate court having jurisdiction over the administration of the estate or trust.
- "Estate" means the estate of a decedent or a person under disability.
-
-
"Fiduciary" means the one or more persons designated in a will, trust instrument, or otherwise, whether corporate or natural persons and including successors and substitutes, who are acting in any of the following capacities:
- Personal representatives, including executors, administrators, administrators with the will annexed (cum testamento annexo), administrators in succession acting under a will (de bonis non), ancillary administrators acting under a will, and ancillary executors;
- Special administrators;
- Conservators; and
- Trustees.
- "Fiduciary" does not include a guardian, special fiduciary, or public administrator, except when the public administrator has been appointed a fiduciary as defined in this subsection (3).
-
"Fiduciary" means the one or more persons designated in a will, trust instrument, or otherwise, whether corporate or natural persons and including successors and substitutes, who are acting in any of the following capacities:
- "Trust" means any express trust created by a will, trust instrument, or other instrument, whereby there is imposed upon a trustee the duty to administer a trust asset, for the benefit of a named or otherwise described income or principal beneficiary, or both. A trust shall not include trusts for the benefit of creditors, resulting or constructive trusts, business trusts where certificates of beneficial interest are issued to the beneficiary, investment trusts, voting trusts, security instruments such as deeds of trust and mortgages, trusts created by the judgment or decree of a court, liquidation or reorganization trusts, or trusts for the sole purpose of paying dividends, interest, interest coupons, salaries, wages, pensions, or profits, instruments wherein one or more persons are mere nominees for another, or trusts created in deposits in any banking institution or savings and loan institution.
- "Will" means a will of a decedent and includes a testament or codicil.
Source: L. 67: p. 766, § 1. C.R.S. 1963: § 57-8-2. L. 73: p. 1647, § 7. L. 75: (3) R&RE, p. 588, § 7, effective July 1.
ANNOTATION
Ex-husband had fiduciary duty to ex-wife since he retained complete control over her share of stock. Despite having the power to sell the stock within his sole discretion, the husband still was required to operate within the bounds of prudent judgment, reasonableness, and equity. Marshall v. Grauberger, 796 P.2d 34 (Colo. App. 1990).
As a matter of law, the husband owed the wife a fiduciary duty to deal with her interest with the utmost good faith. Marshall v. Grauberger, 796 P.2d 34 (Colo. App. 1990).
A trustee's duty of loyalty and of reasonable care dictates that he must seek to obtain the best price for trust property he is selling. If a trust has been damaged but there is uncertainty as to the extent of the damage, damages are to be closely approximated by drawing reasonable and probable inferences from the facts proven. Marshall v. Grauberger, 796 P.2d 34 (Colo. App. 1990).
15-1-803. Powers conferred on fiduciaries.
Fiduciaries have all powers conferred upon them by the provisions of this part 8, unless limited by the language or provisions in the will or trust instrument expressing a clear intention that powers conferred under this part 8 shall be denied to the fiduciary. They have, in addition to the powers conferred in this part 8, such other or further powers as are set forth in the will or trust instrument or as are provided by other statutes or by court rule or order. If any power specifically conferred on a fiduciary by the will or trust instrument conflicts with any power conferred by this part 8, the fiduciary shall be deemed to have only the power specifically conferred by the will or trust instrument and not the conflicting power conferred by this part 8. Provisions in articles 10 to 20 of this title concerning the exercise of powers in the administration of an estate by an executor having powers under a will shall apply to executors having powers conferred under this part 8.
Source: L. 67: p. 767, § 1. C.R.S. 1963: § 57-8-3. L. 73: p. 1648, § 8.
ANNOTATION
Applied in Fry & Co. v. District Court, 653 P.2d 1135 (Colo. 1982).
15-1-804. Powers available.
- During the period of administration of the estate or trust and until final distribution, a fiduciary has the power to perform, without court authorization, every act reasonably necessary to administer the estate or trust, including but not limited to the powers specified in subsection (2) of this section. In the exercise of any of his powers, whether derived from this part 8 or from any other source, a fiduciary has a duty to act reasonably and equitably with due regard for his obligations and responsibilities toward the interests of beneficiaries and creditors, the estate or trust involved, and the purposes thereof and with due regard for the manner in which men of prudence, discretion, and intelligence would act in the management of the property of another.
-
Subject to subsection (1) of this section, a fiduciary has the power:
- To receive, take possession of, recover, and preserve the assets of the estate or trust, both real and personal, coming to his attention or knowledge and the rents, issues, and profits arising therefrom;
- To retain the initial assets of the estate or trust without liability for loss, depreciation, or diminution in value resulting from such retention until, in the judgment of the fiduciary, disposition of such assets should be made;
- To accept additions to the estate or trust, not only from the estate of the decedent or the settlor of the trust, but also from other sources;
- To acquire an undivided interest in an estate or trust asset in which the fiduciary, in a fiduciary or individual capacity, also holds an undivided interest;
- To invest and reinvest assets of the estate or trust, as provided by law;
- To effect and keep in force fire, rent, title, liability, casualty, or other insurance to protect the assets of the estate or trust and the fiduciary against hazards usually insured against;
-
With respect to real property or any interest in real property owned by the estate or trust, except where such real property, or interest in real property, is specifically devised:
- To grant options to sell and to sell and convey the same at public or private sale, for cash or on credit, upon fair, reasonable, and equitable terms;
- To lease the same, even for a term extending beyond the duration of the administration of the estate or trust, and, in any such case, to include or exclude the right to explore for and remove mineral or other natural resources, and in connection with mineral leases to enter into pooling and unitization agreements;
- To encumber the same;
- To make repairs or alterations in buildings, or other structures; to improve or demolish any improvements; to raze existing party walls or buildings and erect new party walls or buildings together with owners of adjoining or adjacent property or to enter into agreements with respect thereto; to subdivide, develop, and dedicate to public use; to make or obtain the vacation of public plats; to adjust boundaries; to adjust differences in valuation on exchange or partition by giving or receiving money or money's worth; and to dedicate and grant easements to public use without consideration;
-
With respect to personal property or any interest in personal property, owned by the estate or trust, except where such personal property is specifically bequeathed:
- To grant options to sell and to sell the same at public or private sale, for cash or on credit, upon fair, reasonable, and equitable terms;
- To lease personal property, even for a term extending beyond the duration of the administration of the estate or trust;
- To encumber the same;
- To make repairs to the personal property of the estate or trust;
-
With respect to any indebtedness owed to the estate or trust, secured or unsecured:
- To continue the same upon and after maturity, with or without renewal or extension, upon such terms as the fiduciary deems advisable;
- To foreclose any security for such indebtedness, to purchase any property securing such indebtedness, and to acquire any property by conveyance from the debtor in lieu of foreclosure;
- To perform, in the case of an estate, any and all valid and legally enforceable executory contracts to which at the time of his death the decedent was a party and which at the time of such death had not been fully performed by such decedent and to discharge all obligations of the estate arising under or by reason of such contracts if such obligations are legally enforceable against the estate;
- To enter into contracts which are reasonably incident to the administration of the estate or trust;
- To continue or to participate in the operation of any business activity or enterprise, including a sole proprietorship or partnership, existing at the inception of the estate or trust (in the case of an estate having due regard for those having claims against the estate) and to incorporate or otherwise change its form;
- To deposit funds of the estate or trust in one or more banks, including the banking department of a corporate fiduciary;
- To deposit fiduciary property with others, to the extent permitted by part 5 of this article, so long as the cost thereof does not constitute an additional charge against the estate or trust but is payable out of compensation otherwise properly payable to the fiduciary;
- To hold title to fiduciary property in the name of a nominee, without disclosure of the estate or trust, to the extent permitted by part 5 of this article;
- To borrow money from any source, including the commercial department of a corporate fiduciary, with any such indebtedness being repayable solely from assets of the estate or trust and to pledge or encumber estate or trust assets as security for such loans;
- To advance money for the protection of the estate, or the trust, or the assets thereof and for all expenses, losses, and liabilities incurred in or by the collection, care, administration, or protection of the estate, or trust, or the assets thereof. For all such advances, the fiduciary shall have a lien on the estate or trust assets and may reimburse himself with interest at a reasonable rate out of the estate or trust.
- To pay, contest, or otherwise settle claims by or against the estate or trust, including taxes, assessments, and expenses, by compromise, arbitration, or otherwise;
- To determine all matters of estate and trust accounting as the fiduciary deems to be proper and equitable;
- In the case of a trust, to advance trust income to or for the use of a beneficiary, for which advance the fiduciary shall have a lien on the future benefits of such beneficiary from the trust;
- To make distributions in kind, in money, or partially in each, at fair market values on the effective date of distribution, as determined by the fiduciary, and without requiring pro rata distribution of specific assets;
- In the case of a trust, to abandon, charge off, or otherwise dispose of any property held by or on behalf of the trust which is of no value or of insufficient value to justify collection, care, administration, or protection;
- To execute and deliver all legal instruments which are necessary or appropriate for the administration of the estate or trust;
-
- To employ attorneys or other advisors to advise or assist the fiduciary in the performance of his or her duties or, instead of acting personally, to employ one or more agents to do any ministerial act required to be done by the fiduciary in the performance of his or her duties;
- In accordance with section 15-1.1-109 of the "Colorado Uniform Prudent Investor Act", to delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances;
- In the case of the survivors of the holders of a power given to or imposed upon two or more fiduciaries, to exercise or perform such power, unless the exercise of such power would be contrary to any express provision of the will, trust instrument, or other instrument;
- As successor or substitute fiduciary, to succeed to all of the powers and duties of an original, successor, or prior substitute fiduciary, unless contrary to any express provision of the will, trust instrument, or other instrument;
- To vote in person or by proxy shares of stock or other securities which are assets of the estate or trust;
- To pay calls, assessments, and any other sums chargeable to or accruing against or on account of shares of stock or other securities which are assets of the estate or trust whenever such payments may be legally enforceable against the fiduciary or any property of the estate or trust or whenever the fiduciary deems payment expedient and for the best interests of the estate or trust;
- To sell or exercise stock subscription or conversion rights, participate in foreclosures, reorganizations, consolidations, mergers, or liquidations; to enter into voting trust agreements or other similar arrangements; and to consent to corporate sales, leases, and encumbrances. In the exercise of such powers, the fiduciary shall be authorized, whenever he deems such course expedient, to deposit stocks or other securities which are assets of the estate or trust with any protective or other similar committee or with voting trustees under such terms and conditions respecting the deposit thereof as the fiduciary may approve.
- In the case of a trustee, to hold the assets of two or more trusts or parts of such trusts created by the same instrument or by two or more instruments if the trust provisions are substantially similar, as an undivided whole, without separation as between the assets of such trusts or parts of such trusts; but such separate trusts or parts of such trusts shall have undivided interests in such assets; and no such holding shall defer the vesting of any estate in possession or otherwise;
- In the case of an estate, to join with the surviving spouse, his conservator, his guardian, the executor of his will, or the administrator of his estate, in the execution and filing of a joint income tax return for any period prior to the death of a decedent for which he has not filed a return, a federal gift tax return on gifts made by the decedent's surviving spouse, or a Colorado gift tax return on gifts made before January 1, 1980, by the decedent's surviving spouse, and to consent to said gifts being made one-half by the decedent, for any period prior to a decedent's death, and to pay such taxes thereon as are chargeable to the decedent;
- With respect to stock of a corporation held in an estate or trust where the powers of investment conferred upon the fiduciary by the governing instrument or by this part 8 include the power to retain assets initially contributed, or subsequently added from the estate of the decedent or by the settlor of the trust or from any other source, to retain such stock, to exchange or convert such stock for the stock or other securities of an affiliate of the corporation issuing such stock, and to retain such new stock and other securities. For the purposes of this paragraph (ff), "corporation" includes the corporate fiduciary as well as any other corporation, and "affiliate" of a corporation means any corporation controlling, controlled by, or under common control with such corporation, or any corporation formed as a result of or for the purpose of effectuating any merger, consolidation, or reorganization of such corporation. The powers conferred by this paragraph (ff) are hereby conferred upon the fiduciaries of all estates and trusts, unless otherwise limited by language or provisions in the will or trust agreement expressing a clear intention to the contrary.
- In the case of a bank acting as a corporate fiduciary, to invest fiduciary funds awaiting investment or distribution in short-term investments, including, but not limited to, a collective investment fund. A bank acting as a corporate fiduciary may also deposit fiduciary funds awaiting investment or distribution in the commercial department of such bank or in an affiliate bank. For the purposes of this paragraph (gg), the term "bank" includes a state bank or bank and trust company which is chartered by this state or as a national bank.
- To grant a conservation easement in gross, as defined in section 38-30.5-102, C.R.S., whether for consideration or gratuitously; except that, if such grant is for less than fair market value, the consent of interested persons, as defined in section 15-10-201 (27), shall be obtained in writing or an order of the court shall be obtained after notice to interested persons, unless a will or trust instrument directs, permits, or requires a donation of a conservation easement in gross, in which case no such consent or order shall be required;
- Subject to the terms of the documents controlling the entity concerned, to retain or acquire interests in any entity in which the fiduciary does not have general liability, regardless of form, including but not limited to any partnership, corporation, limited liability company, and joint venture, and to become a shareholder, partner, member, or joint venturer.
Source: L. 67: p. 767, § 1. C.R.S. 1963: § 57-8-4. L. 70: p. 196, § 1. L. 73: p. 1648, § 9. L. 77: (2)(n) and (2)(o) amended, p. 827, § 2, effective July 1. L. 79: (2)(u) amended, p. 656, § 20, effective July 1. L. 81: (2)(ee) amended, p. 1885, § 6, effective May 27; (2)(g)(I) and (2)(g)(II) amended, p. 631, § 8, effective July 1. L. 92: (2)(gg) added, p. 1991, § 1, effective April 16. L. 95: (2)(x) amended, p. 312, § 3, effective July 1. L. 99: (2)(hh) added, p. 70, § 1, effective August 4. L. 2002: (2)(ii) added, p. 650, § 3, effective July 1.
ANNOTATION
Law reviews. For article, "Choosing a Fiduciary", see 15 Colo. Law. 203 (1986).
A revocable living trust is valid even though the settlor reserves an extensive power of control over administration of the corpus. Oken v. Hammer, 791 P.2d 9 (Colo. App. 1990).
Whether a deed of trust is intended to exercise the trustee's powers, rather than encumber a lesser interest in the property, is a question of the intent of the parties. Evidence is properly admissible to ascertain the intent of the parties. Oken v. Hammer, 791 P.2d 9 (Colo. App. 1990).
Indorsement on the note from the transferor to the holder was not required since, although trust instruments did not specifically include the power to indorse notes, the obligation to liquidate those assets included the implied power to perform the necessary acts required to carry out that undertaking. First Nat. Bank v. Lohman, 827 P.2d 583 (Colo. App. 1992).
A difference in voting rights of shares is a relevant factor that should be considered when determining fair market value. Providing no compensation to reflect the difference in voting rights rendered the in-kind distribution of shares among the children unequal. In re Estate of Beren, 2012 COA 203 , 412 P.3d 487, aff'd in part and rev'd in part on other grounds, 2015 CO 29, 349 P.3d 233.
Section does not empower a personal representative to resolve a dispute after it has been raised in the probate court. Personal representative's discretion was limited to deciding whether the estate would accede or seek reformation of a conveyance for mistake. If the personal representation chose to seek reformation, the probate court was obligated to take evidence and make a ruling. In re Estate of Beren, 2012 COA 203 , 412 P.3d 487, aff'd in part and rev'd in part on other grounds, 2015 CO 29, 349 P.3d 233.
Applied in Cavanaugh v. State Dept. of Rev. Inheritance & Gift Tax Div., 42 Colo. App. 453, 599 P.2d 965 (1979).
15-1-805. Powers of fiduciary conferred by court.
The court having jurisdiction of the estate or trust may authorize the fiduciary to exercise any power not otherwise held by the fiduciary which, in the judgment of the court, is necessary for the proper collection, care, administration, and protection of the estate or the trust.
Source: L. 67: p. 770, § 1. C.R.S. 1963: § 57-8-5.
15-1-806. Third persons protected in dealing with fiduciary.
With respect to a third person dealing with a fiduciary or assisting a fiduciary in the conduct of a transaction, proper exercise of his powers by the fiduciary is to be presumed, and such third person shall not be bound to inquire whether the fiduciary has power to act or is properly exercising such powers, nor shall such third person be bound to see to the proper application of estate or trust assets paid or delivered to the fiduciary.
Source: L. 67: p. 770, § 1. C.R.S. 1963: § 57-8-6.
15-1-807. Applicability.
This part 8 shall apply to all trusts existing on January 1, 1968, which are later amended to make applicable this part 8, and to all estates and trusts which may come into existence after January 1, 1968.
Source: L. 67: p. 771, § 1. C.R.S. 1963: § 57-8-7.
PART 9 DISCLAIMER OF SUCCESSION - NONTESTAMENTARY INSTRUMENTS
15-1-901 to 15-1-907. (Repealed)
Editor's note: (1) This part 9 was numbered as article 9 of chapter 57, C.R.S. 1963. For amendments to this part 9 prior to its repeal in 1995, consult the Colorado statutory research explanatory note and the table itemizing the replacement volumes and supplements to the original volume of C.R.S. 1973 beginning on page vii in the front of this volume.
(2) Section 15-1-907 provided for the repeal of this part 9, effective July 1, 1995. (See L. 94, p. 1041 .)
PART 10 CHARITABLE, EDUCATIONAL, RELIGIOUS, AND BENEVOLENT TRUSTS
Cross references: For testamentary additions to trusts, see § 15-11-511.
15-1-1001. Legislative declaration.
It is the purpose of this part 10 to preserve the intent of testators and grantors of testamentary and inter vivos trusts created prior to and after June 2, 1971, for charitable, educational, religious, and benevolent purposes, by minimizing the imposition of federal income and excise taxes, and federal estate and gift taxes, imposed upon the assets of such trusts, and thereby preserving the maximum amount of the trust assets for the charitable, educational, religious, and benevolent purposes for which they were intended. The attorney general of this state shall perform such acts as, in his or her opinion, will result in the effectuation of this declaration of purpose.
Source: L. 71: p. 589, § 1. C.R.S. 1963: § 57-10-1. L. 73: p. 638, § 1. L. 2016: Entire section amended, (HB 16-1094), ch. 94, p. 266, § 9, effective August 10.
ANNOTATION
An express trust was created by implication in fact, rather than theory of implied trust in case where loyal minority members of local church sought to recover possession of church's property from seceding majority members. Bishop and Diocese of Colo. v. Mote, 716 P.2d 85 ( Colo. 1986 ), cert. denied, 479 U.S. 826, 107 S. Ct. 102, 93 L. Ed. 2d 52 (1986).
15-1-1002. Prohibition of certain acts - amendment of governing instrument.
-
In the administration of any trust which is a private foundation as defined in section 509 of the federal "Internal Revenue Code of 1986", a charitable trust as defined in section 4947 (a)(1) of the federal "Internal Revenue Code of 1986", or a split-interest
trust as defined in section 4947 (a)(2) of the federal "Internal Revenue Code of 1986", notwithstanding any provisions to the contrary in the governing instrument or in any other law of this state, and except as otherwise provided
by court decree entered on or after June 2, 1971, the following acts shall be prohibited:
- Engaging in any act of "self-dealing", as defined in section 4941 (d) of the federal "Internal Revenue Code of 1986", which would give rise to any liability for the tax imposed by section 4941 (a) of the federal "Internal Revenue Code of 1986";
- Retaining any "excess business holdings", as defined in section 4943 (c) of the federal "Internal Revenue Code of 1986", which would give rise to any liability for the tax imposed by section 4943 (a) of the federal "Internal Revenue Code of 1986";
- Making any investments which would jeopardize the carrying out of any of the exempt purposes of the trust, within the meaning of section 4944 of the federal "Internal Revenue Code of 1986", so as to give rise to any liability for the tax imposed by section 4944 (a) of the federal "Internal Revenue Code of 1986"; and
- Making any "taxable expenditure", as defined in section 4945 (d) of the federal "Internal Revenue Code of 1986", which would give rise to any liability for the tax imposed by section 4945 (a) of the federal "Internal Revenue Code of 1986".
- The provisions of subsection (1) of this section shall not apply either to those split-interest trusts or to amounts thereof which are not subject to the prohibitions applicable to private foundations by reason of the provisions of section 4947 of the federal "Internal Revenue Code of 1986".
- Notwithstanding any provisions to the contrary in the governing instrument or in any other law of this state, the trustee of any charitable trust as defined in section 4947 (a)(1) or 4947 (a)(2) of the federal "Internal Revenue Code of 1986", with the consent of all the beneficiaries under the governing instrument, may, without application to any court and either before or after the funding of such trust, amend the governing instrument to conform to the provisions of sections 508 (e), 664, 2055 (e), and 2522 (c) of the federal "Internal Revenue Code of 1986", to the extent applicable, by executing a written amendment to the trust for that purpose. Consent shall not be required as to individual beneficiaries not living at the time of amendment or as to charitable beneficiaries not named or not in existence at the time of amendment. The possibility of beneficial interests arising after the amendment of the governing instruments shall not defeat the ability to amend. In the case of an individual beneficiary not competent to give consent, the consent of such beneficiary's guardian or conservator, if any, or the consent of a guardian ad litem appointed by a court of competent jurisdiction is treated as the consent of the beneficiary. A copy of the proposed amendment, executed by the trustee and consented to by all beneficiaries whose consent is required under this subsection (3), must be delivered in person or by registered mail to the attorney general. The attorney general may, within sixty days after such receipt, indicate by registered mail to the trustee his or her specific objections to such proposed amendment, in which event the provisions of subsection (4) of this section apply if he or she does not withdraw his or her objections. In the case of any amendment to a trust created by will or to a trust created by inter vivos instrument, unless otherwise provided, the amendment applies as of the date of death of the decedent or as of the date of gift.
- In the event that all such trustees and beneficiaries under the governing instrument do not consent to such amendment or in the event that there are no named beneficiaries, any court of competent jurisdiction shall have the power to amend the governing instrument in accordance with subsection (3) of this section upon petition of the trustee or any beneficiary and upon a subsequent finding by the court that the testator's or the grantor's intention would not be defeated by such amendment. A copy of such petition shall be delivered in person or by registered mail to the attorney general.
- Unless otherwise expressly provided in the governing instrument, any devise, bequest, or transfer in a testamentary or revocable inter vivos trust for religious, educational, charitable, or benevolent uses to be determined by the trustee or any other person shall be made only to organizations and for purposes within the meaning of section 2055 (a) of the federal "Internal Revenue Code of 1986".
Source: L. 71: p. 589, § 1. C.R.S. 1963: § 57-10-2. L. 73: p. 638, § 2. L. 2000: (1), (2), (3), and (5) amended, p. 1844, § 25, effective August 2. L. 2016: (3) amended, (HB 16-1094), ch. 94, p. 266, § 10, effective August 10.
15-1-1003. Requirement for distribution of certain amounts.
In the administration of any trust which is a private foundation, as defined in section 509 of the federal "Internal Revenue Code of 1986", or which is a charitable trust, as defined in section 4947 (a)(1) of the federal "Internal Revenue Code of 1986", there shall be distributed, for the purposes specified in the trust instrument, for each taxable year, amounts at least sufficient to avoid liability for the tax imposed by section 4942 (a) of the federal "Internal Revenue Code of 1986". No trustee of such a trust shall be required to reimburse the trust from his own property for the amount of any liability for such tax which is incurred by the trust if the trustee acted in a prudent manner and in good faith. No trustee of such a trust shall be required to reimburse the trust from his own property for any amount which he, acting prudently and in good faith, distributes from the trust, believing it to be required to be distributed in order to avoid the liability for such tax, but which later is determined not to have been required to be distributed for that purpose.
Source: L. 71: p. 590, § 1. C.R.S. 1963: § 57-10-3. L. 2000: Entire section amended, p. 1845, § 26, effective August 2.
15-1-1004. Applicability of sections 15-1-1002 and 15-1-1003.
The provisions of sections 15-1-1002 and 15-1-1003 shall not apply to any trust to the extent that a court of competent jurisdiction shall determine that such application would be contrary to the terms of the instrument governing such trust and that the terms of such instrument may not properly be changed to conform to such sections.
Source: L. 71: p. 590, § 1. C.R.S. 1963: § 57-10-4.
15-1-1005. Rights and powers of courts and attorney general not impaired.
Nothing in this part 10 shall impair the rights and powers of the courts or the attorney general of this state with respect to any trust.
Source: L. 71: p. 590, § 1. C.R.S. 1963: § 57-10-5.
15-1-1006. References to "Internal Revenue Code of 1954".
All references to sections of the "Internal Revenue Code of 1954" refer to the "Internal Revenue Code of 1954" as it exists on June 2, 1971; except that all references to the "Internal Revenue Code of 1954" in section 15-1-1002 (3) and (5) refer to the "Internal Revenue Code of 1954" as it exists on April 19, 1973.
Source: L. 71: p. 590, § 1. C.R.S. 1963: § 57-10-6. L. 73: p. 639, § 3.
15-1-1007. Application of part 10.
This part 10 shall apply to all trusts established after December 31, 1969, with the exceptions contained in section 4947 (a)(2) of the federal "Internal Revenue Code of 1986". This part 10 shall also apply to all trusts established before January 1, 1970, with the exceptions contained in section 508 (e)(2) and section 4947 (a)(2) of the federal "Internal Revenue Code of 1986". Section 15-1-1002 (3) to (5) shall apply in the case of all decedents dying after December 31, 1969, and in the case of all irrevocable inter vivos trusts created after July 31, 1969.
Source: L. 71: p. 591, § 1. C.R.S. 1963: § 57-10-7. L. 73: p. 639, § 4. L. 2000: Entire section amended, p. 1846, § 27, effective August 2.
PART 11 UNIFORM PRUDENT MANAGEMENT OF INSTITUTIONAL FUNDS ACT
Editor's note: This part 11 was numbered as article 26 of chapter 31, C.R.S. 1963, and was not amended prior to 2008. The substantive provisions of this part 11 were repealed and reenacted in 2008, resulting in the addition, relocation, and elimination of sections as well as subject matter. For the text of this part 11 prior to 2008, consult the 2007 Colorado Revised Statutes. Former C.R.S. section numbers are shown in editor's notes following those sections that were relocated. For a detailed comparison of this part 11, see the comparative tables located in the back of the index.
PREFATORY NOTE
Reasons for Revision. The Uniform Prudent Management of Institutional Funds Act (UPMIFA) replaces the Uniform Management of Institutional Funds Act (UMIFA). The National Conference of Commissioners on Uniform State Laws approved UMIFA in 1972, and 47 jurisdictions have enacted the act. UMIFA provided guidance and authority to charitable organizations within its scope concerning the management and investment of funds held by those organizations, UMIFA provided endowment spending rules that did not depend on trust accounting principles of income and principal, and UMIFA permitted the release of restrictions on the use or management of funds under certain circumstances. The changes UMIFA made to the law permitted charitable organizations to use modern investment techniques such as total-return investing and to determine endowment fund spending based on spending rates rather than on determinations of "income" and "principal."
UMIFA was drafted almost 35 years ago, and portions of it are now out of date. The prudence standards in UMIFA have provided useful guidance, but prudence norms evolve over time. The new Act provides modern articulations of the prudence standards for the management and investment of charitable funds and for endowment spending. The Uniform Prudent Investor Act (UPIA), an Act promulgated in 1994 and already enacted in 43 jurisdictions, served as a model for many of the revisions. UPIA updates rules on investment decision making for trusts, including charitable trusts, and imposes additional duties on trustees for the protection of beneficiaries. UPMIFA applies these rules and duties to charities organized as nonprofit corporations. UPMIFA does not apply to trusts managed by corporate and other fiduciaries that are not charities, because UPIA provides management and investment standards for those trusts.
In applying principles based on UPIA to charities organized as nonprofit corporations, UPMIFA combines the approaches taken by UPIA and by the Revised Model Nonprofit Corporation Act (RMNCA). UPMIFA reflects the fact that standards for managing and investing institutional funds are and should be the same regardless of whether a charitable organization is organized as a trust, a nonprofit corporation, or some other entity. See Bevis Longstreth, Modern Investment Management and the Prudent Man Rule 7 (1986) (stating "[t]he modern paradigm of prudence applies to all fiduciaries who are subject to some version of the prudent man rule, whether under ERISA, the private foundation provisions of the Code, UMIFA, other state statutes, or the common law."); Harvey P. Dale, Nonprofit Directors and Officers - Duties and Liabilities for Investment Decisions, 1994 N.Y.U. Conf. Tax Plan. 501(c)(3) Org's. Ch. 4.
UPMIFA provides guidance and authority to charitable organizations concerning the management and investment of funds held by those organizations, and UPMIFA imposes additional duties on those who manage and invest charitable funds. These duties provide additional protections for charities and also protect the interests of donors who want to see their contributions used wisely.
UPMIFA modernizes the rules governing expenditures from endowment funds, both to provide stricter guidelines on spending from endowment funds and to give institutions the ability to cope more easily with fluctuations in the value of the endowment.
Finally, UPMIFA updates the provisions governing the release and modification of restrictions on charitable funds to permit more efficient management of these funds. These provisions derive from the approach taken in the Uniform Trust Code (UTC) for modifying charitable trusts. Like the UTC provisions, UPMIFA's modification rules preserve the historic position of the attorneys general in most states as the overseers of charities.
As under UMIFA, the new Act applies to charities organized as charitable trusts, as nonprofit corporations, or in some other manner, but the rules do not apply to funds managed by trustees that are not charities. Thus, the Act does not apply to trusts managed by corporate or individual trustees, but the Act does apply to trusts managed by charities.
Prudent Management and Investment. UMIFA applied the 1972 prudence standard to investment decision making. In contrast, UPMIFA will give charities updated and more useful guidance by incorporating language from UPIA, modified to fit the special needs of charities. The revised Act spells out more of the factors a charity should consider in making investment decisions, thereby imposing a modern, well accepted, prudence standard based on UPIA.
Among the expressly enumerated prudence factors in UPMIFA is "the preservation of the endowment fund," a standard not articulated in UMIFA.
In addition to identifying factors that a charity must consider in making management and investment decisions, UPMIFA requires a charity and those who manage and invest its funds to:
1. Give primary consideration to donor intent as expressed in a gift instrument,
2. Act in good faith, with the care an ordinarily prudent person would exercise,
3. Incur only reasonable costs in investing and managing charitable funds,
4. Make a reasonable effort to verify relevant facts,
5. Make decisions about each asset in the context of the portfolio of investments, as part of an overall investment strategy,
6. Diversify investments unless due to special circumstances, the purposes of the fund are better served without diversification,
7. Dispose of unsuitable assets, and
8. In general, develop an investment strategy appropriate for the fund and the charity.
UMIFA did not articulate these requirements.
Thus, UPMIFA strengthens the rules governing management and investment decision making by charities and provides more guidance for those who manage and invest the funds.
Donor Intent with Respect to Endowments. UPMIFA improves the protection of donor intent with respect to expenditures from endowments. When a donor expresses intent clearly in a written gift instrument, the Act requires that the charity follow the donor's instructions. When a donor's intent is not so expressed, UPMIFA directs the charity to spend an amount that is prudent, consistent with the purposes of the fund, relevant economic factors, and the donor's intent that the fund continue in perpetuity. This approach allows the charity to give effect to donor intent, protect its endowment, assure generational equity, and use the endowment to support the purposes for which the endowment was created.
Retroactivity. Like UMIFA, UPIA, the Uniform Principal and Income Act of 1961, and the Uniform Principal and Income Act of 1997, UPMIFA applies retroactively to institutional funds created before and prospectively to institutional funds created after enactment of the statute. Regarding the considerations motivating this treatment of the issues, see the comment to Section 4.
Endowment Spending. UPMIFA improves the endowment spending rule by eliminating the concept of historic dollar value and providing better guidance regarding the operation of the prudence standard. Under UMIFA a charity can spend amounts above historic dollar value that the charity determines to be prudent. The Act directs the charity to focus on the purposes and needs of the charity rather than on the purposes and perpetual nature of the fund. Amounts below historic dollar value cannot be spent. The Drafting Committee concluded that this endowment spending rule created numerous problems and that restructuring the rule would benefit charities, their donors, and the public. The problems include:
1. Historic dollar value fixes valuation at a moment in time, and that moment is arbitrary. If a donor provides for a gift in the donor's will, the date of valuation for the gift will likely be the donor's date of death. (UMIFA left uncertain what the appropriate date for valuing a testamentary gift was.) The determination of historic dollar value can vary significantly depending upon when in the market cycle the donor dies. In addition, the fund may be below historic dollar value at the time the charity receives the gift if the value of the asset declines between the date of the donor's death and the date the asset is actually distributed to the charity from the estate.
2. After a fund has been in existence for a number of years, historic dollar value may become meaningless. Assuming reasonable long term investment success, the value of the typical fund will be well above historic dollar value, and historic dollar value will no longer represent the purchasing power of the original gift. Without better guidance on spending the increase in value of the fund, historic dollar value does not provide adequate protection for the fund. If a charity views the restriction on spending simply as a direction to preserve historic dollar value, the charity may spend more than it should.
3. The Act does not provide clear answers to questions a charity faces when the value of an endowment fund drops below historic dollar value. A fund that is so encumbered is commonly called an "underwater" fund. Conflicting advice regarding whether an organization could spend from an underwater fund has led to difficulties for those managing charities. If a charity concluded that it could continue to spend trust accounting income until a fund regained its historic dollar value, the charity might invest for income rather than on a total-return basis. Thus, the historic dollar value rule can cause inappropriate distortions in investment policy and can ultimately lead to a decline in a fund's real value. If, instead, a charity with an underwater fund continues to invest for growth, the charity may be unable to spend anything from an underwater endowment fund for several years. The inability of a charity to spend anything from an endowment is likely to be contrary to donor intent, which is to provide current benefits to the charity.
The Drafting Committee concluded that providing clearly articulated guidance on the prudence rule for spending from an endowment fund, with emphasis on the permanent nature of the fund, would provide the best protection of the purchasing power of endowment funds.
Presumption of Imprudence. UPMIFA includes as an optional provision a presumption of imprudence if a charity spends more than seven percent of an endowment fund in any one year. The presumption is meant to protect against spending an endowment too quickly. Although the Drafting Committee believes that the prudence standard of UPMIFA provides appropriate and adequate protection for endowments, the Committee provided the option for states that want to include a mechanical guideline in the statute. A major drawback to any statutory percentage is that it is unresponsive to changes in the rate of inflation or deflation.
Modification of Restrictions on Charitable Funds. UPMIFA clarifies that the doctrines of cy pres and deviation apply to funds held by nonprofit corporations as well as to funds held by charitable trusts. Courts have applied trust law rules to nonprofit corporations in the past, but the Drafting Committee believed that statutory authority for applying these principles to nonprofit corporations would be helpful. UMIFA permitted release of restrictions but left the application of cy pres uncertain. Under UPMIFA, as under trust law, the court will determine whether and how to apply cy pres or deviation and the attorney general will receive notice and have the opportunity to participate in the proceeding. The one addition to existing law is that UPMIFA gives a charity the authority to modify a restriction on a fund that is both old and small. For these funds, the expense of a trip to court will often be prohibitive. By permitting a charity to make an appropriate modification, money is saved for the charitable purposes of the charity. Even with respect to small, old funds, however, the charity must notify the attorney general of the charity's intended action. Of course, if the attorney general has concerns, he or she can seek the agreement of the charity to change or abandon the modification, and if that fails, can commence a court action to enjoin it. Thus, in all types of modification the attorney general continues to be the protector both of the donor's intent and of the public's interest in charitable funds.
Other Organizational Law. For matters not governed by UPMIFA, a charitable organization will continue to be governed by rules applicable to charitable trusts, if it is organized as a trust, or rules applicable to nonprofit corporations, if it is organized as a nonprofit corporation.
Relation to Trust Law. Although UPMIFA applies a number of rules from trust law to institutions organized as nonprofit corporations, in two respects UPMIFA creates rules that do not exist under the common law applicable to trusts. The endowment spending rule of Section 4 and the provision for modifying a small, old fund in subsection (d) of Section 6 have no counterparts in the common law or the UTC. The Drafting Committee believes that these rules could be useful to charities organized as trusts, and the Committee recommends conforming amendments to the UTC and the Principal and Income Act to incorporate these changes into trust law.
15-1-1101. Short title.
This part 11 shall be known and may be cited as the "Uniform Prudent Management of Institutional Funds Act".
Source: L. 2008: Entire part R&RE, p. 559, § 1, effective September 1.
Editor's note: This section is similar to former § 15-1-1101 as it existed prior to 2008.
ANNOTATION
Law reviews. For article, "Uniform State Laws of Interest to Colorado Probate Lawyers", see 14 Colo. Law. 1961 (1985). For article, "Modern Tomb Raiders: Nonprofit Organizations' Impermissible Use of Restricted Funds", see 31 Colo. Law. 57 (Sept. 2002).
15-1-1102. Definitions.
As used in this part 11, unless the context otherwise requires:
- "Charitable purpose" means the relief of poverty, the advancement of education or religion, the promotion of health, or any other charitable or eleemosynary purpose.
- "Endowment fund" means an institutional fund or part thereof that, under the terms of a gift instrument, is not wholly expendable by the institution on a current basis. The term does not include assets that an institution designates as an endowment fund for its own use.
- "Gift instrument" means a record or records, including an institutional solicitation, under which property is granted to, transferred to, or held by an institution as an institutional fund.
-
"Institution" means:
- A person, other than an individual, organized and operated exclusively for charitable purposes;
- A government or governmental subdivision, agency, or instrumentality, to the extent that it holds funds exclusively for a charitable purpose; or
- A trust that had both charitable and noncharitable interests, after all noncharitable interests have terminated.
-
"Institutional fund" means a fund held by an institution exclusively for charitable purposes. The term does not include funds held by the public employees' retirement association created by article 51 of title 24, C.R.S., or:
(A) Program-related assets;
(B) A fund held for an institution by a trustee that is not an institution; or
(C) A fund in which a beneficiary that is not an institution has an interest, other than an interest that could arise upon violation or failure of the purposes of the fund.
- "Person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, public corporation, government or governmental subdivision, agency, or instrumentality, or any other legal or commercial entity.
- "Program-related asset" means an asset held by an institution primarily to accomplish a charitable purpose of the institution and not primarily for investment.
- "Record" means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
Source: L. 2008: Entire part R&RE, p. 559, § 1, effective September 1. L. 2009: IP(5) amended, (SB 09-282), ch. 288, p. 1398, § 61, effective January 1, 2010.
Editor's note: This section is similar to former § 15-1-1103 as it existed prior to 2008.
OFFICIAL COMMENT
Subsection (1). Charitable Purpose. The definition of charitable purpose follows that of UTC § 405 and Restatement (Third) of Trusts § 28 (2003). This long-familiar standard derives from the English Statute of Charitable Uses, enacted in 1601.
Some 17 states have created statutory definitions of charitable purpose for various purposes. See, e.g., 10 Pa. Cons. Stat. § 162.3 (2005) (defining charitable purpose within the Solicitation of Funds for Charitable Purposes Act to include "humane," "patriotic," "social welfare and advocacy," and "civic" purposes). The definition in subsection (1) applies for purposes of this Act and does not affect other definitions of charitable purpose.
Subsection (2). Endowment Fund. An endowment fund is an institutional fund or a part of an institutional fund that is not wholly expendable by the institution on a current basis. A restriction that makes a fund an endowment fund arises from the terms of a gift instrument. If an institution has more than one endowment fund, under Section 3 the institution can manage and invest some or all endowment funds together. Section 4 and Section 6 must be applied to individual funds and cannot be applied to a group of funds that may be managed collectively for investment purposes.
Board-designated funds are institutional funds but not endowment funds. The rules on expenditures and modification of restrictions in this Act do not apply to restrictions that an institution places on an otherwise unrestricted fund that the institution holds for its own benefit. The institution may be able to change these restrictions itself, subject to internal rules and to the fiduciary duties that apply to those that manage the institution.
If an institution transfers assets to another institution, subject to the restriction that the other institution hold the assets as an endowment, then the second institution will hold the assets as an endowment fund.
Subsection (3). Gift Instrument. The term gift instrument refers to the records that establish the terms of a gift and may consist of more than one document. The definition clarifies that the only legally binding restrictions on a gift are the terms set forth in writing.
As used in this definition, "record" is an expansive concept and means a writing in any form, including electronic. The term includes a will, deed, grant, conveyance, agreement, or memorandum, and also includes writings that do not have a donative purpose. For example, under some circumstances the bylaws of the institution, minutes of the board of directors, or canceled checks could be a gift instrument or be one of several records constituting a gift instrument. Although the term can include any of these records, a record will only become a gift instrument if both the donor and the institution were or should have been aware of its terms when the donor made the gift. For example, if a donor sends a contribution to an institution for its general purposes, then the articles of incorporation may be used to clarify those purposes. If, in contrast, the donor sends a letter explaining that the institution should use the contribution for its "educational projects concerning teenage depression," then any funds received in response must be used for that purpose and not for broader purposes otherwise permissible under the articles of incorporation.
Solicitation materials may constitute a gift instrument. For example, a solicitation that suggests in writing that any gifts received pursuant to the solicitation will be held as an endowment may be integrated with other writings and may be considered part of the gift instrument. Whether the terms of the solicitation become part of the gift instrument will depend upon the circumstances, including whether a subsequent writing superseded the terms of the solicitation. Each gift received in response to a solicitation will be subject to any restrictions indicated in the gift instrument pertaining to that gift. For example, if an initial gift establishes an endowment fund, and the charity then solicits additional gifts "to be held as part of the Charity X Endowment Fund," those additional gifts will each be subject to the restriction that the gifts be held as part of that endowment fund.
The term gift instrument includes matching funds provided by an employer or some other person. Whether matching funds are treated as part of the endowment fund or otherwise will depend on the terms of the matching gift.
The term gift instrument also includes an appropriation by a legislature or other public or governmental body for the benefit of an institution.
Subsection (4). Institution. The Act applies generally to institutions organized and operated exclusively for charitable purposes. The term includes charitable organizations created as nonprofit corporations, unincorporated associations, governmental subdivisions or agencies, or any form of entity, however organized, that is organized and operated exclusively for charitable purposes. The term includes a trust organized and operated exclusively for charitable purposes, but only if a charity acts as trustee. This approach leaves unchanged the coverage of UMIFA. The exclusion of "individual" from the definition of institution is not intended to exclude a corporation sole.
Although UPMIFA does not apply to all charitable trusts, many of UPMIFA's provisions derive from trust law. Prudent investor standards apply to trustees of charitable trusts in states that have adopted UPIA. Trustees of charitable trusts can use the doctrines of cy pres and deviation to modify trust provisions, and the UTC includes a number of modification provisions. The Uniform Principal and Income Act permits allocation between principal and income to facilitate total-return investing. Charitable trusts not included in UPMIFA, primarily those managed by corporate trustees and individuals, will lose the benefits of UPMIFA's endowment spending rule and the provision permitting a charity to apply cy pres, without court supervision, for modifications to a small, old fund. Enacting jurisdictions may choose to incorporate these rules into existing trust statutes to provide the benefits to charitable funds managed by corporate trustees.
The definition of institution includes governmental organizations that hold funds exclusively for the purposes listed in the definition. A governmental entity created by state law may fall outside the definition on account of the form of organization under which the state created it. Because state arrangements are so varied, creating a definition that encompasses all charitable entities created by states is not feasible. States should consider applying the core principles of UPMIFA to such governmental institutions. For example, the control over a state university may be held by a State Board of Regents. In that situation, the state may have created a governing structure by statute or in the state constitution so that the university is, in effect, privately chartered. The Drafting Committee does not intend to exclude these universities from the definition of institution, but additional state legislation may be necessary to address particular situations.
Subsection (5). Institutional Fund. The term institutional fund includes any fund held by an institution for charitable purposes, whether the fund is expendable currently or subject to restrictions. The term does not include a fund held by a trustee that is not an institution.
Some institutions combine assets from multiple funds for investment purposes, and some institutions invest funds from different institutions in a common fund. Typically each fund is assigned units representing the share value of the individual fund. The assets are invested collectively, permitting more efficient investment and improved diversification of the overall portfolio. The collective fund makes annual distributions to the individual funds based on the units held by each fund. For purposes of Section 3 [and Section 5], the collective fund is considered one institutional fund. Section 4 and Section 6 apply to each fund individually and not to the collective fund.
Assets held by an institution primarily for program-related purposes rather than exclusively for investment are not subject to UPMIFA. For example, a university may purchase land adjacent to its campus for future development. The purchase might not meet prudent investor standards for commercial real estate, but the purchase may be appropriate because the university needs to build a new dormitory. The classroom buildings, administration buildings, and dormitories held by the university all have value as property, but the university does not hold those buildings as financial assets for investment purposes. The Act excludes from the prudent investor norms those assets that a charity uses to conduct its charitable activities, but does not exclude assets that have a tangential tie to the charitable purpose of the institution but are held primarily for investment purposes.
A fund held by an institution is not an institutional fund if any beneficiary of the fund is not an institution. For example, a charitable remainder trust held by a charity as trustee for the benefit of the donor during the donor's lifetime, with the remainder interest held by the charity, is not an institutional fund. However, this subsection treats as an institution a charitable remainder trust that continues to operate for charitable purposes after the termination of the noncharitable interests. The Act will have only a limited effect on a charitable remainder trust that terminates after the noncharitable interest ends. During the period required to complete the distribution of the trust's property, the prudence norm will apply to the actions of the trustee, but the short timeframe will affect investment decision making.
Subsection (6). Person. The Act uses as the definition of person the definition approved by the National Conference of Commissioners on Uniform State Laws. The definition of institution uses the term person, but to be an institution a person must be organized and operated exclusively for charitable purposes. A person with a commercial purpose cannot be an institution. Thus, although the definition of person includes "business trust" and "any other . . . commercial entity," the Act does not apply to an entity organized for business purposes and not exclusively for charitable purposes. Further, the definition of person includes trusts, but only trusts managed by charities can be institutional funds. UPMIFA does not apply to trusts managed by corporate trustees or by individual trustees.
If a governing instrument provides that a fund will revert to the donor if, and only if, the institution ceases to exist or the purposes of the fund fail, then the fund will be considered an institutional fund until such contingency occurs.
Subsection (7). Program-Related Asset. Although UPMIFA does not apply to program-related assets, if program-related assets serve, in part, as investments for an institution, then the institution should identify categories for reporting those investments and should establish investment criteria for the investments that are reasonably related to achieving the institution's charitable purposes. For example, a program providing below-market loans to inner-city businesses may be "primarily to accomplish a charitable purpose of the institution" but also can be considered, in part, an investment. The institution should create reasonable credit standards and other guidelines for the program to increase the likelihood that the loans will be repaid.
Subsection (8). Record. This definition was added to clarify that the definition of instrument includes electronic records as defined in Section 2(8) of the Uniform Electronic Transactions Act (1999).
15-1-1103. Standard of conduct in managing and investing institutional fund.
- Subject to the intent of a donor expressed in a gift instrument, an institution, in managing and investing an institutional fund, shall consider the charitable purposes of the institution and the purposes of the institutional fund.
- In addition to complying with the duty of loyalty imposed by law other than this part 11, each person responsible for managing and investing an institutional fund shall manage and invest the institutional fund in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.
-
In managing and investing an institutional fund, an institution:
- May incur only costs that are appropriate and reasonable in relation to the assets, the purposes of the institution, and the skills available to the institution; and
- Shall make a reasonable effort to verify facts relevant to the management and investment of the institutional fund.
- Except as otherwise provided by law other than this part 11, an institution may invest in any kind of property or type of investment consistent with this section.
- An institution shall diversify the investments of an institutional fund unless the institution reasonably determines that, because of special circumstances, the purposes of the institutional fund are better served without diversification.
- Within a reasonable time after receiving property, an institution shall make and carry out decisions concerning the retention or disposition of the property or to rebalance a portfolio, in order to bring the institutional fund into compliance with the purposes, terms, and distribution requirements of the institution as necessary to meet other circumstances of the institution and the requirements of this part 11.
- A person that has special skills or expertise, or is selected in reliance upon the person's representation that the person has special skills or expertise, has a duty to use those skills or that expertise in managing and investing institutional funds.
- An institution may pool two or more institutional funds for purposes of management and investment.
-
Except as otherwise provided by a gift instrument, the following rules apply:
(1) In managing and investing an institutional fund, the following factors, if relevant, must be considered:
- General economic conditions;
- The possible effect of inflation or deflation;
- The expected tax consequences, if any, of investment decisions or strategies;
- The role that each investment or course of action plays within the overall investment portfolio of the institutional fund;
- The expected total return from income and the appreciation of investments;
- Other resources of the institution;
- The needs of the institution and the institutional fund to make distributions and to preserve capital; and
-
An asset's special relationship or special value, if any, to the charitable purposes of the institution.
(2) Management and investment decisions about an individual asset must be made not in isolation but rather in the context of the institutional fund's portfolio of investments as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the institutional fund and to the institution.
Source: L. 2008: Entire part R&RE, p. 560, § 1, effective September 1.
Editor's note: This section is similar to former §§ 15-1-1106 and 15-1-1108 as they existed prior to 2008.
OFFICIAL COMMENT
Purpose and Scope of Revisions. This section adopts the prudence standard for investment decision making. The section directs directors or others responsible for managing and investing the funds of an institution to act as a prudent investor would, using a portfolio approach in making investments and considering the risk and return objectives of the fund. The section lists the factors that commonly bear on decisions in fiduciary investing and incorporates the duty to diversify investments absent a conclusion that special circumstances make a decision not to diversify reasonable. Thus, the section follows modern portfolio theory for investment decision making. Section 3 applies to all funds held by an institution, regardless of whether the institution obtained the funds by gift or otherwise and regardless of whether the funds are restricted.
The Drafting Committee discussed extensively the standard that should govern nonprofit managers. UMIFA states the standard as "ordinary business care and prudence under the facts and circumstances prevailing at the time of the action or decision." Since the decision in Stern v. Lucy Webb Hayes National Training School for Deaconesses, 381 F. Supp. 1003 (1974), the trend has been to hold directors of nonprofit corporations to a standard nominally similar to the corporate standard but with the recognition that the facts and circumstances considered include the fact that the entity is a charity and not a business corporation.
The language of the prudence standard adopted in UPMIFA is derived from the RMNCA and from the prudent investor rule of UPIA. The standard is consistent with the business judgment standard under corporate law, as applied to charitable institutions. That is, a manager operating a charitable organization under the business judgment rule would look to the same factors as those identified by the prudent investor rule. The standard for prudent investment set forth in Section 3 first states the duty of care as articulated in the RMNCA, but provides more specific guidance for those managing and investing institutional funds by incorporating language from UPIA. The criteria derived from UPIA are consistent with good practice under current law applicable to nonprofit corporations.
Trust law norms already inform managers of nonprofit corporations. The Preamble to UPIA explains: "Although the Uniform Prudent Investor Act by its terms applies to trusts and not to charitable corporations, the standards of the Act can be expected to inform the investment responsibilities of directors and officers of charitable corporations." See also, Restatement (Third) of Trusts: Prudent Investor Rule § 379, Comment b, at 190 (1992) (stating that "absent a contrary statute or other provision, the prudent investor rule applies to investment of funds held for charitable corporations."). Trust precedents have routinely been found to be helpful but not binding authority in corporate cases.
The Drafting Committee decided that by adopting language from both the RMNCA and UPIA, UPMIFA could clarify that common standards of prudent investing apply to all charitable institutions. Although the principal trust authorities, UPIA § (2)(a), Restatement (Third) of Trusts § 337, UTC § 804, and Restatement (Second) of Trusts § 174 (prudent administration) use the phrase "care, skill and caution," the Drafting Committee decided to use the more familiar corporate formulation as found in RMNCA. The standard also appears in Sections 3, 4 and 5 of UPMIFA. The Drafting Committee does not intend any substantive change to the UPIA standard and believes that "reasonable care, skill, and caution" are implicit in the term "care" as used in the RMNCA. The Drafting Committee included the detailed provisions from UPIA, because the Committee believed that the greater precision of the prudence norms of the Restatement and UPIA, as compared with UMIFA, could helpfully inform managers of charitable institutions. For an explanation of the Prudent Investor Act, see John H. Langbein, The Uniform Prudent Investor Act and the Future of Trust Investing, 81 Iowa L. Rev. 641 (1996), and for a discussion of the effect UPIA has had on investment decision making, see Max M. Schanzenbach & Robert H. Sitkoff, Did Reform of Prudent Trust Investment Laws Change Trust Portfolio Allocation?, 50 J. L. & Econ. (forthcoming 2007).
Section 3 has incorporated the provisions of UPIA with only a few exceptions. UPIA applies to private trusts and is entirely default law. The settlor of a private trust has complete control over virtually all trust provisions. See UTC § 105. Because UPMIFA applies to charitable organizations, UPMIFA makes the duty of care, the duty to minimize costs, and the duty to investigate mandatory. The duty of loyalty is mandatory under applicable organization law, corporate or trust. Other than these duties, the provisions of Section 3 are default rules. A gift instrument or the governing instruments of an institution can modify these duties, but the charitable purpose doctrine limits the extent to which an institution or a donor can restrict these duties. In addition, subsection (a) of Section 3 reminds the decision maker that the intent of a donor expressed in a gift instrument will control decision making. Further, the decision maker must consider the charitable purposes of the institution and the purposes of the institutional fund for which decisions are being made. These factors are specific to charitable organizations; UPIA § 2(a) states the duty to consider similar factors in the private trust context.
UPMIFA does not include the duty of impartiality, stated in UPIA § 6, because nonprofit corporations do not confront the multiple beneficiaries problem to which the duty is addressed. Under UPIA, a trustee must treat the current beneficiaries and the remainder beneficiaries with due regard to their respective interests, subject to alternative direction from the trust document. A nonprofit corporation typically creates one charity. The institution may serve multiple beneficiaries, but those beneficiaries do not have enforceable rights in the institution in the same way that beneficiaries of a private trust do. Of course, if a charitable trust is created to benefit more than one charity, rather than being created to carry out a charitable purpose, then UPIA will apply the duty of impartiality to that trust.
In other respects, the Drafting Committee made changes to language from UPIA only where necessary to adapt the language for charitable institutions. No material differences are intended. Subsection (e)(1)(D) of Section 3 of UPMIFA does not include a clause that appears at the end of UPIA § 2(c)(4) ("which may include financial assets, interest in closely held enterprises, tangible and intangible personal property, and real property."). The Drafting Committee deemed this clause unnecessary for charitable institutions. The language of subsection (e)(1)(G) reflects a modification of the language of UPIA § (2)(c)(7). Other minor modifications to the UPIA provisions make the language more appropriate for charitable institutions.
The duties imposed by this section apply to those who govern an institution, including directors and trustees, and to those to whom the directors or managers delegate responsibility for investment and management of institutional funds. The standard applies to officers and employees of an institution and to agents who invest and manage institutional funds. Volunteers who work with an institution will be subject to the duties imposed here, but state and federal statutes may provide reduced liability for persons who act without compensation. UPMIFA does not affect the application of those shield statutes.
Subsection (a). Donor Intent and Charitable Purposes. Subsection (a) states the overarching duty to comply with donor intent as expressed in the terms of the gift instrument. The emphasis in the Act on giving effect to donor intent does not mean that the donor can or should control the management of the institution. The other fundamental duty is the duty to consider the charitable purposes of the institution and of the institutional fund in making management and investment decisions. UPIA § 2(a) states a similar duty to consider the purposes of a trust in investing and managing assets of a trust.
Subsection (b). Duty of Loyalty. Subsection (b) reminds those managing and investing institutional funds that the duty of loyalty will apply to their actions, but Section 3 does not state the loyalty standard that applies. The Drafting Committee was concerned, at least nominally, that different standards of loyalty may apply to directors of nonprofit corporations and to trustees of charitable trusts. The RMNCA provides that under the duty of loyalty a director of a nonprofit corporation should act "in a manner the director reasonably believes to be in the best interests of the corporation." RMNCA § 8.30. The trust law articulation of the loyalty standard uses "sole interests" rather than "best interests." As the Restatement of Trusts explains, "[t]he trustee is under a duty to the beneficiary to administer the trust solely in the interest of the beneficiary." Restatement (Second) of Trusts § 170 (1). Although the standards for loyalty, like the standard of care, are merging, see Evelyn Brody, Charitable Governance: What's Trust Law Got to do With It? Chi.-Kent L. Rev. (2005); John H. Langbein, Questioning the Trust Law Duty of Loyalty: Sole Interest or Best Interest, 114 Yale L.J. 929 (2005), the Drafting Committee concluded that formulating a duty of loyalty provision for UPMIFA was unnecessary. Thus the duty of loyalty under nonprofit corporation law will apply to charities organized as nonprofit corporations, and the duty of loyalty under trust law will apply to charitable trusts.
Subsection (b). Duty of Care. Subsection (b) also applies the duty of care to performance of investment duties. The language derives from § 8.30 of the RMNCA. This subsection states the duty to act in good faith, "with the care an ordinarily prudent person in a like position would exercise under similar circumstances." Although the language in the RMNCA and in UPMIFA is similar to that of § 8.30 of the Model Business Corporation Act (3d ed. 2002), the standard as applied to persons making decisions for charities is informed by the fact that the institution is a charity and not a business corporation. Thus, in UPMIFA the references to "like position" and "similar circumstances" mean that the charitable nature of the institution affects the decision making of a prudent person acting under the standard set forth in subsection (b). The duty of care involves considering the factors set forth in subsection (e)(1).
Subsection (c)(1). Duty to Minimize Costs. Subsection (c)(1) tracks the language of UPIA § 7 and requires an institution to minimize costs. An institution may prudently incur costs by hiring an investment advisor, but the costs incurred should be appropriate under the circumstances. See UPIA § 7 cmt; Restatement (Third) of Trusts: Prudent Investor Rule § 227, cmt. M, at 58 (1992); Restatement (Second) of Trusts § 188 (1959). The duty is consistent with the duty to act prudently under § 8.30 of the RMNCA.
Subsection (c)(2). Duty to Investigate. This subsection incorporates the traditional fiduciary duty to investigate, using language from UPIA § 2(d). The subsection requires persons who make investment and management decisions to investigate the accuracy of the information used in making decisions.
Subsection (d). Pooling Funds. An institution holding more than one institutional fund may find that pooling its funds for investment and management purposes will be economically beneficial. The Act permits pooling for these purposes. The prohibition against commingling no longer prevents pooling funds for investment and management purposes. See UPIA § 3, cmt. (duty to diversify aided by pooling); UPIA § 7, cmt. (pooling to minimize costs); Restatement (Third) of Trusts: Duty to Segregate and Identify Trust Property § 84 (T.D. No. 4 2005). Funds will be considered individually for other purposes of the Act, including for the spending rule for endowment funds of Section 4 and the modification rules of Section 6.
Subsection (e)(1). Prudent Decision Making. Subsection (e)(1) takes much of its language from UPIA § 2(c). In making decisions about whether to acquire or retain an asset, the institution should consider the institution's mission, its current programs, and the desire to cultivate additional donations from a donor, in addition to factors related more directly to the asset's potential as an investment.
Subsection (e)(1)(C) reflects the fact that some organizations will invest in taxable investments that may generate unrelated business taxable income for income tax purposes.
Assets held primarily for program-related purposes are not subject to UPMIFA. The management of those assets will continue to be governed by other laws applicable to the institution. Other assets may not be held primarily for program-related purposes but may have both investment purposes and program-related purposes. Subsections (a) and (e)(1)(H) indicate that a prudent decision maker can take into consideration the relationship between an investment and the purposes of the institution and of the institutional fund in making an investment that may have a program-related purpose but not be primarily program-related. The degree to which an institution uses an asset to accomplish a charitable purpose will affect the weight given that factor in a decision to acquire or retain the asset.
Subsection (e)(2). Portfolio Approach. This subsection reflects the use of portfolio theory in modern investment practice. The language comes from UPIA § 2(b), which follows the articulation of the prudent investor standard in Restatement (Third) of Trusts: Prudent Investor Rule § 227(a) (1992).
Subsection (e)(3). Broad Investment Authority. Consistent with the portfolio theory of investment, this subsection permits a broad range of investments. The language derives from UPIA § 2(e).
Section 4 of UMIFA indicated that an institution could invest "without restriction to investments a fiduciary may make." The committee removed this language from subsection (e)(3) as unnecessary, because states no longer have legal lists restricting fiduciary investing to the specific types of investments identified in statutory lists.
Subsection (e)(3) also provides that other law may limit the authority under this subsection. In addition, all of subsection (e) is subject to contrary provisions in a gift instrument, and a gift instrument may restrict the ability to invest in particular assets. For example, the gift instrument for a particular institutional fund might preclude the institution from investing the assets of the fund in companies that produce tobacco products.
In her book, Governing Nonprofit Organizations: Federal and State Law and Regulation 434 (Harv. Univ. Press 2004), Marion R. Fremont-Smith reports that some large charities pledge their endowment funds as security for loans. Subsection (e)(3) permits this sort of debt financing, subject to the guidelines of subsection (e)(1).
Subsection (e)(4). Duty to Diversify. This subsection assumes that prudence requires diversification but permits an institution to determine that nondiversification is appropriate under exceptional circumstances. A decision not to diversify must be based on the needs of the charity and not solely for the benefit of a donor. A decision to retain property in the hope of obtaining additional contributions from the same donor may be considered made for the benefit of the charity, but the appropriateness of that decision will depend on the circumstances. This subsection derives its language from UPIA § 3. See UPIA § 3 cmt. (discussing the rationale for diversification); Restatement (Third) of Trusts: Prudent Investor Rule § 227 (1992).
Subsection (e)(5). Disposing of Unsuitable Assets. This subsection imposes a duty on an institution to review the suitability of retaining property contributed to the institution within a reasonable period of time after the institution receives the property. Subsection (e)(5) requires the institution to make a decision but does not require a particular outcome. The institution may consider a variety of factors in making its decision, and a decision to retain the property either for a period of time or indefinitely may be a prudent decision.
Section 4(2) of UMIFA specifically authorized an institution to retain property contributed by a donor. The comment explained that an institution might retain property in the hope of obtaining additional contributions from the donor. Under UPMIFA the potential for developing additional contributions by retaining property contributed to the institution would be among the "other circumstances" that the institution might consider in deciding whether to retain or dispose of the property. The institution must weigh the potential for obtaining additional contributions with all other factors that affect the suitability of retaining the property in the investment portfolio.
The language of subsection (e)(5) comes from UPIA § 4, which restates Restatement (Third) of Trusts: Prudent Investor Rule § 229 (1992), which adopted language from Restatement (Second) of Trusts § 231 (1959). See UPIA § 4 cmt.
Subsection (e)(6). Special Skills or Expertise. Subsection (e)(6) states the rule provided in UPIA § 2(f) requiring a trustee to use the trustee's own skills and expertise in carrying out the trustee's fiduciary duties. The comment to RMNCA § 8.30 describes the existence of a similar rule under the law of nonprofit corporations. Section 8.30(a)(2) provides that in discharging duties a director must act "with the care an ordinarily prudent person in a like position would exercise under similar circumstances. . . ." The comment explains that"[t]he concept of under similar circumstances' relates not only to the circumstances of the corporation but to the special background, qualifications, and management experience of the individual director and the role the director plays in the corporation." After describing directors chosen for their ability to raise money, the comment notes that "[n]o special skill or expertise should be expected from such directors unless their background or knowledge evidences some special ability."
The intent of subsection (e)(6) is that a person managing or investing institutional funds must use the person's own judgment and experience, including any particular skills or expertise, in carrying out the management or investment duties. For example, if a charity names a person as a director in part because the person is a lawyer, the lawyer's background may allow the lawyer to recognize legal issues in connection with funds held by the charity. The lawyer should identify the issues for the board, but the lawyer is not expected to provide legal advice. A lawyer is not expected to be able to recognize every legal issue, particularly issues outside the lawyer's area of expertise, simply because the board member is lawyer. See ALI Principles of the Law of Nonprofit Organizations, Preliminary Draft No. 3 (May 12, 2005) § 315 (Duty of Care), cmt. c.
UMIFA contained two provisions that authorized investments in pooled or common investment funds. UMIFA §§ 4(3), 4(4). The Drafting Committee concluded that Section 3(e)(3) of UPMIFA authorizes these investments. The decision not to include the two provisions in UPMIFA implies no disapproval of such investments.
15-1-1104. Appropriation for expenditure of accumulation of endowment fund - rules of construction.
-
Subject to the intent of a donor expressed in the gift instrument, an institution may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines is prudent for the uses, benefits, purposes, and duration for which
the endowment fund is established. Unless stated otherwise in the gift instrument, the assets in an endowment fund are donor-restricted assets until appropriated for expenditure by the institution. In making a determination to
appropriate or accumulate, the institution shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and shall consider, if relevant, the following factors:
- The duration and preservation of the endowment fund;
- The purposes of the institution and the endowment fund;
- General economic conditions;
- The possible effect of inflation or deflation;
- The expected total return from income and the appreciation of investments;
- Other resources of the institution; and
- The investment policy of the institution.
- To limit the authority to appropriate for expenditure or accumulate under subsection (a) of this section, a gift instrument must specifically state the limitation.
-
Terms in a gift instrument designating a gift as an endowment, or a direction or authorization in the gift instrument to use only "income", "interest", "dividends", or "rents, issues, or profits", or "to preserve the principal intact", or words of similar
import:
(1) Create an endowment fund of permanent duration unless other language in the gift instrument limits the duration or purpose of the endowment fund; and
(2) Do not otherwise limit the authority to appropriate for expenditure or accumulate under subsection (a) of this section.
Source: L. 2008: Entire part R&RE, p. 562, § 1, effective September 1.
Editor's note: This section is similar to former §§ 15-1-1104 and 15-1-1105 as they existed prior to 2008.
OFFICIAL COMMENT
Purpose and Scope of Revisions. This section revises the provision in UMIFA that permitted the expenditure of appreciation of an endowment fund to the extent the fund had appreciated in value above the fund's historic dollar value. UMIFA defined historic dollar value to mean all contributions to the fund, valued at the time of contribution. Instead of using historic dollar value as a limitation, UPMIFA applies a more carefully articulated prudence standard to the process of making decisions about expenditures from an endowment fund. The expenditure rule of Section 4 applies only to the extent that a donor and an institution have not reached some other agreement about spending from an endowment. If a gift instrument sets forth specific requirements for spending, then the charity must comply with those requirements. However, if the gift instrument uses more general language, for example directing the charity to "hold the fund as an endowment" or "retain principal and spend income," then Section 4 provides a rule of construction to guide the charity.
Prior to the promulgation of UMIFA, "income" for trust accounting purposes meant interest and dividends but not capital gains, whether or not realized. Many institutions assumed that trust accounting principles applied to charities organized as nonprofit corporations, and the rules limited the institutions' ability to invest their endowment funds effectively. UMIFA addressed this problem by construing "income" in gift instruments to include a prudent amount of capital gains, both realized and unrealized. Under UMIFA an institution could spend appreciation in addition to spending income determined under trust accounting rules. This rule of construction likely carried out the intent of the donor better than a rule limiting spending to trust accounting income, while permitting the charity to invest in a manner that could generate better returns for the fund.
UPMIFA also applies a rule of construction to terms like "income" or "endowment." The assumption in the Act is that a donor who uses one of these terms intends to create a fund that will generate sufficient gains to be able to make ongoing distributions from the fund while at the same time preserving the purchasing power of the fund. Because historic dollar value under UMIFA was a number fixed in time, the use of that approach may not have adequately captured the intent of a donor who wanted the endowment fund to continue to maintain its value in current dollars. UPMIFA takes a different approach, directing the institution to determine spending based on the total assets of the endowment fund rather than determining spending by adding a prudent amount of appreciation to trust accounting income.
UPMIFA requires the persons making spending decisions for an endowment fund to focus on the purposes of the endowment fund as opposed to the purposes of the institution more generally, as was the case under UMIFA. When the institution considers the purposes and duration of the fund, the institution will give priority to the donor's general intent that the fund be maintained permanently. Although the Act does not require that a specific amount be set aside as "principal," the Act assumes that the charity will act to preserve "principal" (i.e., to maintain the purchasing power of the amounts contributed to the fund) while spending "income" (i.e. making a distribution each year that represents a reasonable spending rate, given investment performance and general economic conditions). Thus, an institution should monitor principal in an accounting sense, identifying the original value of the fund (the historic dollar value) and the increases in value necessary to maintain the purchasing power of the fund.
Subsection (a). Expenditure of Endowment Funds. Subsection (a) uses the RMNCA articulation of the standard of care for decision making under Section 4. The change in language does not reflect a substantive change. The comment to Section 3 more fully describes that standard of care.
Section 4 permits expenditures from an endowment fund to the extent the institution determines that the expenditures are prudent after considering the factors listed in subsection (a). These factors emphasize the importance of the intent of the donor, as expressed in a gift instrument. Section 4 looks to written documents as evidence of donor's intent and does not require an institution to rely on oral expressions of intent. By requiring written evidence of intent, the Act protects reliance by the donor and the institution on the written terms of a donative agreement. Informal conversations may be misremembered and may be subject to multiple interpretations. Of course, oral expressions of intent may guide an institution in further carrying out a donor's wishes and in understanding a donor's intent.
The factors in subsection (a) require attention to the purposes of the institution and the endowment fund, economic conditions, and present and reasonably anticipated resources of the institution. As under UMIFA, determinations under Section 4 do not depend on the characterization of assets as income or principal and are not limited to the amount of income and unrealized appreciation. The authority in Section 4 is permissive, however, and an institution organized as a trust may continue to make spending decisions under trust accounting principles so long as doing so is prudent.
Institutions have operated effectively under UMIFA and have operated more conservatively than the historic dollar value rule would have permitted. Institutions have little incentive to maximize allowable spending. Good practice has been to provide for modest expenditures while maintaining the purchasing power of a fund. Institutions have followed this practice even though UMIFA (1) does not require an institution to maintain a fund's purchasing power and (2) does allow an institution to spend any amounts in a fund above historic dollar value, subject to the prudence standard. The Drafting Committee concluded that eliminating historic dollar value and providing institutions with more discretion would not lead to depletion of endowment funds. Instead, UPMIFA should encourage institutions to establish a spending policy that will be responsive to short-term fluctuations in the value of the fund. Section 4 allows an institution to maintain appropriate levels of expenditures in times of economic downturn or economic strength. In some years, accumulation rather than spending will be prudent, and in other years an institution may appropriately make expenditures even if a fund has not generated investment return that year.
Several levels of safeguard exist to prevent an institution from depleting an endowment fund or diverting assets from the purposes for which the fund was created. In comparison with UMIFA, UPMIFA provides greater direction to the institution with respect to making a prudent determination about spending from an endowment. UMIFA told the decision maker to consider "long and short term needs of the institution in carrying out its educational, religious, charitable, or other eleemosynary purposes, its present and anticipated financial requirements, expected total return on its investments, price level trends, and general economic conditions." UPMIFA clarifies that in making spending decisions the institution should attempt to ensure that the value of the fund endures while still providing that some amounts be spent for the purposes of the endowment fund. In UPMIFA prudent decision making emphasizes the endowment aspect of the fund, rather than the overall purposes or needs of the institution.
In addition to the guidance provided by Section 4, other safeguards exist. Donors can restrict gifts and can provide specific instructions to donee institutions regarding appropriate uses for assets contributed. Within institutions, fiduciary duties govern the persons making decisions on expenditures. Those persons must operate both with the best interests of the institution in mind and in keeping with the intent of donors. If an institution diverts an institutional fund from the charitable purposes of the institution, the state attorney general can enforce the charitable interests of the public. By relying on these safeguards while providing institutions with adequate discretion to make appropriate expenditures, the Act creates a standard that takes into consideration the diversity of the charitable sector. The committee expects that accumulated experience with such spending formulas will continue to inform institutional practice under the Act.
Distinguishing Legal and Accounting Standards. Deleting historic dollar value does not transform any portion of an endowment fund into unrestricted assets from a legal standpoint. An endowment fund is restricted because of the donor's intent that the fund be restricted by the prudent spending rule, that the fund not be spent in the current year, and that the fund continue to maintain its value for a long time. Regardless of the treatment of endowment fund from an accounting standpoint, legally an endowment fund should not be considered unrestricted. Subsection (a) states that endowment funds will be legally restricted until the institution appropriates funds for expenditure. The UMIFA statutes in Utah and Maine contain similar language. 13 Me. Rev. Stat. Ann. tit. 13 § 4106 (West 2005); Utah Code Ann. 1953 § 13-29-3 (2005). See, also, advisory published by Mass. Attorney General, "The Attorney General's Position on FASB Statement of Financial Accounting Standards No. 117, paragraph 22 and Related G.L.C. 180A Issues" (January 2004) http://www.ago.state.ma.us/filelibrary/fasb.pdf (last visited May 22, 2006) (concerning the treatment of endowments as legally restricted assets).
The term "endowment fund" includes funds that may last in perpetuity but also funds that are created to last for a fixed term of years or until the institution achieves a specified objective. Section 4 requires the institution to consider the intended duration of the fund in making determinations about spending. For example, if a donor directs that a fund be spent over 20 years, Section 4 will guide the institution in making distribution decisions. The institution would amortize the fund over 20 years rather than try to maintain the fund in perpetuity. For an endowment fund of limited duration, spending at a rate higher than rates typically used for endowment spending will be both necessary and prudent.
Subsection (c). Rule of Construction. Donor's intent must be respected in the process of making decisions to expend endowment funds. Section 4 does not allow an institution to convert an endowment fund into a non-endowment fund nor does the section allow the institution to ignore a donor's intent that a fund be maintained as an endowment. Rather, subsection (c) provides rules of construction to assist institutions in interpreting donor's intent. Subsection (c) assumes that if a donor wants an institution to spend "only the income" from a fund, the donor intends that the fund both support current expenditures and be preserved permanently. The donor is unlikely to be concerned about designation of particular returns as "income" or "principal" under accounting principles. Rather the donor is more likely to assume that the institution will use modern total-return investing techniques to generate enough funds to distribute while maintaining the long-term viability of the fund. Subsection (c) is an intent effectuating provision that provides default rules to construe donor's intent.
As subsection (b) explains, a donor who wants to specify particular spending guidelines can do so. For example, a donor might require that a charity spend between three and five percent of an endowed gift each year, regardless of investment performance or other factors. Because the charity agrees to the restriction in accepting the gift, the restriction will govern spending decisions by the charity. Another donor might want to limit expenditures to trust accounting income and not want the institution to be able to expend appreciation. An instruction to "pay only the income" will not be specific enough, but an instruction to "pay only interest and dividend income earned by the fund and not to make other distributions of the kind authorized by Section 4 of UPMIFA" should be sufficient. If a donor indicates that the rules on investing or expenditures under Section 4 do not apply to a particular fund, then as a practical matter the institution will probably invest the fund separately. Thus, a decision by a donor to require fund specific expenditure rules will likely also have consequences in the way the institution invests the fund.
Retroactive Application of the Rule of Construction. A constructional rule resolves an ambiguity, in this case, because donors use words like endowment or income without specific directions regarding the intended meaning. Changing a statutory constructional rule does not change the underlying intent, and instead changes the way an ambiguity is resolved, in an attempt to increase the likelihood of giving effect to the intent of most donors.
If a donor has stated in a gift instrument specific directions as to spending, then the institution must respect those wishes, but many donors do not give precise instructions about how to spend endowment funds. In Section 4 UPMIFA provides guidance for giving effect to a donor's intent when the donor has not been specific. Like Section 3 of UMIFA, Section 4 of UPMIFA is a rule of construction, so it does not violate either donor intent or the Constitution.
The issue of whether to apply a rule of construction retroactively was considered in connection with UMIFA. When the New Hampshire legislature considered UMIFA, the Senate asked the New Hampshire Supreme Court for an opinion regarding whether UMIFA, if adopted, would violate a provision of the state constitution prohibiting retrospective laws, and also whether the statute would encroach on the functions of the judicial branch. The opinion answered no to both questions. Opinion of the Justices, Request of the Senate No. 6667, 113 N.H. 287, 306 A.2d 55 (1973).
More recently the Colorado Supreme Court considered the retroactive application of another constructional statute, one that deems the designation of a spouse as the beneficiary of a life insurance policy to be revoked in a case in which the marriage was dissolved after the naming of the spouse as beneficiary. In re Estate of DeWitt, 54 P.3d 849 ( Colo. 2002 ). In holding that retroactive application of the statute did not violate the Contracts Clause, the court cited approvingly from a statement prepared by the Joint Editorial Board for Uniform Trusts and Estates Acts (JEB). JEB Statement Regarding the Constitutionality of Changes in Default Rules as Applied to PreExisting Documents, 17 Am. Coll. Tr. & Est. Couns. Notes 184 app. II (1991).
The JEB Statement explains that the purpose of the anti-retroactivity norm is to protect a transferor who relies on existing rules of law. By definition, however, rules of construction apply only in situations in which a transferor did not spell out his or her intent and hence did not rely on the then-current rule of construction. See also In re Gardner's Trust, 266 Minn. 127, 132, 123 N.W. 2d 69, 73 (1963) ("[I]t is doubtful whether the testatrix had any clear intention in mind at the time the will was executed. It is equally plausible that if she had thought about it at all she would have desired to have the dividends go where the law required them to go at the time they were received by the trustee.") (Uniform Principal and Income Act).
Non-retroactivity would produce serious practical problems: If the Act were not retroactive, a charity would need to keep two sets of books for each endowment fund created before the enactment of UPMIFA, if new funds were added after the enactment. The burden that such a rule would impose is out of proportion to the benefit sought.
Subsection (d). Rebuttable Presumption of Imprudence. The Drafting Committee debated at length whether to include a presumption of imprudence for spending above a fixed percentage of the value of the fund. The Drafting Committee decided to include a presumption in the Act in brackets, as an option for states to consider, and to include in these Comments a discussion of the advantages and disadvantages of including a presumption in the Act. (Colorado did not adopt the provisions contained in subsection (d).)
Some who commented on the Act viewed the presumption as linked to the retroactive application of the rule of construction of subsection (c). A donor who contributed to an endowment fund under UMIFA may have assumed that the historic dollar value of the gift would be subject to a no-spending rule under the statute. Because UPMIFA removes the concept of historic dollar value, the bracketed presumption of imprudence would assure the donor that spending from an endowment fund will be so limited.
Those in favor of the presumption of imprudence argued that the presumption would curb the temptation that a charity might have to spend endowment assets too rapidly. Although the presumption would be rebuttable, and spending above the identified percentage might, in some years and for some charities, be prudent, institutions would likely be reluctant to authorize spending above seven percent. In addition, the presumption would give the attorney general a benchmark of sorts.
A variety of considerations cut against including a presumption of imprudence in the statute. A fixed percentage in the statute might be perceived as a safe harbor that could lead institutions to spend more than is prudent. Although the provision should not be read to imply that spending below seven percent will be considered prudent, some charities might interpret the statute in that way. Decision makers might be pressured to spend up to the percentage, and in doing so spend more than is prudent, without adequate review of the prudence factors as required under the Act.
Perhaps the biggest problem with including a presumption in the statute is the difficulty of picking a number that will be appropriate in view of the range of institutions and charitable purposes and the fact that economic conditions will change over time. Under recent economic conditions, a spending rate of seven percent is too high for most funds, but in a period of high inflation, seven percent might be too low. In making a prudent decision regarding how much to spend from an endowment fund, each institution must consider a variety of factors, including the particular purposes of the fund, the wishes of the donors, changing economic factors, and whether the fund will receive future donations.
Whether or not a statute includes the presumption, institutions must remember that prudence controls decision making. Each institution must make decisions on expenditures based on the circumstances of the particular charity.
Application of Presumption. For a state wishing to adopt a presumption of imprudence, subsection (d) provides language. Under subsection (d), a rebuttable presumption of imprudence will arise if expenditures in one year exceed seven percent of the assets of an endowment fund. The subsection applies a rolling average of three or more years in determining the value of the fund for purposes of calculating the seven-percent amount. An institution can rebut the presumption of imprudence if circumstances in a particular year make expenditures above that amount prudent. The concept and the language for the presumption of imprudence comes from Mass. Gen. L. ch. 180A, § 2 (2004). Massachusetts enacted this rule in 1975 as part of its UMIFA statute. New Mexico adopted the same presumption in 1978. N.M.S.A. § 46-9-2 (C) (2004). New Hampshire has a similar provision. N.H. Rev. Stat. § 292-B:6.
The period that a charity uses to calculate the presumption (three or more years) and the frequency of valuation (at least quarterly) will be binding in any determination of whether the presumption applies. For example, if a charity values an endowment fund on a quarterly basis and averages the quarterly values over three years to determine the fair market value of the fund for purposes calculating seven percent of the fund, the charity's choices of three years as a smoothing period and quarterly as a valuation period cannot be challenged. If the charity makes an appropriation that is less than seven percent of this value, then the presumption of imprudence does not arise even if the appropriation would exceed seven percent of the value of the fund calculated based on monthly valuations averaged over five years.
If sufficient evidence establishes, by the preponderance of the evidence, the facts necessary to raise the presumption of imprudence, then the institution will have to carry the burden of production of (i.e., the burden of going forward with) other evidence that would tend to demonstrate that its decision was prudent. The existence of the presumption does not shift the burden of persuasion to the charity.
Expenditures from an endowment fund may include distributions for charitable purposes and amounts used for the management and administration of the fund, including annual charges for fundraising. The value of a fund, as calculated for purposes of determining the seven percent amount, will reflect increases due to contributions and investment gains and decreases due to distributions and investment losses. The seven percent figure includes charges for fundraising and administrative expenses other than investment management expenses. All costs or fees associated with an endowment fund are factors that prudent decision makers consider. High costs or fees of investment management could be considered imprudent regardless of whether spending exceeds seven percent of the fund's value.
The presumption of imprudence does not create an automatic safe harbor. Expenditures at six percent might well be imprudently high. See James P. Garland, The Fecundity of Endowments and Long-Duration Trusts, The Journal of Portfolio Management (2005). Evidence reviewed by the Drafting Committee suggests that at present few funds can sustain spending at a rate above five percent. See Roger G. Ibbotson & Rex A. Sinquefield, Stocks, Bonds, Bills, and Inflation: Historical Returns (1926-1987) (Research Foundation of the Institute of Chartered Financial Analysts, 1989). Indeed, under current conditions five percent can be too high. See Joel C. Dobris, Why Five? The Strange, Magnetic, and Mesmerizing Affect of the Five Percent Unitrust and Spending Rate on Settlors, Their Advisers, and Retirees, 40 Real Prop. Prob. & Tr. J. 39 (2005). Further, spending at a lower rate, particularly in the early years of an endowment, may result in greater distributions over time. See DeMarche Associates, Inc, Spending Policies and Investment Planning for Foundations: A Structure for Determining a Foundation's Asset Mix (Council on Foundations: 3d ed. 1999). A presumption of imprudence can serve as a reminder that spending at too high a rate will jeopardize the long-term nature of an endowment fund. If an endowment fund is intended to continue permanently, the institution should take special care to limit annual spending to a level that protects the purchasing power of the fund.
Subsection (d) provides that the terms of the gift instrument can provide additional spending authority. For example, if a gift instrument directs that an institution expend a fund over a ten-year period, exhausting the fund after ten years, spending at a rate higher than seven percent will be necessary.
Subsection (d) does not require an institution to spend a minimum amount each year. The prudence standard and the needs of the institution will supply sufficient guidance regarding whether to accumulate rather than to spend in a particular year.
Spending above seven percent in any one year will not necessarily be imprudent. For some endowment funds fluctuating spending rates may be appropriate. Although the Act does not apply the percentage for the presumption on a rolling basis (e.g., 21 percent over three years), some endowment funds may prudently spend little or nothing in some years and more than seven percent in other years. For example, a charity planning a construction project might decide to spend nothing from an endowment for three years and then in the fourth year might spend 20 percent of the value of the fund for construction costs. The decision to accumulate in years one through three and then to spend 20 percent in the fourth year might be prudent for the charity, depending on the other factors. The charity should maintain adequate records during the accumulation period and should document the decision-making process in the fourth year to be able to meet the burden of production associated with the presumption. Another charity might prudently spend 20 percent in year one and nothing for the following three years. That charity would also need to document the decision-making process through which the decision to spend occurred and maintain records explaining why the decision was prudent under the circumstances.
A charity might establish a "capital replacement fund" designed to provide funds to the institution for repair or replacement of major items of equipment. Disbursements from such a fund will likely fluctuate, with limited expenditures in some years and big expenditures in others. The fund would not exhibit a uniform spending rate. Indeed, an advantage of a capital replacement fund is the ability to absorb a significant capital expenditure in a single year without a negative impact on the operating budget of the institution. Disbursements might average five percent per year but would vary, with spending in some years more and in some years less. Even if this fund is an endowment fund subject to Section 4, spending above seven percent in a particular year could well be prudent. Subsection (d) does not preclude spending above seven percent.
A charity creating a capital replacement fund or a building fund might chose to adopt spending rules for the fund that would not be subject to UPMIFA. Specific donor intent can supersede the rules of UPMIFA. If the charity creates a gift instrument that establishes appropriate rules on spending for the fund, and if donors agree to those restrictions, then the UPMIFA rules on spending, including the bracketed presumption, will not apply.
Institutions with Limited Investment and Spending Experience. Several attorneys general and other charity officials raised concerns about whether small institutions would be able to adjust to a spending rule based solely on prudence, without the bright-line guidance of historic dollar value. Some charity regulators who spoke with the Drafting Committee noted that large institutions have sophisticated investment strategies, access to good investment advisors, and experience with spending rules that maintain purchasing power for endowment funds. For these institutions, the rules of UPMIFA should work well. For smaller institutions, however, the state regulators thought that additional guidance could be helpful. After discussing strategies to address this concern, the Drafting Committee decided to include in these comments an additional optional provision that a state could choose to include in its UPMIFA statute.
The optional provision focuses on institutions with endowment funds valued, in the aggregate, at less than $2,000,000. The number is in brackets to indicate that it could be set higher or lower. The number was chosen to address the concern of the state regulators that some small charities might be more likely to spend imprudently than large charities. The Drafting Committee selected $2,000,000 as the value that might include most unsophisticated institutions but would not be overinclusive.
The optional provision creates a notification requirement for an institution with a small endowment that plans to spend below historic dollar value. If an institution subject to the provision decides to appropriate an amount that would cause the value of its endowment funds to drop below the aggregate historic dollar value for all of its endowment funds, then the institution will have to notify the attorney general before proceeding with the expenditure. The provision does not require that the institution obtain the approval of the attorney general before making the distribution. Rather, the notification requirement gives the attorney general the opportunity to take a closer look at the institution and its spending decision, to educate the institution on prudent decision making for endowment funds, and to intervene if the attorney general determines that the spending would be imprudent for the institution. Although the Drafting Committee thinks that the prudence standard in UPMIFA provides adequate guidance to all institutions within the scope of the Act, if a state chooses to adopt a notification provision for institutions with small endowments, the Drafting Committee recommends the following language:
(-) If an institution has endowment funds with an aggregate value of less than [$2,000,000], the institution shall notify the [Attorney General] at least [60 days] prior to an appropriation for expenditure of an amount that would cause the value of the institution's endowment funds to fall below the aggregate historic dollar value of the institution's endowment funds, unless the expenditure is permitted or required under law other than this [act] or in the gift instrument. For purposes of this subsection, "historic dollar value" means the aggregate value in dollars of (i) each endowment fund at the time it became an endowment fund, (ii) each subsequent donation to the fund at the time the donation is made, and (iii) each accumulation made pursuant to a direction in the applicable gift instrument at the time the accumulation is added to the fund. The institution's determination of historic dollar value made in good faith is conclusive.
15-1-1105. Delegation of management and investment functions.
-
Subject to any specific limitation set forth in a gift instrument or in law other than this part 11, an institution may delegate to an external agent the management and investment of an institutional fund to the extent that an institution could prudently
delegate under the circumstances. An institution shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, in:
- Selecting an agent;
- Establishing the scope and terms of the delegation, consistent with the purposes of the institution and the institutional fund; and
- Periodically reviewing the agent's actions in order to monitor the agent's performance and compliance with the scope and terms of the delegation.
- In performing a delegated function, an agent owes a duty to the institution to exercise reasonable care to comply with the scope and terms of the delegation.
- An institution that complies with subsection (a) of this section is not liable for the decisions or actions of an agent to which the function was delegated.
- By accepting delegation of a management or investment function from an institution that is subject to the laws of this state, an agent submits to the jurisdiction of the courts of this state in all proceedings arising from or related to the delegation or the performance of the delegated function.
- An institution may delegate management and investment functions to its committees, officers, or employees as authorized by law of this state other than this part 11.
Source: L. 2008: Entire part R&RE, p. 563, § 1, effective September 1.
Editor's note: This section is similar to former § 15-1-1107 as it existed prior to 2008.
OFFICIAL COMMENT
The prudent investor standard in Section 4 presupposes the power to delegate. For some types of investment, prudence requires diversification, and diversification may best be accomplished through the use of pooled investment vehicles that entail delegation. The Drafting Committee decided to put Section 5 in brackets because many states already provide sufficient authority to delegate authority through other statutes. If such authority exists, then an enacting state should enact UPMIFA without Section 5. Enacting delegation rules that duplicate existing rules could be confusing and might create conflicts. For charitable trusts, UPIA provides the same delegation rules as those in Section 5. For nonprofit corporations, nonprofit corporation statutes often provide comparable rules. A state enacting UPMIFA must be certain that its laws authorize delegation, either through other statutes or by enacting Section 5.
Section 5 incorporates the delegation rule found in UPIA § 9, updating the delegation rules in UMIFA § 5. Section 5 permits the decision makers in an institution to delegate management and investment functions to external agents if the decision makers exercise reasonable skill, care, and caution in selecting the agent, defining the scope of the delegation and reviewing the performance of the agent. In some circumstances, the scope of the delegation may include redelegation. For example, an institution may select an investment manager to assist with investment decisions. The delegation may include the authority to redelegate to investment managers with expertise in particular investment areas. All decisions to delegate require the exercise of reasonable care, skill, and caution in selecting, instructing, and monitoring agents. Further, decision makers cannot delegate the authority to make decisions concerning expenditures and can only delegate management and investment functions. Subsection (c) protects decision makers who comply with the requirement for proper delegation from liability for actions or decisions of the agents. In making decisions concerning delegation, the institution must be mindful of Section 3(c)(1) of UPMIFA, the provision that directs the institution to incur only reasonable costs in managing and investing an institutional fund.
Section 5 does not address issues of internal delegation and potential liability for internal delegation, and subsection (c) does not affect laws that govern personal liability of directors or trustees for matters outside the scope of Section 5. Directors will look to nonprofit corporation laws for these rules, while trustees will look to trust law. See, e.g., RMNCA, § 8.30(b) (permitting directors to rely on information prepared by an officer or employee of the institution if the director reasonably believes the officer or employee to be reliable and competent in the matters presented).
The language of subsection (c) is similar to that of UPIA § 9(c) and RMNCA § 8.30(d). The decision not to include the terms "beneficiaries" or "members" in subsection (c) does not indicate a decision that this section does not create immunity from claims brought by beneficiaries or members. Instead, a decision maker who complies with section 5 will be protected from any liability resulting from actions or decisions made by an external agent.
Subsection (d) creates personal jurisdiction over the agent. This subsection is not a choice of law rule.
Subsection (e) notes that law other than this Act governs internal delegation. Section 5 of UMIFA included internal delegation as well as external delegation, due to a concern at that time that trust law concepts might govern internal delegation in nonprofit corporations. With the widespread adoption of nonprofit corporation statutes, that concern no longer exists. The decision not to address internal delegation in UPMIFA does not suggest that a governing board of a nonprofit corporation cannot delegate to committees, officers, or employees. Rather, a nonprofit corporation must look to other law, typically a nonprofit corporation statute, for the rules governing internal delegation.
15-1-1106. Release or modification of restrictions on management, investment, or purpose.
- If the donor consents in a record, an institution may release or modify, in whole or in part, a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund. A release or modification may not allow an institutional fund to be used for a purpose other than a charitable purpose of the institution.
- The court, upon application of an institution, may modify a restriction contained in a gift instrument regarding the management or investment of an institutional fund if the restriction has become impracticable or wasteful, if it impairs the management or investment of the institutional fund, or if, because of circumstances not anticipated by the donor, a modification of a restriction will further the purposes of the institutional fund. The institution shall notify the attorney general of the application, and the attorney general must be given an opportunity to be heard. To the extent practicable, any modification must be made in accordance with the donor's probable intention.
- If a particular charitable purpose or a restriction contained in a gift instrument on the use of an institutional fund becomes unlawful, impracticable, impossible to achieve, or wasteful, the court, upon application of an institution, may modify the purpose of the institutional fund or the restriction on the use of the institutional fund in a manner consistent with the charitable purposes expressed in the gift instrument. The institution shall notify the attorney general of the application, and the attorney general must be given an opportunity to be heard.
-
If an institution determines that a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund is unlawful, impracticable, impossible to achieve, or wasteful, the institution, sixty days after notification
to the attorney general, may release or modify the restriction, in whole or part, if:
- The institutional fund, subject to the restriction, has a total value of less than one hundred thousand dollars; except that the dollar limit established in this paragraph (1) shall be adjusted for inflation in accordance with the annual percentage change in the United States department of labor, bureau of labor statistics, consumer price index for Denver-Aurora-Lakewood for all items and all urban consumers, or its applicable predecessor or successor index. On or before January 1, 2010, and each even-numbered year thereafter, the attorney general shall calculate the adjusted dollar amount for the next two-year cycle using inflation for the prior two calendar years as of the date of the calculation. The adjusted exemption shall be rounded upward to the nearest one-hundred-dollar increment. The attorney general shall certify the amount of the adjustment for the next two-year cycle and shall publish the amount on the attorney general's website.
- More than twenty years have elapsed since the institutional fund was established; and
- The institution uses the property in a manner consistent with the charitable purposes expressed in the gift instrument.
Source: L. 2008: Entire part R&RE, p. 563, § 1, effective September 1. L. 2018: (d)(1) amended, (HB 18-1375), ch. 274, p. 1697, § 11, effective May 29.
Editor's note: This section is similar to former § 15-1-1109 as it existed prior to 2008.
OFFICIAL COMMENT
Section 6 expands the rules on releasing or modifying restrictions that are found in Section 7 of UMIFA. Subsection (a) restates the rule from UMIFA allowing the release of a restriction with donor consent. Subsections (b) and (c) make clear that an institution can always ask a court to apply equitable deviation or cy pres to modify or release a restriction, under appropriate circumstances. Subsection (d), a new provision, permits an institution to apply cy pres on its own for small funds that have existed for a substantial period of time, after giving notice to the state attorney general.
Although UMIFA stated that it did not "limit the application of the doctrine of cy pres", UMIFA § 7(d), what that statement meant under the Act was unclear. UMIFA itself appeared to permit only a release of a restriction and not a modification. That all-or-nothing approach did not adequately protect donor intent. See Yale Univ. v. Blumenthal, 621 A.2d 1304 (Conn. 1993). By expressly including deviation and cy pres, UPMIFA requires an institution to seek modifications that are "in accordance with the donor's probable intention" for deviation and "in a manner consistent with the charitable purposes expressed in the gift instrument" for cy pres.
Individual Funds. The rules on modification require that the institution, or a court applying a court-ordered doctrine, review each institutional fund separately. Although an institution may manage institutional funds collectively, for purposes of this Section each fund must be considered individually.
Subsection (a). Donor Release. Subsection (a) permits the release of a restriction if the donor consents. A release with donor consent cannot change the charitable beneficiary of the fund. Although the donor has the power to consent to a release of a restriction, this section does not create a power in the donor that will cause a federal tax problem for the donor. The gift to the institution is a completed gift for tax purposes, the property cannot be diverted from the charitable beneficiary, and the donor cannot redirect the property to another use by the charity. The donor has no retained interest in the fund.
Subsection (b). Equitable Deviation. Subsection (b) applies the rule of equitable deviation, adapting the language of UTC § 412 to this section. See also Restatement (Third) of Trusts § 66 (2003). Under the deviation doctrine, a court may modify restrictions on the way an institution manages or administers a fund in a manner that furthers the purposes of the fund. Deviation implements the donor's intent. A donor commonly has a predominating purpose for a gift and, secondarily, an intent that the purpose be carried out in a particular manner. Deviation does not alter the purpose but rather modifies the means in order to carry out the purpose.
Sometimes deviation is needed on account of circumstances unanticipated when the donor created the restriction. In other situations the restriction may impair the management or investment of the fund. Modification of the restriction may permit the institution to carry out the donor's purposes in a more effective manner. A court applying deviation should attempt to follow the donor's probable intention in deciding how to modify the restriction. Consistent with the doctrine of equitable deviation in trust law, subsection (b) does not require an institution to notify donors of the proposed modification. Good practice dictates notifying any donors who are alive and can be located with a reasonable expenditure of time and money. Consistent with the doctrine of deviation under trust law, the institution must notify the attorney general who may choose to participate in the court proceeding. The attorney general protects donor intent as well as the public's interest in charitable assets. Attorney general is in brackets in the Act because in some states another official enforces the law of charities.
Subsection (c). Cy Pres. Subsection (c) applies the rule of cy pres from trust law, authorizing the court to modify the purpose of an institutional fund. The term "modify" encompasses the release of a restriction as well as an alteration of a restriction and also permits a court to order that the fund be paid to another institution. A court can apply the doctrine of cy pres only if the restriction in question has become unlawful, impracticable, impossible to achieve, or wasteful. This standard, which comes from UTC § 413, updates the circumstances under which cy pres may be applied by adding "wasteful" to the usual common law articulation of the doctrine. Any change must be made in a manner consistent with the charitable purposes expressed in the gift instrument. See also Restatement (Third) of Trusts § 67 (2003). Consistent with the doctrine of cy pres, subsection (c) does not require an institution seeking cy pres to notify donors. Good practice will be to notify donors whenever possible. As with deviation, the institution must notify the attorney general who must have the opportunity to be heard in the proceeding.
Subsection (d). Modification of Small, Old Funds. Subsection (d) permits an institution to release or modify a restriction according to cy pres principles but without court approval if the amount of the institutional fund involved is small and if the institutional fund has been in existence for more than 20 years. The rationale is that under some circumstances a restriction may no longer make sense but the cost of a judicial cy pres proceeding will be too great to warrant a change in the restriction. The Drafting Committee discussed at length the parameters for allowing an institution to apply cy pres without court supervision. The Committee drafted subsection (d) to balance the needs of an institution to serve its charitable purposes efficiently with the policy of enforcing donor intent. The Committee concluded that an institutional fund with a value of $25,000 or less is sufficiently small that the cost of a judicial proceeding will be out of proportion to its protective purpose. The Committee included a requirement that the institutional fund be in existence at least 20 years, as a further safeguard for fidelity to donor intent. The 20-year period begins to run from the date of inception of the fund and not from the date of each gift to the fund. The amount and the number of years have been placed in brackets to signal to an enacting jurisdiction that it may wish to designate a higher or lower figure. Because the amount should reflect the cost of a judicial proceeding to obtain a modification, the number may be higher in some states and lower in others.
As under judicial cy pres, an institution acting under subsection (d) must change the restriction in a manner that is in keeping with the intent of the donor and the purpose of the fund. For example, if the value of a fund is too small to justify the cost of administration of the fund as a separate fund, the term "wasteful" would allow the institution to combine the fund with another fund with similar purposes. If a fund has been created for nursing scholarships and the institution closes its nursing school, the institution might appropriately decide to use the fund for other scholarships at the institution. In using the authority granted under subsection (d), the institution must determine which alternative use for the fund reasonably approximates the original intent of the donor. The institution cannot divert the fund to an entirely different use. For example, the fund for nursing scholarships could not be used to build a football stadium.
An institution seeking to modify a provision under subsection (d) must notify the attorney general of the planned modification. The institution must wait 60 days before proceeding; the attorney general may take action if the proposed modification appears inappropriate.
Notice to Donors. The Drafting Committee decided not to require notification of donors under subsections (b), (c), and (d). The trust law rules of equitable deviation and cy pres do not require donor notification and instead depend on the court and the attorney general to protect donor intent and the public's interest in charitable assets.
With regard to subsection (d), the Drafting Committee concluded that an institution should not be required to give notice to donors. Subsection (d) can only be used for an old and small fund. Locating a donor who contributed to the fund more than 20 years earlier may be difficult and expensive. If multiple donors each gave a small amount to create a fund 20 years earlier, the task of locating all of those donors would be harder still. The Drafting Committee concluded that an institution's concern for donor relations would serve as a sufficient incentive for notifying donors when donors can be located.
15-1-1107. Reviewing compliance.
Compliance with this part 11 is determined in light of the facts and circumstances existing at the time a decision is made or action is taken, and not by hindsight.
Source: L. 2008: Entire part R&RE, p. 564, § 1, effective September 1.
15-1-1108. Application to existing institutional funds.
This part 11 applies to institutional funds existing on or established after September 1, 2008. As applied to institutional funds existing on September 1, 2008, this part 11 governs only decisions made or actions taken on or after said date.
Source: L. 2008: Entire part R&RE, p. 565, § 1, effective September 1.
15-1-1109. Relation to "Electronic Signatures in Global and National Commerce Act".
This part 11 modifies, limits, and supersedes the "Electronic Signatures in Global and National Commerce Act", 15 U.S.C. sec. 7001 et seq., but does not modify, limit, or supersede section 101 (a) of that act, 15 U.S.C. sec. 7001 (a), or authorize electronic delivery of any of the notices described in section 103 (b) of that act, 15 U.S.C. sec. 7003 (b).
Source: L. 2008: Entire part R&RE, p. 565, § 1, effective September 1.
15-1-1110. Uniformity of application and construction.
In applying and construing this part 11, consideration must be given to the need to promote uniformity of the law with respect to its subject matter among states that enact it.
Source: L. 2008: Entire part R&RE, p. 565, § 1, effective September 1.
Editor's note: This section is similar to former § 15-1-1102 as it existed prior to 2008.
PART 12 LIFE ESTATE IN PROPERTY OF SURVIVING SPOUSE
15-1-1201. Life estate in property - rights of surviving spouse.
-
Unless the instrument provides otherwise, any devise of a life estate in property to a surviving spouse by a decedent spouse shall entitle the surviving spouse to:
- All income for life from the entire interest in or specific portion of the property, payable annually or at more frequent intervals;
- Exclusive beneficial enjoyment of the property during his life, including such income or use of the property as is consistent with the value of the property and its preservation; except that, during the surviving spouse's lifetime, no person other than the surviving spouse may receive any distribution of the property or its income; and
- Make the property productive or convert it into productive property within a reasonable time after the devise; except that, the exercise of such power shall be subject to the degree of judgment and care which a prudent person would use if he were the owner of the property. The proceeds of any such conversion shall be reinvested by the surviving spouse in a form subject to the life estate and remainder rights created by the decedent.
- The provisions of this part 12 shall be interpreted consistently with the requirements of section 2056 (b)(7) of the federal "Internal Revenue Code of 1986", as amended, if the personal representative of the estate of the decedent spouse elects to treat such life estate as qualified terminable interest property under said Internal Revenue Code section.
Source: L. 88: Entire part added, p. 647, § 1, effective May 17. L. 2000: (2) amended, p. 1846, § 28, effective August 2.
15-1-1202. Applicability of part.
This part 12 shall apply to the estate of any person whose death occurred after December 31, 1981.
Source: L. 88: Entire part added, p. 648, § 1, effective May 17.
PART 13 UNIFORM STATUTORY FORM POWER OF ATTORNEY ACT
15-1-1301 to 15-1-1321. (Repealed)
Editor's note: (1) This part 13 was added in 1992. For amendments to this part 13 prior to its repeal in 2010, consult the Colorado statutory research explanatory note and the table itemizing the replacement volumes and supplements to the original volume of C.R.S. 1973 beginning on page vii in the front of this volume.
(2) Section 15-1-1321 provided for the repeal of this part 13, effective January 1, 2010. (See L. 2009, p. 427 .)
PART 14 RESTRICTIONS ON EXERCISE OF CERTAIN FIDUCIARY POWERS
15-1-1401. Restrictions on exercise of certain fiduciary powers.
-
-
Due to the inherent conflict of interest that exists between a trustee who is a beneficiary of a trust and other beneficiaries of the trust, any of the following powers conferred upon a trustee shall not be exercised by such trustee:
- To make or cause to be made discretionary distributions of either principal or income to or for the direct or indirect benefit of such trustee; except that such a power may be exercised by such trustee to the extent that it may be exercised to provide for that trustee's health, education, maintenance, or support as described under sections 2041 and 2514 of the federal "Internal Revenue Code of 1986", as amended;
- To make discretionary distributions of either principal or income to satisfy any legal obligations of such trustee; or
- To make or cause to be made discretionary distributions of either principal or income to or for the direct or indirect benefit of any person who has the right to remove or replace such trustee; except that such a power may be exercised by such trustee to the extent that it may be exercised to provide for such person's health, education, maintenance, or support as described under sections 2041 and 2514 of the federal "Internal Revenue Code of 1986", as amended.
- Any of the powers prescribed in paragraph (a) of this subsection (1) that are conferred upon two or more trustees may be exercised by the trustees who are not so disqualified. If there is no trustee qualified to exercise such powers, any party in interest, as described in subsection (3) of this section, may apply to a court of competent jurisdiction to appoint an independent trustee, and such powers may be exercised by the independent trustee appointed by the court. Subparagraph (I) of paragraph (a) of this subsection (1) shall not prohibit a trustee from making payments, including reimbursement of and compensation of such trustee, for the protection of the trust, or the assets thereof, and for all expenses, losses, and liabilities incurred in or by the collection, care, administration, or protection of the trust or the assets thereof.
-
Due to the inherent conflict of interest that exists between a trustee who is a beneficiary of a trust and other beneficiaries of the trust, any of the following powers conferred upon a trustee shall not be exercised by such trustee:
- This section applies to every trust unless the terms of the trust as it may be amended in accordance with its terms provide expressly to the contrary and either specifically refer to this section or otherwise clearly demonstrate the intent that this rule not apply or unless, if the trust is irrevocable, all parties in interest, as described in subsection (3) of this section, elect affirmatively, in the manner prescribed in subsection (4) of this section, not to be subject to the application of this section. Such election shall be made on or before July 1, 1999, or three years after the date on which the trust becomes irrevocable, whichever occurs later.
-
For the purpose of subsection (1) or subsection (2) of this section:
- If the trust is revocable or amendable and the settlor is not incapacitated, the party in interest is the settlor.
- If the trust is revocable or amendable and the settlor is incapacitated, the party in interest is the settlor's legal representative under applicable law or the settlor's agent under a durable power of attorney that is sufficient to grant such authority.
-
If the trust is not revocable or amendable, the parties in interest are:
- Each trustee then serving;
- Each income beneficiary then in existence or, if any such beneficiary has not attained majority or is otherwise incapacitated, the beneficiary's legal representative under applicable law or the beneficiary's agent under a durable power of attorney that is sufficient to grant such authority; and
- Each remainder beneficiary then in existence or, if any such remainder beneficiary has not attained majority or is otherwise incapacitated, the beneficiary's legal representative under applicable law or the beneficiary's agent under a durable power of attorney that is sufficient to grant such authority.
-
The affirmative election required under subsection (2) of this section shall be made:
- If the settlor is not incapacitated and the trust is revocable or amendable, through a revocation of or an amendment to the trust;
- If the settlor is incapacitated and the trust is revocable or amendable, through a written declaration executed in the manner prescribed for the acknowledgment of deeds in this state and delivered to the trustee; or
- If the trust is not revocable or amendable, through a written declaration executed in the manner prescribed for the acknowledgment of deeds in this state and delivered to the trustee.
- A person who has the right to remove or to replace a trustee does not possess nor may that person be deemed to possess, by virtue of having that right, the powers proscribed in subparagraphs (I), (II), and (III) of paragraph (a) of subsection (1) of this section of the trustee that is subject to removal or to replacement.
-
- Subparagraphs (I) and (II) of paragraph (a) of subsection (1) of this section shall not apply to a trustee with respect to trust property and the income from such property where such property would, upon the death of such trustee, be included in the gross estate of such trustee for federal estate tax purposes for any reason other than the powers proscribed by subparagraphs (I) and (II) of paragraph (a) of subsection (1) of this section.
- Subparagraph (I) of paragraph (a) of subsection (1) of this section shall not apply to a trustee that may be appointed or removed by a person for whose benefit the proscribed powers may be exercised to distribute trust property or the income from such property where such property would, upon the death of such person, be included in the gross estate of such person for federal estate tax purposes for any reason other than such powers to appoint or remove such trustee.
- The provisions of this section neither create a new cause of action nor impair any existing cause of action that, in either case, relates to any power proscribed by subsection (1) of this section that was exercised before July 1, 1996.
Source: L. 96: Entire part added, p. 654, § 4, effective July 1.
PART 15 REVISED UNIFORM FIDUCIARY ACCESS TO DIGITAL ASSETS ACT
PREFATORY NOTE
The purpose of the Revised Fiduciary Access to Digital Assets Act (Revised UFADAA) is twofold. First, it gives fiduciaries the legal authority to manage digital assets and electronic communications in the same way they manage tangible assets and financial accounts, to the extent possible. Second, it gives custodians of digital assets and electronic communications legal authority to deal with the fiduciaries of their users, while respecting the user's reasonable expectation of privacy for personal communications. The general goal of the act is to facilitate fiduciary access and custodian disclosure while respecting the privacy and intent of the user. It adheres to the traditional approach of trusts and estates law, which respects the intent of an account holder and promotes the fiduciary's ability to administer the account holder's property in accord with legally-binding fiduciary duties. The act removes barriers to a fiduciary's access to electronic records and property and leaves unaffected other law, such as fiduciary, probate, trust, banking, investment securities, agency, and privacy law. Existing law prohibits any fiduciary from violating fiduciary responsibilities by divulging or publicizing any information the fiduciary obtains while carrying out his or her fiduciary duties.
Revised UFADAA addresses four different types of fiduciaries: personal representatives of decedents' estates, conservators for protected persons, agents acting pursuant to a power of attorney, and trustees. It distinguishes the authority of fiduciaries, which exercise authority subject to this act only on behalf of the user, from any other efforts to access the digital assets. Family members or friends may seek such access, but, unless they are fiduciaries, their efforts are subject to other laws and are not covered by this act.
Digital assets are electronic records in which individuals have a right or interest. As the number of digital assets held by the average person increases, questions surrounding the disposition of these assets upon the individual's death or incapacity are becoming more common. These assets, ranging from online gaming items to photos, to digital music, to client lists, can have real economic or sentimental value. Yet few laws exist on the rights of fiduciaries over digital assets. Holders of digital assets may not consider the fate of their online presences once they are no longer able to manage their assets, and may not expressly provide for the disposition of their digital assets or electronic communications in the event of their death or incapacity. Even when they do, their instructions may come into conflict with custodians' terms-of-service agreements. Some Internet service providers have explicit policies on what will happen when an individual dies, while others do not, and even where these policies are included in the terms-of- service agreement, consumers may not be fully aware of the implications of these provisions in the event of death or incapacity or how courts might resolve a conflict between such policies and a will, trust instrument, or power of attorney.
The situation regarding fiduciaries' access to digital assets is less than clear, and is subject to federal and state privacy and computer "hacking" laws as well as state probate law. A minority of states has enacted legislation on fiduciary access to digital assets, and numerous other states have considered, or are considering, legislation. Existing legislation differs with respect to the types of digital assets covered, the rights of the fiduciary, the category of fiduciary included, and whether the principal's death or incapacity is covered. A uniform approach among states will provide certainty and predictability for courts, users of Internet services, fiduciaries, and Internet service providers. Revised UFADAA gives states precise, comprehensive, and easily accessible guidance on questions concerning fiduciaries' ability to access the electronic records of a decedent, protected person, principal, or a trust.
With regard to the general scope of the act, the act's coverage is inherently limited by the definition of "digital assets." The act applies only to electronic records in which an individual has a property right or interest, which do not include the underlying asset or liability unless it is itself an electronic record.
The act is divided into 21 sections. [Colorado adopted 18 sections.] Section 1502 contains definitions of terms used throughout the act.
Section 1503 governs applicability, clarifying the scope of the act and the fiduciaries who have access to digital assets under Revised UFADAA, and carves out an exception for digital assets of an employer used by an employee during the ordinary course of business.
Section 1504 provides ways for users to direct the disposition or deletion of their digital assets at their death or incapacity, and establishes a priority system in case of conflicting instructions.
Section 1505 establishes that the terms-of-service governing an online account apply to fiduciaries as well as to users, and clarify that a fiduciary cannot take any action that the user could not have legally taken.
Section 1506 gives the custodians of digital assets a choice for disclosing those assets to fiduciaries. A custodian may, but need not, comply with a request for access by allowing the fiduciary to reset the password and access the user's account. In many cases that will be the simplest method of compliance. However, a custodian may also comply without giving access to a user's account by simply giving a copy of all the user's digital assets to the fiduciary. That method may be preferred for a social media account when a fiduciary has no need for full access and control.
Sections 1507-1514 establish the rights of personal representatives, conservators, agents acting pursuant to a power of attorney, and trustees. Each of the fiduciaries is subject to different rules for the content of communications protected under federal privacy laws and for other types of digital assets. Generally, a fiduciary will have access to a catalogue of the user's communications, but not the content, unless the user consented to the disclosure of the content.
Section 1515 contains general provisions relating to the rights and responsibilities of the fiduciary. Section 1516 addresses compliance by custodians and grants immunity for any acts taken in order to comply with a fiduciary's request under this act. Sections 1517 and 1518 address miscellaneous topics.
15-1-1501. Short title.
This part 15 may be cited as the "Revised Uniform Fiduciary Access to Digital Assets Act".
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 179, § 1, effective August 10.
15-1-1502. Definitions.
In this part 15:
- "Account" means an arrangement under a terms-of-service agreement in which a custodian carries, maintains, processes, receives, or stores a digital asset of the user or provides goods or services to the user.
- "Agent" means an attorney-in-fact granted authority under a durable or nondurable power of attorney.
- "Carries" means engages in the transmission of an electronic communication.
- "Catalog of electronic communications" means information that identifies each person with which a user has had an electronic communication, the time and date of the communication, and the electronic address of the person.
- "Conservator" means a person appointed by a court to manage the estate of a living individual. The term includes a limited conservator.
-
"Content of an electronic communication" means information concerning the substance or meaning of a communication that:
- Has been sent or received by a user;
- Is in electronic storage by a custodian providing an electronic-communication service to the public or is carried or maintained by a custodian providing a remote-computing service to the public; and
- Is not readily accessible to the public.
- "Court" means the district court, except in the city and county of Denver where it is the probate court.
- "Custodian" means a person that carries, maintains, processes, receives, or stores a digital asset of a user.
- "Designated recipient" means a person chosen by a user using an on-line tool to administer digital assets of the user.
- "Digital asset" means an electronic record in which an individual has a right or interest. The term does not include an underlying asset or liability unless the asset or liability is itself an electronic record.
- "Electronic" means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.
- "Electronic communication" has the meaning set forth in 18 U.S.C. sec. 2510(12), as amended.
- "Electronic-communication service" means a custodian that provides to a user the ability to send or receive an electronic communication.
- "Fiduciary" means an original, additional, or successor personal representative, conservator, agent, or trustee.
- "Information" means data, text, images, videos, sounds, codes, computer programs, software, databases, or the like.
- "On-line tool" means an electronic service provided by a custodian that allows the user, in an agreement distinct from the terms-of-service agreement between the custodian and user, to provide directions for disclosure or nondisclosure of digital assets to a third person.
- "Person" means an individual; estate; business or nonprofit entity; public corporation; government or governmental subdivision, agency, or instrumentality; or other legal entity.
- "Personal representative" means an executor, administrator, special administrator, or person that performs substantially the same function under law of this state other than this part 15.
- "Power of attorney" means a record that grants an agent authority to act in the place of a principal.
- "Principal" means an individual who grants authority to an agent in a power of attorney.
- "Protected person" means an individual for whom a conservator has been appointed. The term includes an individual for whom an application for the appointment of a conservator is pending.
- "Record" means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
- "Remote-computing service" means a custodian that provides to a user computer-processing services or the storage of digital assets by means of an electronic communications system, as defined in 18 U.S.C. sec. 2510(14), as amended.
- "Terms-of-service agreement" means an agreement that controls the relationship between a user and a custodian.
- "Trustee" means a fiduciary with legal title to property under an agreement or declaration that creates a beneficial interest in another. The term includes a successor trustee.
- "User" means a person that has an account with a custodian.
-
"Will" includes a codicil, testamentary instrument that only appoints an executor, and instrument that revokes or revises a testamentary instrument.
- any wire or oral communication;
- any communication made through a tone-only paging device;
- any communication from a tracking device (as defined in section 3117 of this title); or
- electronic funds transfer information stored by a financial institution in a communications system used for the electronic storage and transfer of funds.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 179, § 1, effective August 10.
OFFICIAL COMMENT
Many of the definitions are based on those in the Uniform Probate Code: agent (UPC Section 1-201(1)), conservator (UPC Section 5-102(1)), court (UPC Section 1- 201(8)), electronic (UPC Section 5B-102(3)), fiduciary (UPC Section 1-201(15)), person (UPC Section 5B-101(6)), personal representative (UPC Section 1-201(35)), power of attorney (UPC Section 5B-102(7)), principal (UPC Section 5B-102(9)), protected person (UPC Section 5-102(8)), record (UPC Section 1-201(41)), and will (UPC Section 1- 201(57)). The definition of "information" is based on that in the Uniform Electronic Transactions Act, Section 2, subsection (11). Many of the other definitions are either drawn from federal law, as discussed below, or are new for this act.
The definition of "account" is broadly worded to encompass any contractual arrangement subject to a terms-of-service agreement, but limited for the purpose of this act by the requirement that the custodian carry, maintain, process, receive, or store a digital asset of the user.
The definition of "digital asset" expressly excludes underlying assets such as funds held in an online bank account. Because records may exist in both electronic and non- electronic formats, this definition clarifies the scope of the act and the limitation on the type of records to which it applies. The term includes types of electronic records currently in existence and yet to be invented. It includes any type of electronically-stored information, such as: 1) information stored on a user's computer and other digital devices; 2) content uploaded onto websites; and 3) rights in digital property. It also includes records that are either the catalogue or the content of an electronic communication. See 18 U.S.C. Section 2702(a)(2); James D. Lamm, Christina L. Kunz, Damien A. Riehl and Peter John Rademacher, The Digital Death Conundrum: How Federal and State Laws Prevent Fiduciaries from Managing Digital Property, 68 U. Miami L. Rev. 385, 388 (2014) (available at: http://goo.gl/T9jX1d).
The term "catalogue of electronic communications" is designed to cover log-type information about an electronic communication such as the email addresses of the sender and the recipient, and the date and time the communication was sent.
The term "content of an electronic communication" is adapted from 18 U.S.C. Section 2510(8), which provides that content: "when used with respect to any wire, oral, or electronic communication, includes any information concerning the substance, purport, or meaning of that communication." The definition is designed to cover only content subject to the coverage of Section 2702 of the Electronic Communications Privacy Act (ECPA), 18 U.S.C. Section 2510 et seq.; it does not include content not subject to ECPA. Consequently, the "content of an electronic communication", as used later throughout Revised UFADAA, refers only to information in the body of an electronic message that is not readily accessible to the public; if the information were readily accessible to the public, it would not be subject to the privacy protections of federal law under ECPA. See S. Rep. No. 99-541, at 36 (1986). Example: X uses a Twitter account to send a message. If the tweet is sent only to other people who have been granted access to X's tweets, then it meets Revised UFADAA's definition of "content of an electronic communication." But, if the tweet is completely public with no access restrictions, then it does not meet the act's definition of "content of an electronic communication." ECPA does not apply to private e-mail service providers, such as employers and educational institutions. See 18 U.S.C. Section 2702(a)(2); James D. Lamm, Christina L. Kunz, Damien A. Riehl and Peter John Rademacher, The Digital Death Conundrum: How Federal and State Laws Prevent Fiduciaries from Managing Digital Property, 68 U. Miami L. Rev. 385, 404 (2014) (available at: http://goo.gl/T9jX1d).
A "user" is a person that has an account with a custodian, and includes a deceased individual that entered into the agreement while alive. A fiduciary can be a user when the fiduciary opens the account.
The definition of "carries" is drawn from federal law, 47 U.S.C. Section 1001(8).
A "custodian" includes any entity that provides or stores electronic data for a user.
The fiduciary's access to a record defined as a "digital asset" does not mean the fiduciary owns the asset or may engage in transactions with the asset. Consider, for example, a fiduciary's legal rights with respect to funds in a bank account or securities held with a broker or other custodian, regardless of whether the bank, broker, or custodian has a brick-and-mortar presence. This act affects electronic records concerning the bank account or securities, but does not affect the authority to engage in transfers of title or other commercial transactions in the funds or securities, even though such transfers or other transactions might occur electronically. Revised UFADAA only deals with the right of the fiduciary to access all relevant electronic communications and digital assets accessible through the online account. An entity may not refuse to provide access to online records any more than the entity can refuse to provide the fiduciary with access to hard copy records.
An "electronic communication" is a particular type of digital asset subject to the privacy protections of the Electronic Communications Privacy Act. It includes email, text messages, instant messages, and any other electronic communication between private parties. The definition of "electronic communication" is that set out in 18 U.S.C. Section 2510(12): "electronic communication" means any transfer of signs, signals, writing, images, sounds, data, or intelligence of any nature transmitted in whole or in part by a wire, radio, electromagnetic, photoelectronic or photooptical system that affects interstate or foreign commerce, but does not include--
The definition of "electronic-communication service" is drawn from 18 U.S.C. Section 2510(15): "any service which provides to users thereof the ability to send or receive wire or electronic communications." The definition of "remote-computing service" is adapted from 18 U.S.C. Section 2711(2): "the provision to the public of computer storage or processing services by means of an electronic communications system." The definition refers to 18 U.S.C. Section 2510(14), which defines an electronic communications system as: "any wire, radio, electromagnetic, photooptical or photoelectronic facilities for the transmission of wire or electronic communications, and any computer facilities or related electronic equipment for the electronic storage of such communications."
A "fiduciary" under this act occupies a status recognized by state law, and a fiduciary's powers under this act are subject to the relevant limits established by other state laws.
An "online tool" is a mechanism by which a user names an individual to manage the user's digital assets after the occurrence of a future event, such as the user's death or incapacity. The named individual is referred to as the "designated recipient" in the act to differentiate the person from a fiduciary. A designated recipient may perform many of the same tasks as a fiduciary, but is not held to the same legal standard of conduct.
The term "record" includes information available on both tangible and electronic media. Revised UFADAA applies only to electronic records.
The "terms-of-service agreement" definition relies on the definition of "agreement" found in UCC Section 1-201(b)(3) ("the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade"). It refers to any agreement that controls the relationship between a user and a custodian, even though it might be called a terms-of-use agreement, a click-wrap agreement, a click-through license, or a similar term. State and federal law determine capacity to enter into a binding terms-of-service agreement.
15-1-1503. Applicability.
-
This part 15 applies to:
- A fiduciary acting under a will or power of attorney executed before, on, or after August 10, 2016;
- A personal representative acting for a decedent who died before, on, or after August 10, 2016;
- A conservatorship proceeding commenced before, on, or after August 10, 2016; and
- A trustee acting under a trust created before, on, or after August 10, 2016.
- This part 15 applies to a custodian if the user resides in this state or resided in this state at the time of the user's death.
-
- This part 15 does not apply to a digital asset of an employer used by an employee in the ordinary course of the employer's business.
- This part 15 does not apply to a digital asset of an entity used by a manager, owner, or other person in the course of the conduct of the internal affairs of the entity. The terms "entity", "manager", and "owner" in this paragraph (b) have the same meaning as defined in section 7-90-102, C.R.S.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 181, § 1, effective August 10.
OFFICIAL COMMENT
This act does not change the substantive rules of other laws, such as agency, banking, conservatorship, contract, copyright, criminal, fiduciary, privacy, probate, property, security, trust, or other applicable law except to vest fiduciaries with authority, according to the provisions of this act, to access or copy digital assets of a decedent, protected person, principal, settlor, or trustee.
Subsection (1)(b) covers the situations in which a decedent dies intestate, so it falls outside of subsection (1)(a), as well as the situations in which a state's procedures for small estates are used.
Subsection (2) states that custodians are subject to the act if the custodian's user was a resident of the enacting state. This includes out-of-state custodians, who must respond to requests for access in the same way that out-of-state banks or credit card companies must respond to requests from a fiduciary requesting access to a customer's account.
Subsection (3) clarifies that the act does not apply to a fiduciary's access to an employer's internal email system.
Example 1--Fiduciary access to an employee e-mail account. D dies, employed by Company Y. Company Y has an internal e-mail communication system, available only to Y's employees, and used by them in the ordinary course of Y's business. D's personal representative, R, believes that D used Company Y's e-mail system to effectuate some financial transactions that R cannot find through other means. R requests access from Company Y to the e-mails.
Company Y is not a custodian subject to the act. Under Section 1502(8), a custodian must carry, maintain or store a user's digital assets. A user, under Section 1502(26) must have an account, and an account, in turn, is defined under Section 1502(1) as a contractual arrangement subject to a terms-of-service agreement. Company Y, like most employers, did not enter into a terms-of-service agreement with D, so Y is not a custodian.
Example 2--Employee of electronic-communication service provider. D dies, employed by Company Y. Company Y is an electronic-communication service provider. Company Y has an internal e-mail communication system, available only to Y's employees and used by them in the ordinary course of Y's business. D used the internal Company Y system. When not at work, D also used an electronic-communication service system that Company Y provides to the public. D's personal representative, R, believes that D used Company Y's internal e-mail system as well as Company Y's electronic- communication system available to the public to effectuate some financial transactions. R seeks access to both communication systems.
As is true in Example 1, Company Y is not a custodian subject to the act for purposes of the internal email system. The situation is different with respect to R's access to Company Y's system that is available to the public. Assuming that Company Y can disclose the communications under federal law and R meets the other requirements of this act, Company Y must disclose them to R.
15-1-1504. User direction for disclosure of digital assets.
- A user may use an on-line tool to direct the custodian to disclose to a designated recipient or to not disclose some or all of the user's digital assets, including the content of electronic communications. If the on-line tool allows the user to modify or delete a direction at all times, a direction regarding disclosure using an on-line tool overrides a contrary direction by the user in a will, trust, power of attorney, or other record.
- If a user has not used an on-line tool to give direction under subsection (1) of this section or if the custodian has not provided an on-line tool, the user may allow or prohibit in a will, trust, power of attorney, or other record, disclosure to a fiduciary of some or all of the user's digital assets, including the content of electronic communications sent or received by the user.
- A user's direction under subsection (1) or (2) of this section overrides a contrary provision in a terms-of-service agreement that does not require the user to act affirmatively and distinctly from the user's assent to the terms of service.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 182, § 1, effective August 10.
OFFICIAL COMMENT
This section addresses the relationship of online tools, other records documenting the user's intent, and terms-of-service agreements. In some instances, there may be a conflict between the directions provided by a user in an online tool that limits access by other parties to the user's digital assets, and the user's estate planning or other personal documents that purport to authorize access for specified persons in identified situations. The act attempts to balance these interests by establishing a three-tier priority system for determining the user's intent with respect to any digital asset.
Subsection (1) gives top priority to a user's wishes as expressed using an online tool. If a custodian of digital assets allows the user to provide directions for handling those digital assets in case of the user's death or incapacity, and the user does so, that provides the clearest possible indication of the user's intent and is specifically limited to those particular digital assets.
If the user does not give direction using an online tool, but makes provisions in an estate plan for the disposition of digital assets, subsection (2) gives legal effect to the user's directions. The fiduciary charged with managing the user's digital assets must provide a copy of the relevant document to the custodian when requesting access. See Sections 1507 through 1514.
If the user provides no other direction, the terms-of-service governing the account will apply. If the terms-of-service do not address fiduciary access to digital assets, the default rules provided in this act will apply.
15-1-1505. Terms-of-service agreement.
- This part 15 does not change or impair a right of a custodian or a user under a terms-of-service agreement to access and use digital assets of the user.
- This part 15 does not give a fiduciary or designated recipient any new or expanded rights other than those held by the user for whom, or for whose estate, the fiduciary or designated recipient acts or represents.
- A fiduciary's or designated recipient's access to digital assets may be modified or eliminated by a user, by federal law, or by a terms-of-service agreement if the user has not provided direction under section 15-1-1504.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 182, § 1, effective August 10.
OFFICIAL COMMENT
This section clarifies that, to the extent that a custodian gives a fiduciary access to an account pursuant to Section 1506, the account's terms-of-service agreement applies equally to the original user and to a fiduciary acting for the original user. A fiduciary is subject to the same terms and conditions of the user's agreement with the custodian. This section does not require a custodian to permit a fiduciary to assume a user's terms-of-service agreement if the custodian can otherwise comply with Section 1506.
15-1-1506. Procedure for disclosing digital assets.
-
When disclosing digital assets of a user under this part 15, the custodian may at its sole discretion:
- Grant a fiduciary or designated recipient full access to the user's account;
- Grant a fiduciary or designated recipient partial access to the user's account sufficient to perform the tasks with which the fiduciary or designated recipient is charged; or
- Provide a fiduciary or designated recipient a copy in a record of any digital asset that, on the date the custodian received the request for disclosure, the user could have accessed if the user were alive and had full capacity and access to the account.
- A custodian may assess a reasonable administrative charge for the cost of disclosing digital assets under this part 15.
- A custodian need not disclose under this part 15 a digital asset deleted by a user.
-
If a user directs or a fiduciary requests a custodian to disclose under this part 15 some, but not all, of the user's digital assets, the custodian need not disclose the assets if segregation of the assets would impose an undue burden on the custodian.
If the custodian believes the direction or request imposes an undue burden, the custodian or fiduciary may seek an order from the court to disclose:
- A subset limited by date of the user's digital assets;
- All of the user's digital assets to the fiduciary or designated recipient;
- None of the user's digital assets; or
- All of the user's digital assets to the court for review in camera.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 183, § 1, effective August 10.
OFFICIAL COMMENT
This section governs a custodian's response to a request for disclosure of a user's digital assets.
Subsection (1) gives the custodian of digital assets a choice of methods for disclosing digital assets to an authorized fiduciary. Each custodian has a different business model and may prefer one method over another.
Subsection (2) allows a custodian to assess a reasonable administrative charge for the cost of disclosure. This is intended to be analogous to the charge any business may assess for administrative tasks outside the ordinary course of its business to comply with a court order.
Subsection (3) states that any digital asset deleted by the user need not be disclosed, even if recoverable by the custodian. Deletion is assumed to be a good indication that the user did not intend for a fiduciary to have access.
Subsection (4) addresses requests that are unduly burdensome because they require segregation of digital assets. For example, a fiduciary's request for disclosure of "any email pertaining to financial matters" would require a custodian to sort through the full list of emails and cull any irrelevant messages before disclosure. If a custodian receives an unduly burdensome request of this sort, it may decline to disclose the digital assets, and either the fiduciary or custodian may seek guidance from a court.
15-1-1507. Disclosure of content of electronic communications of deceased user.
-
If a deceased user consented or a court directs disclosure of the contents of electronic communications of the user, the custodian shall disclose to the personal representative of the estate of the user the content of an electronic communication sent
or received by the user if the representative gives the custodian:
- A written request for disclosure in physical or electronic form;
- A certified copy of the death certificate of the user;
- A certified copy of the letter of appointment of the representative or a small-estate affidavit or court order;
- Unless the user provided direction using an on-line tool, a copy of the user's will, trust, power of attorney, or other record evidencing the user's consent to disclosure of the content of electronic communications; and
-
If requested by the custodian:
- A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the user's account;
- Evidence linking the account to the user; or
-
A finding by the court that:
- The user had a specific account with the custodian, identifiable by the information specified in subparagraph (I) of this paragraph (e);
- Disclosure of the content of electronic communications of the user would not violate 18 U.S.C. sec. 2701, et seq., as amended; 47 U.S.C. sec. 222, as amended; or other applicable law;
- Unless the user provided direction using an on-line tool, the user consented to disclosure of the content of electronic communications; or
- Disclosure of the content of electronic communications of the user is reasonably necessary for administration of the estate.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 183, § 1, effective August 10.
OFFICIAL COMMENT
The Electronic Communications Privacy Act (ECPA) distinguishes between the permissible disclosure of the "content" of an electronic communication, covered in 18 U.S.C. Section 2702(b), and of "a record or other information pertaining to a" subscriber or customer, covered in 18 U.S.C. Section 2702(c); see Matthew J. Tokson, The Content/Envelope Distinction in Internet Law, 50 Wm. & Mary L. Rev. 2105 (2009). Section 1507 concerns disclosure of content; Section 1508 covers disclosure of non-content and other digital assets of the user.
Content-based material can, in turn, be divided into two types of communications: those received by the user and those sent. Federal law, 18 U.S.C. Section 2702(b) permits a custodian to divulge the contents of a communication "(1) to an addressee or intended recipient of such communication or an agent of such addressee or intended recipient" or "(3) with the lawful consent of the originator or an addressee or intended recipient of such communication, or the subscriber in the case of remote computing service."
Consequently, when the user is the "addressee or intended recipient," material can be disclosed either to that individual or to an agent for that person, 18 U.S.C. Section 2702(b)(1), and it can also be disclosed to third parties with the "lawful consent" of the addressee or intended recipient. 18 U.S.C. Section 2702(b)(3). Material for which the user is the "originator" (or the "subscriber" to a remote computing service) can be disclosed to third parties only with the user's "lawful consent." 18 U.S.C. Section 2702(b)(3). (Note that, when the user is the addressee or intended recipient, material can be disclosed under either (b)(1) or (b)(3), but that when the user is the originator, lawful consent is required under (b)(3).) See the Comments concerning the definition of "content" after Section 1502. By contrast to content-based material, non-content material can be disclosed either with the lawful consent of the user or to any person (other than a governmental entity) even without lawful consent. This information includes material about any communication sent, such as the addressee, sender, date/time, and other subscriber data, which this act defines as the "catalogue of electronic communications." (Further discussion of this issue and examples are set out in the Comments to Section 1515, infra.)
Therefore, Section 1507 gives the personal representative access to digital assets if the user consented to disclosure or if a court orders disclosure. To obtain access, the personal representative must provide the documentation specified by Section 1507. First, the personal representative must give the custodian a written request for disclosure, a copy of the death certificate, a document establishing the authority of the personal representative, and, in the absence of an online tool, a record evidencing the user's consent to disclosure. When requesting disclosure, the fiduciary must write or email the custodian. The form of the request is limited, and does not, for example, include video, Tweet, instant message or other forms of communication.
Second, if the custodian requests, then the personal representative can be required to establish that the requested information is necessary for estate administration and the account is attributable to the decedent. Different custodians may have different procedures. Thus a custodian may request that the personal representative obtain a court order, and such an order must include findings that: 1) the user had a specific account with the custodian, 2) that disclosure of the content of electronic communications of the user would not violate the SCA or other law, 3) unless the user provided direction using an online tool, that the user consented to disclosure of the content of electronic communications, or 4) that disclosure of the content of electronic communications of a user is reasonably necessary for administration of the estate.
15-1-1508. Disclosure of other digital assets of deceased user.
-
Unless the user prohibited disclosure of digital assets or the court directs otherwise, a custodian shall disclose to the personal representative of the estate of a deceased user a catalog of electronic communications sent or received by the user and
digital assets, other than the content of electronic communications, of the user, if the representative gives the custodian:
- A written request for disclosure in physical or electronic form;
- A certified copy of the death certificate of the user;
- A certified copy of the letter of appointment of the representative or a small-estate affidavit or court order; and
-
If requested by the custodian:
- A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the user's account;
- Evidence linking the account to the user;
- An affidavit stating that disclosure of the user's digital assets is reasonably necessary for administration of the estate; or
-
A finding by the court that:
- The user had a specific account with the custodian, identifiable by the information specified in subparagraph (I) of this paragraph (d); or
- Disclosure of the user's digital assets is reasonably necessary for administration of the estate.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 184, § 1, effective August 10.
OFFICIAL COMMENT
As in Section 1507, when requesting disclosure of non-content, the fiduciary must write or email the custodian.
Section 1508 requires disclosure of all other digital assets, unless prohibited by the decedent or directed by the court, once the personal representative provides a written request, a death certificate and a certified copy of the letter of appointment. In addition, the custodian may request a court order, and such an order must include findings that the decedent had a specific account with the custodian and that disclosure of the decedent's digital assets is reasonably necessary for administration of the estate. Thus, Section 1508 was intended to give personal representatives default access to the "catalogue" of electronic communications and other digital assets not protected by federal privacy law.
15-1-1509. Disclosure of content of electronic communications of principal.
-
To the extent a power of attorney expressly grants an agent authority over the content of electronic communications sent or received by the principal and unless directed otherwise by the principal or the court, a custodian shall disclose to the agent
the content if the agent gives the custodian:
- A written request for disclosure in physical or electronic form;
- An original or copy of the power of attorney expressly granting the agent authority over the content of electronic communications of the principal;
- A certification by the agent, under penalty of perjury, that the power of attorney is in effect; and
-
If requested by the custodian:
- A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the principal's account; or
- Evidence linking the account to the principal.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 185, § 1, effective August 10.
OFFICIAL COMMENT
An agent has access to the content of electronic communications only when the power of attorney explicitly grants access. Section 1510 concerns disclosure of other digital assets of the principal.
When a power of attorney contains the consent of the principal, ECPA does not prevent the agent from exercising authority over the content of an electronic communication. See the Comments to Section 1507. There should be no question that an explicit delegation of authority in a power of attorney constitutes authorization from the user to access digital assets and provides "lawful consent" to allow disclosure of the content of an electronic communication from an electronic-communication service or a remote-computing service pursuant to applicable law. Both authorization and lawful consent are important because 18 U.S.C. Section 2701 deals with intentional access without authorization and 18 U.S.C. Section 2702 allows a service provider to disclose with lawful consent. Federal courts have not yet interpreted how ECPA affects a fiduciary's efforts to access the content of an electronic communication. E.g., In re Facebook, Inc., 923 F. Supp. 2d 1204 (N.D. Cal. 2012).
When requesting access, the agent must write or email the custodian (see the comments in Section 1507). The agent must also give the custodian an original or copy of the power of attorney expressly granting the agent authority over the contents of electronic communications of the principal to the agent and a certification by the agent, under penalty of perjury, that the power of attorney is in effect. In addition, if requested by the custodian, the agent must provide a unique subscriber or account identifier assigned by the custodian to identify the principal's account or other evidence linking the account to the principal.
15-1-1510. Disclosure of other digital assets of principal.
-
Unless otherwise ordered by the court, directed by the principal, or provided by a power of attorney, a custodian shall disclose to an agent with specific authority over digital assets or general authority to act on behalf of a principal a catalog of
electronic communications sent or received by the principal and digital assets, other than the content of electronic communications, of the principal if the agent gives the custodian:
- A written request for disclosure in physical or electronic form;
- An original or a copy of the power of attorney that gives the agent specific authority over digital assets or general authority to act on behalf of the principal;
- A certification by the agent, under penalty of perjury, that the power of attorney is in effect; and
-
If requested by the custodian:
- A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the principal's account; or
- Evidence linking the account to the principal.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 185, § 1, effective August 10.
OFFICIAL COMMENT
This section establishes that the agent has default authority over all of the principal's digital assets, other than the content of the principal's electronic communications. When requesting access, the agent must write or email the custodian (see the comments in Section 1507).
The agent must also give the custodian an original or copy of the power of attorney and a certification by the agent, under penalty of perjury, that the power of attorney is in effect. Also, if requested by the custodian, the agent must provide a unique subscriber or account identifier assigned by the custodian to identify the principal's account, or some evidence linking the account to the principal.
15-1-1511. Disclosure of digital assets held in trust when trustee is original user.
Unless otherwise ordered by the court or provided in a trust, a custodian shall disclose to a trustee that is an original user of an account any digital asset of the account held in trust, including a catalog of electronic communications of the trustee and the content of electronic communications.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 186, § 1, effective August 10.
OFFICIAL COMMENT
Section 1511 provides that trustees who are original users can access all digital assets held in the trust. There should be no question that a trustee who is the original user will have full access to all digital assets. This includes the content of electronic communications, as access to content is presumed with respect to assets for which the trustee is the initial user. A trustee may have title to digital assets when the trustee opens an account as trustee; under those circumstances, the trustee can access the content of each digital asset that is in an account for which the trustee is the original user, not necessarily each digital asset held in the trust.
15-1-1512. Disclosure of contents of electronic communications held in trust when trustee not original user.
-
Unless otherwise ordered by the court, directed by the user, or provided in a trust, a custodian shall disclose to a trustee that is not an original user of an account the content of an electronic communication sent or received by an original or successor
user and carried, maintained, processed, received, or stored by the custodian in the account of the trust if the trustee gives the custodian:
- A written request for disclosure in physical or electronic form;
- A certified copy of the trust instrument or a registration of the trust under part 2 of article 5 of this title 15 that includes consent to disclosure of the content of electronic communications to the trustee;
- A certification by the trustee, under penalty of perjury, that the trust exists and the trustee is a currently acting trustee of the trust; and
-
If requested by the custodian:
- A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the trust's account; or
- Evidence linking the account to the trust.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 186, § 1, effective August 10. L. 2018: (1)(b) amended, (SB 18-180), ch. 169, p. 1192, § 6, effective January 1, 2019.
OFFICIAL COMMENT
For accounts that are transferred into a trust by the settlor or in another manner, a trustee is not the original user of the account, and the trustee's authority is qualified. Thus, Section 1512, governing disclosure of content of electronic communications from those accounts, requires consent.
Section 1512 addresses situations involving an inter vivos transfer of a digital asset into a trust, a transfer into a testamentary trust, or a transfer via a pourover will or other governing instrument of a digital asset into a trust. In those situations, a trustee becomes a successor user when the settlor transfers a digital asset into the trust. There should be no question that the trustee with legal title to the digital asset was authorized by the settlor to access the digital assets so transferred, including both the catalogue and content of an electronic communication, and this provides "lawful consent" to allow disclosure of the content of an electronic communication from an electronic-communication service or a remote-computing service pursuant to applicable law. See the Comments concerning the definitions of the "content of an electronic communication" after Section 1502. Nonetheless, Sections 1512 and 1513 distinguish between the catalogue and content of an electronic communication in case there are any questions about whether the form in which property transferred into a trust is held constitutes lawful consent. Both authorization and lawful consent are important because 18 U.S.C. Section 2701 deals with intentional access without authorization and because 18 U.S.C. Section 2702 allows a service provider to disclose with lawful consent.
The underlying trust documents and default trust law will supply the allocation of responsibilities between and among trustees. When requesting access, the trustee must write or email the custodian (see comments to Section 1507). The trustee must also give the custodian an original or copy of the trust that includes consent to disclosure of the content of electronic communications to the trustee and a certification by the trustee, under penalty of perjury, that the trust exists and that the trustee is a currently acting trustee of the trust. Also, if requested by the custodian, the trustee must provide a unique subscriber or account identifier assigned by the custodian to identify the trust's account, or some evidence linking the account to the trust.
15-1-1513. Disclosure of other digital assets held in trust when trustee not original user.
-
Unless otherwise ordered by the court, directed by the user, or provided in a trust, a custodian shall disclose, to a trustee that is not an original user of an account, a catalog of electronic communications sent or received by an original or successor
user and stored, carried, or maintained by the custodian in an account of the trust and any digital assets, other than the content of electronic communications, in which the trust has a right or interest if the trustee gives the
custodian:
- A written request for disclosure in physical or electronic form;
- A certified copy of the trust instrument or a registration of the trust under part 2 of article 5 of this title 15;
- A certification by the trustee, under penalty of perjury, that the trust exists and the trustee is a currently acting trustee of the trust; and
-
If requested by the custodian:
- A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the trust's account; or
- Evidence linking the account to the trust.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 186, § 1, effective August 10. L. 2018: (1)(b) amended, (SB 18-180), ch. 169, p. 1192, § 7, effective January 1, 2019.
OFFICIAL COMMENT
Section 1513 governs digital assets other than the contents of electronic communications, so it does not require the settlor's consent.
When requesting access, the trustee must write or email the custodian (see Comments to Section 1507).
The trustee must also give the custodian an original or copy of the trust, and a certification by the trustee, under penalty of perjury, that the trust exists and that the trustee is a currently acting trustee of the trust. Also, if requested by the custodian, the trustee must provide a unique subscriber or account identifier assigned by the custodian to identify the trust's account, or some evidence linking the account to the trust.
15-1-1514. Disclosure of digital assets to conservator of protected person.
- After an opportunity for a hearing under article 14 of this title, the court may grant a conservator access to the digital assets of a protected person.
-
Unless otherwise ordered by the court or directed by the user, a custodian shall disclose to a conservator the catalog of electronic communications sent or received by a protected person and any digital assets, other than the content of electronic communications,
in which the protected person has a right or interest if the conservator gives the custodian:
- A written request for disclosure in physical or electronic form;
- A certified copy of the court order that gives the conservator authority over the digital assets of the protected person; and
-
If requested by the custodian:
- A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the account of the protected person; or
- Evidence linking the account to the protected person.
- A conservator with general authority to manage the assets of a protected person may request a custodian of the digital assets of the protected person to suspend or terminate an account of the protected person for good cause. A request made under this section must be accompanied by a certified copy of the court order giving the conservator authority over the protected person's property.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 187, § 1, effective August 10.
OFFICIAL COMMENT
When a conservator is appointed to represent a protected person's interests, the protected person may still retain some right to privacy in their personal communications. Therefore, Section 1514 does not permit conservators to request disclosure of a protected person's electronic communications on the basis of the conservatorship order alone. To access a protected person's digital assets and a catalogue of electronic communications, a conservator must be specifically authorized by the court to do so. This requirement for express judicial authority over digital assets does not limit the fiduciary's authority over the underlying assets, such as funds held in a bank account. The meaning of the term "hearing" will vary from state to state according to state law and procedures.
State law will establish the criteria for when a court will grant power to the conservator. For example, UPC Section 5-411(c) requires the court to consider the decision the protected person would have made as well as a list of other factors. Existing state law may also set out the requisite standards for a conservator's actions. The conservator must exercise authority in the interests of the protected person. When requesting access to digital assets in which the protected person has a right or interest, the conservator must write or email the custodian (see comments to Section 1507).
The conservator must also give the custodian a certified copy of the court order that gives the conservator authority over the protected person's digital assets. Also, if requested by the custodian, the conservator must provide a unique subscriber or account identifier assigned by the custodian to identify the protected person's account, or some evidence linking the account to the protected person. The custodian is required to disclose the digital assets so requested.
Under subsection (3), a conservator with general authority to manage the assets of the protected person may request suspension or termination of the protected person's account, for good cause.
15-1-1515. Fiduciary duty and authority.
-
The legal duties imposed on a fiduciary charged with managing tangible property apply to the management of digital assets, including:
- The duty of care;
- The duty of loyalty; and
- The duty of confidentiality.
-
A fiduciary's or designated recipient's authority with respect to a digital asset of a user:
- Except as otherwise provided in section 15-1-1504, is subject to the applicable terms of service;
- Is subject to other applicable law, including copyright law;
- In the case of a fiduciary, is limited by the scope of the fiduciary's duties; and
- May not be used to impersonate the user.
- A fiduciary with authority over the property of a decedent, protected person, principal, or settlor has the right to access any digital asset in which the decedent, protected person, principal, or settlor had a right or interest and that is not held by a custodian or subject to a terms-of-service agreement.
- A fiduciary acting within the scope of the fiduciary's duties is an authorized user of the property of the decedent, protected person, principal, or settlor for the purpose of applicable computer-fraud and unauthorized-computer-access laws, including article 5.5 of title 18, C.R.S.
-
A fiduciary with authority over the tangible, personal property of a decedent, protected person, principal, or settlor:
- Has the right to access the property and any digital asset stored in it; and
- Is an authorized user for the purpose of computer-fraud and unauthorized-computer-access laws, including article 5.5 of title 18, C.R.S.
- A custodian may disclose information in an account to a fiduciary of the user when the information is required to terminate an account used to access digital assets licensed to the user.
-
A fiduciary of a user may request a custodian to terminate the user's account. A request for termination must be in writing, in either physical or electronic form, and accompanied by:
- If the user is deceased, a certified copy of the death certificate of the user;
- A certified copy of the letter of appointment of the representative or a small-estate affidavit or court order, court order, power of attorney, or trust giving the fiduciary authority over the account; and
-
If requested by the custodian:
- A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the user's account;
- Evidence linking the account to the user; or
- A finding by the court that the user had a specific account with the custodian, identifiable by the information specified in subparagraph (I) of this paragraph (c).
- A domiciliary foreign personal representative is not required to comply with the provisions of section 15-13-204, or with any other provision of article 13 of this title, as a condition to obtaining disclosure of a digital asset pursuant to this part 15.
- A foreign conservator is not required to comply with the provisions of section 15-14-433 as a condition to obtaining disclosure of a digital asset pursuant to this part 15.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 187, § 1, effective August 10.
OFFICIAL COMMENT
The original version of UFADAA incorporated fiduciary duties by reference to "other law." This proved to be confusing and led to enactment difficulty. Section 1515 specifies the nature, extent and limitation of the fiduciary's authority over digital assets. Subsection (1) expressly imposes all fiduciary duties to the management of digital assets, including the duties of care, loyalty and confidentiality. Subsection (2) specifies that a fiduciary's authority over digital assets is subject to the terms-of-service agreement, except to the extent the terms-of- service agreement provision is overridden by an action taken pursuant to Section 1504, and it reinforces the applicability of copyright and fiduciary duties. Finally, subsection (2) prohibits a fiduciary's authority being used to impersonate a user. Subsection (3) permits the fiduciary to access all digital assets not in an account or subject to a terms-of- service agreement. Subsection (4) further specifies that the fiduciary is an authorized user under any applicable law on unauthorized computer access.
Subsection (7) gives the fiduciary the option of requesting that an account be terminated, if termination would not violate a fiduciary duty.
This issue concerning the parameters of the fiduciary's authority potentially arises in two situations: 1) the fiduciary obtains access to a password or the like directly from the user, as would be true in various circumstances such as for the trustee of an inter vivos trust or someone who has stored passwords in a written or electronic list and those passwords are then transmitted to the fiduciary; and 2) the fiduciary obtains access pursuant to this act.
This section clarifies that the fiduciary has the same authority as the user if the user were the one exercising the authority (note that, where the user has died, this means that the fiduciary has the same access as the user had immediately before death). This means that the fiduciary's authority to access the digital asset is the same as the user except where, pursuant to Section 1504, the user has explicitly opted out of fiduciary access. In exercising its responsibilities, the fiduciary is subject to the duties and obligations established pursuant to state fiduciary law, and is liable for breach of those duties. Note that even if the digital asset were illegally obtained by the user, the fiduciary would still need access in order to handle that asset appropriately. There may, for example, be tax consequences that the fiduciary would be obligated to report.
However, this section does not require a custodian to permit a fiduciary to assume a user's terms-of-service agreement if the custodian can otherwise comply with Section 1506.
In exercising its responsibilities, the fiduciary is subject to the same limitations as the user more generally. For example, a fiduciary cannot delete an account if this would be fraudulent. Similarly, if the user could challenge provisions in a terms-of-service agreement, then the fiduciary is also able to do so. See Ajemian v. Yahoo!, Inc., 987 N.E.2d 604 (Mass. 2013).
Subsection (2) is designed to establish that the fiduciary is authorized to obtain or access digital assets in accordance with other applicable laws. The language mirrors that used in Title II of the Electronic Communications Privacy Act of 1986 (ECPA), also known as the Stored Communications Act, 18 U.S.C. Section 2701 et seq. (2006); see, e.g., Orin S. Kerr, A User's Guide to the Stored Communications Act, and a Legislator's Guide to Amending It, 72 Geo. Wash. L. Rev. 1208 (2004). The subsection clarifies that state law treats the fiduciary as "authorized" under state laws criminalizing unauthorized access.
State laws vary in their coverage but typically prohibit unauthorized computer access. By defining the fiduciary as an authorized user in subsection (4), the fiduciary has authorization under applicable law to access the digital assets under state computer trespass laws.
Federal courts may look to these provisions to guide their interpretations of ECPA and the federal Computer Fraud and Abuse Act, but fiduciaries should understand that federal courts may not view such provisions as dispositive in determining whether access to a user's account violated federal criminal law.
Subsection (5) clarifies that the fiduciary is authorized to access digital assets stored on tangible personal property of the decedent, protected person, principal, or settlor, such as laptops, computers, smartphones or storage media, exempting fiduciaries from application for purposes of state or federal laws on unauthorized computer access. For criminal law purposes, this clarifies that the fiduciary is authorized to access all of the user's digital assets, whether held locally or remotely.
Example 1--Access to digital assets by personal representative. D dies with a will that is silent with respect to digital assets. D has a bank account for which D received only electronic statements, D has stored photos in a cloud-based Internet account, and D has an e-mail account with a company that provides electronic- communication services to the public. The personal representative of D's estate needs access to the electronic bank account statements, the photo account, and e-mails.
The personal representative of D's estate has the authority to access D's electronic banking statements and D's photo account, which both fall under the act's definition of a "digital asset." This means that, if these accounts are password-protected or otherwise unavailable to the personal representative, then the bank and the photo account service must give access to the personal representative when the request is made in accordance with Section 1508. If the terms-of-service agreement permits D to transfer the accounts electronically, then the personal representative of D's estate can use that procedure for transfer as well.
The personal representative of D's estate is also able to request that the e-mail account service provider grant access to e-mails sent or received by D; ECPA permits the service provider to release the catalogue to the personal representative. The service provider also must provide the personal representative access to the content of an electronic communication sent or received by D if the user has consented and the fiduciary submitted the information required under Section 1507. The bank may release the catalogue of electronic communications or content of an electronic communication for which it is the originator or the addressee because the bank is not subject to the ECPA.
Example 2--Access to digital assets by agent. X creates a power of attorney designating A as X's agent. The power of attorney expressly grants A authority over X's digital assets, including the content of an electronic communication. X has a bank account for which X receives only electronic statements, X has stored photos in a cloud-based Internet account, and X has a game character and in-game property associated with an online game. X also has an e-mail account with a company that provides electronic-communication services to the public.
A has the authority to access X's electronic bank statements, the photo account, the game character and in-game property associated with the online game, all of which fall under the act's definition of a "digital asset." This means that, if these accounts are password-protected or otherwise unavailable to A as X's agent, then the bank, the photo account service provider, and the online game service provider must give access to A when the request is made in accordance with Section 1510. If the terms-of-service agreement permits X to transfer the accounts electronically, then A as X's agent can use that procedure for transfer as well.
As X's agent, A is also able to request that the e-mail account service provider grant access to e-mails sent or received by X; ECPA permits the service provider to release the catalogue. The service provider also must provide A access to the content of an electronic communication sent or received by X if the fiduciary provides the information required under Section 1509. The bank may release the catalogue of electronic communications or content of an electronic communication for which it is the originator or the addressee because the bank is not subject to the ECPA.
Example 3--Access to digital assets by trustee. T is the trustee of a trust established by S. As trustee of the trust, T opens a bank account for which T receives only electronic statements. S transfers into the trust to T as trustee (in compliance with a terms-of-service agreement) a game character and in-game property associated with an online game and a cloud-based Internet account in which S has stored photos. S also transfers to T as trustee (in compliance with the terms-of-service agreement) an e-mail account with a company that provides electronic-communication services to the public.
T is an original user with respect to the bank account that T opened, and T has the ability to access the electronic banking statements under Section 1511. T, as successor user to S, may under Section 1513 access the game character and in-game property associated with the online game and the photo account, which both fall under the act's definition of a "digital asset." This means that, if these accounts are password-protected or otherwise unavailable to T as trustee, then the bank, the photo account service provider, and the online game service provider must give access to T when the request is made in accordance with the act. If the terms-of-service agreement permits the user to transfer the accounts electronically, then T as trustee can use that procedure for transfer as well.
T as successor user of the e-mail account for which S was previously the user is also able to request that the e-mail account service provider grant access to e-mails sent or received by S; and ECPA permits the service provider to release the catalogue. The service provider also must provide T access to the content of an electronic communication sent or received by S if the fiduciary provides the information required under Section 1512. The bank may release the catalogue of electronic communications or content of an electronic communication for which it is the originator or the addressee because the bank is not subject to the ECPA.
15-1-1516. Custodian compliance and immunity.
- Not later than sixty days after receipt of the information required under sections 15-1-1507 to 15-1-1515, a custodian shall comply with a request under this part 15 from a fiduciary or designated recipient to disclose digital assets or terminate an account. If the custodian fails to comply, the fiduciary or designated recipient may apply to the court for an order directing compliance.
- An order under subsection (1) of this section directing compliance must contain a finding that compliance is not in violation of 18 U.S.C. sec. 2702, as amended.
- A custodian may notify the user that a request for disclosure or to terminate an account was made under this part 15.
- A custodian may deny a request under this part 15 from a fiduciary or designated recipient for disclosure of digital assets or to terminate an account if the custodian is aware of any lawful access to the account following the receipt of the fiduciary's request.
-
This part 15 does not limit a custodian's ability to obtain, or to require a fiduciary or designated recipient requesting disclosure or termination under this part 15 to obtain, a court order that:
- Specifies that an account belongs to the protected person or principal;
- Specifies that there is sufficient consent from the protected person or principal to support the requested disclosure; and
- Contains a finding required by law other than this part 15.
- A custodian and its officers, employees, and agents are immune from liability for an act or omission done in good faith in compliance with this part 15.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 189, § 1, effective August 10.
OFFICIAL COMMENT
This section establishes that custodians are protected from liability when they act in accordance with the procedures of this act and in good faith. The types of actions covered include disclosure as well as transfer of copies. The critical issue in conferring immunity is the source of the liability. Direct liability is not subject to immunity; indirect liability is subject to immunity.
Direct liability could only arise from noncompliance with a judicial order issued under sections 1507 to 1515. Upon determination of a right of access under those sections, a court may issue an order to grant access under section 1516. Section 1516(2) requires that an order directing compliance contain a finding that compliance is not in violation of 18 U.S.C. Section 2702. Noncompliance with that order would give rise to liability for contempt. There is no immunity from this liability.
Indirect liability could arise from granting a right of access under this act. Access to a digital asset might invade the privacy or the harm the reputation of the decedent, protected person, principal, or settlor, it might harm the family or business of the decedent, protected person, principal, or settlor, and it might harm other persons. The grantor of access to the digital asset is immune from liability arising out of any of these circumstances if the grantor acted in good faith to comply with this act. If there is a judicial order under section 1516, compliance with the order establishes good faith. Absent a judicial order under section 1516, good faith must be established by the grantor's assessment of the requirements of this act. Further, Section 1516(5) allows the custodian to verify that the account belongs to the person represented by the fiduciary.
15-1-1517. Uniformity of application and construction.
In applying and construing this uniform act, consideration must be given to the need to promote uniformity of the law with respect to its subject matter among states that enact it.
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 190, § 1, effective August 10.
15-1-1518. Relation to electronic signatures in global and national commerce act.
This part 15 modifies, limits, or supersedes the federal "Electronic Signatures in Global and National Commerce Act", 15 U.S.C. sec. 7001, et seq., but does not modify, limit, or supersede section 101(c) of that act, 15 U.S.C. sec. 7001(c), or authorize electronic delivery of any of the notices described in section 103(b) of that act, 15 U.S.C. sec. 7003(b).
Source: L. 2016: Entire part added, (SB 16-088), ch. 71, p. 190, § 1, effective August 10.
ARTICLE 1.1 UNIFORM PRUDENT INVESTOR ACT
Editor's note: This article is a uniform act, and the numbering of subsections and paragraphs varies from the numbering system generally used in Colorado Revised Statutes.
Law reviews: For article, "Diversification Under the Uniform Prudent Investor Act", see 32 Colo. Law. 87 (Nov. 2003); for article, "What Every Trustee Should Know About Investing", see 35 Colo. Law. 51 (Feb. 2006); for article, "The Dangers of Relying on Trust Language", see 45 Colo. Law. 55 (March 2016).
Section
PREFATORY NOTE
Over the quarter century from the late 1960's the investment practices of fiduciaries experienced significant change. The Uniform Prudent Investor Act (UPIA) undertakes to update trust investment law in recognition of the alterations that have occurred in investment practice. These changes have occurred under the influence of a large and broadly accepted body of empirical and theoretical knowledge about the behavior of capital markets, often described as "modern portfolio theory."
This Act draws upon the revised standards for prudent trust investment promulgated by the American Law Institute in its Restatement (Third) of Trusts: Prudent Investor Rule (1992) [hereafter Restatement of Trusts 3d: Prudent Investor Rule; also referred to as 1992 Restatement].
Objectives of the Act.
UPIA makes five fundamental alterations in the former criteria for prudent investing. All are to be found in the Restatement of Trusts 3d: Prudent Investor Rule.
- The standard of prudence is applied to any investment as part of the total portfolio, rather than to individual investments. In the trust setting the term "portfolio" embraces all the trust's assets. UPIA § 2(b).
- The tradeoff in all investing between risk and return is identified as the fiduciary's central consideration. UPIA § 2(b).
- All categoric restrictions on types of investments have been abrogated; the trustee can invest in anything that plays an appropriate role in achieving the risk/return objectives of the trust and that meets the other requirements of prudent investing. UPIA § 2(e).
- The long familiar requirement that fiduciaries diversify their investments has been integrated into the definition of prudent investing. UPIA § 3.
- The much criticized former rule of trust law forbidding the trustee to delegate investment and management functions has been reversed. Delegation is now permitted, subject to safeguards. UPIA § 9.
Literature.
These changes in trust investment law have been presaged in an extensive body of practical and scholarly writing. See especially the discussion and reporter's notes by Edward C. Halbach, Jr., in Restatement of Trusts 3d: Prudent Investor Rule (1992); see also Edward C. Halbach, Jr., Trust Investment Law in the Third Restatement, 27 Real Property, Probate & Trust J. 407 (1992); Bevis Longstreth, Modern Investment Management and the Prudent Man Rule (1986); Jeffrey N. Gordon, The Puzzling Persistence of the Constrained Prudent Man Rule, 62 N.Y.U.L. Rev. 52 (1987); John H. Langbein & Richard A. Posner, The Revolution in Trust Investment Law, 62 A.B.A.J. 887 (1976); Note, the Regulation of Risky Investments, 83 Harvard L. Rev. 603 (1970). A succinct account of the main findings of modern portfolio theory, written for lawyers, is Jonathan R. Macey, An Introduction to Modern Financial Theory (1991) (American College of Trust & Estate Counsel Foundation). A leading introductory text on modern portfolio theory is R.A. Brealey, An Introduction to Risk and Return from Common Stocks (2d ed. 1983).
Legislation.
Most states have legislation governing trust-investment law. This Act promotes uniformity of state law on the basis of the new consensus reflected in the Restatement of Trusts 3d: Prudent Investor Rule. Some states have already acted. California, Delaware, Georgia, Minnesota, Tennessee, and Washington revised their prudent investor legislation to emphasize the total-portfolio standard of care in advance of the 1992 Restatement. These statutes are extracted and discussed in Restatement of Trusts 3d: Prudent Investor Rule § 227, reporter's note, at 60-66 (1992).
Drafters in Illinois in 1991 worked from the April 1990 "Proposed Final Draft" of the Restatement of Trusts 3d: Prudent Investor Rule and enacted legislation that is closely modeled on the new Restatement. 760 ILCS § 5/5 (prudent investing); and § 5/5.1 (delegation) (1992). As the Comments to this Uniform Prudent Investor Act reflect, the Act draws upon the Illinois statute in several sections. Virginia revised its prudent investor act in a similar vein in 1992. Virginia Code § 26-45.1 (prudent investing) (1992). Florida revised its statute in 1993. Florida Laws, ch. 93-257, amending Florida Statutes § 518.11 (prudent investing) and creating § 518.112 (delegation). New York legislation drawing on the new Restatement and on a preliminary version of this Uniform Prudent Investor Act was enacted in 1994. N.Y. Assembly Bill 11683-B, Ch. 609 (1994), adding Estates, Powers and Trusts Law § 11-2.3 (Prudent Investor Act).
Remedies.
This Act does not undertake to address issues of remedy law or the computation of damages in trust matters. Remedies are the subject of a reasonably distinct body of doctrine. See generally Restatement (Second) of Trusts §§ 197-226A (1959) [hereinafter cited as Restatement of Trusts 2d; also referred to as 1959 Restatement].
Implications for charitable and pension trusts.
This Act is centrally concerned with the investment responsibilities arising under the private gratuitous trust, which is the common vehicle for conditioned wealth transfer within the family. Nevertheless, the prudent investor rule also bears on charitable and pension trusts, among others. "In making investments of trust funds the trustee of a charitable trust is under a duty similar to that of the trustee of a private trust." Restatement of Trusts 2d § 389 (1959). The Employee Retirement Income Security Act (ERISA), the federal regulatory scheme for pension trusts enacted in 1974, absorbs trust-investment law through the prudence standard of ERISA § 404(a)(1)(B), 29 U.S.C. § 1104(a). The Supreme Court has said: "ERISA's legislative history confirms that the Act's fiduciary responsibility provisions 'codif[y] and mak[e] applicable to [ERISA] fiduciaries certain principles developed in the evolution of the law of trusts.'" Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110-11 (1989) (footnote omitted).
Other fiduciary relationships.
The Uniform Prudent Investor Act regulates the investment responsibilities of trustees. Other fiduciaries -- such as executors, conservators, and guardians of the property -- sometimes have responsibilities over assets that are governed by the standards of prudent investment. It will often be appropriate for states to adapt the law governing investment by trustees under this Act to these other fiduciary regimes, taking account of such changed circumstances as the relatively short duration of most executorships and the intensity of court supervision of conservators and guardians in some jurisdictions. The present Act does not undertake to adjust trust-investment law to the special circumstances of the state schemes for administering decedents' estates or conducting the affairs of protected persons.
Although the Uniform Prudent Investor Act by its terms applies to trusts and not to charitable corporations, the standards of the Act can be expected to inform the investment responsibilities of directors and officers of charitable corporations. As the 1992 Restatement observes, "the duties of the members of the governing board of a charitable corporation are generally similar to the duties of the trustee of a charitable trust." Restatement of Trusts 3d: Prudent Investor Rule § 379, Comment b, at 190 (1992). See also id. § 389, Comment b, at 190-91 (absent contrary statute or other provision, prudent investor rule applies to investment of funds held for charitable corporations).
15-1.1-101. Prudent investor rule.
- Except as otherwise provided in subsection (b) of this section, a trustee who invests and manages trust assets owes a duty to the beneficiaries of the trust to comply with the prudent investor rule set forth in this article.
- The prudent investor rule, a default rule, may be expanded, restricted, eliminated, or otherwise altered by the provisions of a trust. A trustee is not liable to a beneficiary to the extent that the trustee acted in reasonable reliance on the provisions of the trust.
Source: L. 95: Entire article added, p. 309, § 1, effective July 1.
OFFICIAL COMMENT
This section imposes the obligation of prudence in the conduct of investment functions and identifies further sections of the Act that specify the attributes of prudent conduct.
Origins. The prudence standard for trust investing traces back to Harvard College v. Amory, 26 Mass. (9 Pick.) 446 (1830). Trustees should "observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested." Id. at 461.
Prior legislation. The Model Prudent Man Rule Statute (1942), sponsored by the American Bankers Association, undertook to codify the language of the Amory case. See Mayo A. Shattuck, The Development of the Prudent Man Rule for Fiduciary Investment in the United States in the Twentieth Century, 12 Ohio State L.J. 491, at 501 (1951); for the text of the model act, which inspired many state statutes, see id. at 508-09. Another prominent codification of the Amory standard is Uniform Probate Code § 7-302 (1969), which provides that "the trustee shall observe the standards in dealing with the trust assets that would be observed by a prudent man dealing with the property of another . . . ."
Congress has imposed a comparable prudence standard for the administration of pension and employee benefit trusts in the Employee Retirement Income Security Act (ERISA), enacted in 1974. ERISA § 404(a)(1)(B), 29 U.S.C. § 1104(a), provides that "a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and . . . with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims . . . ."
Prior Restatement. The Restatement of Trusts 2d (1959) also tracked the language of the Amory case: "In making investments of trust funds the trustee is under a duty to the beneficiary . . . to make such investments and only such investments as a prudent man would make of his own property having in view the preservation of the estate and the amount and regularity of the income to be derived . . . ." Restatement of Trusts 2d § 227 (1959).
Objective standard. The concept of prudence in the judicial opinions and legislation is essentially relational or comparative. It resembles in this respect the "reasonable person" rule of tort law. A prudent trustee behaves as other trustees similarly situated would behave. The standard is, therefore, objective rather than subjective. Sections 2 through 9 of this Act identify the main factors that bear on prudent investment behavior.
Variation. Almost all of the rules of trust law are default rules, that is, rules that the settlor may alter or abrogate. Subsection (b) carries forward this traditional attribute of trust law. Traditional trust law also allows the beneficiaries of the trust to excuse its performance, when they are all capable and not misinformed. Restatement of Trusts 2d § 216 (1959).
ANNOTATION
The Colorado Uniform Prudent Investor Act provides a legal standard of care, not an independent cause of action. The general assembly considered the issue of remedies and chose not to include an independent right of action in the act. Micale v. Bank One, N.A., 382 F. Supp. 2d 1207 (D. Colo. 2005).
15-1.1-102. Standard of care - portfolio strategy - risk and return objectives.
- A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.
- A trustee's investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.
-
Among circumstances that a trustee shall consider in investing and managing trust assets are such of the following as are relevant to the trust or its beneficiaries:
- General economic conditions;
- The possible effect of inflation or deflation;
- The expected tax consequences of investment decisions or strategies;
- The role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property;
- The expected total return from income and the appreciation of capital;
- Other resources of the beneficiaries;
- Needs for liquidity, regularity of income, and preservation or appreciation of capital; and
- An asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.
- A trustee shall make a reasonable effort to verify facts relevant to the investment and management of trust assets.
- A trustee may invest in any kind of property or type of investment consistent with the standards of this article.
- A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee's representation that the trustee has special skills or expertise, has a duty to use those special skills or expertise.
Source: L. 95: Entire article added, p. 309, § 1, effective July 1.
OFFICIAL COMMENT
Section 2 is the heart of the Act. Subsections (a), (b), and (c) are patterned loosely on the language of the Restatement of Trusts 3d: Prudent Investor Rule § 227 (1992), and on the 1991 Illinois statute, 760 § ILCS 5/5a (1992). Subsection (f) is derived from Uniform Probate Code § 7-302 (1969).
Objective standard. Subsection (a) of this Act carries forward the relational and objective standard made familiar in the Amory case, in earlier prudent investor legislation, and in the Restatements. Early formulations of the prudent person rule were sometimes troubled by the effort to distinguish between the standard of a prudent person investing for another and investing on his or her own account. The language of subsection (a), by relating the trustee's duty to "the purposes, terms, distribution requirements, and other circumstances of the trust," should put such questions to rest. The standard is the standard of the prudent investor similarly situated.
Portfolio standard. Subsection (b) emphasizes the consolidated portfolio standard for evaluating investment decisions. An investment that might be imprudent standing alone can become prudent if undertaken in sensible relation to other trust assets, or to other nontrust assets. In the trust setting the term "portfolio" embraces the entire trust estate.
Risk and return. Subsection (b) also sounds the main theme of modern investment practice, sensitivity to the risk/return curve. See generally the works cited in the Prefatory Note to this Act, under "Literature." Returns correlate strongly with risk, but tolerance for risk varies greatly with the financial and other circumstances of the investor, or in the case of a trust, with the purposes of the trust and the relevant circumstances of the beneficiaries. A trust whose main purpose is to support an elderly widow of modest means will have a lower risk tolerance than a trust to accumulate for a young scion of great wealth.
Subsection (b) of this Act follows Restatement of Trusts 3d: Prudent Investor Rule § 227(a), which provides that the standard of prudent investing "requires the exercise of reasonable care, skill, and caution, and is to be applied to investments not in isolation but in the context of the trust portfolio and as a part of an overall investment strategy, which should incorporate risk and return objectives reasonably suitable to the trust."
Factors affecting investment. Subsection (c) points to certain of the factors that commonly bear on risk/return preferences in fiduciary investing. This listing is nonexclusive. Tax considerations, such as preserving the stepped up basis on death under Internal Revenue Code § 1014 for low-basis assets, have traditionally been exceptionally important in estate planning for affluent persons. Under the present recognition rules of the federal income tax, taxable investors, including trust beneficiaries, are in general best served by an investment strategy that minimizes the taxation incident to portfolio turnover. See generally Robert H. Jeffrey & Robert D. Arnott, Is Your Alpha Big Enough to Cover Its Taxes?, Journal of Portfolio Management 15 (Spring 1993).
Another familiar example of how tax considerations bear upon trust investing: In a regime of pass-through taxation, it may be prudent for the trust to buy lower yielding tax-exempt securities for high-bracket taxpayers, whereas it would ordinarily be imprudent for the trustees of a charitable trust, whose income is tax exempt, to accept the lowered yields associated with tax-exempt securities.
When tax considerations affect beneficiaries differently, the trustee's duty of impartiality requires attention to the competing interests of each of them.
Subsection (c)(8), allowing the trustee to take into account any preferences of the beneficiaries respecting heirlooms or other prized assets, derives from the Illinois act, 760 ILCS § 5/5(a)(4) (1992).
Duty to monitor. Subsections (a) through (d) apply both to investing and managing trust assets. "Managing" embraces monitoring, that is, the trustee's continuing responsibility for oversight of the suitability of investments already made as well as the trustee's decisions respecting new investments.
Duty to investigate. Subsection (d) carries forward the traditional responsibility of the fiduciary investor to examine information likely to bear importantly on the value or the security of an investment -- for example, audit reports or records of title. E.g., Estate of Collins, 72 Cal. App. 3d 663, 139 Cal. Rptr. 644 (1977) (trustees lent on a junior mortgage on unimproved real estate, failed to have land appraised, and accepted an unaudited financial statement; held liable for losses).
Abrogating categoric restrictions. Subsection 2(e) clarifies that no particular kind of property or type of investment is inherently imprudent. Traditional trust law was encumbered with a variety of categoric exclusions, such as prohibitions on junior mortgages or new ventures. In some states legislation created so-called "legal lists" of approved trust investments. The universe of investment products changes incessantly. Investments that were at one time thought too risky, such as equities, or more recently, futures, are now used in fiduciary portfolios. By contrast, the investment that was at one time thought ideal for trusts, the long-term bond, has been discovered to import a level of risk and volatility -- in this case, inflation risk -- that had not been anticipated. Accordingly, section 2(e) of this Act follows Restatement of Trusts 3d: Prudent Investor Rule in abrogating categoric restrictions. The Restatement says: "Specific investments or techniques are not per se prudent or imprudent. The riskiness of a specific property, and thus the propriety of its inclusion in the trust estate, is not judged in the abstract but in terms of its anticipated effect on the particular trust's portfolio." Restatement of Trusts 3d: Prudent Investor Rule § 227, Comment f , at 24 (1992). The premise of subsection 2(e) is that trust beneficiaries are better protected by the Act's emphasis on close attention to risk/return objectives as prescribed in subsection 2(b) than in attempts to identify categories of investment that are per se prudent or imprudent.
The Act impliedly disavows the emphasis in older law on avoiding "speculative" or "risky" investments. Low levels of risk may be appropriate in some trust settings but inappropriate in others. It is the trustee's task to invest at a risk level that is suitable to the purposes of the trust.
The abolition of categoric restrictions against types of investment in no way alters the trustee's conventional duty of loyalty, which is reiterated for the purposes of this Act in Section 5. For example, were the trustee to invest in a second mortgage on a piece of real property owned by the trustee, the investment would be wrongful on account of the trustee's breach of the duty to abstain from self-dealing, even though the investment would no longer automatically offend the former categoric restriction against fiduciary investments in junior mortgages.
Professional fiduciaries. The distinction taken in subsection (f) between amateur and professional trustees is familiar law. The prudent investor standard applies to a range of fiduciaries, from the most sophisticated professional investment management firms and corporate fiduciaries, to family members of minimal experience. Because the standard of prudence is relational, it follows that the standard for professional trustees is the standard of prudent professionals; for amateurs, it is the standard of prudent amateurs. Restatement of Trusts 2d § 174 (1959) provides: "The trustee is under a duty to the beneficiary in administering the trust to exercise such care and skill as a man of ordinary prudence would exercise in dealing with his own property; and if the trustee has or procures his appointment as trustee by representing that he has greater skill than that of a man of ordinary prudence, he is under a duty to exercise such skill." Case law strongly supports the concept of the higher standard of care for the trustee representing itself to be expert or professional. See Annot., Standard of Care Required of Trustee Representing Itself to Have Expert Knowledge or Skill, 91 A.L.R. 3d 904 (1979) & 1992 Supp. at 48-49.
The Drafting Committee declined the suggestion that the Act should create an exception to the prudent investor rule (or to the diversification requirement of Section 3) in the case of smaller trusts. The Committee believes that subsections (b) and (c) of the Act emphasize factors that are sensitive to the traits of small trusts; and that subsection (f) adjusts helpfully for the distinction between professional and amateur trusteeship. Furthermore, it is always open to the settlor of a trust under Section 1(b) of the Act to reduce the trustee's standard of care if the settlor deems such a step appropriate. The official comments to the 1992 Restatement observe that pooled investments, such as mutual funds and bank common trust funds, are especially suitable for small trusts. Restatement of Trusts 3d: Prudent Investor Rule § 227, Comments h, m, at 28, 51; reporter's note to Comment g, id. at 83.
Matters of proof. Although virtually all express trusts are created by written instrument, oral trusts are known, and accordingly, this Act presupposes no formal requirement that trust terms be in writing. When there is a written trust instrument, modern authority strongly favors allowing evidence extrinsic to the instrument to be consulted for the purpose of ascertaining the settlor's intent. See Uniform Probate Code § 2-601 (1990), Comment; Restatement (Third) of Property: Donative Transfers (Preliminary Draft No. 2, ch. 11, Sept. 11, 1992).
ANNOTATION
Trustee's purchases on margin and failure to diversify investments do not per se constitute breach of duty and are not categorically imprudent. The default rule is that what is considered prudent can be altered or eliminated by the terms of the trust instrument. Van Gundy v. Van Gundy, 2012 COA 194 , 292 P.3d 1201.
15-1.1-103. Diversification.
A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.
Source: L. 95: Entire article added, p. 310, § 1, effective July 1.
OFFICIAL COMMENT
The language of this section derives from Restatement of Trusts 2d § 228 (1959). ERISA insists upon a comparable rule for pension trusts. ERISA § 404(a)(1)(C), 29 U.S.C. § 1104(a)(1)(C). Case law overwhelmingly supports the duty to diversify. See Annot., Duty of Trustee to Diversify Investments, and Liability for Failure to Do So, 24 A.L.R. 3d 730 (1969) & 1992 Supp. at 78-79.
The 1992 Restatement of Trusts takes the significant step of integrating the diversification requirement into the concept of prudent investing. Section 227(b) of the 1992 Restatement treats diversification as one of the fundamental elements of prudent investing, replacing the separate section 228 of the Restatement of Trusts 2d. The message of the 1992 Restatement, carried forward in Section 3 of this Act, is that prudent investing ordinarily requires diversification.
Circumstances can however, overcome the duty to diversify. For example, if a tax-sensitive trust owns an underdiversified block of low-basis securities, the tax costs of recognizing the gain may outweigh the advantages of diversifying the holding. The wish to retain a family business is another situation in which the purposes of the trust sometimes override the conventional duty to diversify.
Rationale for diversification. "Diversification reduces risk . . . [because] stock price movements are not uniform. They are imperfectly correlated. This means that if one holds a well diversified portfolio, the gains in one investment will cancel out the losses in another." Jonathan R. Macey, An Introduction to Modern Financial Theory 20 (American College of Trust and Estate Counsel Foundation, 1991). For example, during the Arab oil embargo of 1973, international oil stocks suffered declines, but the shares of domestic oil producers and coal companies benefitted. Holding a broad enough portfolio allowed the investor to set off, to some extent, the losses associated with the embargo.
Modern portfolio theory divides risk into the categories of "compensated" and "uncompensated" risk. The risk of owning shares in a mature and well-managed company in a settled industry is less than the risk of owning shares in a start-up high-technology venture. The investor requires a higher expected return to induce the investor to bear the greater risk of disappointment associated with the start-up firm. This is compensated risk -- the firm pays the investor for bearing the risk. By contrast, nobody pays the investor for owning too few stocks. The investor who owned only international oils in 1973 was running a risk that could have been reduced by having configured the portfolio differently -- to include investments in different industries. This is uncompensated risk -- nobody pays the investor for owning shares in too few industries and too few companies. Risk that can be eliminated by adding different stocks (or bonds) is uncompensated risk. The object of diversification is to minimize this uncompensated risk of having too few investments. "As long as stock prices do not move exactly together, the risk of a diversified portfolio will be less than the average risk of the separate holdings." R.A. Brealey, An Introduction to Risk and Return from Common Stocks 103 (2d ed. 1983).
There is no automatic rule for identifying how much diversification is enough. The 1992 Restatement says: "Significant diversification advantages can be achieved with a small number of well-selected securities representing different industries . . . . Broader diversification is usually to be preferred in trust investing," and pooled investment vehicles "make thorough diversification practical for most trustees." Restatement of Trusts 3d: Prudent Investor Rule § 227, General Note on Comments e-h, at 77 (1992). See also Macey, supra, at 23-24; Brealey, supra, at 111-13.
Diversifying by pooling. It is difficult for a small trust fund to diversify thoroughly by constructing its own portfolio of individually selected investments. Transaction costs such as the round-lot (100 share) trading economies make it relatively expensive for a small investor to assemble a broad enough portfolio to minimize uncompensated risk. For this reason, pooled investment vehicles have become the main mechanism for facilitating diversification for the investment needs of smaller trusts.
Most states have legislation authorizing common trust funds; see 3 Austin W. Scott & William F. Fratcher, The Law of Trusts § 227.9, at 463-65 n.26 (4th ed. 1988) (collecting citations to state statutes). As of 1992, 35 states and the District of Columbia had enacted the Uniform Common Trust Fund Act (UCTFA) (1938), overcoming the rule against commingling trust assets and expressly enabling banks and trust companies to establish common trust funds. 7 Uniform Laws Ann. 1992 Supp. at 130 (schedule of adopting states). The Prefatory Note to the UCTFA explains: "The purposes of such a common or joint investment fund are to diversify the investment of the several trusts and thus spread the risk of loss, and to make it easy to invest any amount of trust funds quickly and with a small amount of trouble." 7 Uniform Laws Ann. 402 (1985).
Fiduciary investing in mutual funds. Trusts can also achieve diversification by investing in mutual funds. See Restatement of Trusts 3d: Prudent Investor Rule, § 227, Comment m, at 99-100 (1992) (endorsing trust investment in mutual funds). ERISA § 401(b)(1), 29 U.S.C. § 1101(b)(1), expressly authorizes pension trusts to invest in mutual funds, identified as securities "issued by an investment company registered under the Investment Company Act of 1940 . . . ."
15-1.1-104. Duties at inception of trusteeship.
Within a reasonable time after accepting a trusteeship or receiving trust assets, a trustee shall review the trust assets and make and implement decisions concerning the retention and disposition of assets, in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust, and with the requirements of this article.
Source: L. 95: Entire article added, p. 310, § 1, effective July 1.
OFFICIAL COMMENT
Section 4, requiring the trustee to dispose of unsuitable assets within a reasonable time, is old law, codified in Restatement of Trusts 3d: Prudent Investor Rule § 229 (1992), lightly revising Restatement of Trusts 2d § 230 (1959). The duty extends as well to investments that were proper when purchased but subsequently become improper. Restatement of Trusts 2d § 231 (1959). The same standards apply to successor trustees, see Restatement of Trusts 2d § 196 (1959).
The question of what period of time is reasonable turns on the totality of factors affecting the asset and the trust. The 1959 Restatement took the view that "[o]rdinarily any time within a year is reasonable, but under some circumstances a year may be too long a time and under other circumstances a trustee is not liable although he fails to effect the conversion for more than a year." Restatement of Trusts 2d § 230, comment b (1959). The 1992 Restatement retreated from this rule of thumb, saying, "No positive rule can be stated with respect to what constitutes a reasonable time for the sale or exchange of securities." Restatement of Trusts 3d: Prudent Investor Rule § 229, comment b (1992).
The criteria and circumstances identified in Section 2 of this Act as bearing upon the prudence of decisions to invest and manage trust assets also pertain to the prudence of decisions to retain or dispose of inception assets under this section.
15-1.1-105. Loyalty.
A trustee shall invest and manage the trust assets solely in the interest of the beneficiaries.
Source: L. 95: Entire article added, p. 311, § 1, effective July 1.
OFFICIAL COMMENT
The duty of loyalty is perhaps the most characteristic rule of trust law, requiring the trustee to act exclusively for the beneficiaries, as opposed to acting for the trustee's own interest or that of third parties. The language of Section 4 of this Act derives from Restatement of Trusts 3d: Prudent Investor Rule § 170 (1992), which makes minute changes in Restatement of Trusts 2d § 170 (1959).
The concept that the duty of prudence in trust administration, especially in investing and managing trust assets, entails adherence to the duty of loyalty is familiar. ERISA § 404(a)(1)(B), 29 U.S.C. § 1104(a)(1)(B), extracted in the Comment to Section 1 of this Act, effectively merges the requirements of prudence and loyalty. A fiduciary cannot be prudent in the conduct of investment functions if the fiduciary is sacrificing the interests of the beneficiaries.
The duty of loyalty is not limited to settings entailing self-dealing or conflict of interest in which the trustee would benefit personally from the trust. "The trustee is under a duty to the beneficiary in administering the trust not to be guided by the interest of any third person. Thus, it is improper for the trustee to sell trust property to a third person for the purpose of benefitting the third person rather than the trust." Restatement of Trusts 2d § 170, comment q, at 371 (1959).
No form of so-called "social investing" is consistent with the duty of loyalty if the investment activity entails sacrificing the interests of trust beneficiaries -- for example, by accepting below-market returns -- in favor of the interests of the persons supposedly benefitted by pursuing the particular social cause. See, e.g., John H. Langbein & Richard Posner, Social Investing and the Law of Trusts, 79 Michigan L. Rev. 72, 96-97 (1980) (collecting authority). For pension trust assets, see generally Ian D. Lanoff, The Social Investment of Private Pension Plan Assets: May it Be Done Lawfully under ERISA?, 31 Labor L.J. 387 (1980). Commentators supporting social investing tend to concede the overriding force of the duty of loyalty. They argue instead that particular schemes of social investing may not result in below-market returns. See, e.g., Marcia O'Brien Hylton, "Socially Responsible" Investing: Doing Good Versus Doing Well in an Inefficient Market, 42 American U.L. Rev. 1 (1992). In 1994 the Department of Labor issued an Interpretive Bulletin reviewing its prior analysis of social investing questions and reiterating that pension trust fiduciaries may invest only in conformity with the prudence and loyalty standards of ERISA §§ 403-404. Interpretive Bulletin 94-1, 59 Fed. Regis. 32606 (Jun. 22, 1994), to be codified as 29 CFR § 2509.94-1. The Bulletin reminds fiduciary investors that they are prohibited from "subordinat[ing] the interests of participants and beneficiaries in their retirement income to unrelated objectives."
15-1.1-106. Impartiality.
If a trust has two or more beneficiaries, the trustee shall act impartially in investing and managing the trust assets, taking into account any differing interests of the beneficiaries.
Source: L. 95: Entire article added, p. 311, § 1, effective July 1.
OFFICIAL COMMENT
The duty of impartiality derives from the duty of loyalty. When the trustee owes duties to more than one beneficiary, loyalty requires the trustee to respect the interests of all the beneficiaries. Prudence in investing and administration requires the trustee to take account of the interests of all the beneficiaries for whom the trustee is acting, especially the conflicts between the interests of beneficiaries interested in income and those interested in principal.
The language of Section 6 derives from Restatement of Trusts 2d § 183 (1959); see also id., § 232. Multiple beneficiaries may be beneficiaries in succession (such as life and remainder interests) or beneficiaries with simultaneous interests (as when the income interest in a trust is being divided among several beneficiaries).
The trustee's duty of impartiality commonly affects the conduct of investment and management functions in the sphere of principal and income allocations. This Act prescribes no regime for allocating receipts and expenses. The details of such allocations are commonly handled under specialized legislation, such as the Revised Uniform Principal and Income Act (1962) (which is presently under study by the Uniform Law Commission with a view toward further revision).
15-1.1-107. Investment costs.
In investing and managing trust assets, a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee.
Source: L. 95: Entire article added, p. 311, § 1, effective July 1.
OFFICIAL COMMENT
Wasting beneficiaries' money is imprudent. In devising and implementing strategies for the investment and management of trust assets, trustees are obliged to minimize costs.
The language of Section 7 derives from Restatement of Trusts 2d § 188 (1959). The Restatement of Trusts 3d says: "Concerns over compensation and other charges are not an obstacle to a reasonable course of action using mutual funds and other pooling arrangements, but they do require special attention by a trustee. . . . [I]t is important for trustees to make careful cost comparisons, particularly among similar products of a specific type being considered for a trust portfolio." Restatement of Trusts 3d: Prudent Investor Rule § 227, comment m, at 58 (1992).
15-1.1-108. Reviewing compliance.
Compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee's decision or action and not by hindsight.
Source: L. 95: Entire article added, p. 311, § 1, effective July 1.
OFFICIAL COMMENT
This section derives from the 1991 Illinois act, 760 ILCS 5/5(a)(2) (1992), which draws upon Restatement of Trusts 3d: Prudent Investor Rule § 227, comment b, at 11 (1992). Trustees are not insurers. Not every investment or management decision will turn out in the light of hindsight to have been successful. Hindsight is not the relevant standard. In the language of law and economics, the standard is ex ante, not ex post.
15-1.1-109. Delegation of investment and management functions.
-
A trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances. The trustee shall exercise reasonable care, skill, and caution in:
- Selecting an agent;
- Establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and
- Periodically reviewing the agent's actions in order to monitor the agent's performance and compliance with the terms of the delegation.
- In performing a delegated function, an agent owes a duty to the trust to exercise reasonable care to comply with the terms of the delegation.
- A trustee who complies with the requirements of subsection (a) of this section is not liable to the beneficiaries or to the trust for the decisions or actions of the agent to whom the function was delegated.
- By accepting the delegation of a trust function from the trustee of a trust that is subject to the law of this State, an agent submits to the jurisdiction of the courts of this State.
Source: L. 95: Entire article added, p. 311, § 1, effective July 1.
OFFICIAL COMMENT
This section of the Act reverses the much-criticized rule that forbad trustees to delegate investment and management functions. The language of this section is derived from Restatement of Trusts 3d: Prudent Investor Rule § 171 (1992), discussed infra, and from the 1991 Illinois act, 760 ILCS § 5/5.1(b), (c) (1992).
Former law. The former nondelegation rule survived into the 1959 Restatement: "The trustee is under a duty to the beneficiary not to delegate to others the doing of acts which the trustee can reasonably be required personally to perform." The rule put a premium on the frequently arbitrary task of distinguishing discretionary functions that were thought to be nondelegable from supposedly ministerial functions that the trustee was allowed to delegate. Restatement of Trusts 2d § 171 (1959).
The Restatement of Trusts 2d admitted in a comment that "There is not a clear-cut line dividing the acts which a trustee can properly delegate from those which he cannot properly delegate." Instead, the comment directed attention to a list of factors that "may be of importance: (1) the amount of discretion involved; (2) the value and character of the property involved; (3) whether the property is principal or income; (4) the proximity or remoteness of the subject matter of the trust; (5) the character of the act as one involving professional skill or facilities possessed or not possessed by the trustee himself." Restatement of Trusts 2d § 171, comment d (1959). The 1959 Restatement further said: "A trustee cannot properly delegate to another power to select investments." Restatement of Trusts 2d § 171, comment h (1959).
For discussion and criticism of the former rule see William L. Cary & Craig B. Bright, The Delegation of Investment Responsibility for Endowment Funds, 74 Columbia L. Rev. 207 (1974); John H. Langbein & Richard A. Posner, Market Funds and Trust-Investment Law, 1976 American Bar Foundation Research J. 1, 18-24.
The modern trend to favor delegation. The trend of subsequent legislation, culminating in the Restatement of Trusts 3d: Prudent Investor Rule, has been strongly hostile to the nondelegation rule. See John H. Langbein, Reversing the Nondelegation Rule of Trust-Investment Law, 59 Missouri L. Rev. 105 (1994).
The delegation rule of the Uniform Trustee Powers Act. The Uniform Trustee Powers Act (1964) effectively abrogates the nondelegation rule. It authorizes trustees "to employ persons, including attorneys, auditors, investment advisors, or agents, even if they are associated with the trustee, to advise or assist the trustee in the performance of his administrative duties; to act without independent investigation upon their recommendations; and instead of acting personally, to employ one or more agents to perform any act of administration, whether or not discretionary . . . ." Uniform Trustee Powers Act § 3(24), 7B Uniform Laws Ann. 743 (1985). The Act has been enacted in 16 states, see "Record of Passage of Uniform and Model Acts as of September 30, 1993," 1993-94 Reference Book of Uniform Law Commissioners (unpaginated, following page 111) (1993).
UMIFA's delegation rule. The Uniform Management of Institutional Funds Act (1972) (UMIFA), authorizes the governing boards of eleemosynary institutions, who are trustee-like fiduciaries, to delegate investment matters either to a committee of the board or to outside investment advisors, investment counsel, managers, banks, or trust companies. UMIFA § 5, 7A Uniform Laws Ann. 705 (1985). UMIFA has been enacted in 38 states, see "Record of Passage of Uniform and Model Acts as of September 30, 1993," 1993-94 Reference Book of Uniform Law Commissioners (unpaginated, following page 111) (1993).
ERISA's delegation rule. The Employee Retirement Income Security Act of 1974, the federal statute that prescribes fiduciary standards for investing the assets of pension and employee benefit plans, allows a pension or employee benefit plan to provide that "authority to manage, acquire or dispose of assets of the plan is delegated to one or more investment managers . . . . " ERISA § 403(a)(2), 29 U.S.C. § 1103(a)(2). Commentators have explained the rationale for ERISA's encouragement of delegation:
ERISA . . . invites the dissolution of unitary trusteeship. . . . ERISA's fractionation of traditional trusteeship reflects the complexity of the modern pension trust. Because millions, even billions of dollars can be involved, great care is required in investing and safekeeping plan assets. Administering such plans--computing and honoring benefit entitlements across decades of employment and retirement--is also a complex business. . . . Since, however, neither the sponsor nor any other single entity has a comparative advantage in performing all these functions, the tendency has been for pension plans to use a variety of specialized providers. A consulting actuary, a plan administration firm, or an insurance company may oversee the design of a plan and arrange for processing benefit claims. Investment industry professionals manage the portfolio (the largest plans spread their pension investments among dozens of money management firms).
John H. Langbein & Bruce A. Wolk, Pension and Employee Benefit Law 496 (1990).
The delegation rule of the 1992 Restatement. The Restatement of Trusts 3d: Prudent Investor Rule (1992) repeals the nondelegation rule of Restatement of Trusts 2d § 171 (1959), extracted supra, and replaces it with substitute text that reads:
§ 171. Duty with Respect to Delegation. A trustee has a duty personally to perform the responsibilities of trusteeship except as a prudent person might delegate those responsibilities to others. In deciding whether, to whom, and in what manner to delegate fiduciary authority in the administration of a trust, and thereafter in supervising agents, the trustee is under a duty to the beneficiaries to exercise fiduciary discretion and to act as a prudent person would act in similar circumstances.
Restatement of Trusts 3d: Prudent Investor Rule § 171 (1992). The 1992 Restatement integrates this delegation standard into the prudent investor rule of section 227, providing that "the trustee must . . . deciding whether and how to delegate to others . . . ." Restatement of Trusts 3d: Prudent Investor Rule § 227(c) (1992).
Protecting the beneficiary against unreasonable delegation. There is an intrinsic tension in trust law between granting trustees broad powers that facilitate flexible and efficient trust administration, on the one hand, and protecting trust beneficiaries from the misuse of such powers on the other hand. A broad set of trustees' powers, such as those found in most lawyer-drafted instruments and exemplified in the Uniform Trustees' Powers Act, permits the trustee to act vigorously and expeditiously to maximize the interests of the beneficiaries in a variety of transactions and administrative settings. Trust law relies upon the duties of loyalty and prudent administration, and upon procedural safeguards such as periodic accounting and the availability of judicial oversight, to prevent the misuse of these powers. Delegation, which is a species of trustee power, raises the same tension. If the trustee delegates effectively, the beneficiaries obtain the advantage of the agent's specialized investment skills or whatever other attributes induced the trustee to delegate. But if the trustee delegates to a knave or an incompetent, the delegation can work harm upon the beneficiaries.
Section 9 of the Uniform Prudent Investor Act is designed to strike the appropriate balance between the advantages and the hazards of delegation. Section 9 authorizes delegation under the limitations of subsections (a) and (b). Section 9(a) imposes duties of care, skill, and caution on the trustee in selecting the agent, in establishing the terms of the delegation, and in reviewing the agent's compliance.
The trustee's duties of care, skill, and caution in framing the terms of the delegation should protect the beneficiary against overbroad delegation. For example, a trustee could not prudently agree to an investment management agreement containing an exculpation clause that leaves the trust without recourse against reckless mismanagement. Leaving one's beneficiaries remediless against willful wrongdoing is inconsistent with the duty to use care and caution in formulating the terms of the delegation. This sense that it is imprudent to expose beneficiaries to broad exculpation clauses underlies both federal and state legislation restricting exculpation clauses, e.g., ERISA §§ 404(a)(1)(D), 410(a), 29 U.S.C. §§ 1104(a)(1)(D), 1110(a); New York Est. Powers Trusts Law § 11-1.7 (McKinney 1967).
Although subsection (c) of the Act exonerates the trustee from personal responsibility for the agent's conduct when the delegation satisfies the standards of subsection 9(a), subsection 9(b) makes the agent responsible to the trust. The beneficiaries of the trust can, therefore, rely upon the trustee to enforce the terms of the delegation.
Costs. The duty to minimize costs that is articulated in Section 7 of this Act applies to delegation as well as to other aspects of fiduciary investing. In deciding whether to delegate, the trustee must balance the projected benefits against the likely costs. Similarly, in deciding how to delegate, the trustee must take costs into account. The trustee must be alert to protect the beneficiary from "double dipping." If, for example, the trustee's regular compensation schedule presupposes that the trustee will conduct the investment management function, it should ordinarily follow that the trustee will lower its fee when delegating the investment function to an outside manager.
15-1.1-110. Language invoking standard of article.
The following terms or comparable language in the provisions of a trust, unless otherwise limited or modified, authorizes any investment or strategy permitted under this article: "investments permissible by law for investment of trust funds," "legal investments," "authorized investments," "using the judgment and care under the circumstances then prevailing that persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital," "prudent man rule," "prudent trustee rule," "prudent person rule," and "prudent investor rule."
Source: L. 95: Entire article added, p. 311, § 1, effective July 1.
OFFICIAL COMMENT
This provision is taken from the Illinois act, 760 ILCS § 5/5(d) (1992), and is meant to facilitate incorporation of the Act by means of the formulaic language commonly used in trust instruments.
15-1.1-111. Application to existing trusts.
This article applies to trusts existing on and created after July 1, 1995; except that, as applied to trusts existing on July 1, 1995, this article governs only decisions or actions occurring after said date.
Source: L. 95: Entire article added, p. 312, § 1, effective July 1.
15-1.1-112. Uniformity of application and construction.
This article shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this article among the states enacting it.
Source: L. 95: Entire article added, p. 312, § 1, effective July 1.
15-1.1-113. Short title.
This article shall be known and may be cited as the "Colorado Uniform Prudent Investor Act".
Source: L. 95: Entire article added, p. 312, § 1, effective July 1.
15-1.1-114. Severability.
If any provision of this article or its application to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of this article which can be given effect without the invalid provision or application, and to this end the provisions of this article are severable.
Source: L. 95: Entire article added, p. 312, § 1, effective July 1.
15-1.1-115. Colorado changes to uniform act - specific statutes control - use of term "trustee".
-
- The general assembly recognizes that persons, corporations, entities, or state agencies who have responsibility for investing funds may be subject to a standard that is specifically set forth in other statutes. Under such circumstances, such persons, corporations, entities, or state agencies shall comply with the standard of investment set forth in the other statute, and this article shall not modify or repeal that standard.
- In addition, as provided for in section 15-1-304.1, this article shall not apply to those persons, corporations, entities, or state agencies which were made subject to the provisions of section 15-1-304 by specific reference in another statute in existence prior to July 1, 1995.
- As used in this article, "trustee" includes original or successor administrators, special administrators, administrators cum testamento annexo, executors, guardians, conservators, and trustees, whether of express or implied trusts.
Source: L. 95: Entire article added, p. 312, § 1, effective July 1.
ARTICLE 1.5 COLORADO UNIFORM CUSTODIAL TRUST ACT
Section
PREFATORY NOTE
This Uniform Act provides for the creation of a statutory custodial trust for adults to be governed by the provisions of the Act whenever property is delivered to another "as custodial trustee under the (Enacting state) Uniform Custodial Trust Act." The provisions of this Act are based on trust analogies to concepts developed and used in establishing custodianships for minors under the Uniform Transfers to Minors Act (UTMA). The Custodial Trust Act is designed to provide a statutory standby inter vivos trust for individuals who typically are not very affluent or sophisticated, and possibly represented by attorneys engaged in general rather than specialized estate practice. The most frequent use of this trust would be in response to the commonly occurring need of elderly individuals to provide for the future management of assets in the event of incapacity. The statute will also be available for accomplishing distribution of funds by judgment debtors and others to incapacitated persons for whom a conservator has not been appointed. Since this Act allows any person, competent to transfer property, to create custodial trusts for the benefit of themselves or others, with the beneficial interest in custodial trust property in the beneficiary and not in the custodial trustee, its potential for use is extensive. Although the most frequent use probably will be by elderly persons, it is also available for a parent to establish a custodial trust for an adult child who may be incapacitated; for adult persons in the military, or those leaving the country temporarily, to place their property with another for management without relinquishing beneficial ownership of their property; or for young people who have received property under the Uniform Transfers to Minors Act to continue a custodial trust as adults in order to obtain the benefit and convenience of management services performed by the custodial trustee.
This Act follows the approach taken by the Uniform Transfers to Minors Act and allows any kind of property, real or personal, tangible or intangible, to be made the subject of a transfer to a custodial trustee for the benefit of a beneficiary. However, the most typical transaction envisioned would involve a person who would transfer intangible property, such as securities or bank accounts, to a custodial trustee but with retention by the transferor of direction over the property. Later, this direction could be relinquished, or it could be lost upon incapacity. The objective of the statute is to provide a simple trust that is uncomplicated in its creation, administration, and termination. The potential for tax problems is minimized by permitting the beneficiary in most instances to retain control while the beneficiary has capacity to manage the assets effectively. The statute contains an asset specific transfer provision that it is believed will be simple to use and will gain the acceptance of the securities and financial industry. A simple transfer document, examples of which are set forth in the Act, and a receipt from the custodian, also in the Act, would provide for identification of beneficiaries or distributees upon death of the beneficiary. Protection is extended to third parties dealing with the custodian. Although the Act is patterned on the Uniform Transfers to Minors Act and meshes into the Uniform Probate Code, it is appropriate for enactment as well in states which have not adopted either UTMA or the UPC.
An adult beneficiary, who is not incapacitated, may: (1) terminate the custodial trust on demand (section 15-1.5-102 (5)); (2) receive so much of the income or custodial property as he or she may request from time to time (section 15-1.5-109 (1)); and (3) give the custodial trustee binding instructions for investment or management (section 15-1.5-107 (2)). In the absence of direction by the beneficiary, who is not incapacitated, the custodial trustee manages the property subject to the standard of care that would be observed by a prudent person dealing with the property of another and is not limited by other statutory restrictions on investments by fiduciaries. (section 15-1.5-107).
A principal feature of the Custodial Trust under this Act is designed to protect the beneficiary and his or her dependents against the perils of the beneficiary's possible future incapacity without the necessity of a conservatorship. Under section 15-1.5-110, the incapacity of the beneficiary does not terminate (1) the custodial trust, (2) the designation of a successor custodial trustee, (3) any power or authority of the custodial trustee, or (4) the immunities of third persons relying on actions of the custodial trustee. The custodial trustee continues to manage the property as a discretionary trust under the prudent person standard for the benefit of the incapacitated beneficiary.
Means of monitoring and enforcing the custodial trust include provisions requiring the custodial trustee to keep the beneficiary informed, requiring accounting by the custodial trustee (section 15-1.5-115), providing for removal of the custodial trustee (section 15-1.5- 113), and the distribution of the assets on termination of the custodial trust (section 15-1.5- 117). The custodial trustee is protected in section 15-1.5-116 by the statutes of limitation on proceedings against the custodial trustee.
Transactions with the custodial trustee should be executed readily and quickly by third parties because their rights and protections are determined by the Act and a third party acting in good faith has no need to determine the custodial trustee's authority to bind the beneficiary with respect to property and investment matters. (section 15-1.5-111). The Act generally limits the claims of third parties to recourse against the custodial property, with the beneficiary insulated against personal liability unless he or she is personally at fault and the custodial trustee is similarly insulated unless the custodial trustee is personally at fault or failed to disclose the custodial capacity when entering into a contract (section 15-1.5-112).
As a consequence of the mobility of our population, particularly the mature persons who are most likely to utilize this Act, uniformity of the laws governing custodial trusts is highly desirable, and the Act is designed to avoid conflict of laws problems. A custodial trust created under this Act remains subject to this Act despite a subsequent change in the residence of the transferor, the beneficiary, or the custodial trustee or the removal of the custodial trust property from the state of original location. (section 15-1.5-119).
15-1.5-101. Definitions.
As used in this article 1.5:
- "Adult" means an individual who is at least eighteen years of age.
- "Beneficiary" means an individual for whom property has been transferred to or held under a declaration of trust by a custodial trustee for the individual's use and benefit under this article.
- "Conservator" means a person appointed or qualified by a court to manage the estate of an individual or a person legally authorized to perform substantially the same functions.
- "Court" means the district courts of this state, except in the city and county of Denver, where it means the probate court.
- "Custodial trust property" means an interest in property transferred to or held under a declaration of trust by a custodial trustee under this article and the income from and proceeds of that interest.
- "Custodial trustee" means a person designated as trustee of a custodial trust under this article or a substitute or successor to the person designated.
- "Guardian" means a person appointed or qualified by a court as a guardian of an individual, including a limited guardian, but not a person who is only a guardian ad litem.
- "Incapacitated" means lacking the ability to manage property and business affairs effectively by reason of a behavioral or mental health disorder, an intellectual and developmental disability, a physical illness or disability, a substance use disorder, confinement, detention by a foreign power, disappearance, minority, or other disabling cause.
- "Legal representative" means a personal representative or conservator.
- "Member of the beneficiary's family" means a beneficiary's spouse, descendant, stepchild, parent, stepparent, grandparent, brother, sister, uncle, or aunt, whether related by whole or half blood or by adoption.
- "Person" means an individual, corporation, business trust, estate, trust, partnership, joint venture, association, or any other legal or commercial entity.
- "Personal representative" means an executor, administrator, or special administrator of a decedent's estate, a person legally authorized to perform substantially the same functions, or a successor to any of them.
- "State" means a state, territory, or possession of the United States, the District of Columbia, or the Commonwealth of Puerto Rico.
- "Transferor" means a person who creates a custodial trust by transfer or declaration.
- "Trust company" means a financial institution, corporation, or other legal entity authorized to exercise general trust powers.
Source: L. 99: Entire article added, p. 1211, § 1, effective August 4. L. 2017: IP and (8) amended, (HB 17-1046), ch. 50, p. 157, § 7, effective March 16; (8) amended, (SB 17-242), ch. 263, p. 1295, § 115, effective May 25.
Cross references: For the legislative declaration in SB 17-242, see section 1 of chapter 263, Session Laws of Colorado 2017.
OFFICIAL COMMENT
- "Adult" is a person 18 years of age for the purpose of custodial trusts. The result of this is that a person 18 years of age will be eligible to be a custodial trustee under this Act, although he or she may not be eligible under UTMA since minor custodianships under UTMA may run to age 21 and the minor could in some cases be older than the custodian. As the Comments under Section 1 of UTMA explain, the age of 21 was retained under that Act because the Internal Revenue Code continues to permit a "minority trust" under Section 2053(c), to continue in effect until age 21 and because it was believed that most transferors creating trusts or custodianships for minors would prefer to retain the property under management for the benefit of the young person as long as possible. The difference has little or no practical consequence and serves the purpose of each Act.
(3) "Conservator" is defined broadly to permit identification of a person functioning as a conservator.
(4) "Court" means the district courts of this state, except in the city and county of Denver, where it means the probate court. Here the likelihood is that most states would utilize the same court, e.g., the probate court, that deals with conservators and estates.
(5 and 6) The terms, "custodial trust property" and "custodial trustee," are used throughout to identify clearly the statutory trust property and trustee under this Act. The statutory trust concept is used throughout the Act.
(7) A definition of guardian has been included and is based on the Uniform Probate Code Section 5-103(6).
(8) A definition of incapacitated has been included, for the purpose of this Act, because incapacity of the beneficiary converts the trust from a revocable trust to a discretionary trust. The definition is taken from the Uniform Probate Code Section 5-401(c) relating to the person who is unable to manage property. Compare Uniform Probate Code Section 5-103(7). Note that section 15-1.5-110(1)(b) permits a transferor to direct that the trust shall be administered as one for an incapacitated person. Section 15-1.5-110 deals specifically with the determination of incapacity.
(10) The beneficiary's family is broadly defined to identify persons who may have standing to seek judicial intervention or accounting (sections 15-1.5-113 and 15-1.5-115).
(11) The definition of a person is taken from the Uniform Probate Code Section 1-201(29).
(12) Personal representative is broadly defined and the definition reflects that in the Uniform Probate Code Section 1-201(30).
ANNOTATION
Law reviews. For article, "Age Requirements in Colorado: A Guide for Estate Planners", see 34 Colo. Law. 87 (Aug. 2005).
15-1.5-102. Custodial trust - general.
- A person may create a custodial trust of property by a written transfer of the property to another person, evidenced by registration or by other instrument of transfer, executed in any lawful manner, naming as beneficiary an individual who may be the transferor, in which the transferee is designated, in substance, as custodial trustee under the "Colorado Uniform Custodial Trust Act".
- A person may create a custodial trust of property by a written declaration, evidenced by registration of the property or by other instrument of declaration executed in any lawful manner, describing the property and naming as beneficiary an individual other than the declarant, in which the declarant as titleholder is designated, in substance, as custodial trustee under the "Colorado Uniform Custodial Trust Act". A registration or other declaration of trust for the sole benefit of the declarant is not a custodial trust under the "Colorado Uniform Custodial Trust Act".
- Title to custodial trust property is in the custodial trustee and the beneficial interest is in the beneficiary.
- Except as provided in subsection (5) of this section, a transferor may not terminate a custodial trust.
- The beneficiary, if not incapacitated, or the conservator of an incapacitated beneficiary, may terminate a custodial trust by delivering to the custodial trustee a writing signed by the beneficiary or conservator declaring the termination. If not previously terminated, the custodial trust terminates on the death of the beneficiary.
- Any person may augment existing custodial trust property by the addition of other property pursuant to this article.
- The transferor may designate, or authorize the designation of, a successor custodial trustee in the trust instrument.
- This article does not displace or restrict other means of creating trusts. A trust whose terms do not conform to this article may be enforceable according to its terms under other law.
Source: L. 99: Entire article added, p. 1212, § 1, effective August 4.
OFFICIAL COMMENT
Section 15-1.5-102 is the principal provision authorizing the creation of a custodial trust and utilizes the concept of incorporation by reference when the transferee or titleholder of property is designated as custodial trustee under the Act. Section 15-1.5-102 sets forth the general effect of such a transfer. Section 15-1.5-118 provides forms which satisfy the requirements of this section and identifies customary methods of transferring assets to create a custodial trust.
Section 15-1.5-102(1) provides that a trust may be created by transfer to another for the benefit of the transferor or another. This is expected to be the most common way in which a custodial trust would be created. However, a custodial trust may also be created by declaration of trust by the owner of property to hold it for the benefit of another as is provided in section 15-1.5-102(2). A declaration in trust by the owner of property for the sole benefit of the owner is not contemplated by this Act because such an attempt may be considered ineffective as a trust due to the total identity of the trustee and beneficiary. However, the doctrine of merger would not preclude an effective transfer under this Act for the benefit of the transferor and one or more other beneficiaries. See section 15-1.5-106.
A custodial trust could be created by the exercise of a valid power of attorney or power of appointment given by the owner of property as one of the transfers "consistent with law."
These alternatives permit the major uses of the custodial trust to be accomplished expeditiously. For example, an older person, wishing to be relieved of management of property may transfer property to another for benefit of the transferor or of the transferor's spouse or child. The declaration may be used to establish a trust of which the owner is trustee to continue management of the property for benefit of another, such as a spouse or child. The trust may include a provision for distribution of assets remaining at the beneficiary's death directly to a named distributee.
This Act does not preclude the creation of trusts under other existing law, statutory or nonstatutory, but is designed to facilitate the creation of simple trusts incorporating the provisions of this Act. The written transfer or declaration "consistent with law" requires that the formalities of the transfer of particular property necessary under other law will be observed, e.g., if land is involved, the requirements of a proper deed and recording must be satisfied.
Section 15-1.5-102 (3) provides for the retention of the beneficial interest in the custodial trust property in the beneficiary and, of course, not in the custodial trustee. The extensive control and benefit in the beneficiary who is not incapacitated maintains the simplicity of the trust and avoids tax complexity. The custodial trustee is given the title to the property and authority to act with regard to the property only as is authorized by the statute. The custodial trustee's powers are enumerated in section 15-1.5-108.
Section 15-1.5-102 (5) gives the adult beneficiary, who is not incapacitated, the power to terminate the custodial trust at any time during his or her lifetime. This power of termination exists in any beneficiary who is not incapacitated whether the beneficiary was or was not the transferor. A beneficiary may be determined to be incapacitated or the transferor may designate that the trust is to be administered as a trust for an incapacitated beneficiary under section 15-1.5-110, in which event the beneficiary does not have the power to terminate. However, the designation of incapacity by the transferor can be modified by the trustee or the court by reason of changed circumstances pursuant to section 15-1.5-110. The Act precludes termination by exercise of a durable power of attorney if the beneficiary is incompetent (section 15-1.5-107(6)). If the donor prefers not to permit the beneficiary the power to terminate or to designate the beneficiary as incapacitated under section 15-1.5-110, an individually drafted trust outside the scope of this Act would seem appropriate.
Upon termination of a custodial trust, the custodial trust property must be distributed as provided in section 15-1.5-117.
A transfer under this Act is irrevocable except to the extent the beneficiary may terminate it. Hence, a transfer to a trustee for benefit of a person other than the transferor is not revocable by the transferor. If a power of revocation were retained by the transferor, that would be a trust outside the scope of this Act and enforceable under general law pursuant to subsection 15-1.5-102 (8).
This Act does not provide for protection of the custodial trust assets from the claims of creditors of the beneficiary, whether those are general or governmental creditors. Other laws of the state remain unaffected. In this regard, unusual problems of handicapped persons and the coordination of resources and state or federal services call for special provision and planning outside the scope of this Act.
15-1.5-103. Custodial trustee for future payment or transfer.
- A person having the right to designate the recipient of property payable or transferable upon a future event may create a custodial trust upon the occurrence of the future event by designating in writing the recipient, followed in substance by "as custodial trustee for (name of beneficiary) under the "Colorado Uniform Custodial Trust Act"".
- Persons may be designated as substitute or successor custodial trustees to whom the property must be paid or transferred in the order named if the first designated custodial trustee is unable or unwilling to serve.
- A designation under this section may be made in a will, a trust, a deed, a multiple-party account, an insurance policy, an instrument exercising a power of appointment, or a writing designating a beneficiary of contractual rights. Otherwise, to be effective, the designation must be registered with or delivered to the fiduciary, payor, issuer, or obligor of the future right.
Source: L. 99: Entire article added, p. 1213, § 1, effective August 4.
OFFICIAL COMMENT
This section permits a future custodial trustee to be designated to receive property for the beneficiary of a custodial trust to be effective upon the occurrence of a future event or transfer. To accommodate changes in circumstances during the passage of time, one or more successors or substitute custodial trustees can also be designated. The designation of the future custodial trustee and the beneficiary can be made in an instrument which is revocable or irrevocable depending upon the nature of the transaction or transfer. Any person designated as a future custodial trustee may decline to serve before the transfer occurs or may resign under section 15-1.5-113 after the transfer.
The source of this section is Section 3 of UTMA. The enacting state's rule against perpetuities may limit or affect the creation of a custodial trust upon the occurrence of a future event, but because the use of a custodial trust usually contemplates dispositions for the benefit of living persons, perpetuity problems should rarely arise.
15-1.5-104. Form and effect of receipt and acceptance by custodial trustee - jurisdiction.
- Obligations of a custodial trustee, including the obligation to follow upon directions of the beneficiary, arise under this article upon the custodial trustee's acceptance, express or implied, of the custodial trust property.
-
The custodial trustee's acceptance may be evidenced by a writing stating in substance:
I, ____________ (name of custodial trustee) acknowledge receipt of the custodial trust property described below or in the attached instrument and accept the custodial trust as custodial trustee for ____________ (name of beneficiary) under the "Colorado Uniform Custodial Trust Act". I undertake to administer and distribute the custodial trust property pursuant to the "Colorado Uniform Custodial Trust Act". My obligations as custodial trustee are subject to the directions of the beneficiary unless the beneficiary is designated as, is, or becomes incapacitated. The custodial trust property consists of ____________.
Dated: _______________
_____________________
(Signature of Custodial Trustee)
- Upon accepting custodial trust property, a person designated as custodial trustee under this article is subject to personal jurisdiction of the court with respect to any matter relating to the custodial trust.
CUSTODIAL TRUSTEE'S RECEIPT AND ACCEPTANCE
Source: L. 99: Entire article added, p. 1214, § 1, effective August 4.
OFFICIAL COMMENT
Although a custodial trust is created by a transfer that satisfies section 15-1.5-102 of the Act, the responsibility and obligations upon the trustee do not arise until the trustee has accepted the transfer. This detailed section is included to call the attention of the parties to the effective receipt and acceptance by the custodial trustee. Once a custodial trustee accepts the transfer of the custodial trust property, the custodial trustee assumes the obligation of a custodial trustee under this Act. The acceptance can be expressed or implied, but it is recommended that the written acceptance provided for in section 15-1.5-104 (2) be utilized. By the acceptance the custodial trustee submits to the personal jurisdiction of the courts of the enacting state for the purpose of the custodial trust, despite subsequent relocation of the parties or of the custodial trust property. The principal sources of these provisions are Sections 8 and 9 of UTMA and the analogous provisions under the Uniform Probate Code, Sections 3-602, 5-208, 5-307, 7-103.
15-1.5-105. Transfer to custodial trustee by fiduciary or obligor - facility of payment.
- Unless otherwise directed by an instrument designating a custodial trustee pursuant to section 15-1.5-103, a person, including a fiduciary other than a custodial trustee, who holds property of or owes a debt to an incapacitated individual not having a conservator may make a transfer to an adult member of the beneficiary's family or to a trust company as custodial trustee for the use and benefit of the incapacitated individual. If the value of the property or the debt exceeds thirty thousand dollars, the transfer is not effective unless authorized by the court.
- A written acknowledgment of delivery, signed by a custodial trustee, is a sufficient receipt and discharge for property transferred to the custodial trustee pursuant to this section.
Source: L. 99: Entire article added, p. 1214, § 1, effective August 4.
OFFICIAL COMMENT
This section is in the nature of a facility-of-payment provision that permits persons owing money to an incapacitated individual to discharge a fixed obligation by a payment to a custodial trustee under this Act. The section does not authorize the custodial trustee to settle claims for disputed amounts but only to acknowledge an effective receipt of property paid or delivered. It is based primarily on Sections 6 and 7 of UTMA and includes the protections of Section 8 of UTMA as well. It permits a custodial trust to be established as a substitute for a conservatorship to receive payments due an incapacitated individual. Also, see section 15-1.5-111, which protects transferors and other third parties dealing with the custodial trustee.
15-1.5-106. Multiple beneficiaries - separate custodial trusts - survivorship.
- Beneficial interests in a custodial trust created for multiple beneficiaries are deemed to be separate custodial trusts of equal undivided interests for each beneficiary. Except in a transfer or declaration for use and benefit of husband and wife, for whom survivorship is presumed, a right of survivorship does not exist unless the instrument creating the custodial trust specifically provides for survivorship.
- Custodial trust property held under this article by the same custodial trustee for the use and benefit of the same beneficiary may be administered as a single custodial trust.
- A custodial trustee of custodial trust property held for more than one beneficiary shall separately account to each beneficiary pursuant to sections 15-1.5-107 and 15-1.5-115 for the administration of the custodial trust.
Source: L. 99: Entire article added, p. 1214, § 1, effective August 4.
OFFICIAL COMMENT
This Act, unlike UTMA, does not preclude a custodial trust for more than one beneficiary. Adult persons creating custodial trusts are likely to set up custodial trusts in various forms, e.g., parents may wish to set up a custodial trust for their children or for themselves, then for a spouse, etc. However, the interests of each beneficiary are separate and the custodial trustee is obligated under subsection (3) to account separately to each beneficiary for administration of the beneficiary's interest in the custodial trust.
Subsection (2) allows a custodial trustee who is administering multiple custodial trusts for the same beneficiary to administer the custodial trusts as a single custodial trust. For example, if multiple trusts are created for an incapacitated beneficiary, the custodial trustee can administer them as a single custodial trust.
15-1.5-107. General duties of custodial trustee.
- If appropriate, a custodial trustee shall register or record the instrument vesting title to custodial trust property.
- If the beneficiary is not incapacitated, a custodial trustee shall follow the directions of the beneficiary in the management, control, investment, or retention of the custodial trust property. In the absence of effective contrary direction by the beneficiary while not incapacitated, or if the beneficiary is incapacitated, the custodial trustee shall observe the standard of care that would be observed by a prudent person dealing with property of another and shall comply with the provisions of the "Colorado Uniform Prudent Investor Act". However, a custodial trustee, in the custodial trustee's discretion, may retain any custodial trust property received from the transferor.
- Subject to subsection (2) of this section, a custodial trustee shall take control of and collect, hold, manage, invest, and reinvest custodial trust property.
- A custodial trustee at all times shall keep custodial trust property of which the custodial trustee has control, separate from all other property in a manner sufficient to identify it clearly as custodial trust property of the beneficiary. Custodial trust property, the title to which is subject to recordation, is so identified if an appropriate instrument so identifying the property is recorded, and custodial trust property subject to registration is so identified if it is registered, or held in an account in the name of the custodial trustee, designated in substance: "as custodial trustee for (name of beneficiary) under the "Colorado Uniform Custodial Trust Act"".
- A custodial trustee shall keep records of all transactions with respect to custodial trust property, including information necessary for the preparation of tax returns, and shall make the records and information available at reasonable times to the beneficiary or legal representative of the beneficiary.
- The exercise of a durable power of attorney for an incapacitated beneficiary is not effective to terminate or direct the administration or distribution of a custodial trust.
Source: L. 99: Entire article added, p. 1215, § 1, effective August 4.
Editor's note: Colorado modified the model act by directing that the custodial trustee shall also comply with the provisions of the "Colorado Uniform Prudent Investor Act".
OFFICIAL COMMENT
Subsection (2) restates and confirms the control by the beneficiary who is not incapacitated. However, the trustee has a reasonable obligation to act when the beneficiary has not directed him. Under sections 15-1.5-109 and 15-1.5-110, when a beneficiary becomes incapacitated, the custodial trust becomes a discretionary trust and the trustee is subject to the control of the statute and not the beneficiary's direction. The custodial trustee is subject to the usual trustee's standard as taken from Section 7-302 of the Uniform Probate Code. The statute also imposes a slightly higher standard on professional fiduciaries acting under the statute. Otherwise, much of this section is taken from Section 12 of UTMA. Whenever recordable assets, such as land, are in the custodial trust, the trustee would be expected to record title to the asset. The section is entitled "general duties" because there are additional specific duties identified in other sections such as Section 15-1.5-109.
15-1.5-108. General powers of custodial trustee.
- A custodial trustee, acting in a fiduciary capacity, has all the rights and powers over custodial trust property which an unmarried adult owner has over individually owned property, but a custodial trustee may exercise those rights and powers in a fiduciary capacity only.
- This section does not relieve a custodial trustee from liability for a violation of section 15-1.5-107.
Source: L. 99: Entire article added, p. 1216, § 1, effective August 4.
OFFICIAL COMMENT
This section is taken from Section 13 of UTMA. It grants the trustee very broad powers over the property, subject, however, to the Prudent Person Rule and to the obligations set out in the Act. An alternative approach to subsection (1) that might be taken by an enacting state is to refer to the existing statutes granting powers to a trustee, such as the Uniform Trustee's Powers Act. For example: [A custodial trustee has the powers of a trustee under the Uniform Trustee's Powers Act.]
15-1.5-109. Use of custodial trust property.
- A custodial trustee shall pay to the beneficiary or expend for the beneficiary's use and benefit so much or all of the custodial trust property as the beneficiary while not incapacitated may direct from time to time.
- If the beneficiary is incapacitated, the custodial trustee shall expend so much or all of the custodial trust property as the custodial trustee considers advisable for the use and benefit of the beneficiary and individuals who were supported by the beneficiary when the beneficiary became incapacitated or who are legally entitled to support by the beneficiary. Expenditures may be made in the manner, when, and to the extent that the custodial trustee determines suitable and proper, without court order and without regard to other support, income, or property of the beneficiary.
- A custodial trustee may establish checking, savings, or other similar accounts of reasonable amounts under which either the custodial trustee or the beneficiary may withdraw funds from, or draw checks against, the accounts. Funds withdrawn from, or checks written against, the account by the beneficiary are distributions of custodial trust property by the custodial trustee to the beneficiary.
Source: L. 99: Entire article added, p. 1216, § 1, effective August 4.
OFFICIAL COMMENT
This section provides that the custodial trustee is obligated to follow the directions of the beneficiary who is not incapacitated in paying over or expending custodial trust property. If the beneficiary is incapacitated, this section imposes duties on the custodial trustee to apply funds for the beneficiary similar to those imposed on custodians for minors under Section 14 of UTMA. In addition, however, subsection (2) authorizes a custodial trustee to pay over or expend custodial trust property for the use and benefit of the incapacitated beneficiary's dependents who were supported by the beneficiary at the time the beneficiary became incapacitated or for whom there is a legal obligation to support.
The use-and-benefits standard for the expenditure of custodial property is intended to avoid any implication that the custodial trust property can be used only for the required support of the incapacitated beneficiary.
Subsection (3) allows a custodial trustee to maintain a bank account, of an amount reasonable under the circumstances, with the beneficiary whereby both the beneficiary and the custodial trustee may write checks on the account. This may be used as one method of making money available for the beneficiary's personal needs. Many incapacitated persons, unable to manage business affairs, are still competent to pay personal expenses. This type of arrangement would be important to them. A custodial trustee should maintain, of course, a separate bank account for use in managing the custodial trust property and investments.
An alternative approach might be taken to this section that refers to the distributive powers of a conservator under the laws of the enacting state, in the event that state should prefer that incorporation by reference. For example: [The custodial trustee has the distributive powers of a conservator under the Uniform Probate Code.]
15-1.5-110. Determination of incapacity - effect.
-
The custodial trustee shall administer the custodial trust as for an incapacitated beneficiary if:
- The custodial trust was created under section 15-1.5-105;
- The transferor has so directed in the instrument creating the custodial trust; or
- The custodial trustee has determined that the beneficiary is incapacitated.
-
A custodial trustee may determine that the beneficiary is incapacitated in reliance upon:
- Previous direction or authority given by the beneficiary while not incapacitated, including direction or authority pursuant to a durable power of attorney;
- The certificate of the beneficiary's physician; or
- Other persuasive evidence.
- If a custodial trustee for an incapacitated beneficiary reasonably concludes that the beneficiary's incapacity has ceased, or that circumstances concerning the beneficiary's ability to manage property and business affairs have changed since the creation of a custodial trust directing administration as for an incapacitated beneficiary, the custodial trustee may administer the trust as for a beneficiary who is not incapacitated.
- On petition of the beneficiary, the custodial trustee, or other person interested in the custodial trust property or the welfare of the beneficiary, the court shall determine whether the beneficiary is incapacitated.
- Absent determination of incapacity of the beneficiary under subsection (2) or (4) of this section, a custodial trustee who has reason to believe that the beneficiary is incapacitated shall administer the custodial trust in accordance with the provisions of this article applicable to an incapacitated beneficiary.
-
Incapacity of a beneficiary does not terminate:
- The custodial trust;
- Any designation of a successor custodial trustee;
- Rights or powers of the custodial trustee; or
- Any immunities of third persons acting on instructions of the custodial trustee.
Source: L. 99: Entire article added, p. 1216, § 1, effective August 4.
OFFICIAL COMMENT
This is one of the more important sections of the Act under which the custodial trustee may determine that the beneficiary is incapacitated so the trust will change from one subject to the control of the beneficiary to a discretionary trust for the beneficiary. Subsection (2) allows the custodial trustee to determine that the beneficiary is incapacitated provided the determination is based upon the certificate of the beneficiary's physician, the prior direction or authority of the beneficiary, or other reasonable evidence. That authority could be evidenced, for example, by a durable power of attorney executed by the beneficiary prior to becoming incapacitated even though that power of attorney is not otherwise effective to control management or termination of the custodial trust. Such a durable power of attorney could be given to a child, spouse, friend, or other trusted individual. In addition, specific authority is provided in subsection (4) for the beneficiary, the custodial trustee, or other interested person to seek a declaration from the court as to the capacity of the beneficiary for the purposes of this Act. This is important to the custodial trustee, as his duties and responsibilities change on the event of the beneficiary's incapacity.
This section is not a proceeding for the appointment of a conservator, and it is not contemplated that such a declaration would lead to court appointment of a conservator or guardian unless other factors would warrant such appointment. The existence of a comprehensive and well-managed custodial trust would be one factor that would tend to avoid the necessity for the appointment of a conservator or guardian of the estate.
This section also does not provide a proceeding to attack the legal competence of a transferor in setting up a trust under section 15-1.5-102. Rather, section 15-1.5-110 relates to a management matter in a validly established custodial trust.
Subsection (6) provides that the incapacity of the beneficiary does not terminate the custodial trust. If the beneficiary becomes incapacitated, the authority of the custodial trustee continues and the custodial trustee must follow the statutory provisions of the Act relating to managing custodial trusts for incapacitated individuals.
15-1.5-111. Exemption of third persons from liability.
-
A third person in good faith and without a court order may act on instructions of, or otherwise deal with, a person purporting to make a transfer as, or purporting to act in the capacity of, a custodial trustee. In the absence of knowledge to the contrary,
the third person is not responsible for determining:
- The validity of the purported custodial trustee's designation;
- The propriety of, or the authority under this article for, any action of the purported custodial trustee;
- The validity or propriety of an instrument executed or instruction given pursuant to this article either by the person purporting to make a transfer or declaration or by the purported custodial trustee; or
- The propriety of the application of property vested in the purported custodial trustee.
Source: L. 99: Entire article added, p. 1217, § 1, effective August 4.
OFFICIAL COMMENT
This section is based upon Section 16 of the UTMA and protects third persons who deal in good faith with the custodial trustee.
15-1.5-112. Liability to third persons.
- A claim based on a contract entered into by a custodial trustee acting in a fiduciary capacity, an obligation arising from the ownership or control of custodial trust property, or a tort committed in the course of administering the custodial trust may be asserted by a third person against the custodial trust property by proceeding against the custodial trustee in a fiduciary capacity, whether or not the custodial trustee or the beneficiary is personally liable.
-
A custodial trustee is not personally liable to a third person:
- On a contract properly entered into in a fiduciary capacity unless the custodial trustee fails to reveal that capacity or to identify the custodial trust in the contract; or
- For an obligation arising from control of custodial trust property or for a tort committed in the course of the administration of the custodial trust unless the custodial trustee is personally at fault.
- A beneficiary is not personally liable to a third person for an obligation arising from beneficial ownership of custodial trust property or for a tort committed in the course of administration of the custodial trust unless the beneficiary is personally in possession of the custodial trust property giving rise to the liability or is personally at fault.
- Subsections (2) and (3) of this section do not preclude actions or proceedings to establish liability of the custodial trustee or beneficiary to the extent the person sued is protected as the insured by liability insurance.
Source: L. 99: Entire article added, p. 1218, § 1 effective August 4.
OFFICIAL COMMENT
This section is patterned after Section 17 of the UTMA and that section in turn was based upon Sections 5-428 and 7-306 of the Uniform Probate Code limiting the liability of conservators and trustees. See also Restatement of Trusts, 2d Sections 265 and 277. The effect of this section is to limit the claims of third parties to recourse against custodial trust property as both the custodial trustee and the beneficiary are protected from personal liability absent personal fault on their part. This section does not alter the obligations between the custodial trustee and the beneficiary arising out of the administration of the estate and the accounting for that administration.
There may be cases in which a custodial trustee or beneficiary may have a right to possession of custodial trust property and may insure against liability arising out of possession or control of the property as a named insured, e.g., under homeowner's or automobile liability insurance. In such a case, the beneficiary should be permitted as a party defendant under subsection (4) but only to the extent of the protection of the liability insurance.
15-1.5-113. Declination, resignation, incapacity, death, or removal of custodial trustee - designation of successor custodial trustee.
- Before accepting the custodial trust property, a person designated as custodial trustee may decline to serve by notifying the person who made the designation, the transferor, or the transferor's legal representative. If an event giving rise to a transfer has not occurred, the substitute custodial trustee designated under section 15-1.5-103 becomes the custodial trustee, or, if a substitute custodial trustee has not been designated, the person who made the designation may designate a substitute custodial trustee pursuant to section 15-1.5-103. In other cases, the transferor or the transferor's legal representative may designate a substitute custodial trustee.
-
A custodial trustee who has accepted the custodial trust property may resign by:
- Delivering written notice to a successor custodial trustee, if any, the beneficiary, and, if the beneficiary is incapacitated, to the beneficiary's conservator, if any; and
- Transferring or registering, or recording an appropriate instrument relating to, the custodial trust property, in the name of, and delivering the records to, the successor custodial trustee identified under subsection (3) of this section.
- If a custodial trustee or successor custodial trustee is ineligible, resigns, dies, or becomes incapacitated, the successor designated under section 15-1.5-102 (7) or section 15-1.5-103 becomes custodial trustee. If there is no effective provision for a successor, the beneficiary, if not incapacitated, may designate a successor custodial trustee. If the beneficiary is incapacitated, or fails to act within ninety days after the ineligibility, resignation, death, or incapacity of the custodial trustee, the beneficiary's conservator becomes successor custodial trustee. If the beneficiary does not have a conservator or the conservator fails to act, the resigning custodial trustee may designate a successor custodial trustee.
- If a successor custodial trustee is not designated pursuant to subsection (3) of this section, the transferor, the legal representative of the transferor or of the custodial trustee, an adult member of the beneficiary's family, the guardian of the beneficiary, a person interested in the custodial trust property, or a person interested in the welfare of the beneficiary may petition the court to designate a successor custodial trustee.
- A custodial trustee who declines to serve or resigns, or the legal representative of a deceased or incapacitated custodial trustee, as soon as practicable, shall put the custodial trust property and records in the possession and control of the successor custodial trustee. The successor custodial trustee may enforce the obligation to deliver custodial trust property and records and becomes responsible for each item as received.
- A beneficiary, the beneficiary's conservator, an adult member of the beneficiary's family, a guardian of the beneficiary, a person interested in the custodial trust property, or a person interested in the welfare of the beneficiary may petition the court to remove the custodial trustee for cause and designate a successor custodial trustee, to require the custodial trustee to furnish a bond or other security for the faithful performance of fiduciary duties, or for other appropriate relief.
Source: L. 99: Entire article added, p. 1218, § 1, effective August 4.
OFFICIAL COMMENT
This section follows many of the provisions of Section 18 of UTMA with some substantive changes. It is designed to accommodate in a single section the circumstances in which a custodial trustee would be replaced by another custodial trustee. Under subsection (2), if the beneficiary is incapacitated, a custodial trustee who resigns must give written notice to both the beneficiary and the beneficiary's conservator if one exists. Under subsection (3), a beneficiary who is not incapacitated may designate, without limitation, a successor custodial trustee. If, however, the beneficiary fails to act or is incapacitated, the procedure to be followed is very similar to that found in UTMA except that the nonincapacitated beneficiary has 90 days to act and if the beneficiary has no conservator or if the conservator declines to act, the custodial trustee may eventually designate a successor custodial trustee.
Under subsection (6), the beneficiary, whether or not incapacitated, can petition the court to remove the custodial trustee for cause and to designate a successor trustee, or the court may require the custodial trustee to give bond or other appropriate relief.
This section, unlike Section 18 of UTMA, does not give the custodial trustee the general power to designate a successor custodial trustee but rather limits that power to the situation in which the procedure for designating successor custodial trustees by others has been exhausted.
15-1.5-114. Expenses, compensation, and bond of custodial trustee.
-
Except as otherwise provided in the instrument creating the custodial trust, in an agreement with the beneficiary, or by court order, a custodial trustee:
- Is entitled to reimbursement from custodial trust property for reasonable expenses incurred in the performance of fiduciary services;
- Has a noncumulative election, to be made no later than six months after the end of each calendar year, to charge a reasonable compensation for fiduciary services performed during that year; and
- Need not furnish a bond or other security for the faithful performance of fiduciary duties.
Source: L. 99: Entire article added, p. 1219, § 1, effective August 4.
OFFICIAL COMMENT
This section follows the pattern of Section 15 of the UTMA except it does subject the arrangements for payment of expenses, compensation, and bond to provisions in the custodial trust instrument or agreement of the beneficiary or court order.
As in UTMA, the provisions with regard to compensation are designed to avoid imputed compensation to the custodian who waives compensation and also to avoid the accumulation of claims for compensation until the termination of the custodial trust. Although the ability to control these matters by the trust instrument or agreement of the beneficiary seems to be implied, as was assumed in UTMA, it is here expressly stated because of the possibility of informal arrangements with persons as trustees.
15-1.5-115. Reporting and accounting by custodial trustee - determination of liability of custodial trustee.
-
-
Upon the acceptance of custodial trust property, the custodial trustee shall provide a written statement describing the custodial trust property and shall thereafter provide a written statement of the administration of the custodial trust property:
- Once each year;
- Upon request at reasonable times by the beneficiary or the beneficiary's legal representative;
- Upon resignation or removal of the custodial trustee; and
- Upon termination of the custodial trust.
- The statements must be provided to the beneficiary or to the beneficiary's legal representative, if any. Upon termination of the beneficiary's interest, the custodial trustee shall furnish a current statement to the person to whom the custodial trust property is to be delivered.
-
Upon the acceptance of custodial trust property, the custodial trustee shall provide a written statement describing the custodial trust property and shall thereafter provide a written statement of the administration of the custodial trust property:
- A beneficiary, the beneficiary's legal representative, an adult member of the beneficiary's family, a person interested in the custodial trust property, or a person interested in the welfare of the beneficiary may petition the court for an accounting by the custodial trustee or the custodial trustee's legal representative.
- A successor custodial trustee may petition the court for an accounting by a predecessor custodial trustee.
- In an action or proceeding under this article or in any other proceeding, the court may require or permit the custodial trustee or the custodial trustee's legal representative to account. The custodial trustee or the custodial trustee's legal representative may petition the court for approval of final accounts.
- If a custodial trustee is removed, the court shall require an accounting and order delivery of the custodial trust property and records to the successor custodial trustee and the execution of all instruments required for transfer of the custodial trust property.
- On petition of the custodial trustee or any person who could petition for an accounting, the court, after notice to interested persons, may issue instructions to the custodial trustee or review the propriety of the acts of a custodial trustee or the reasonableness of compensation determined by the custodial trustee for the services of the custodial trustee or others.
Source: L. 99: Entire article added, p. 1220, § 1, effective August 4.
OFFICIAL COMMENT
This section requires that the custodial trustee inform the beneficiary of the initiation of the trust and provide reasonably current reports of the administration of the custodial trust to the beneficiary or the beneficiary's legal representative. Even though some custodial trustees may act informally, it seems appropriate that both the trustee and the beneficiary be expected to exchange complete information concerning the administration of the trust at least once each year. In some cases, more frequent exchanges of information between the custodial trustee and beneficiary would be expected, e.g., when they use a bank account to which both have access. This is particularly true with regard to necessary information for tax reporting by the parties involved. This section assumes the usual minimum components of an account, i.e., assets and values at the beginning of the accounting period, receipts, and disbursements during the accounting period and assets and their values on hand or available for distribution at the close of the accounting period.
Subsection (1) identifies the necessary reports and accountings for the parties, and subsection (2) identifies a broad group of persons who may petition the court for an accounting by the custodial trustee or the custodial trustee's legal representative. Much of the section is drawn from Section 19 of the UTMA modified to fit the custodial trust. Subsection (6) recognizes the inherent power of the court to instruct trustees and review their actions. This paragraph is patterned after Uniform Probate Code Section 7-205.
15-1.5-116. Limitations of action against custodial trustee.
-
Except as provided in subsection (3) of this section, unless previously barred by adjudication, consent, or limitation, a claim for relief against a custodial trustee for accounting or breach of duty is barred as to a beneficiary, a person to whom custodial
trust property is to be paid or delivered, or the legal representative of an incapacitated or deceased beneficiary or payee:
- Who has received a final account or statement fully disclosing the matter unless an action or proceeding to assert the claim is commenced within two years after receipt of the final account or statement; or
- Who has not received a final account or statement fully disclosing the matter unless an action or proceeding to assert the claim is commenced within three years after the termination of the custodial trust.
- Except as provided in subsection (3) of this section, a claim for relief to recover from a custodial trustee for fraud, misrepresentation, or concealment related to the final settlement of the custodial trust or concealment of the existence of the custodial trust is barred unless an action or proceeding to assert the claim is commenced within five years after the termination of the custodial trust.
-
A claim for relief is not barred by this section if the claimant:
- Is a minor, until the earlier of two years after the claimant becomes an adult or dies;
- Is an incapacitated adult, until the earliest of two years after the appointment of a conservator, the removal of the incapacity, or the death of the claimant; or
- Was an adult, now deceased, who was not incapacitated, until two years after the claimant's death.
Source: L. 99: Entire article added, p. 1221, § 1, effective August 4.
OFFICIAL COMMENT
In an effort to provide as comprehensive a statute as possible to inform the parties of substantially all of their obligations and rights, statutes of limitation are provided in this section. The limitations provided in this section are derived from the Uniform Probate Code, Sections 1-106 and 7-307, and from the Missouri Custodial Act.
The nature of the limitations imposed by the section are illustrated by the situation in which a custodial trustee is removed, resigns, or dies. If the former custodial trustee accounts as required under section 15-1.5-113 on removal or resignation, or the deceased custodial trustee's personal representative accounts, the two-year limitation of subsection (1)(a) applies. Should the former custodial trustee or the personal representative fail to account, then, subsection (1)(b) would apply to limit the time in which a proceeding to assert the claim could be commenced. This time would begin to run on the date the trust terminated. Of course, if the claim is one for fraud or concealment, the longer time limitation of subsection (2) would apply. In any event, should the beneficiary become incapacitated or die before the applicable time limitation had expired, the tolling provision of subsection (3) could postpone the time bar until two years after removal of the disability or death.
15-1.5-117. Distribution on termination.
-
Upon termination of a custodial trust, the custodial trustee shall transfer the unexpended custodial trust property:
- To the beneficiary, if not incapacitated or deceased;
- To the conservator or other recipient designated by the court for an incapacitated beneficiary; or
-
Upon the beneficiary's death, in the following order:
- As last directed in a writing signed by the deceased beneficiary while not incapacitated and received by the custodial trustee during the life of the deceased beneficiary;
- To the survivor of multiple beneficiaries if survivorship is provided for pursuant to section 15-1.5-106;
- As designated in the instrument creating the custodial trust; or
- To the estate of the deceased beneficiary.
- If, when the custodial trust would otherwise terminate, the distributee is incapacitated, the custodial trust continues for the use and benefit of the distributee as beneficiary until the incapacity is removed or the custodial trust is otherwise terminated.
- Death of a beneficiary does not terminate the power of the custodial trustee to discharge obligations of the custodial trustee or beneficiary incurred before the termination of the custodial trust.
Source: L. 99: Entire article added, p. 1221, § effective August 4.
OFFICIAL COMMENT
This section controls distribution of the custodial trust property when the custodial trust is terminated under section 15-1.5-102(5). It is designed to provide for efficient and certain distribution without judicial proceedings. Subsection (1)(c) is an important provision for avoiding complications on distribution and provides that distribution may be controlled first, by the direction of the deceased beneficiary or second, by the custodial trust instrument (see sections 15-1.5-102, 15-1.5-106, and 15-1.5-118) and, only if no effective prior designation for the payment or distribution of the property on the death of the beneficiary has been made, shall it pass through the beneficiary's estate.
The direction to the custodial trustee by the beneficiary, who is not incapacitated, for distribution on termination of the custodial trust may be in any written form clearly identifying the distributee. For example, the following direction would be adequate under the statute:
I, ____ (name of beneficiary) hereby direct ____ (name of trustee) as custodial trustee, to transfer and pay the unexpended balance of the custodial trust property of which I am beneficiary to ____ as distributee on the termination of the trust at my death. In the event of the prior death of ____ above named as distributee, I designate ____ as distributee of the custodial trust property.
Signed (signature) _____ Beneficiary
Date _______
Receipt Acknowledged (signature) __________
Custodial Trustee
Date _________
15-1.5-118. Methods and forms for creating custodial trusts.
-
If a transaction, including a declaration with respect to or a transfer of specific property, otherwise satisfies applicable law, the criteria of section 15-1.5-102 are satisfied by:
-
The execution and either delivery to the custodial trustee or recording of an instrument in substantially the following form:
I, ____________ (name of transferor or name and representative capacity if a fiduciary), transfer to ____________ (name of trustee other than transferor), as custodial trustee for ____________ (name of beneficiary) as beneficiary and as distributee on termination of the trust in absence of direction by the beneficiary under the "Colorado Uniform Custodial Trust Act", the following: (insert a description of the custodial trust property legally sufficient to identify and transfer each item of property).
Dated: ________________ ______________________
(Signature); or
-
The execution and the recording or giving notice of its execution to the beneficiary of an instrument in substantially the following form:
I, ____________ (name of owner of property), declare that henceforth I hold as custodial trustee for ____________ (name of beneficiary other than transferor) as beneficiary and as distributee on termination of the trust in absence of direction by the beneficiary under the "Colorado Uniform Custodial Trust Act", the following: (insert a description of the custodial trust property legally sufficient to identify and transfer each item of property).
Dated: ________________ ______________________
(Signature).
-
The execution and either delivery to the custodial trustee or recording of an instrument in substantially the following form:
-
Customary methods of transferring or evidencing ownership of property may be used to create a custodial trust, including any of the following:
- Registration of a security in the name of a trust company, an adult other than the transferor, or the transferor if the beneficiary is other than the transferor, designated in substance: "as custodial trustee for (name of beneficiary) under the "Colorado Uniform Custodial Trust Act"";
- Delivery of a certificated security, or a document necessary for the transfer of an uncertificated security, together with any necessary endorsement, to an adult other than the transferor or to a trust company as custodial trustee, accompanied by an instrument in substantially the form prescribed in paragraph (a) of subsection (1) of this section;
- Payment of money or transfer of a security held in the name of a broker or a financial institution or its nominee to a broker or financial institution for credit to an account in the name of a trust company, an adult other than the transferor, or the transferor if the beneficiary is other than the transferor, designated in substance: "as custodial trustee for (name of beneficiary) under the "Colorado Uniform Custodial Trust Act"";
- Registration of ownership of a life or endowment insurance policy or annuity contract with the issuer in the name of a trust company, an adult other than the transferor, or the transferor if the beneficiary is other than the transferor, designated in substance: "as custodial trustee for (name of beneficiary) under the "Colorado Uniform Custodial Trust Act"";
- Delivery of a written assignment to an adult other than the transferor or to a trust company whose name in the assignment is designated in substance by the words: "as custodial trustee for (name of beneficiary) under the "Colorado Uniform Custodial Trust Act"";
- Irrevocable exercise of a power of appointment, pursuant to its terms, in favor of a trust company, an adult other than the donee of the power, or the donee who holds the power if the beneficiary is other than the donee, whose name in the appointment is designated in substance: "as custodial trustee for (name of beneficiary) under the "Colorado Uniform Custodial Trust Act"";
- Delivery of a written notification or assignment of a right to future payment under a contract to an obligor which transfers the right under the contract to a trust company, an adult other than the transferor, or the transferor if the beneficiary is other than the transferor, whose name in the notification or assignment is designated in substance: "as custodial trustee for (name of beneficiary) under the "Colorado Uniform Custodial Trust Act"";
- Execution, delivery, and recordation of a conveyance of an interest in real property in the name of a trust company, an adult other than the transferor, or the transferor if the beneficiary is other than the transferor, designated in substance: "as custodial trustee for (name of beneficiary) under the "Colorado Uniform Custodial Trust Act"";
-
Issuance of a certificate of title by an agency of a state or of the United States which evidences title to tangible personal property:
- Issued in the name of a trust company, an adult other than the transferor, or the transferor if the beneficiary is other than the transferor, designated in substance: "as custodial trustee for (name of beneficiary) under the "Colorado Uniform Custodial Trust Act""; or
- Delivered to a trust company or an adult other than the transferor or endorsed by the transferor to that person, designated in substance: "as custodial trustee for (name of beneficiary) under the "Colorado Uniform Custodial Trust Act""; or
- Execution and delivery of an instrument of gift to a trust company or an adult other than the transferor, designated in substance: "as custodial trustee for (name of beneficiary) under the "Colorado Uniform Custodial Trust Act"".
TRANSFER UNDER THE "COLORADO UNIFORM CUSTODIAL TRUST ACT"
DECLARATION OF TRUST UNDER THE "COLORADO UNIFORM CUSTODIAL TRUST ACT"
Source: L. 99: Entire article added, p. 1222, § 1, effective August 4.
OFFICIAL COMMENT
This section largely follows Section 9 of UTMA. It provides instructional detail for forms and methods of transferring assets that satisfy the requirements of the statute. Although many of the customary methods of transferring assets are identified, these methods are not intended to be exclusive since any type of property that can be transferred by any legal means is intended to be within the scope of the statute, provided the requirements of section 15-1.5-102 are met. The method of transfer or conveyance appropriate to the asset should be used, e.g., if land is involved, a deed or conveyance that satisfies the local requirements would be appropriate. In the effort to make the statute as self-contained and as fully explanatory as possible, these provisions for implementation are included in the statute rather than being appended or inserted in the Comments.
15-1.5-119. Applicable law.
- This article applies to a transfer or declaration creating a custodial trust that refers to this article if, at the time of the transfer or declaration, the transferor, beneficiary, or custodial trustee is a resident of or has its principal place of business in this state or custodial trust property is located in this state. The custodial trust remains subject to this article despite a later change in residence or principal place of business of the transferor, beneficiary, or custodial trustee, or removal of the custodial trust property from this state.
- A transfer made pursuant to an act of another state substantially similar to this article is governed by the law of that state and may be enforced in this state.
Source: L. 99: Entire article added, p. 1224, § 1, effective August 4.
OFFICIAL COMMENT
This section is designed to avoid confusion in the event a party or assets are removed from the state.
15-1.5-120. Uniformity of application and construction.
This article shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this article among states enacting it.
Source: L. 99: Entire article added, p. 1225, § 1, effective August 4.
15-1.5-121. Short title.
This article may be cited as the "Colorado Uniform Custodial Trust Act".
Source: L. 99: Entire article added, p. 1225, § 1, effective August 4.
15-1.5-122. Severability.
If any provision of this article or its application to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of this article which can be given effect without the invalid provision or application, and to this end the provisions of this article are severable.
Source: L. 99: Entire article added, p. 1225, § 1, effective August 4.
POWERS OF APPOINTMENT
ARTICLE 2 POWERS OF APPOINTMENT
15-2-101 to 15-2-304. (Repealed)
Editor's note: (1) This article was numbered as articles 1 to 3 of chapter 107, C.R.S. 1963. For amendments to this article prior to its repeal in 2015, consult the 2014 Colorado Revised Statutes and the Colorado statutory research explanatory note beginning on page vii in the front of this volume.
(2) Section 15-2-304 provided for the repeal of this article, effective July 1, 2015. (See L. 2014, pp. 782, 783.)
ARTICLE 2.5 UNIFORM POWERS OF APPOINTMENT ACT
Law reviews: For article, "Powers of Appointment Primer--Part 1: The Colorado Uniform Powers of Appointment Act", see 47 Colo. Law. 54 (June 2018).
Section
PREFATORY NOTE
Professor W. Barton Leach described the power of appointment as "the most efficient dispositive device that the ingenuity of Anglo-American lawyers has ever worked out." 24 A.B.A. J. 807 (1938). Powers of appointment are routinely included in trusts to add flexibility to the arrangement.
A power of appointment is the authority, acting in a nonfiduciary capacity, to designate recipients of beneficial ownership interests in, or powers of appointment over, the appointive property. An owner, of course, has this authority with respect to the owner's property. By creating a power of appointment, the owner typically confers this authority on someone else.
The power of appointment is a staple of modern estate-planning practice. However, many jurisdictions within the United States have very little statutory or case law on powers of appointment.
A comprehensive restatement of the law of powers of appointment was approved in 2010 and published in 2011 by the American Law Institute. See chapters 17-23 of the Restatement Third of Property: Wills and Other Donative Transfers.
This act draws heavily on that Restatement. The aim of this act is to codify the law of powers of appointment, or at least the portions of the law that are most amenable to codification.
The act is divided into six parts. Part 1 contains general provisions. Part 2 contains provisions concerning the creation, revocation, and amendment of a power of appointment. Part 3 addresses the exercise of a power of appointment. Part 4 contains provisions on the disclaimer or release of a power of appointment and on contracts to appoint or not to appoint. Part 5 concerns the rights of the powerholder's creditors in appointive property. Part 6 contains miscellaneous provisions.
After each section, there is a detailed Comment. The Comments explain, and should be read in conjunction with, the statutory text. The Comments also provide information and guidance about best practices in creating and exercising powers of appointment.
PART 1 GENERAL PROVISIONS
15-2.5-101. Short title.
This article may be cited as the "Colorado Uniform Powers of Appointment Act".
Source: L. 2014: Entire article added, (HB 14-1353), ch. 209, p. 772, § 1, effective July 1, 2015.
15-2.5-102. Definitions.
In this article:
- "Appointee" means a person to whom a powerholder makes an appointment of appointive property.
- "Appointive property" means property or property interest subject to a power of appointment.
-
"Blanket-exercise clause" means a clause in an instrument, which clause exercises a power of appointment and is not a specific-exercise clause. The term includes a clause that:
- Expressly uses the words "any power" in exercising any power of appointment the powerholder has;
- Expressly uses the words "any property" in appointing any property over which the powerholder has a power of appointment; or
- Disposes of all property subject to disposition by the powerholder.
- "Donor" means a person who creates a power of appointment.
- "Exclusionary power of appointment" means a power of appointment exercisable in favor of any one or more of the permissible appointees to the exclusion of the other permissible appointees.
- "General power of appointment" means a power of appointment exercisable in favor of the powerholder, the powerholder's estate, a creditor of the powerholder, or a creditor of the powerholder's estate.
- "Gift-in-default clause" means a clause identifying a taker in default of appointment.
- "Impermissible appointee" means a person who is not a permissible appointee.
- "Instrument" means a record.
- "Nongeneral power of appointment" means a power of appointment that is not a general power of appointment.
- "Permissible appointee" means a person in whose favor a powerholder may exercise a power of appointment.
- "Person" means an individual; estate; trust; business or nonprofit entity; public corporation; government or governmental subdivision, agency, or instrumentality; or other legal entity.
- "Powerholder" means a person in whom a donor creates a power of appointment.
- "Power of appointment" means a power that enables a powerholder acting in a nonfiduciary capacity to designate a recipient of an ownership interest in or another power of appointment over the appointive property. The term does not include a power of attorney.
-
"Presently exercisable power of appointment" means a power of appointment exercisable by the powerholder at the relevant time. The term:
-
Includes a power of appointment not exercisable until the occurrence of a specified event, the satisfaction of an ascertainable standard, or the passage of a specified time only after:
- The occurrence of the specified event;
- The satisfaction of the ascertainable standard; or
- The passage of the specified time; and
- Does not include a power exercisable only at the powerholder's death.
-
Includes a power of appointment not exercisable until the occurrence of a specified event, the satisfaction of an ascertainable standard, or the passage of a specified time only after:
- "Record" means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
- "Specific-exercise clause" means a clause in an instrument, which clause specifically refers to and exercises a particular power of appointment.
- "Taker in default of appointment" means a person who takes all or part of the appointive property to the extent the powerholder does not effectively exercise the power of appointment.
- "Terms of the instrument" means the manifestation of the intent of the maker of the instrument regarding the instrument's provisions as expressed in the instrument or as may be established by other evidence that would be admissible in a legal proceeding.
Source: L. 2014: Entire article added, (HB 14-1353), ch. 209, p. 772, § 1, effective July 1, 2015.
OFFICIAL COMMENT
Subsection (1) defines an appointee as the person to which a powerholder makes an appointment of appointive property. For the definition of the related term, "permissible appointee," see subsection 11.
Subsection (2) defines appointive property as the property or property interest subject to a power of appointment. The effective creation of a power of appointment requires that there be appointive property. See Section 201.
Subsections (3) and (17) introduce the distinction between blanket-exercise and specific-exercise clauses. A specific-exercise clause exercises and specifically refers to the particular power of appointment in question, using language such as the following: "I exercise the power of appointment conferred upon me by my father's will as follows: I appoint [fill in details of appointment]." In contrast, a blanket-exercise clause exercises "any" power of appointment the powerholder may have, appoints "any" property over which the powerholder may have a power of appointment, or disposes of all property subject to disposition by the powerholder. The use of specific-exercise clauses is encouraged; the use of blanket-exercise clauses is discouraged. See Section 301 and the accompanying Comment.
Subsections (4) and (13) define the donor and the powerholder. The donor is the person who created the power of appointment. The powerholder is the person in whom the power of appointment was conferred or in whom the power was reserved. The traditional, but potentially confusing, term for powerholder is "donee." See Restatement of Property § 319 (1940); Restatement Second of Property: Donative Transfers § 11.2 (1986); Restatement Third of Property: Wills and Other Donative Transfers § 17.2 (2011). In the case of a reserved power, the same person is both the donor and the powerholder.
Subsection (5) introduces the distinction between exclusionary and nonexclusionary powers of appointment. An exclusionary power is one in which the donor has authorized the powerholder to appoint to any one or more of the permissible appointees to the exclusion of the other permissible appointees. For example, a power to appoint "to such of my descendants as the powerholder may select" is exclusionary, because the powerholder may appoint to any one or more of the donor's descendants to the exclusion of the other descendants. In contrast, a nonexclusionary power is one in which the powerholder cannot make an appointment that excludes any permissible appointee, or one or more designated permissible appointees, from a share of the appointive property. An example of a nonexclusionary power is a power "to appoint to all and every one of my children in such shares and proportions as the powerholder shall select." Here, the powerholder is not under a duty to exercise the power; but, if the powerholder does exercise the power, the appointment must abide by the power's nonexclusionary nature. See Sections 301 and 305. An instrument creating a power of appointment is construed as creating an exclusionary power unless the terms of the instrument manifest a contrary intent. See Section 203. The typical power of appointment is exclusionary. And in fact, only a power of appointment whose permissible appointees are "defined and limited" can be nonexclusionary. For elaboration of the well-accepted term of art "defined and limited," see Section 205 and the accompanying Comment.
Subsections (6) and (10) explain the distinction between general and nongeneral powers of appointment. A general power of appointment enables the powerholder to exercise the power in favor of one or more of the following: the powerholder, the powerholder's estate, the creditors of the powerholder, or the creditors of the powerholder's estate, regardless of whether the power is also exercisable in favor of others. A nongeneral power of appointment--sometimes called a "special" power of appointment--cannot be exercised in favor of the powerholder, the powerholder's estate, the creditors of the powerholder, or the creditors of the powerholder's estate. Estate planners often classify nongeneral powers as being either "broad" or "limited," depending on the range of permissible appointees. A power to appoint to anyone in the world except the powerholder, the powerholder's estate, and the creditors of either would be an example of a broad nongeneral power. In contrast, a power in the donor's spouse to appoint among the donor's descendants would be an example of a limited nongeneral power.
An instrument creating a power of appointment is construed as creating a general power unless the terms of the instrument manifest a contrary intent. See Section 203. A power to revoke, amend, or withdraw is a general power of appointment if it is exercisable in favor of the powerholder, the powerholder's estate, or the creditors of either. If the settlor of a trust empowers a trustee or another person to change a power of appointment from a general power into a nongeneral power, or vice versa, the power is either general or nongeneral depending on the scope of the power at any particular time.
Subsection (7) defines the gift-in-default clause. In an instrument creating a power of appointment, the clause that identifies the taker in default is called the gift-in-default clause. A gift-in-default clause is not mandatory but is included in a well-drafted instrument.
Subsections (8) and (11) explain the distinction between impermissible and permissible appointees. The permissible appointees--known at common law as the "objects" --of a power of appointment may be narrowly defined (for example, "to such of the powerholder's descendants as the powerholder may select"), broadly defined (for example, "to such persons as the powerholder may select, except the powerholder, the powerholder's estate, the powerholder's creditors, or the creditors of the powerholder's estate"), or unlimited (for example, "to such persons as the powerholder may select"). A permissible appointee of a power of appointment does not, in that capacity, have a property interest that can be transferred to another. Otherwise, a permissible appointee could transform an impermissible appointee into a permissible appointee, exceeding the intended scope of the power and thereby violating the donor's intent. An appointment cannot benefit an impermissible appointee. See Section 307.
Subsection (9) defines the term "instrument" as either a writing or a record, depending on the choice made by the enacting jurisdiction. The drafting committee had no clear preference between the two options. Interestingly, there is no pre-existing Uniform Law definition of "instrument" outside the commercial context. See Uniform Commercial Code 3-104(b), 9-102(a)(47). The term is used without definition in, for example, the Uniform Probate Code, the Uniform Trust Code, and the Uniform Power of Attorney Act.
Subsections (12) and (16) contain the definitions of "person" and "record". With one exception, these are standard definitions approved by the Uniform Law Commission. The exception is that the word "trust" has been added to the definition of "person". Trust law in the United States is moving in the direction of viewing the trust as an entity, see Restatement Third of Trusts Introductory Note to Chapter 21, but does not yet do so.
Subsection (14) defines a power of appointment. A power of appointment is a power enabling the powerholder, acting in a nonfiduciary capacity, to designate recipients of ownership interests in or powers of appointment over the appointive property. (Powers held in a fiduciary capacity, such a trustee's power to "decant" property from one trust to another, are the subject of other uniform legislation.)
A power to revoke or amend a trust or a power to withdraw income or principal from a trust is a power of appointment, whether the power is reserved by the transferor or conferred on another. See Restatement Third of Trusts § 56, Comment b. A power to withdraw income or principal subject to an ascertainable standard is a postponed power, exercisable upon the satisfaction of the ascertainable standard. See the Comment to subsection (15), below.
A power to direct a trustee to distribute income or principal to another is a power of appointment.
In this act, a fiduciary distributive power is not a power of appointment. Fiduciary distributive powers include a trustee's power to distribute principal to or for the benefit of an income beneficiary, or for some other individual, or to pay income or principal to a designated beneficiary, or to distribute income or principal among a defined group of beneficiaries. Unlike the exercise of a power of appointment, the exercise of a fiduciary distributive power is subject to fiduciary standards. Unlike a power of appointment, a fiduciary distributive power does not lapse upon the death of the fiduciary, but survives in a successor fiduciary. Nevertheless, a fiduciary distributive power, like a power of appointment, cannot be validly exercised in favor of or for the benefit of someone who is not a permissible appointee.
A power over the management of property, sometimes called an administrative power, is not a power of appointment. For example, a power of sale coupled with a power to invest the proceeds of the sale, as commonly held by a trustee of a trust, is not a power of appointment but is an administrative power. A power of sale merely authorizes the person to substitute money for the property sold but does not authorize the person to alter the beneficial interests in the substituted property.
A power to designate or replace a trustee or other fiduciary is not a power of appointment. A power to designate or replace a trustee or other fiduciary involves property management and is a power to designate only the nonbeneficial holder of property.
A power of attorney is not a power of appointment. See Restatement of Property § 318, Comment h: "A power of attorney, in the commonest sense of that term, creates the relationship of principal and agent and is terminated by the death of the [principal]. In both of these characteristics such a power differs from a power of appointment. The latter does not create an agency relationship and, except in the case of a power reserved in the donor, it is usually expected that it will be exercised after the donor's death." The distinction is carried forward in Restatement Third of Property: Wills and Other Donative Transfers § 17.1, Comment j. See also Uniform Power of Attorney Act §§ 102(7) (defining the holder of a power of attorney as an agent), 110(a)(1) (providing that the principal's death terminates a power of attorney).
A power to create or amend a beneficiary designation, for example with respect to the proceeds of a life insurance policy or of a pension plan, is not a power of appointment. An instrument creating a power of appointment must, among other things, transfer the appointive property. See Section 201; Restatement Third of Property: Wills and Other Donative Transfers § 18.1.
On the authority of a powerholder to exercise the power of appointment by creating a new power of appointment, see Section 305. If a powerholder exercises a power by creating another power, the powerholder of the first power is the donor of the second power, and the powerholder of the second power is the appointee of the first power.
Subsection (15) introduces the distinctions among powers of appointment based upon when the power can be exercised. (A power is exercised when the instrument of exercise is effective. Thus, a power exercised by deed is exercised when the deed is effective. The law of deeds typically requires, among other things, intent, delivery, and acceptance. A power exercised by will is exercised when the will is effective--at the testator's death, not when the will is executed.)
There are three categories here: a power of appointment is presently exercisable, postponed, or testamentary.
A power of appointment is presently exercisable if it is exercisable at the time in question. Typically, a presently exercisable power of appointment is exercisable at the time in question during the powerholder's life and also at the powerholder's death, e.g., by the powerholder's will. Thus, a power of appointment that is exercisable "by deed or will" is a presently exercisable power. To take another example, a power of appointment exercisable by the powerholder's last unrevoked instrument in writing is a presently exercisable power, because the powerholder can make a present exercise irrevocable by explicitly so providing in the instrument exercising the power. See Restatement Third of Property: Wills and Other Donative Transfers § 17.4, Comment a.
A power of appointment is presently exercisable even though, at the time in question, the powerholder can only appoint an interest that is revocable or subject to a condition. For example, suppose that a trust directs the trustee to pay the income to the powerholder for life, then to distribute the principal by representation to the powerholder's surviving descendants. The trust further provides that, if the powerholder leaves no surviving descendants, the principal is to be distributed "to such individuals as the powerholder shall appoint." The powerholder has a presently exercisable power of appointment, but the appointive property is a remainder interest that is conditioned on the powerholder leaving no surviving descendants.
A power is a postponed power--sometimes known as a deferred power--if it is not yet exercisable until the occurrence of a specified event, the satisfaction of an ascertainable standard, or the passage of a specified time. A postponed power becomes presently exercisable upon the occurrence of the specified event, the satisfaction of the ascertainable standard, or the passage of the specified time. The second sentence in subsection (15) is modeled on Uniform Power of Attorney Act § 102(8).
A power is testamentary if it is not exercisable during the powerholder's life but only in the powerholder's will or in a nontestamentary instrument that is functionally similar to the powerholder's will, such as the powerholder's revocable trust that remains revocable until the powerholder's death. On the ability of a powerholder to exercise a testamentary power of appointment in such a revocable trust, see Section 304 and the accompanying Comment. See also Restatement Third of Property: Wills and Other Donative Transfers § 19.9, Comment b.
Subsection (18) defines a taker in default of appointment. A taker in default of appointment often called the "taker in default" --has a property interest that can be transferred to another. If a taker in default transfers the interest to another, the transferee becomes a taker in default.
Subsection (19) defines the "terms of the instrument" as the manifestation of the intent of the maker of the instrument regarding the instrument's provisions as expressed in the instrument or as may be established by other evidence that would be admissible in a legal proceeding. The maker of an instrument creating a power of appointment is the donor. The maker of an instrument exercising a power of appointment is the powerholder. This definition is a slightly modified version of the definition of "terms of a trust" in Uniform Trust Code § 103(18).
The definitions in this section are substantially consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers §§ 17.1 to 17.5 and the accompanying Commentary.
15-2.5-103. Governing law.
-
Unless the terms of the instrument creating a power of appointment manifest a contrary intent:
- The creation, revocation, or amendment of the power is governed by the law of the donor's domicile at the relevant time; and
- The exercise, release, or disclaimer of the power, or the revocation or amendment of the exercise, release, or disclaimer of the power, is governed by the law of the powerholder's domicile at the relevant time.
Source: L. 2014: Entire article added, (HB 14-1353), ch. 209, p. 774, § 1, effective July 1, 2015.
OFFICIAL COMMENT
This section provides default rules for determining the law governing the creation and exercise of, and related matters concerning, a power of appointment.
Unless the terms of the instrument creating the power provide otherwise, the actions of the donor--the creation, revocation, or amendment of the power--are governed by the law of the donor's domicile; and the actions of the powerholder--the exercise, release, or disclaimer, or the revocation or amendment thereof--are governed by the law of the powerholder's domicile.
In each case, the domicile is determined at the relevant time. For example, a donor's creation of a power is governed by the law of the donor's domicile at the time of the power's creation; and a donor's amendment of a power is governed by the law of the donor's domicile at the time of the amendment. Similarly, a powerholder's exercise of a power is governed by the law of the powerholder's domicile at the time of the exercise.
The standard "public policy" rules of choice of law naturally continue to apply. See, for example, Restatement Second of Conflict of Laws § 187.
Subsection (1)(b) is a departure from older law. The older position was that the law of the donor's domicile governs acts both of the donor (such as the creation of the power) and of the powerholder (such as the exercise of the power). See, e.g., Beals v. State Street Bank & Trust Co., 326 N.E.2d 896 (Mass. 1975); Bank of New York v. Black, 139 A.2d 393 (N.J. 1958).
Subsection (1)(b) adopts the modern view that acts of the powerholder should be governed by the law of the powerholder's domicile, because that is the law the powerholder (or the powerholder's lawyer) is likely to know. This approach is supported by Restatement Third of Property: Wills and Other Donative Transfers § 19.1, Comment e; Restatement Second of Conflict of Laws § 275, Comment c. It is also supported by Estate of McMullin, 417 A.2d 152 (Pa. 1980); White v. United States, 680 F.2d 1156 (7th Cir. 1982).
See generally, Restatement Third of Property: Wills and Other Donative Transfers § 19.1, Comment e; Restatement Second of Conflict of Laws § 275, Comment c.
15-2.5-104. Supplementation by common law and principles of equity.
Unless displaced by the particular provisions of this article, the principles of law and equity supplement its provisions.
Source: L. 2014: Entire article added, (HB 14-1353), ch. 209, p. 774, § 1, effective July 1, 2015.
OFFICIAL COMMENT
This act codifies those portions of the law of powers of appointment that are most amenable to codification. The act is supplemented by the common law and principles of equity. To determine the common law and principles of equity in a particular state, a court might look first to prior case law in the state and to more general sources, such as the Restatement Third of Property: Wills and Other Donative Transfers. The common law is not static but includes the contemporary and evolving rules of decision developed by the courts in exercise of their power to adapt the law to new situations and changing conditions. It also includes the traditional and broad equitable jurisdiction of the court, which the act in no way restricts.
The statutory text of the act is also supplemented by these Comments, which, like the Comments to any Uniform Act, may be relied on as a guide for interpretation. See Stern Oil Co. v. Brown, 817 N.W.2d 395 (S.D. 2012) (interpreting Uniform Commercial Code); Isbell v. Commercial Investment Associates, Inc., 644 S.E.2d 72 (Va. 2007) (interpreting Uniform Residential Landlord Tenant Act); Yale University v. Blumenthal, 621 A.2d 1304, 1307 (Conn. 1993) (interpreting Uniform Management of Institutional Funds Act); GMAC v. Anaya, 703 P.2d 169, 172 (N.M. 1985) (interpreting Uniform Commercial Code and describing the Comments as "persuasive" though "not binding"); Jack Davies, Legislative Law and Process in a Nutshell § 59-4 (3d ed. 2007).
The text of and Comment to this section are based on Uniform Trust Code § 106 and its accompanying Comment.
PART 2 CREATION, REVOCATION, AND AMENDMENT OF POWER OF APPOINTMENT
15-2.5-201. Creation of power of appointment.
-
A power of appointment is created only if:
-
The instrument creating the power:
- Is valid under applicable law; and
- Except as otherwise provided in subsection (2) of this section, transfers the appointive property; and
- The terms of the instrument creating the power manifest the donor's intent to create in a powerholder a power of appointment over the appointive property exercisable in favor of a permissible appointee.
-
The instrument creating the power:
- Subparagraph (II) of paragraph (a) of subsection (1) of this section does not apply to the creation of a power of appointment by the exercise of a power of appointment.
- A power of appointment may not be created in a deceased individual.
- Subject to an applicable rule against perpetuities, a power of appointment may be created in an unborn or unascertained powerholder.
Source: L. 2014: Entire article added, (HB 14-1353), ch. 209, p. 774, § 1, effective July 1, 2015. L. 2015: (1)(a)(II) amended, (SB 15-264), ch. 259, p. 951, § 37, effective August 5.
OFFICIAL COMMENT
An instrument can only create a power of appointment if, under applicable law, the instrument itself is valid (or partially valid, see the next paragraph). Thus, for example, a will creating a power of appointment must be valid under the law--including choice of law (see Section 103)--applicable to wills. An inter vivos trust creating a power of appointment must be valid under the law--including choice of law (see Section 103)--applicable to inter vivos trusts. In part, this requirement of validity means that the instrument must be properly executed to the extent other law imposes requirements of execution. In addition, the creator of the instrument must have the capacity to execute the instrument and be free from undue influence and other wrongdoing. On questions of capacity, see Restatement Third of Property: Wills and Other Donative Transfers §§ 8.1 (Mental Capacity) and 8.2 (Minority). On freedom from undue influence and other wrongdoing, see, e.g., Restatement Third of Property §§ 8.3 (Undue Influence, Duress, or Fraud). The ability of an agent or guardian to create a power of appointment on behalf of a principal or ward is determined by other law, such as the Uniform Power of Attorney Act or the Uniform Guardianship and Protective Proceedings Act.
The instrument need not be entirely valid. A partially valid instrument creates a power of appointment if the provisions creating the power are valid.
In addition to being valid in the relevant provisions, an instrument creating a power of appointment must transfer the appointive property. The creation of a power of appointment unlike the creation of a power of attorney--requires a transfer. See Restatement Third of Property: Wills and Other Donative Transfers § 18.1 ("A power of appointment is created by a transfer that manifests an intent to create a power of appointment."). The term "transfer" includes a declaration by an owner of property that the owner holds the property as trustee. Such a declaration necessarily entails a transfer of legal title from the owner-as-owner to the owner-as-trustee; it also entails a transfer of all or some of the equitable interests in the property from the owner to the trust's beneficiaries. See Restatement Third of Property: Wills and Other Donative Transfers § 7.1, Comment a.
The requirement of a transfer presupposes that the donor has the right to transfer the property. An ordinary individual cannot create a power of appointment over the Brooklyn Bridge. Less fancifully, a donor cannot create a power of appointment if doing so would circumvent a valid restriction on the transfer of the property. For example, interests in unincorporated business organizations may have transfer restrictions arising from statute, contract, or both. A donor cannot use the creation of a power of appointment to circumvent a valid restriction on transfer.
The one exception to the requirement of a transfer is stated in subsection (2): by necessity, the requirement of a transfer does not apply to the creation of a power of appointment by the exercise of a power of appointment. On the ability of a powerholder to exercise the power by creating a new power of appointment, see Section 305.
In addition to the aforementioned requirements, an instrument creating a power of appointment must manifest the donor's intent to create in one or more powerholders a power of appointment over appointive property. This manifestation of intent does not require the use of particular words or phrases (such as "power of appointment"), but careful drafting should leave no doubt about the transferor's intent.
Sometimes the instrument is poorly drafted, raising the question whether the donor intended to create a power of appointment. In such a case, determining the donor's intent is a process of construction. On construction generally, see Chapters 10, 11, and 12 of the Restatement Third of Property: Wills and Other Donative Transfers. See also, more specifically, Restatement Third of Property: Wills and Other Donative Transfers § 18.1, Comments b-g, containing many illustrations of language ambiguous about whether a power of appointment was intended and, for each illustration, offering guidance about how to construe the language.
The creation of a power of appointment requires that there be a donor, a powerholder (who may be the same as the donor), and appointive property. There must also be one or more permissible appointees, though these need not be restricted; a powerholder can be authorized to appoint to anyone. A donor is not required to designate a taker in default of appointment, although a well-drafted instrument will specify one or more takers in default.
Subsection (3) states the well-accepted rule that a power of appointment cannot be created in an individual who is deceased. If the powerholder dies before the effective date of an instrument purporting to confer a power of appointment, the power is not created, and an attempted exercise of the power is ineffective. (The effective date of a power of appointment created in a donor's will is the donor's death, not when the donor executes the will. The effective date of a power of appointment created in a donor's inter vivos trust is the date the trust is established, even if the trust is revocable. See Restatement Third of Property: Wills and Other Donative Transfers § 19.11, Comments b and c.)
Nor is a power of appointment created if all the possible permissible appointees of the power are deceased when the transfer that is intended to create the power becomes legally operative. If all the possible permissible appointees of a power die after the power is created and before the powerholder exercises the power, the power terminates.
A power of appointment is not created if the permissible appointees are so indefinite that it is impossible to identify any person to whom the powerholder can appoint. If the description of the permissible appointees is such that one or more persons are identifiable, but it is not possible to determine whether other persons are within the description, the power is validly created, but an appointment can only be made to persons who can be identified as within the description of the permissible appointees.
Subsection (4) explains that a power of appointment can be conferred on an unborn or unascertained powerholder, subject to any applicable rule against perpetuities. This is a postponed power. The power arises on the powerholder's birth or ascertainment. The language creating the power as well as other factors such as the powerholder's capacity under applicable law determine whether the power is then presently exercisable, postponed, or testamentary.
The rules of this section are consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers §§ 18.1 and 19.9 and the accompanying Commentary.
15-2.5-202. Nontransferability.
A powerholder may not transfer a power of appointment. If a powerholder dies without exercising or releasing a power, the power lapses.
Source: L. 2014: Entire article added, (HB 14-1353), ch. 209, p. 775, § 1, effective July 1, 2015.
OFFICIAL COMMENT
A power of appointment is nontransferable. The powerholder may not transfer the power to another person. (On the ability of the powerholder to exercise the power by conferring on a permissible appointee a new power of appointment over the appointive property, see Section 305.) If the powerholder dies without exercising or releasing the power, the power lapses. (If a power is held by multiple powerholders, which is rare, on the death of one powerholder that individual's power lapses but the power continues to be held by the surviving powerholders.) If the powerholder partially releases the power and dies without exercising the remaining part, the unexercised part of the power lapses. The power does not pass through the powerholder's estate to the powerholder's successors in interest.
The ability of an agent or guardian to create, revoke, exercise, or revoke the exercise of a power of appointment on behalf of a principal or ward is determined by other law, such as the Uniform Power of Attorney Act or the Uniform Guardianship and Protective Proceedings Act.
The rule of this section is consistent with, and this Comment draws on, the Restatement Third of Property: Wills and Other Donative Transfers § 17.1, Comment b.
15-2.5-203. Presumption of unlimited authority.
-
Subject to section 15-2.5-205, and unless the terms of the instrument creating a power of appointment manifest a contrary intent, the power is:
- Presently exercisable;
- Exclusionary; and
- Except as otherwise provided in section 15-2.5-204, general.
Source: L. 2014: Entire article added, (HB 14-1353), ch. 209, p. 775, § 1, effective July 1, 2015.
OFFICIAL COMMENT
In determining which type of power of appointment is created, the general principle of construction, articulated in this section, is that a power falls into the category giving the powerholder the maximum discretionary authority except to the extent the terms of the instrument creating the power restrict the powerholder's authority. Maximum discretion confers on the powerholder the flexibility to alter the donor's disposition in response to changing conditions.
In accordance with this presumption of unlimited authority, a power is general unless the terms of the creating instrument specify that the powerholder cannot exercise the power in favor of the powerholder, the powerholder's estate, or the creditors of either. A power is presently exercisable unless the terms of the creating instrument specify that the power can only be exercised at some later time or in some document such as a will that only takes effect at some later time. A power is exclusionary unless the terms of the creating instrument specify that a permissible appointee must receive a certain amount or portion of the appointive assets if the power is exercised.
This general principle of construction applies, unless the terms of the instrument creating the power of appointment provide otherwise. A well-drafted instrument intended to create a nongeneral or testamentary or nonexclusionary power will use clear language to achieve the desired objective. Not all instruments are well-drafted, however. A court may have to construe the terms of the instrument to discern the donor's intent. For principles of construction applicable to the creation of a power of appointment, see Restatement Third of Property: Wills and Other Donative Transfers Chapters 17 and 18, and the accompanying Commentary, containing many examples.
15-2.5-204. Exception to presumption of unlimited authority.
-
Unless the terms of the instrument creating a power of appointment manifest a contrary intent, the power is nongeneral if:
- The power is exercisable only at the powerholder's death; and
- The permissible appointees of the power are a defined and limited class that does not include the powerholder's estate, the powerholder's creditors, or the creditors of the powerholder's estate.
Source: L. 2014: Entire article added, (HB 14-1353), ch. 209, p. 775, § 1, effective July 1, 2015.
OFFICIAL COMMENT
This section is designed to remedy a recurring drafting mistake. A testamentary power of appointment created in a defined and limited class that happens to include the powerholder is usually intended to be a nongeneral power. For example, a testamentary power created in one of the donor's descendants (such as the donor's child or grandchild) to appoint among the donor's "descendants" or "issue" is typically intended to be a nongeneral power. See, for example, PLR 201229005 (stating the ruling of the Internal Revenue Service that a testamentary power of appointment in the donor's son, exercisable in favor of the donor's "issue," is a nongeneral power for purposes of 26 U.S.C. § 2041). Accordingly, the presumption of this Section is that such a power is nongeneral.
On the meaning of the well-accepted term of art "defined and limited," see the Comment to Section 205. See also Restatement Third of Property: Wills and Other Donative Transfers § 17.5, Comment c.
15-2.5-205. Rules of classification - definitions.
- In this section, "adverse party" means a person with a substantial beneficial interest in property, which interest would be affected adversely by a powerholder's exercise or nonexercise of a power of appointment in favor of the powerholder, the powerholder's estate, a creditor of the powerholder, or a creditor of the powerholder's estate.
- If a powerholder may exercise a power of appointment only with the consent or joinder of an adverse party, the power is nongeneral.
- If the permissible appointees of a power of appointment are not defined and limited, the power is exclusionary.
Source: L. 2014: Entire article added, (HB 14-1353), ch. 209, p. 775, § 1, effective July 1, 2015.
OFFICIAL COMMENT
Subsection (2) states a well-accepted and mandatory exception to the presumption of unlimited authority articulated in Section 203. If a power of appointment can be exercised only with the consent or joinder of an adverse party, the power is not a general power. An adverse party is an individual who has a substantial beneficial interest in the trust or other property arrangement that would be adversely affected by the exercise or nonexercise of the power in favor of the powerholder, the powerholder's estate, or the creditors of either. In this context, the word "substantial" is not subject to precise definition but must be determined in light of all the facts and circumstances. Consider the following examples.
Example 1. D transferred property in trust, directing the trustee "to pay the income to D's son S for life, remainder in corpus to such person or persons as S, with the joinder of X, shall appoint; in default of appointment, remainder to X." S's power is not a general power because X meets the definition of an adverse party.
Example 2. Same facts as Example 1, except that S's power is exercisable with the joinder of Y rather than with the joinder of X. Y has no property interest that could be adversely affected by the exercise of the power. Because Y is not an adverse party, S's power is general.
Whether the party whose consent or joinder is required is adverse or not is determined at the time in question. Consider the following example.
Example 3. Same facts as Example 2, except that, one month after D's creation of the trust, X transfers the remainder interest to Y. Before the transfer, Y is not an adverse party and S's power is general. After the transfer, Y is an adverse party and S's power is nongeneral.
Subsection (3) also states a longstanding mandatory rule. Only a power of appointment whose permissible appointees are defined and limited can be nonexclusionary. "Defined and limited" in this context is a well-accepted term of art. For elaboration and examples, see Restatement Third of Property: Wills and Other Donative Transfers § 17.5, Comment c. In general, permissible appointees are "defined and limited" if they are defined and limited to a reasonable number. Typically, permissible appointees who are defined and limited are described in class-gift terms: a single- generation class such as "children," "grandchildren," "brothers and sisters," or "nieces and nephews," or a multiple-generation class such as "issue" or "descendants" or "heirs." Permissible appointees need not be described in class-gift terms to be defined and limited, however. The permissible appointees are also defined and limited if one or more permissible appointees are designated by name or otherwise individually identified.
If the permissible appointees are not defined and limited, the power is exclusionary irrespective of the donor's intent. A power exercisable, for example, in favor of "such person or persons other than the powerholder, the powerholder's estate, the creditors of the powerholder, and the creditors of the powerholder's estate" is an exclusionary power. An attempt by the donor to require the powerholder to appoint at least $X to each permissible appointee of the power is ineffective, because the permissible appointees of the power are so numerous that it would be administratively impossible to carry out the donor's expressed intent. The donor's expressed restriction is disregarded, and the powerholder may exclude any one or more of the permissible appointees in exercising the power.
In contrast, a power to appoint only to the powerholder's creditors or to the creditors of the powerholder's estate is a power in favor of a defined and limited class. Such a power could be nonexclusionary if, for example, the terms of the instrument creating the power provide that the power is a power to appoint "to such of the powerholder's estate creditors as the powerholder shall by will appoint, but if the powerholder exercises the power, the powerholder must appoint $X to a designated estate creditor or must appoint in full satisfaction of the powerholder's debt to a designated estate creditor."
If a power is determined to be nonexclusionary, it is to be inferred that the donor intends to require an appointment to confer a reasonable benefit upon each mandatory appointee. An appointment under which a mandatory appointee receives nothing, or only a nominal sum, violates this requirement and is forbidden. This doctrine is known as the doctrine forbidding illusory appointments. For elaboration, see Restatement Third of Property: Wills and Other Donative Transfers § 17.5, Comment j.
The terms of the instrument creating a power of appointment sometimes provide that no appointee shall receive any share in default of appointment unless the appointee consents to allow the amount of the appointment to be taken into account in calculating the fund to be distributed in default of appointment. This "hotchpot" language is used to minimize unintended inequalities of distribution among permissible appointees. Such a clause does not make the power nonexclusionary, because the terms do not prevent the powerholder from making an appointment that excludes a permissible appointee. See Restatement Third of Property: Wills and Other Donative Transfers § 17.5, Comment k.
The rules of this section are consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers §§ 17.3 to 17.5 and the accompanying Introductory Note and Commentary.
15-2.5-206. Power of the donor to revoke or amend.
-
A donor may revoke or amend a power of appointment only to the extent that:
- The instrument creating the power is revocable by the donor; or
- The donor reserves a power of revocation or amendment in the instrument creating the power of appointment.
Source: L. 2014: Entire article added, (HB 14-1353), ch. 209, p. 776, § 1, effective July 1, 2015.
OFFICIAL COMMENT
The donor of a power of appointment has the authority to revoke or amend the power only to the extent the instrument creating the power is revocable by the donor