OFFICIAL COMMENT

The Uniform Trust Code, while comprehensive, applies only to express trusts. Excluded from the Code's coverage are resulting and constructive trusts, which are not express trusts but remedial devices imposed by law. For the requirements for creating an express trust and the methods by which express trusts are created, see Sections 401-402. The Code does not attempt to distinguish express trusts from other legal relationships with respect to property, such as agencies and contracts for the benefit of third parties. For the distinctions, see Restatement (Third) of Trusts §§ 2, 5 (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts §§ 2, 5-16C (1959).

The Uniform Trust Code is directed primarily at trusts that arise in an estate planning or other donative context, but express trusts can arise in other contexts. For example, a trust created pursuant to a divorce action would be included, even though such a trust is not donative but is created pursuant to a bargained-for exchange. Commercial trusts come in numerous forms, including trusts created pursuant to a state business trust act and trusts created to administer specified funds, such as to pay a pension or to manage pooled investments. Commercial trusts are often subject to special-purpose legislation and case law, which in some respects displace the usual rules stated in this Code. See John H. Langbein, The Secret Life of the Trust: The Trust as an Instrument of Commerce, 107 Yale L.J. 165 (1997).

Express trusts also may be created by means of court judgment or decree. Examples include trusts created to hold the proceeds of personal injury recoveries and trusts created to hold the assets of a protected person in a conservatorship proceeding. See, e.g., Uniform Probate Code § 5-411(a)(4).

NORTH CAROLINA COMMENT

This section modifies the Uniform Trust Code, which provides that the Code applies to "express trusts," by bringing forward the provisions of former G.S. 36A-22.1(5) of the Trust Administration Act which give specific examples of what is and is not included within the term "express trusts". The Uniform Trust Code did not list any such examples.

Effect of Amendments. - Session Laws 2012-56, s. 8, effective October 1, 2012, substituted "Payable on Death accounts as defined in G.S. 53C-6-7" for "trust accounts as defined in G.S. 53-146.2."

CASE NOTES

Applied in In re Foreclosure of the Deed of Trust of Vogler Realty, Inc., 365 N.C. 389, 722 S.E.2d 459 (2012).

Cited in Belk v. Belk, 221 N.C. App. 1, 728 S.E.2d 356 (2012).

OFFICIAL COMMENT

A definition of "action" (paragraph (1)) is included for drafting convenience, to avoid having to clarify in the numerous places in the Uniform Trust Code where reference is made to an "action" by the trustee that the term includes a failure to act.

The definition of "ascertainable standard" (paragraph (2)) was added to the Code by a 2004 amendment. The term was previously used only in and defined in Section 814. Other 2004 amendments add the term to Sections 103(11) and 504, necessitating the need to move the definition in Section 814 to the list of defined terms in Section 103 and thereby make it applicable throughout the Code.

"Beneficiary" (paragraph (3)) refers only to a beneficiary of a trust as defined in the Uniform Trust Code. In addition to living and ascertained individuals, beneficiaries may be unborn or unascertained. Pursuant to Section 402(b), a trust is valid only if a beneficiary can be ascertained now or in the future. The term "beneficiary" includes not only beneficiaries who received their interests under the terms of the trust but also beneficiaries who received their interests by other means, including by assignment, exercise of a power of appointment, resulting trust upon the failure of an interest, gap in a disposition, operation of an antilapse statute upon the predecease of a named beneficiary, or upon termination of the trust. The fact that a person incidentally benefits from the trust does not mean that the person is a beneficiary. For example, neither a trustee nor persons hired by the trustee become beneficiaries merely because they receive compensation from the trust. See Restatement (Third) of Trusts Section 48 cmt. c (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Section 126 cmt. c (1959).

While the holder of a power of appointment is not considered a trust beneficiary under the common law of trusts, holders of powers are classified as beneficiaries under the Uniform Trust Code. Holders of powers are included on the assumption that their interests are significant enough that they should be afforded the rights of beneficiaries. A power of appointment as used in state trust law and this Code is as defined in state property law and not federal tax law although there is considerable overlap between the two definitions.

A power of appointment is authority to designate the recipients of beneficial interests in property. See Restatement (Second) of Property: Donative Transfers Section 11.1 (1986). A power is either general or nongeneral and either presently exercisable or not presently exercisable. A general power of appointment is a power exercisable in favor of the holder of the power, the power holder's creditors, the power holder's estate, or the creditors of the power holder's estate. See Restatement (Second) of Property: Donative Transfers Section 11.4 (1986). All other powers are nongeneral. A power is presently exercisable if the power holder can currently create an interest, present or future, in an object of the power. A power of appointment is not presently exercisable if exercisable only by the power holder's will or if its exercise is not effective for a specified period of time or until occurrence of some event. See Restatement (Second) of Property: Donative Transfers Section 11.5 (1986). Powers of appointment may be held in either a fiduciary or nonfiduciary capacity. The definition of "beneficiary" excludes powers held by a trustee but not powers held by others in a fiduciary capacity.

While all categories of powers of appointment are included within the definition of "beneficiary," the Uniform Trust Code elsewhere makes distinctions among types of powers. Under Section 302, the holder of a testamentary general power of appointment may represent and bind persons whose interests are subject to the power. A "power of withdrawal" (paragraph (11)) is defined as a presently exercisable general power of appointment other than a power exercisable by a trustee and limited by an ascertainable standard, or a power which is exercisable by another 14 person only upon consent of the trustee or a person holding an adverse interest. The exception for a power exercisable by a trustee that is limited by an ascertainable standard was added in 2004. For a discussion of this amendment, see the comment on the 2004 Amendment to Section 504, which made a related change.

The definition of "beneficiary" includes only those who hold beneficial interests in the trust. Because a charitable trust is not created to benefit ascertainable beneficiaries but to benefit the community at large (see Section 405(a)), persons receiving distributions from a charitable trust are not beneficiaries as that term is defined in this Code. However, pursuant to Section 110(b), also granted rights of a qualified beneficiary under the Code are charitable organizations expressly designated to receive distributions under the terms of a charitable trust but only if there beneficial interests sufficient to satisfy the definition of qualified beneficiary for a noncharitable trust.

The Uniform Trust Code leaves certain issues concerning beneficiaries to the common law. Any person with capacity to take and hold legal title to intended trust property has capacity to be a beneficiary. See Restatement (Third) of Trusts Section 43 (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Sections 116-119 (1959). Except as limited by public policy, the extent of a beneficiary's interest is determined solely by the settlor's intent. See Restatement (Third) of Trusts Section 49 (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Sections 127-128 (1959). While most beneficial interests terminate upon a beneficiary's death, the interest of a beneficiary may devolve by will or intestate succession the same as a corresponding legal interest. See Restatement (Third) of Trusts Section 55(1) (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Sections 140, 142 (1959).

Under the Uniform Trust Code, when a trust has both charitable and noncharitable beneficiaries only the charitable portion qualifies as a "charitable trust" (paragraph (4)). The great majority of the Code's provisions apply to both charitable and noncharitable trusts without distinction. The distinctions between the two types of trusts are found in the requirements relating to trust creation and modification. Pursuant to Sections 405 and 413, a charitable trust must have a charitable purpose and charitable trusts may be modified or terminated under the doctrine of cy pres. Also, Section 411 allows a noncharitable trust to in certain instances be terminated by its beneficiaries while charitable trusts do not have beneficiaries in the usual sense. To the extent of these distinctions, a split-interest trust is subject to two sets of provisions, one applicable to the charitable interests, the other the noncharitable.

For discussion of the definition of "conservator" (paragraph (5)), see the definition of "guardian" (paragraph (7)).

To encourage trustees to accept and administer trusts containing real property, the Uniform Trust Code contains several provisions designed to limit exposure to possible liability for violation of "environmental law" (paragraph (6)). Section 701(c)(2) authorizes a nominated 15 trustee to investigate trust property to determine potential liability for violation of environmental law or other law without accepting the trusteeship. Section 816(13) grants a trustee comprehensive and detailed powers to deal with property involving environmental risks. Section 1010(b) immunizes a trustee from personal liability for violation of environmental law arising from the ownership and control of trust property.

Under the Uniform Trust Code, a "guardian" (paragraph (7)) makes decisions with respect to personal care; a "conservator" (paragraph (5)) manages property. The terminology used is that employed in Article V of the Uniform Probate Code, and in its free-standing Uniform Guardianship and Protective Proceedings Act. Enacting jurisdictions not using these terms in the defined sense should substitute their own terminology. For this reason, both terms have been placed in brackets. The definition of "guardian" accommodates those jurisdictions which allow appointment of a guardian by a parent or spouse in addition to appointment by a court. Enacting jurisdictions which allow appointment of a guardian solely by a court should delete the bracketed language "a parent, or a spouse."

The phrase "interests of the beneficiaries" (paragraph (8)) is used with some frequency in the Uniform Trust Code. The definition clarifies that the interests are as provided in the terms of the trust and not as determined by the beneficiaries. Absent authority to do so in the terms of the trust, Section 108 prohibits a trustee from changing a trust's principal place of administration if the transfer would violate the trustee's duty to administer the trust at a place appropriate to the interests of the beneficiaries. Section 706(b) conditions certain of the grounds for removing a trustee on the court's finding that removal of the trustee will best serve the interests of the beneficiaries. Section 801 requires the trustee to administer the trust in the interests of the beneficiaries, and Section 802 makes clear that a trustee may not place its own interests above those of the beneficiaries. Section 808(d) requires the holder of a power to direct who is subject to a fiduciary obligation to act with regard to the interests of the beneficiaries. Section 1002(b) may impose greater liability on a cotrustee who commits a breach of trust with reckless indifference to the interests of the beneficiaries. Section 1008 invalidates an exculpatory term to the extent it relieves a trustee of liability for breach of trust committed with reckless indifference to the interests of the beneficiaries.

"Jurisdiction" (paragraph (9)), when used with reference to a geographic area, includes a state or country but is not necessarily so limited. Its precise scope will depend on the context in which it is used. "Jurisdiction" is used in Sections 107 and 403 to refer to the place whose law will govern the trust. The term is used in Section 108 to refer to the trust's principal place of administration. The term is used in Section 816 to refer to the place where the trustee may appoint an ancillary trustee and to the place in whose courts the trustee can bring and defend legal proceedings.

The definition of "property" (paragraph (12)) is intended to be as expansive as possible and to encompass anything that may be the subject of ownership. Included are choses in action, claims, and interests created by beneficiary designations under policies of insurance, financial 16 instruments, and deferred compensation and other retirement arrangements, whether revocable or irrevocable. Any such property interest is sufficient to support creation of a trust. See Section 401 comment.

Due to the difficulty of identifying beneficiaries whose interests are remote and contingent, and because such beneficiaries are not likely to have much interest in the day-to-day affairs of the trust, the Uniform Trust Code uses the concept of "qualified beneficiary" (paragraph (13)) to limit the class of beneficiaries to whom certain notices must be given or consents received. The definition of qualified beneficiaries is used in Section 705 to define the class to whom notice must be given of a trustee resignation. The term is used in Section 813 to define the class to be kept informed of the trust's administration. Section 417 requires that notice be given to the qualified beneficiaries before a trust may be combined or divided. Actions which may be accomplished by the consent of the qualified beneficiaries include the appointment of a successor trustee as provided in Section 704. Prior to transferring a trust's principal place of administration, Section 108(d) requires that the trustee give at least 60 days notice to the qualified beneficiaries.

The qualified beneficiaries consist of the beneficiaries currently eligible to receive a distribution from the trust together with those who might be termed the first-line remaindermen. These are the beneficiaries who would become eligible to receive distributions were the event triggering the termination of a beneficiary's interest or of the trust itself to occur on the date in question. Such a terminating event will typically be the death or deaths of the beneficiaries currently eligible to receive the income. Should a qualified beneficiary be a minor, incapacitated, or unknown, or a beneficiary whose identity or location is not reasonably ascertainable, the representation and virtual representation principles of Article 3 may be employed, including the possible appointment by the court of a representative to represent the beneficiary's interest.

The qualified beneficiaries who take upon termination of the beneficiary's interest or of the trust can include takers in default of the exercise of a power of appointment. The term can also include the persons entitled to receive the trust property pursuant to the exercise of a power of appointment. Because the exercise of a testamentary power of appointment is not effective until the testator's death and probate of the will, the qualified beneficiaries do not include appointees under the will of a living person. Nor would the term include the objects of an unexercised inter vivos power.

Charitable trusts and trusts for a valid noncharitable purpose do not have beneficiaries in the usual sense. However, certain persons, while not technically beneficiaries, do have an interest in seeing that the trust is enforced. Section 110 expands the definition of qualified beneficiaries to encompass this wider group. Section 110(b) grants the rights of qualified beneficiaries to charitable organizations expressly designated under the terms of a charitable trust and whose beneficial interests are sufficient to satisfy the definition of qualified beneficiary for a noncharitable trust. Section 110(c) also grants the rights of qualified beneficiaries to a person appointed by the terms of the trust or by the court to enforce a trust created for an animal or other noncharitable purpose. Section 110(d) is an optional provision granting the rights of a qualified beneficiary with respect to a charitable trust to the attorney general of the enacting jurisdiction.

The definition of "revocable" (paragraph (14)) clarifies that revocable trusts include only trusts whose revocation is substantially within the settlor's control. The fact that the settlor becomes incapacitated does not convert a revocable trust into an irrevocable trust. The trust remains revocable until the settlor's death or the power of revocation is released. The consequences of classifying a trust as revocable are many. The Uniform Trust Code contains provisions relating to liability of a revocable trust for payment of the settlor's debts (Section 505), the standard of capacity for creating a revocable trust (Section 601), the procedure for revocation (Section 602), the subjecting of the beneficiaries' rights to the settlor's control (Section 603), the period for contesting a revocable trust (Section 604), the power of the settlor of a revocable trust to direct the actions of a trustee (Section 808(a)), notice to the qualified beneficiaries upon the settlor's death (Section 813(b)), and the liability of a trustee of a revocable trust for the obligations of a partnership of which the trustee is a general partner (Section 1011(d)).

Because under Section 603(b) the holder of a power of withdrawal has the rights of a settlor of a revocable trust, the definition of "power of withdrawal" (paragraph (11)), and "revocable" (paragraph (14)) are similar. Both exclude individuals who can exercise their power only with the consent of the trustee or person having an adverse interest although the definition of "power of withdrawal" excludes powers subject to an ascertainable standard, a limitation which is not present in the definition of "revocable"

The definition of "settlor" (paragraph (15)) refers to the person who creates, or contributes property to, a trust, whether by will, self-declaration, transfer of property to another person as trustee, or exercise of a power of appointment. For the requirements for creating a trust, see Section 401. Determining the identity of the "settlor" is usually not an issue. The same person will both sign the trust instrument and fund the trust. Ascertaining the identity of the settlor becomes more difficult when more than one person signs the trust instrument or funds the trust. The fact that a person is designated as the "settlor" by the terms of the trust is not necessarily determinative. For example, the person who executes the trust instrument may be acting as the agent for the person who will be funding the trust. In that case, the person funding the trust, and not the person signing the trust instrument, will be the settlor. Should more than one person contribute to a trust, all of the contributors will ordinarily be treated as settlors in proportion to their respective contributions, regardless of which one signed the trust instrument. See Section 602(b).

In the case of a revocable trust employed as a will substitute, gifts to the trust's creator are sometimes made by placing the gifted property directly into the trust. To recognize that such a donor is not intended to be treated as a settlor, the definition of "settlor" excludes a contributor to a trust that is revocable by another person or over which another person has a power of withdrawal. Thus, a parent who contributes to a child's revocable trust would not be treated as 18 one of the trust's settlors. The definition of settlor would treat the child as the sole settlor of the trust to the extent of the child's proportionate contribution. Pursuant to Section 603(b), the child's power of withdrawal over the trust would also result in the child being treated as the settlor with respect to the portion of the trust attributable to the parent's contribution.

Ascertaining the identity of the settlor is important for a variety of reasons. It is important for determining rights in revocable trusts. See Sections 505(a)(1), (3) (creditor claims against settlor of revocable trust), 602 (revocation or modification of revocable trust), and 604 (limitation on contest of revocable trust). It is also important for determining rights of creditors in irrevocable trusts. See Section 505(a)(2) (creditors of settlor can reach maximum amount trustee can distribute to settlor). While the settlor of an irrevocable trust traditionally has no continuing rights over the trust except for the right under Section 411 to terminate the trust with the beneficiaries' consent, the Uniform Trust Code also authorizes the settlor of an irrevocable trust to petition for removal of the trustee and to enforce or modify a charitable trust. See Sections 405(c) (standing to enforce charitable trust), 413 (doctrine of cy pres), and 706 (removal of trustee).

"Spendthrift provision" (paragraph (16)) means a term of a trust which restrains the transfer of a beneficiary's interest, whether by a voluntary act of the beneficiary or by an action of a beneficiary's creditor or assignee, which at least as far as the beneficiary is concerned, would be involuntary. A spendthrift provision is valid under the Uniform Trust Code only if it restrains both voluntary and involuntary transfer. For a discussion of this requirement and the effect of a spendthrift provision in general, see Section 502. The insertion of a spendthrift provision in the terms of the trust may also constitute a material purpose sufficient to prevent termination of the trust by agreement of the beneficiaries under Section 411, although the Code does not presume this result.

"Terms of a trust" (paragraph (18)) is a defined term used frequently in the Uniform Trust Code. While the wording of a written trust instrument is almost always the most important determinant of a trust's terms, the definition is not so limited. Oral statements, the situation of the beneficiaries, the purposes of the trust, the circumstances under which the trust is to be administered, and, to the extent the settlor was otherwise silent, rules of construction, all may have a bearing on determining a trust's meaning. See Restatement (Third) of Trusts Section 4 cmt. a (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts Section 4 cmt. a (1959). If a trust established by order of court is to be administered as an express trust, the terms of the trust are determined from the court order as interpreted in light of the general rules governing interpretation of judgments. See Restatement (Third) of Trusts Section 4 cmt. f (Tentative Draft No. 1, approved 1996).

A manifestation of a settlor's intention does not constitute evidence of a trust's terms if it would be inadmissible in a judicial proceeding in which the trust's terms are in question. See Restatement (Third) of Trusts Section 4 cmt. b (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts Section 4 cmt. b (1959). See also Restatement (Third) Property: 19 Donative Transfers Sections 10.2, 11.1-11.3 (Tentative Draft No. 1, approved 1995). For example, in many states a trust of real property is unenforceable unless evidenced by a writing, although Section 407 of this Code does not so require, leaving this issue to be covered by separate statute if the enacting jurisdiction so elects. Evidence otherwise relevant to determining the terms of a trust may also be excluded under other principles of law, such as the parol evidence rule.

"Trust instrument" (paragraph (19)) is a subset of the definition of "terms of a trust" (paragraph (18)), referring to only such terms as are found in an instrument executed by the settlor. Section 403 provides that a trust is validly created if created in compliance with the law of the place where the trust instrument was executed. Pursuant to Section 604(a)(2), the contest period for a revocable trust can be shortened by providing the potential contestant with a copy of the trust instrument plus other information. Section 813(b)(1) requires that the trustee upon request furnish a beneficiary with a copy of the trust instrument. To allow a trustee to administer a trust with some dispatch without concern about liability if the terms of a trust instrument are contradicted by evidence outside of the instrument, Section 1006 protects a trustee from liability to the extent a breach of trust resulted from reasonable reliance on those terms. Section 1013 allows a trustee to substitute a certification of trust in lieu of providing a third person with a copy of the trust instrument. Section 1106(a)(4) provides that unless there is a clear indication of a contrary intent, rules of construction and presumptions provided in the Uniform Trust Code apply to trust instruments executed before the effective date of the Code.

The definition of "trustee" (paragraph (20)) includes not only the original trustee but also an additional and successor trustee as well as a cotrustee. Because the definition of trustee includes trustees of all types, any trustee, whether original or succeeding, single or cotrustee, has the powers of a trustee and is subject to the duties imposed on trustees under the Uniform Trust Code. Any natural person, including a settlor or beneficiary, has capacity to act as trustee if the person has capacity to hold title to property free of trust. See Restatement (Third) of Trusts Section 32 (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Section 89 (1959). State banking statutes normally impose additional requirements before a corporation can act as trustee.

2004 Amendment. Section 103(2) adds a definition of "ascertainable standard." The term was formerly used only in Section 814. Other 2004 amendments add the term to Sections 103(11) and 504. The amendment moves into this section the definition previously found in Section 814, thereby making it apply generally throughout the Code. Adding this definition required the renumbering of all subsequent definitions in the Section and corrections to crossreferences to this Section throughout the Code and comments.

Section 103(11), the definition of "power of withdrawal," is amended to exclude a possible inference that the term includes a discretionary power in a trustee to make distributions for the trustee's own benefit which is limited by an ascertainable standard. For an explanation of the reason for this amendment, see the comment to the 2004 amendment to Section 504, which 20 addresses a related issue.

Clarifying language is added to Section 103(13), the definition of "qualified beneficiary," to make clear that the second category in the definition refers to termination of an interest that is not associated with termination of the trust.

NORTH CAROLINA COMMENT

The definitions provided in this section of the Uniform Trust Code were modified in the following respects:

(i) In paragraph (3) the words "including the owner of an interest by assignment or transferor" was added to the end of subparagraph a. to conform the definition of "beneficiary" to that contained in former G.S. 36A-22.1(1)(i).

(ii) In paragraph (4) the definition of a "charitable trust" was modified to substitute for the words "or portion of a trust" the words "including a split-interest trust as described in Section 4947 of the Internal Revenue Code". As revised a charitable trust is intended to include only wholly charitable trusts and split-interest trusts, such as charitable remainder trusts and charitable lead trusts.

(iii) The provisions of the Uniform Trust Code defining "conservator" and "guardian" were omitted. In their place paragraph (6) defining "general guardian," paragraph (7) defining "guardian of the estate," and paragraph (8) defining "guardian of the person" were added to the section and given the same definitions that they have in Chapter 35A of the General Statutes. In the North Carolina context, references in the Official Comments to "conservator" should be read to apply to a general guardian or guardian of the estate, and references to "guardian" should be read to apply to a guardian of the person.

(iv) Paragraph (10) adds the definition of "Internal Revenue Code" to this section.

(v) In paragraph (20) the definition of "terms of a trust" was modified in order to exclude from the definition such manifestation of the settlor's intent as may be established "by other evidence that would be admissible" in a judicial proceeding. As revised the phrase "terms of a trust" includes only actual provisions of the trust agreement and any provisions established in a judicial proceeding. Although the drafters agreed with the statement in the Official Comment that "[o]ral statements, the situation of the beneficiaries, the purposes of the trust, the circumstances under which the trust is being administered ... all may have a bearing in determining the trust's meaning", the drafters concluded that such indications of the trust's meaning should not result in changes or additions to the terms of the trust until the court so ruled in a judicial proceeding.

(vi) In paragraph (21) the words "and any modifications permitted by court order" were added to the definition of "trust instrument" in order to clarify that any language added to or deleted from the trust instrument, or otherwise modified pursuant to court order, becomes part of the trust instrument.

(vii) In paragraph (22) the definition of "trustee" was modified to clarify that cotrustees are included whether or not appointed or confirmed by a court and to bring forward the language of former G.S. 36A-22.1(6) regarding the exclusion of trustees in mortgages and deeds of trust.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, this section is amended to add paragraph (13a) defining "principal place of administration". That definition was brought forward from former G.S. 36C-2-204(3) relating to venue to make it applicable to other references to "principal place of administration" in Chapter 36C.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2009)

Effective October 1, 2009, subdivision (3) of this section is amended to clarify that a beneficiary as defined in that subdivision does not include a permissible appointee under a power of appointment. A permissible appointee has a mere expectancy with no vested rights. The interest of such an appointee, unlike a taker in default of an exercise of the power of appointment, requires affirmative action by the holder of the power.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2010-96, s. 22, provides: "The Revisor of Statutes may cause to be printed all explanatory comments of the drafters of S.L. 2009-222, 2009-267, and 2009-318 as the Revisor deems appropriate."

Session Laws 2021-85, s. 2(e), made the rewriting of subdivisions (20) and (21) of this section by Session Laws 2021-85, s. 2(a), effective July 8, 2021, and applicable to trusts created before, on, or after that date.

Session Laws 2021-85, s. 2(d), provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all explanatory comments of the drafters of this section as the Revisor may deem appropriate.”

Effect of Amendments. - Session Laws 2007-106, s. 2, effective October 1, 2007, made minor stylistic and punctuation changes throughout the section; added "The following definitions apply" in the introductory paragraph; and added subdivision (13a). See Editor's note for applicability.

Session Laws 2009-222, s. 1, effective October 1, 2009, inserted "but excluding a permissible appointee of a power of appointment" near the end of subdivision (3)a.

Session Laws 2017-121, s. 2.1, effective July 18, 2017, substituted "Except as otherwise provided in G.S. 36C-8B-25, a" for "A" at the beginning of subdivision (17).

Session Laws 2021-85, s. 2(a), rewrote subdivisions (20) and (21). For effective date and applicability, see editor's note.

Legal Periodicals. - For article, "Allowing Perpetuities in North Carolina," see 31 Campbell L. Rev. 399 (2009).

CASE NOTES

Applied in In re Foreclosure of the Deed of Trust of Vogler Realty, Inc., 365 N.C. 389, 722 S.E.2d 459 (2012).

Cited in In re Testamentary Trust of Charnock, 158 N.C. App. 35, 579 S.E.2d 887 (2003), aff'd, 358 N.C. 523, 597 S.E.2d 706 (2004); First Charter Bank v. Am. Children's Home, 203 N.C. App. 574, 692 S.E.2d 457 (2010); THZ Holdings, LLC v. McCrea, 231 N.C. App. 482, 753 S.E.2d 344 (2013).

OFFICIAL COMMENT

This section specifies when a person is deemed to know a fact. Subsection (a) states the general rule. Subsection (b) provides a special rule dealing with notice to organizations. Pursuant to subsection (a), a fact is known to a person if the person had actual knowledge of the fact, received notification of it, or had reason to know of the fact's existence based on all of the circumstances and other facts known to the person at the time. Under subsection (b), notice to an organization is not necessarily achieved by giving notice to a branch office. Nor does the organization necessarily acquire knowledge at the moment the notice arrives in the organization's mailroom. Rather, the organization has notice or knowledge of a fact only when the information is received by an employee having responsibility to act for the trust, or would have been brought to the employee's attention had the organization exercised reasonable diligence.

"Know" is used in its defined sense in Sections 109 (methods and waiver of notice), 305 (appointment of representative), 604(b) (limitation on contest of revocable trust), 812 (collecting trust property), 1009 (nonliability of trustee upon beneficiary's consent, release, or ratification), and 1012 (protection of person dealing with trustee). But as to certain actions, a person is charged with knowledge of facts the person would have discovered upon reasonable inquiry. See Section 1005 (limitation of action against trustee following report of trustee).

This section is based on Uniform Commercial Code § 1-202 (2000 Annual Meeting Draft).

OFFICIAL COMMENT

Subsection (a) emphasizes that the Uniform Trust Code is primarily a default statute. While this Code provides numerous procedural rules on which a settlor may wish to rely, the settlor is generally free to override these rules and to prescribe the conditions under which the trust is to be administered. With only limited exceptions, the duties and powers of a trustee, relations among trustees, and the rights and interests of a beneficiary are as specified in the terms of the trust.

Subsection (b) lists the items not subject to override in the terms of the trust. Because subsection (b) refers specifically to other sections of the Code, enacting jurisdictions modifying these other sections may also need to modify subsection (b).

Subsection (b)(1) confirms that the requirements for a trust's creation, such as the necessary level of capacity and the requirement that a trust have a legal purpose, are controlled by statute and common law, not by the settlor. For the requirements for creating a trust, see Sections 401-409. Subsection (b)(12) makes clear that the settlor may not reduce any otherwise applicable period of limitations for commencing a judicial proceeding. See Sections 604 (period of limitations for contesting validity of revocable trust), and 1005 (period of limitation on action for breach of trust). Similarly, a settlor may not so negate the responsibilities of a trustee that the trustee would no longer be acting in a fiduciary capacity. Subsection (b)(2) provides that the terms may not eliminate a trustee's duty to act in good faith and in accordance with the purposes of the trust and the interests of the beneficiaries. For this duty, see Sections 801 and 814(a). Subsection (b)(3) provides that the terms may not eliminate the requirement that a trust and its terms must be for the benefit of the beneficiaries. Subsection (b)(3) also provides that the terms may not eliminate the requirement that the trust have a purpose that is lawful, not contrary to public policy, and possible to achieve. Subsections (b)(2)-(3) are echoed in Sections 404 (trust and its terms must be for benefit of beneficiaries; trust must have a purpose that is lawful, not contrary to public policy, and possible to achieve), 801 (trustee must administer trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries), 802(a) (trustee must administer trust solely in interests of the beneficiaries), 814 (trustee must exercise discretionary power in good faith and in accordance with its terms and purposes and the interests of the beneficiaries), and 1008 (exculpatory term unenforceable to extent it relieves trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust and the interests of the beneficiaries).

The terms of a trust may not deny a court authority to take such action as necessary in the interests of justice, including requiring that a trustee furnish bond. Subsection (b)(6), (13). Additionally, should the jurisdiction adopting this Code enact the optional provisions on subjectmatter jurisdiction and venue, subsection (b)(14) similarly provides that such provisions cannot be altered in the terms of the trust. The power of the court to modify or terminate a trust under Sections 410 through 416 is not subject to variation in the terms of the trust. Subsection (b)(4). However, all of these Code sections involve situations which the settlor could have addressed had the settlor had sufficient foresight. These include situations where the purpose of the trust has been achieved, a mistake was made in the trust's creation, or circumstances have arisen that were not anticipated by the settlor.

Section 813 imposes a general obligation to keep the beneficiaries informed as well as several specific notice requirements. Subsections (b)(8) and (b)(9), which were placed in brackets and made optional provisions by a 2004 amendment, specify limits on the settlor's ability to waive these information requirements. With respect to beneficiaries age 25 or older, a settlor may dispense with all of the requirements of Section 813 except for the duties to inform the beneficiaries of the existence of the trust, of the identity of the trustee, and to provide a beneficiary upon request with such reports as the trustee may have prepared. Among the specific requirements that a settlor may waive include the duty to provide a beneficiary upon request with a copy of the trust instrument (Section 813(b)(1)), and the requirement that the trustee provide annual reports to the qualified beneficiaries (Section 813(c)). The furnishing of a copy of the entire trust instrument and preparation of annual reports may be required in a particular case, however, if such information is requested by a beneficiary and is reasonably related to the trust's administration.

Responding to the desire of some settlors that younger beneficiaries not know of the trust's bounty until they have reached an age of maturity and self-sufficiency, subsection (b)(8) allows a settlor to provide that the trustee need not even inform beneficiaries under age 25 of the existence of the trust. However, pursuant to subsection (b)(9), if the younger beneficiary learns of the trust and requests information, the trustee must respond. More generally, subsection (b)(9) prohibits a settlor from overriding the right provided to a beneficiary in Section 813(a) to request from the trustee of an irrevocable trust copies of trustee reports and other information reasonably related to the trust's administration.

During the drafting of the Uniform Trust Code, the drafting committee discussed and rejected a proposal that the ability of the settlor to waive required notice be based on the nature of the beneficiaries' interest and not on the beneficiaries' age. Advocates of this alternative approach concluded that a settlor should be able to waive required notices to the remainder beneficiaries, regardless of their age. Enacting jurisdictions preferring this alternative should substitute the language "adult and current or permissible distributees of trust income or principal" for the reference to "qualified beneficiaries" in subsection (b)(8). They should also delete the reference to beneficiaries "who have attained the age of 25 years."

Waiver by a settlor of the trustee's duty to keep the beneficiaries informed of the trust's administration does not otherwise affect the trustee's duties. The trustee remains accountable to the beneficiaries for the trustee's actions.

Neither subsection (b)(8) nor (b)(9) apply to revocable trusts. The settlor of a revocable trust may waive all reporting to the beneficiaries, even in the event the settlor loses capacity. If the settlor is silent about the subject, reporting to the beneficiaries will be required upon the settlor's loss of capacity. See Section 603.

In conformity with traditional doctrine, the Uniform Trust Code limits the ability of a settlor to exculpate a trustee from liability for breach of trust. The limits are specified in Section 1008. Subsection (b)(10) of this section provides a cross-reference. Similarly, subsection (b)(7) provides a cross-reference to Section 708(b), which limits the binding effect of a provision specifying the trustee's compensation.

Finally, subsection (b)(11) clarifies that a settlor is not free to limit the rights of third persons, such as purchasers of trust property. Subsection (b)(5) clarifies that a settlor may not restrict the rights of a beneficiary's creditors except to the extent a spendthrift restriction is allowed as provided in Article 5.

2001 Amendment. By amendment in 2001, subsections (b) (3), (8) and (9) were revised. The language in subsection (b)(3) "that the trust have a purpose that is lawful, not contrary to public policy, and possible to achieve" is new. This addition clarifies that the settlor may not waive this common law requirement, which is codified in the Code at Section 404.

Subsections (b)(8) and (9) formerly provided:

(8) the duty to notify the qualified beneficiaries of an irrevocable trust who have attained 25 years of age of the existence of the trust, and of their right to request trustee's reports and other information reasonably related to the administration of the trust;

(9) the duty to respond to the request of a beneficiary of an irrevocable trust for trustee's reports and other information reasonably related to the administration of a trust.

The amendment clarifies that the information requirements not subject to waiver are requirements specified in Section 813 of the Code.

2003 Amendment. By amendment in 2003, subsection (b)(8) was revised. Under the previous provision, as amended in 2001, the presence of two "excepts" in the same sentence, the first in the introductory language to subsection (b) and the second at the beginning of subsection (b)(8), has caused considerable confusion. The revision eliminates the second "except" in (b)(8) without changing the meaning of the provision.

2004 Amendment. Sections 105(b)(8) and 105(b)(9) address the extent to which a settlor may waive trustee notices and other disclosures to beneficiaries that would otherwise be required under the Code. These subsections have generated more discussion in jurisdictions considering enactment of the UTC than have any other provisions of the Code. A majority of the enacting jurisdictions have modified these provisions but not in a consistent way. This lack of agreement and resulting variety of approaches is expected to continue as additional states enact the Code.

Placing these sections in brackets signals that uniformity is not expected. States may 26 elect to enact these provisions without change, delete these provisions, or enact them with modifications. In Section 105(b)(9), an internal bracket has been added to make clear that an enacting jurisdiction may limit to the qualified beneficiaries the obligation to respond to a beneficiary's request for information.

The placing of these provisions in brackets does not mean that the Drafting Committee recommends that an enacting jurisdiction delete Sections 105(b)(8) and 105(b)(9). The Committee continues to believe that Sections 105(b)(8) and (b)(9), enacted as is, represent the best balance of competing policy considerations. Rather, the provisions were placed in brackets out of a recognition that there is a lack of consensus on the extent to which a settlor ought to be able to waive reporting to beneficiaries, and that there is little chance that the states will enact Sections 105(b)(8) and (b)(9) with any uniformity.

The policy debate is succinctly stated in Joseph Kartiganer & Raymond H. Young, The UTC: Help for Beneficiaries and Their Attorneys, Prob. & Prop., Mar.pril 2003, at 18, 20:

The beneficiaries' rights to information and reports are among the most important provisions in the UTC. They also are among the provisions that have attracted the most attention. The UTC provisions reflect a compromise position between opposing viewpoints.

Objections raised to beneficiaries' rights to information include the wishes of some settlors who believe that knowledge of trust benefits would not be good for younger beneficiaries, encouraging them to take up a life of ease rather than work and be productive citizens. Sometimes trustees themselves desire secrecy and freedom from interference by beneficiaries.

The policy arguments on the other side are: that the essence of the trust relationship is accounting to the beneficiaries; that it is wise administration to account and inform beneficiaries, to avoid the greater danger of the beneficiary learning of a breach or possible breach long after the event; and that there are practical difficulties with secrecy (for example, the trustee must tell a child that he or she is not eligible for financial aid at college because the trust will pay, and must determine whether to accumulate income at high income tax rates or pay it out for inclusion in the beneficiary's own return). Furthermore, there is the practical advantage of a one-year statute of limitations when the beneficiary is informed of the trust transactions and advised of the bar if no claim is made within the year. UTC §§ 1005. In the absence of notice, the trustee is exposed to liability until five years after the trustee ceases to serve, the interests of beneficiaries end, or the trust terminates. UTC §§ 1005(c).

2005 Amendment. Subsection (b)(2) is revised to make the language consistent with the corresponding duties in Sections 801 and 814(a), which require that a trustee act in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries. Previously, subsection (b)(2) provided that the settlor could not waive the duty of a trustee to act in good faith and in accordance with the purposes of the trust. The amendment adds that also cannot waive the obligation to act in accordance with the terms of the trust and the interests of the beneficiaries.

The purpose of the amendment is to make the language consistent, not to change the substance of the section. Absent some other restriction, a settlor is always free to specify the trust's terms to which the trustee must comply. Also, "interests of the beneficiaries" is a defined term in Section 103(8) meaning the beneficial interests as provided in the terms of the trust, which the settlor is also free to specify.

NORTH CAROLINA COMMENT

The drafters substantially modified subsection (b) of the Uniform Trust Code by omitting the following four paragraphs of the fourteen listed in subsection (b) which describes matters known as "mandatory rules" that a settlor may not override in the terms of the trust:

(i) Paragraph (6) regarding the power of the court to require, dispense with, or modify or terminate a bond. The drafters omitted this paragraph to be consistent with the provision in G.S. 36C-7-702(a), which brings forward the provision in former G.S. 36A-31(b), that in no event shall the court require a bond where the terms of the trust direct otherwise. A beneficiary who has complaints about a trustee's administration of the trust could bring an action to remove the trustee rather than to seek to have the trustee provide bond.

(ii) Paragraph (7) regarding the power of the court to adjust a trustee's compensation specified in the terms of the trust which is unreasonably low or high. This paragraph was omitted to be consistent with the omission in G.S. 36C-7-708(b) of the provisions in Section 708(b) of the Uniform Trust Code authorizing the court to adjust trustee compensation set by the terms of the trust. The drafters concluded that the settlor should have the right to compensate a trustee in whatever amount the settlor chooses regardless of whether a court would find such compensation to be unreasonably high or low.

(iii) Paragraph (8) regarding the trustee's duty under Section 813(b)(2) and (3) of the Uniform Trust Code to notify qualified beneficiaries who have reached age 25 of the existence of the trust and other matters, and paragraph (9) regarding the trustee's duty under Section 813(a) of the Uniform Trust Code to respond to the request of a qualified beneficiary for reports and other information. The drafters substantially modified Section 813(a) and (b) of the Uniform Trust Code, but the modified provisions still impose a duty on the trustee to give the beneficiary specified information upon request, a duty that can be discharged for matters disclosed in a report given to the beneficiary. See G.S. 36C-8-813(a) and (b) and the North Carolina Comments to that section. Whether and to what extent the settlor by the terms of the trust could prevent a beneficiary from receiving trust information was one of the more debatable issues of the Uniform Trust Code. The drafters concluded that in North Carolina the settlor should have the right to override any duty to furnish information imposed by G.S. 36C-8-813(a) and (b). Accordingly, the drafters decided not to impose a mandatory rule with respect to these provisions. This is consistent with the statement in Taylor v. NationsBank, 125 N.C. App. 515, 521, 481 S.E.2d 358, 362 (1997) where the court said that "trust beneficiaries are entitled to view the trust instrument from which their interest is derived" so long as that right is not waived by the settlor through "an explicit provision in the trust to the contrary".

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, subsection (b) is amended to add paragraph (11) providing that the terms of the trust may not override the rule in G.S. 36C-6-602.1(a) that the powers described in that subsection authorizing an agent under a power of attorney to exercise the settlor's powers with respect to a revocable trust cannot be exercised to alter the designation of beneficiaries to receive property on the settlor's death under that settlor's existing estate plan.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2009)

Effective October 1, 2009, with respect to renunciations executed on or after that date, subsection (b) of this section is amended by adding paragraph (12).

SUPPLEMENTAL NORTH CAROLINA COMMENT (2015)

Effective October 1, 2015, subsection (a) and subdivision (b)(2) are amended to apply to a power holder under Article 8A the mandatory rule of subdivision (b)(2) applicable to a trustee to act in good faith in accordance with the terms and purposes of the trust and the interest of the beneficiaries. In addition, subsection (a) is amended to apply to a power holder the mandatory rule of subdivision (b)(6) regarding the limitations on the enforceability of the exculpatory provisions of a trust under G.S. 36C-10-1008.

Also effective October 1, 2015, subsection (c) is added to provide that the mandatory requirement of subdivision (b)(2) that the power holder must act in good faith and rule of subdivision (b)(6) regarding the limitations on the exculpatory terms of a trust under G.S. 36C-10-1008 shall not apply to a power holder with respect to powers conferred upon the power holder in a nonfiduciary capacity. Unlike a trustee, under G.S. 36C-8A-3(a) and the terms of the trust the power holder may act in a nonfiduciary capacity as to certain powers conferred upon the powerholder.

As noted in the North Carolina Comment to Article 8A, the drafters caution against the terms of the trust providing that the powerholder is a nonfiduciary as to a power that does not fall within the exceptions provided by G.S. 36C-8A-3(a). In other cases, a powerholder's status as a fiduciary may be essential to the administration of a trust because this assures that the beneficiaries will have recourse against the powerholder for misuse of the power.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2009-48, s. 18, provides: "The Revisor of Statutes shall cause to be printed along with this act all explanatory comments of the drafters of this act as the Revisor deems appropriate."

Session Laws 2015-205, s. 11(a), as amended by Session Laws 2015-264, s. 31(b), provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Commentary to the Uniform Powers of Appointment Act and of the Official Commentary to the Uniform Trust Code and all explanatory comments of the drafters of Part III and Parts VI through X-A of this act, as the Revisor may deem appropriate."

Session Laws 2021-85, s. 2(d), provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all explanatory comments of the drafters of this section as the Revisor may deem appropriate."

Session Laws 2021-85, s. 2(e), made the amendments to this section by Session Laws 2021-85, s. 2(b), effective July 8, 2021, and applicable to trusts created before, on, or after that date.

Effect of Amendments. - Session Laws 2007-106, s. 3, effective October 1, 2007, in subsection (b), made minor stylistic and punctuation changes in subdivisions (9) and (10), and added subdivision (11). See Editor's note for applicability.

Session Laws 2009-48, s. 15, effective October 1, 2009, and applicable to renunciations and powers of attorney executed on or after that date, in subsection (b), made minor punctuation changes throughout, and added subdivision (b)(12).

Session Laws 2015-205, s. 7, effective October 1, 2015, in subsection (a), inserted "and a power holder under Article 8A of this Chapter" and "and those power holders"; inserted "or a power holder under Article 8A of this Chapter" in subdivision (b)(2); added "except as otherwise provided in subsection (c) of this section" in subdivisions (b)(2) and (b)(6); and added subsection (c). For applicability and effective date, see editor's note.

Session Laws 2021-85, s. 2(b), rewrote subdivisions (b)(2), and (b)(6); and repealed subsection (c), which read: "The provisions of subdivisions (2) and (6) of subsection (b) of this section shall not apply to a power holder described in Article 8A of this Chapter with respect to powers conferred upon the power holder in a nonfiduciary capacity under G.S. 36C 8A 3(a) or under the terms of the trust." For effective date and applicability, see editor's note.

Legal Periodicals. - For article, "Back to the Future: An Empirical Study of Child Custody Outcomes," see 85 N.C.L. Rev. 1629 (2007).

CASE NOTES

Provision Limiting Trustee's Obligation to Provide Accounting Did Not Limit Beneficiaries' Rights to Discover Trust Information in Suit for Accounting. - G.S. 36C-8-813 did not override the duty of the trustee to act in good faith, nor could it obstruct the power of the trial court to take such action as was necessary in the interests of justice, pursuant to G.S. 36C-1-105(b)(2), (9), including compelling discovery where necessary to enforce the beneficiary's rights under the trust. Therefore, a trial court erred in granting the trustee a protective order on the beneficiaries' discovery requests seeking information about their trusts' assets. Wilson v. Wilson, 203 N.C. App. 45, 690 S.E.2d 710 (2010).

Cited in In re Estate of Skinner, 370 N.C. 126, 804 S.E.2d 449 (2017).

OFFICIAL COMMENT

The Uniform Trust Code codifies those portions of the law of express trusts that are most amenable to codification. The Code is supplemented by the common law of trusts, including principles of equity. To determine the common law and principles of equity in a particular state, a court should look first to prior case law in the state and then to more general sources, such as the Restatement of Trusts, Restatement (Third) of Property: Wills and Other Donative Transfers, and the Restatement of Restitution. The common law of trusts 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 Code in no way restricts.

The statutory text of the Uniform Trust Code is also supplemented by these Comments, which, like the Comments to any Uniform Act, may be relied on as a guide for interpretation. See Acierno v. Worthy Bros. Pipeline Corp., 656 A.2d 1085, 1090 (Del. 1995) (interpreting Uniform Commercial Code); Yale University v. Blumenthal, 621 A.2d 1304, 1307 (Conn. 1993) (interpreting Uniform Management of Institutional Funds Act); 2 Norman Singer, Statutory Construction Section 52.05 (6th ed. 2000); Jack Davies, Legislative Law and Process in a Nutshell Section 55-4 (2d ed. 1986).

Comment Amended in 2005.

OFFICIAL COMMENT

This section provides rules for determining the law that will govern the meaning and effect of particular trust terms. The law to apply to determine whether a trust has been validly created is determined under Section 403.

Paragraph (1) allows a settlor to select the law that will govern the meaning and effect of the terms of the trust. The jurisdiction selected need not have any other connection to the trust. The settlor is free to select the governing law regardless of where the trust property may be physically located, whether it consists of real or personal property, and whether the trust was created by will or during the settlor's lifetime. This section does not attempt to specify the strong public policies sufficient to invalidate a settlor's choice of governing law. These public policies will vary depending upon the locale and may change over time.

Paragraph (2) provides a rule for trusts without governing law provisions - the meaning and effect of the trust's terms are to be determined by the law of the jurisdiction having the most significant relationship to the matter at issue. Factors to consider in determining the governing law include the place of the trust's creation, the location of the trust property, and the domicile of the settlor, the trustee, and the beneficiaries. See Restatement (Second) of Conflict of Laws §§ 270 cmt. c and 272 cmt. d (1971). Other more general factors that may be pertinent in particular cases include the relevant policies of the forum, the relevant policies of other interested jurisdictions and degree of their interest, the protection of justified expectations and certainty, and predictability and uniformity of result. See Restatement (Second) of Conflict of Laws § 6 (1971). Usually, the law of the trust's principal place of administration will govern administrative matters and the law of the place having the most significant relationship to the trust's creation will govern the dispositive provisions.

This section is consistent with and was partially patterned on the Hague Convention on the Law Applicable to Trusts and on their Recognition, signed on July 1, 1985. Like this section, the Hague Convention allows the settlor to designate the governing law. Hague Convention art. 6. Absent a designation, the Convention provides that the trust is to be governed by the law of the place having the closest connection to the trust. Hague Convention art. 7. The Convention also lists particular public policies for which the forum may decide to override the choice of law that would otherwise apply. These policies are protection of minors and incapable parties, personal and proprietary effects of marriage, succession rights, transfer of title and security interests in property, protection of creditors in matters of insolvency, and, more generally, protection of third parties acting in good faith. Hague Convention art. 15.

For the authority of a settlor to designate a trust's principal place of administration, see Section 108(a).

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, this section is amended to add subsection (b) clarifying that even if the meaning and effect of a trust are determined by the law of another jurisdiction, the rights of a person, other than the trustee or beneficiary of the trust, who deals with the trust are governed by the provisions of Chapter 36C specified in the subsection.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 4, effective October 1, 2007, designated the former undesignated introductory paragraph as present subsection (a); added "any of the following" at the end of subsection (a); made a minor punctuation change in subdivision (a)(1); and added subsection (b). See Editor's note for applicability.

OFFICIAL COMMENT

This section prescribes rules relating to a trust's principal place of administration. Locating a trust's principal place of administration will ordinarily determine which court has primary if not exclusive jurisdiction over the trust. It may also be important for other matters, such as payment of state income tax or determining the jurisdiction whose laws will govern the trust. See Section 107 comment.

Because of the difficult and variable situations sometimes involved, the Uniform Trust Code does not attempt to further define principal place of administration. A trust's principal place of administration ordinarily will be the place where the trustee is located. Determining the principal place of administration becomes more difficult, however, when cotrustees are located in different states or when a single institutional trustee has trust operations in more than one state. In such cases, other factors may become relevant, including the place where the trust records are kept or trust assets held, or in the case of an institutional trustee, the place where the trust officer responsible for supervising the account is located.

A concept akin to principal place of administration is used by the Office of the Comptroller of the Currency. Reserves that national banks are required to deposit with state authorities is based on the location of the office where trust assets are primarily administered. See 12 C.F.R. Section 9.14(b).

Under the Uniform Trust Code, the fixing of a trust's principal place of administration will determine where the trustee and beneficiaries have consented to suit (Section 202), and the rules for locating venue within a particular state (Section 204). It may also be considered by a court in another jurisdiction in determining whether it has jurisdiction, and if so, whether it is a convenient forum.

A settlor expecting to name a trustee or cotrustees with significant contacts in more than one state may eliminate possible uncertainty about the location of the trust's principal place of administration by specifying the jurisdiction in the terms of the trust. Under subsection (a), a designation in the terms of the trust is controlling if (1) a trustee is a resident of or has its principal place of business in the designated jurisdiction, or (2) all or part of the administration occurs in the designated jurisdiction. Designating the principal place of administration should be distinguished from designating the law to determine the meaning and effect of the trust's terms, as authorized by Section 107. A settlor is free to designate one jurisdiction as the principal place of administration and another to govern the meaning and effect of the trust's provisions.

Subsection (b) provides that a trustee is under a continuing duty to administer the trust at a place appropriate to its purposes, its administration, and the interests of the beneficiaries. "Interests of the beneficiaries," defined in Section 103(8), means the beneficial interests provided in the terms of the trust. Ordinarily, absent a substantial change or circumstances, the trustee may assume that the original place of administration is also the appropriate place of administration. The duty to administer the trust at an appropriate place may also dictate that the trustee not move the trust.

Subsections (c)-(f) provide a procedure for changing the principal place of administration to another state or country. Such changes are often beneficial. A change may be desirable to secure a lower state income tax rate, or because of relocation of the trustee or beneficiaries, the appointment of a new trustee, or a change in the location of the trust investments. The procedure for transfer specified in this section applies only in the absence of a contrary provision in the terms of the trust. See Section 105. To facilitate transfer in the typical case, where all concur that a transfer is either desirable or is at least not harmful, a transfer can be accomplished without court approval unless a qualified beneficiary objects. To allow the qualified beneficiaries sufficient time to review a proposed transfer, the trustee must give the qualified beneficiaries at least 60 days prior notice of the transfer. Notice must be given not only to qualified beneficiaries as defined in Section 103(13) but also to those granted the rights of qualified beneficiaries under Section 110. To assure that those receiving notice have sufficient information upon which to make a decision, minimum contents of the notice are specified. If a qualified beneficiary objects, a trustee wishing to proceed with the transfer must seek court approval.

In connection with a transfer of the principal place of administration, the trustee may transfer some or all of the trust property to a new trustee located outside of the state. The appointment of a new trustee may also be essential if the current trustee is ineligible to administer the trust in the new place. Subsection (f) clarifies that the appointment of the new trustee must comply with the provisions on appointment of successor trustees as provided in the terms of the trust or under Section 704. Absent an order of succession in the terms of the trust, Section 704(c) provides the procedure for appointment of a successor trustee of a noncharitable trust, and Section 704(d) the procedure for appointment of a successor trustee of a charitable trust.

While transfer of the principal place of administration will normally change the governing law with respect to administrative matters, a transfer does not normally alter the controlling law with respect to the validity of the trust and the construction of its dispositive provisions. See 5A Austin W. Scott & William F. Fratcher, The Law of Trusts Section 615 (4th ed. 1989).

NORTH CAROLINA COMMENT

Subsection (b) of the Uniform Trust Code, which provided that a trustee is under a continuing duty to administer the trust at a place appropriate to its purpose, its administration and the interest of the beneficiaries, was omitted because it would have imposed an affirmative duty on a trustee to continually monitor the place of the administration of a trust. Such a duty has not been previously recognized in North Carolina. The drafters concluded that the burden of complying with such a duty outweighed any advantage in imposing it.

Subsection (b) incorporates the provisions of subsection (c) of the Uniform Trust Code but modifies them as follows:

(i) Under subdivision (b)(1) the authority of the trustee to transfer the principal place of administration without court approval so long as no qualified beneficiary objects applies only to transfers within the jurisdiction of the United States. Subsection (c) of the Uniform Trust Code allows a trustee to transfer a trust's principal place of administration if no beneficiary objects to any jurisdiction whether within or without the United States. Subdivision (b)(1) incorporates the provisions of subsection (e) of the Uniform Trust Code to the effect that if a qualified beneficiary objects to the transfer, the authority of the trustee to transfer the trust terminates.

(ii) Under subdivision (b)(2) a trustee may transfer the principal place of administration to a jurisdiction outside of the United States without court approval only with the written consent of all of the qualified beneficiaries. Subsection (c) of the Uniform Trust Code does not make such consent a requirement - it allows such a transfer to take place if no qualified beneficiary objects to the transfer.

Subsection (b) makes an important change in North Carolina law by replacing former G.S. 36A-13 and former G.S. 36A-14 which allowed a trustee to transfer fiduciary funds out of state only after obtaining judicial consent to the transfer both in the State in which the trust is currently administered and the State in which the trust is to be subsequently administered. Judicial approval of a transfer of the place of administration is no longer required where no qualified beneficiary objects to a transfer within the United States or where all qualified beneficiaries consent to a transfer outside the United States.

The reference in the Official Comment to "Subsections (c)-(f)" should be understood to refer to "Subsections (b)-(d)" of this section, and the reference to subsection (f) should be understood to refer to subsection (d) of this section.

OFFICIAL COMMENT

Subsection (a) clarifies that notices under the Uniform Trust Code may be given by any method likely to result in its receipt by the person to be notified. The specific methods listed in the subsection are illustrative, not exhaustive. Subsection (b) relieves a trustee of responsibility for what would otherwise be an impossible task, the giving of notice to a person whose identity or location is unknown and not reasonably ascertainable by the trustee. The section does not define when a notice is deemed to have been sent or delivered or person deemed to be unknown or not reasonably ascertainable, the drafters preferring to leave this issue to the enacting jurisdiction's rules of civil procedure.

Under the Uniform Trust Code, certain actions can be taken upon unanimous consent of the beneficiaries or qualified beneficiaries. See Sections 411 (termination of noncharitable irrevocable trust) and 704 (appointment of successor trustee). Subsection (b) of this section only authorizes waiver of notice. A consent required from a beneficiary in order to achieve unanimity is not waived because the beneficiary is missing. But the fact a beneficiary cannot be located may be a sufficient basis for a substitute consent to be given by another person on the beneficiary's behalf under the representation principles of Article 3.

To facilitate administration, subsection (c) allows waiver of notice by the person to be notified or sent the document. Among the notices and documents to which this subsection can be applied are notice of a proposed transfer of principal place of administration (Section 108(d)) or of a trustee's report (Section 813(c)). This subsection also applies to notice to qualified beneficiaries of a proposed trust combination or division (Section 417), of a temporary assumption of duties without accepting trusteeship (Section 701(c)(1)), and of a trustee's resignation (Section 705(a)(1)).

Notices under the Uniform Trust Code are nonjudicial. Pursuant to subsection (d), notice of a judicial proceeding must be given as provided in the applicable rules of civil procedure.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, subsection (a) is amended to bring forward in subdivisions (a) (2) and (3) the provisions in former G.S. 32-55(d) relating to when notice is deemed given to a beneficiary for purposes of the trustee compensation and make these provisions applicable to notices to beneficiaries with respect to all matters under Chapter 36C. In accordance with the drafters' intent to make provisions concerning notices to beneficiaries uniform in the General Statutes, G.S. 36C-1-109 is also applicable under G.S. 32-55(d), as amended effective October 1, 2007, to notices to beneficiaries for purposes of unitrust conversions and reconversions.

Editor's Note. - This section was amended by Session Laws 2007-106, s. 5, in the coded bill drafting format provided by G.S. 120-20.1. The subdivision designations have been set out above at the direction of the Revisor of Statutes.

Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 5, effective October 1, 2007, divided former subsection (a) into present (a) and (a)(1); added "Subject to subsection (d) of this section" at the beginning of subsection (a); added "methods" in subdivision (a)(1); and added subdivisions (a)(2) and (3). See Editor's note for applicability.

OFFICIAL COMMENT

Under the Uniform Trust Code, certain notices need be given only to the "qualified" beneficiaries. For the definition of "qualified beneficiary," see Section 103(13). Among these notices are notice of a transfer of the trust's principal place of administration (Section 108(d)), notice of a trust division or combination (Section 417), notice of a trustee resignation (Section 705(a)(1)), and notice of a trustee's annual report (Section 813(c)). Subsection (a) of this section authorizes other beneficiaries to receive one or more of these notices by filing a request for notice with the trustee.

Under the Code, certain actions, such as the appointment of a successor trustee, can be accomplished by the consent of the qualified beneficiaries. See, e.g., Section 704 (filling vacancy in trusteeship). Subsection (a) only addresses notice, not required consent. A person who requests notice under subsection (a) does not thereby acquire a right to participate in actions that can be taken only upon consent of the qualified beneficiaries.

Charitable trusts do not have beneficiaries in the usual sense. However, certain persons, while not technically beneficiaries, do have an interest in seeing that the trust is enforced. In the case of a charitable trust, this includes the state's attorney general and charitable organizations expressly designated to receive distributions under the terms of the trust, Under subsection (b), charitable organizations expressly designated in the terms of the trust to receive distributions and who would qualify as a qualified beneficiary were the trust noncharitable, are granted the rights of qualified beneficiaries under the Code. Because the charitable organization must be expressly named in the terms of the trust and must be designated to receive distributions, excluded are organizations that might receive distributions in the trustee's discretion but that are not named in the trust's terms. Requiring that the organization have an interest similar to that of a beneficiary of a private trust also denies the rights of a qualified beneficiary to organizations holding remote remainder interests. For further discussion of the definition of "qualified beneficiary," see Section 103 comment.

Subsection (c) similarly grants the rights of qualified beneficiaries to persons appointed by the terms of the trust or by the court to enforce a trust created for an animal or other trust with a valid purpose but no ascertainable beneficiary. For the requirements for creating such trusts, see Sections 408 and 409.

"Attorney general" is placed in brackets in subsection (d) to accommodate jurisdictions which grant enforcement authority over charitable trusts to another designated official. Because states take various approaches to enforcement of charitable trusts, by a 2004 amendment subsection (d) was placed in brackets in its entirety. For a discussion, see 2004 Amendment below.

Subsection (d) does not limit other means by which the attorney general or other designated official can enforce a charitable trust.

2001 Amendment. By amendment in 2001, "charitable organization expressly designated to receive distributions" was substituted for "charitable organization expressly entitled to receive benefits" in subsection (b). The amendment conforms the language of this section to terminology used elsewhere in the Code.

2004 Amendment. Subsection (b) is amended to better conform this provision to the Drafting Committee's intent. Charitable trusts do not have beneficiaries in the usual sense. Yet, such trusts are often created to benefit named charitable organizations. Under this amendment, which is based on the definition of qualified beneficiary in Section 103, a designated charitable organization has the rights of a qualified beneficiary only if it holds an interest similar to that of a qualified beneficiary in a noncharitable trust. The effect of the amendment is to exclude charitable organizations that might receive distributions in the trustee's discretion even though not expressly mentioned in the trust's terms. Also denied the rights of qualified beneficiaries are charitable organizations that hold only remote remainder interests. The previous version of subsection (b) had a similar intent but the language could be read more broadly.

The placing of subsection (d) in brackets recognizes that the role of the attorney general in the enforcement of charitable trusts varies greatly in the states. In some states, the legislature may prefer that the attorney general be granted the rights of a qualified beneficiary. In other states, the attorney general may play a lesser role in enforcement. The expectation is that states considering enactment will adapt this provision to the particular role that the attorney general plays in the enforcement of charitable trusts in their state. Some states may prefer to delete this provision. Other states might provide that the attorney general has the rights of a qualified beneficiary only for trusts in which no charitable organization has been designated to receive distributions. Yet other states may prefer to enact the provision without change.

NORTH CAROLINA COMMENT

Subsection (a) of the Uniform Trust Code was omitted. It provided that whenever notice is required to be given to qualified beneficiaries of the trust the trustee must also give a notice to any other beneficiary who has requested it. This subsection was omitted because the drafters did not think it was necessary to require the trustee to provide notice to any such beneficiary when only the qualified beneficiaries were authorized to take any action required by the notice.

Subsections (b) and (c) of the Uniform Trust Code were re-designated as subsections (a) and (b) of this section.

Subsection (d) of the Uniform Trust Code, which gave the Attorney General the rights of a qualified beneficiary with respect to charitable trusts, was omitted because G.S. 36C-4-413, North Carolina's cy pres statute, requires that notice be given to the Attorney General and that the Attorney General have an opportunity to be heard in any matter involving a charitable trust.

The reference in the Official Comment to "subsection (c)" should be understood to refer to subsection (b) of this section.

OFFICIAL COMMENT

While the Uniform Trust Code recognizes that a court may intervene in the administration of a trust to the extent its jurisdiction is invoked by interested persons or otherwise provided by law ( see Section 201(a)), resolution of disputes by nonjudicial means is encouraged. This section facilitates the making of such agreements by giving them the same effect as if approved by the court. To achieve such certainty, however, subsection (c) requires that the nonjudicial settlement must contain terms and conditions that a court could properly approve. Under this section, a nonjudicial settlement cannot be used to produce a result not authorized by law, such as to terminate a trust in an impermissible manner.

Trusts ordinarily have beneficiaries who are minors, incapacitated, unborn or unascertained. Because such beneficiaries cannot signify their consent to an agreement, binding settlements can ordinarily be achieved only through the application of doctrines such as virtual representation or appointment of a guardian ad litem, doctrines traditionally available only in the case of judicial settlements. The effect of this section and the Uniform Trust Code more generally is to allow for such binding representation even if the agreement is not submitted for approval to a court. For the rules on representation, including appointments of representatives by the court to approve particular settlements, see Article 3.

Subsection (d) is a nonexclusive list of matters to which a nonjudicial settlement may pertain. Other matters which may be made the subject of a nonjudicial settlement are listed in the Article 3 General Comment. The fact that the trustee and beneficiaries may resolve a matter nonjudicially does not mean that beneficiary approval is required. For example, a trustee may resign pursuant to Section 705 solely by giving notice to the qualified beneficiaries and any cotrustees. But a nonjudicial settlement between the trustee and beneficiaries will frequently prove helpful in working out the terms of the resignation.

Because of the great variety of matters to which a nonjudicial settlement may be applied, this section does not attempt to precisely define the "interested persons" whose consent is required to obtain a binding settlement as provided in subsection (a). However, the consent of the trustee would ordinarily be required to obtain a binding settlement with respect to matters involving a trustee's administration, such as approval of a trustee's report or resignation.

NORTH CAROLINA COMMENT

Subsection (b) makes significant changes in this section of the Uniform Trust Code. Whereas the Uniform Trust Code allows interested persons to enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust, subsection (b) restricts the matters that may be resolved by a nonjudicial settlement agreement to the exclusive list set forth in subsection (b). Some of these matters appeared in the nonexclusive list in subsection (d) of the Uniform Trust Code which was omitted.

The drafters intended by this modification to allow interested persons to nonjudicially resolve only administrative matters relating to the trust and not substantive issues such as the construction of the terms of the trust, a modification of the terms of the trust or a termination of the trust. The drafters were concerned that allowing nonjudicial settlement of substantive issues may provide a basis for inappropriate changes in the terms of the trust or for termination of the trust contrary to the settlor's intent and the requirements otherwise imposed by statute. The modification of this section of the Uniform Trust Code was not intended to prevent parties from entering into binding settlement agreements as permitted under North Carolina law prior to the enactment of this Chapter.

OFFICIAL COMMENT

This section is patterned after Restatement (Third) of Trusts § 25(2) and comment e (Tentative Draft No. 1, approved 1996), although this section, unlike the Restatement, also applies to irrevocable trusts. The revocable trust is used primarily as a will substitute, with its key provision being the determination of the persons to receive the trust property upon the settlor's death. Given this functional equivalence between the revocable trust and a will, the rules for interpreting the disposition of property at death should be the same whether the individual has chosen a will or revocable trust as the individual's primary estate planning instrument. Over the years, the legislatures of the States and the courts have developed a series of rules of construction reflecting the legislative or judicial understanding of how the average testator would wish to dispose of property in cases where the will is silent or insufficiently clear. Few legislatures have yet to extend these rules of construction to revocable trusts, and even fewer to irrevocable trusts, although a number of courts have done so as a matter of judicial construction. See Restatement (Third) of Trusts § 25, Reporter's Notes to cmt. d and e (Tentative Draft No. 1, approved 1996).

Because of the wide variation among the States on the rules of construction applicable to wills, this Code does not attempt to prescribe the exact rules to be applied to trusts but instead adopts the philosophy of the Restatement that the rules applicable to trusts ought to be the same, whatever those rules might be.

Rules of construction are not the same as constructional preferences. A constructional preference is general in nature, providing general guidance for resolving a wide variety of ambiguities. An example is a preference for a construction that results in a complete disposition and avoid illegality. Rules of construction, on the other hand, are specific in nature, providing guidance for resolving specific situations or construing specific terms. Unlike a constructional preference, a rule of construction, when applicable, can lead to only one result. See Restatement (Third) of Property: Donative Transfers § 11.3 and cmt. b (Tentative Draft No. 1, approved 1995).

Rules of construction attribute intention to individual donors based on assumptions of common intention. Rules of construction are found both in enacted statutes and in judicial decisions. Rules of construction can involve the meaning to be given to particular language in the document, such as the meaning to be given to "heirs" or "issue." Rules of construction also address situations the donor failed to anticipate. These include the failure to anticipate the predecease of a beneficiary or to specify the source from which expenses are to be paid. Rules of construction can also concern assumptions as to how a donor would have revised donative documents in light of certain events occurring after execution. These include rules dealing with the effect of a divorce and whether a specific devisee will receive a substitute gift if the subject matter of the devise is disposed of during the testator's lifetime.

Instead of enacting this section, a jurisdiction enacting this Code may wish to enact detailed rules on the construction of trusts, either in addition to its rules on the construction of wills or as part of one comprehensive statute applicable to both wills and trusts. For this reason and to encourage this alternative, the section has been made optional. For possible models, see Uniform Probate Code, Article 2, Parts 7 and 8, which was added to the UPC in 1990, and California Probate Code §§ 21101-21630, enacted in 1994.

NORTH CAROLINA COMMENT

This section is intended to make all rules of construction applicable to wills also applicable to trusts, including but not limited to the rules governing abatement.

Editor's Note. - Session Laws 2017-102, s. 34(a), provides: "The Revisor of Statutes shall cause to be printed an explanatory comment to G.S. 36C-1-112, prepared by the Estate Planning and Fiduciary Law Section of the North Carolina Bar Association, that Section having originally prepared Chapter 36C of the General Statutes for introduction in 2005, as the Revisor may deem appropriate."

CASE NOTES

Rightful Beneficiaries of Trust In Dispute. - Trial court erred by not freezing and by ordering distributions from a trust to some putative beneficiaries, but not others, during pending litigation because the rightful beneficiaries of the trust were in dispute, the original beneficiaries' substantial rights were affected by the large sums being distributed from the trust, the wrongful distribution claim, along with all the pending claims, hinged upon undue influence and the decedent's capacity to execute the purported amendments, the trial court's order allowing the motion to pay and the pending claims overlapped substantially, and the trustee breached its duty of neutrality by deciding who the rightful beneficiaries were before pending litigation had resolved that issue. Wing v. Goldman Sachs Trust Co., N.A., - N.C. App. - , - S.E.2d - (Oct. 20, 2020).

OFFICIAL COMMENT

Every state requires, either as a matter of statutory or common law, that a purchaser of life insurance on another individual have an insurable interest in the life of the insured. See generally Robert H. Jerry, II & Douglas R. Richmond, Understanding Insurance Law, §§ 40, 43 (LexisNexis Publishing, 4 ed., 2007), at 273-77, 293-98. The definition of insurable interest became a matter of widespread concern among trust and estate planners after Chawla ex rel Giesinger v. Transamerica Occidental Life Insurance Co., 2005 WL 405405 (E.D. Va. 2005), aff'd in part, vac'd in part, 440 F.3d 639 (4th Cir. 2006), where a Virginia federal district court applying Maryland law held that a trust did not have an insurable interest in the life of the insured who was the settlor and the creator of the trust. This portion of the district court's decision was subsequently vacated by the Fourth Circuit when holding that the district court's decision should be affirmed on other grounds, but the appellate decision did not question or criticize the district court's insurable interest analysis. The Maryland legislature subsequently enacted a statute in the state's insurance code clarifying the circumstances when a trustee or trust has an insurable interest in another's life, and several other states have enacted various forms of statutory clarification designed to address the " Chawla problem." During this process, the American College of Trust and Estate Counsel, among others, expressed the opinion that it would be best if a uniform approach could be fashioned in resolving the matter.

Consequently, the Uniform Law Commission, after studying the issue, decided to clarify the issue with respect to the Uniform Trust Code (UTC) and established a drafting committee for that purpose. The drafting committee, consisting of knowledgeable Conference members, was assisted by representatives from the American Bar Association, the American College of Trust and Estate Counsel, and the American Council of Life Insurers, consumer advocates, and other interested parties. This amendment resulted from their efforts and is designed to be inserted at the end of Article 1 of the UTC as Section 113. In keeping with the charge to the committee, the purpose of the amendment is to clarify when, for purposes of the Code, a trustee has an insurable interest in an individual whose life is to be the subject of an insurance policy to fund the trust. Clarification of this area of law that was subjected to uncertainty by the Chawla decision will provide a reliable basis upon which trust and estate planning practitioners may draft trust instruments that involve the eventual payment of expected death benefits.

It should be noted that the entire amendment is placed in brackets to indicate that each state should consider whether it is needed or its adoption would be appropriate. In some states Chawla may not present serious problems under pre-existing insurable interest law because it may be clear that a trustee already has an appropriate insurable interest for estate planning purposes. In other states, Chawla would present problems but, as indicated above, the state may have already addressed the issue so that the amendment may not be needed. Currently there are at least ten states that have enacted legislation on the subject (Delaware, Florida, Illinois, Georgia, Maine, Maryland, Minnesota, South Dakota, Virginia, and Washington). In those states that do need to respond to Chawla (plus those that may want to revisit the matter) the amendment offers a reasonable solution that has the support of many in the estate planning field, as well as the life insurance industry.

With regard to language of the amendment, subsection (a) provides that the term "settlor" is limited to a person who executes the trust instrument. This is narrower than the UTC definition of "settlor," which, in addition to the person who executes the trust instrument, would include a person who merely contributes property to the trust. See UTC Section 103(15). As explained in the comment to Section 103(15), the broader definition serves a useful purpose in connection with the UTC generally; however, none of those situations relates to the issue of whose life should properly be the subject of a life insurance policy that is used to fund a trust. Moreover, to use the broader definition would needlessly complicate the issue of whose life should be the subject of insurance because it would be rare, if ever, that a life insurance policy used to fund a trust for estate planning purposes would be on the life of someone other than the settlor signing the trust or someone in whose life that settlor would have an insurable interest. Because there are situations in which a trust instrument will be executed by a fiduciary or agent for the creator of the trust, subsection (a) also makes clear that in such circumstances the fiduciary or agent is deemed to be the equivalent of the settlor.

Subsection (b) carries forward the widely approved rule that the time at which insurable interest in a life insurance policy is determined is the date the policy is issued, otherwise understood as the inception of the policy. Thus, if on the date the policy is issued the trustee has an insurable interest in the individual whose life is insured, the policy is not subject to being declared void for lack of such an interest. Under the reasoning that an individual has an unlimited insurable interest in his or her own life, subsection (b) provides that a trustee has an insurable interest in the settlor's own life. If an individual, as settlor, has created a trust to hold a life insurance policy on his or her own life, has funded that trust with the policy or with money to pay its premiums, and has selected the trustee of the trust, it follows that the trustee should have the same insurable interest that the settlor has in his or her own life. Similarly, recognizing that an individual may purchase insurance on the life of anyone in whom that individual has an insurable interest up to, generally speaking, the amount of that interest, subsection (b) provides that the trustee has an insurable interest in an individual in whom the settlor has, or would have had if living at the time the policy was issued, an insurable interest.

Moreover, paragraph (1) of subsection (b) addresses the Chawla issue by referring to the jurisdiction's insurance code or other law regarding insurable interest as a separate, independent source of law for determining whether a trustee has an insurable interest in the life of an individual on whose life the trust has purchased insurance. This means that the trustee would be entitled to apply for and purchase an insurance policy not only on the life of a settlor but also on the life of any other individual in whom the settlor has an insurable interest, e.g., the spouse or children of the settlor, in the enacting jurisdiction. Exactly whose lives may be insured depends on the law of the enacting jurisdiction. In short, the amendment does not change the enacting jurisdiction's pre-existing law of insurable interest.

Paragraph (2) of subsection (b) addresses a somewhat different issue, although it also references the insurable interest law of the enacting jurisdiction. It is designed to ensure that irrevocable life insurance trusts (ILITs) are created to serve bona fide estate planning purposes by restricting who may be a beneficiary of insurance proceeds from a policy purchased to fund an ILIT. It establishes the requirement that the proceeds of such a life insurance policy used to fund the trust be payable primarily to certain types of trust beneficiaries. As to the latter, paragraph (2) contains bracketed language designed to provide states with a choice with regard to who those beneficiaries might be.

One choice may be exercised by deleting all the brackets, and all the language contained within the brackets, in paragraph (2) of subsection (b). By doing so, the class of beneficiaries for whom the insurance proceeds must primarily benefit is limited to those who, in the enacting state, have an insurable interest in the life of the settlor. Depending on the law of the jurisdiction, this could mean that only those individuals traditionally recognized as having an insurable interest, such as spouses and their children, would qualify, or it could mean that additional family members, such as siblings, grandchildren, grandparents, and perhaps others, have an insurable interest in the life of the settlor. In some other jurisdictions, the law may not be clear on this point. In these jurisdictions, estate planners generally may be concerned that strictly tying the class of beneficiaries to the state's insurable interest law might unduly restrict their ability to provide appropriate legal services to their clients. To help alleviate this concern, an alternative is offered to clarify the law in these jurisdictions. To exercise this choice, the enacting jurisdiction need only remove the brackets while retaining the language contained therein, thereby adopting the language as part of the amendment.

Removing the brackets and retaining the bracketed language in paragraph (2) of subsection (b) clarifies and broadens to a limited extent the class of individuals for whom the insurance must primarily benefit. By including anyone who is related to the settlor or other insured by blood or law within the third degree, the amendment makes clear that not only parents and their children would fall in the required beneficiary category, but also that siblings, grandparents, grandchildren, great-grandparents, great-grandchildren, aunts, uncles, nephews, and nieces would also qualify. Lineal consanguinity, to use the more technical term for relation by blood, is the relationship between individuals when one directly descends from the other. Each generation in this direct line constitutes a degree. Collateral consanguinity refers to the relationship between individuals who descend from a common ancestor but not from each other. The civil law method of calculating degree of collateral consanguinity, which is used in most states, counts the number of generations from one individual, e.g., the insured, up to the common ancestor and then down to the other individual. See 1 RESTATEMENT (THIRD) OF PROPERTY (Wills and Other Donative Transfers) § 2.4 cmt. k (1999).

The following table identifies the relatives of an insured within three degrees of lineal and collateral consanguinity using the civil law method, with each row representing a generation.

Great-Grandparents (3) Grandparen ts (2) Parents (1) Aunts and Uncles (3) INSURED Sisters and Brothers (2) Children (1) Nieces and Nephews (3) Grandchildren (2) Great-Grandchildren (3)

The reference in subparagraph (B)(i) to relation by "law"-if that term is interpreted to have the same legal meaning as the term "affinity"-may extend the category of beneficiaries that must be primarily benefited to in-laws. If that is the case, degrees of relationship by law or affinity should be computed in the same manner as degrees of relationship by consanguinity. See State v. Hooper, 140 Kan. 481, 37 P.2d 52 (1934 )(explaining, for example, that a husband has the same relation, by affinity, to his wife's blood relatives as she has to them by consanguinity, and vice versa). This would mean that a son- or daughter-in-law of the insured would be related in the first degree and a brother- or sister-in-law of the insured would be related in the second degree. A father- or mother-in-law would be related to the insured in the first degree, whereas an aunt- or uncle-in-law would be related to the insured in the third degree. See State v. Allen, 304 N.W.2d 203, at 207 (Iowa 1981)(listing authorities on how to compute degrees of relation).

At the very least, the term "law" should be interpreted to include the relation between spouses and the relation between an adoptive parent and adopted child, if they were not already included under subparagraph (A). Additionally, in case there is any doubt as to whether an adopted grandchild, i.e., a child adopted by an insured's child, is sufficiently related to the insured, as a biological grandchild might be, to have an insurable interest under subparagraph (A), the reference in (B)(i) may ensure that the adopted grandchild falls within the required category of beneficiaries. This is because the adopted grandchild arguably would, at the very least, be related by affinity to the insured in the second degree, just as a biological child of the insured's child would be related by blood in the second degree to the insured. In other words, the adopted grandchild would be treated in the same manner as a biological grandchild for purposes of the amendment.

Stepchildren, who may not otherwise have an insurable interest in the life of the settlor or other insured under subparagraph (A) or who may not be included under subparagraph (B)(i), depending on the interpretation given to the term "law," are specifically included in subparagraph (B)(ii) to ensure that they occupy the same status as any other child of the settlor, biological or adopted.

The reason for the modifying language "if not already included under subparagraph (A)" found in subparagraph (B) of paragraph (2) of subsection (b) is to make it clear that there is no negative implication with regard to anyone related within the third degree to the insured and who would be included by virtue of the adopting jurisdiction's insurable interest law referred to in subparagraph (A). In other words, some of the people, but not all, included under subparagraph (A) will be related to the person whose life is insured within the third degree and the modifying language is designed to make it clear that subparagraph (B)(i) merely adds any others so related. The same reasoning applies to stepchildren. The adopting jurisdiction may already include them under its insurable interest law referred to in subparagraph (A). If not, however, subparagraph (B)(ii) makes sure they are included in the category of people for whom the insurance policy proceeds must primarily benefit.

Although estate planners expressed concern were a jurisdiction to delete subparagraph (B) because they felt doing so would unduly limit their ability to serve their clients' needs, there was a general consensus that including those identified in subparagraph (B) should suffice for the great majority of estate plans. Thus, estate planners strongly support the adoption of the language in subparagraph (B).

It should also be noted that, regardless of the decision relating to the choices presented by the bracketed language in paragraph (2) of subsection (b), the test concerning whether the beneficiaries designated in paragraph (2) are the primary beneficiaries of the policy proceeds takes place at the inception of the life insurance policy, i.e., when the policy is issued. The fact that there may be contingent trust beneficiaries or that the proceeds would be payable to different beneficiaries based on subsequent events or conditions is not relevant to the determination. One need only identify those trust beneficiaries that would receive the policy proceeds were the insured life to expire immediately after the policy is issued and the trust were to terminate at the same time. Among these beneficiaries, the proceeds must be payable primarily to those specified in paragraph (2) of subsection (b). If that is so, the condition is satisfied and may not be challenged thereafter or on the basis that subsequent events might change who would receive the proceeds.

As for the term "primarily," it will often be the case that one is able to calculate that more than fifty percent of the policy proceeds will be payable to the required class of beneficiaries under paragraph (2), but this may not always be the situation. For example, if the purpose of the trust is to provide a lifetime benefit to a spouse or funds for children to obtain an education, the amount may be indeterminate. This, however, does not mean that the policy proceeds are not primarily for the benefit of these individuals if upon the inception of the policy they are the people who will immediately and mainly benefit from the trust, even though there are others not designated in paragraph (2) who may also benefit concurrently or benefit subsequently upon the satisfaction of some condition in the future. In short, the term is intended to be applied in a common sense manner rather than in a hyper-technical manner that would require that a precise dollar amount be payable to certain beneficiaries.

Finally, the amendment is drafted as it would appear in the UTC were it to be part of the Code when the latter is enacted or as it would appear as an amendment to a previously enacted version of the Code. In either case, since Section 1106 of the UTC, as originally drafted, already deals with the applicability of the UTC to trusts existing at the time of enactment, there may be no need to address that issue in this amendment. However, if an issue should arise regarding which trusts and life insurance policies are subject to the amendment, the following language may be helpful in resolving that issue:

This section applies to any trust existing before, on, or after the effective date of this section, regardless of the effective date of the governing instrument under which the trust was created, but only as to a life insurance policy that is in force and for which an insured is alive on or after the effective date of this section.

Cross References. - As to construction of certain formula clauses in will or codicils applicable to estates of decedents dying in calendar year 2010, see G.S. 31-46.1.

OFFICIAL COMMENT

Every state requires, either as a matter of statutory or common law, that a purchaser of life insurance on another individual have an insurable interest in the life of the insured. See 1 generally Robert H. Jerry, II & Douglas R. Richmond, Understanding Insurance Law, §§ 40,43 (LexisNexis Publishing, 4 ed., 2007), at 273-77, 293-98. The definition of insurable interest became a matter of widespread concern among trust and estate planners after Chawla ex rel Giesinger v. Transamerica Occidental Life Insurance Co. , 2005 WL 405405 (E.D. Va. 2005), aff'd in part, vac'd in part, 440 F.3d 639 (4th Cir. 2006), where a Virginia federal district court applying Maryland law held that a trust did not have an insurable interest in the life of the insured who was the settlor and the creator of the trust. This portion of the district court's decision was subsequently vacated by the Fourth Circuit when holding that the district court's decision should be affirmed on other grounds, but the appellate decision did not question or criticize the district court's insurable interest analysis. The Maryland legislature subsequently enacted a statute in the state's insurance code clarifying the circumstances when a trustee or trust has an insurable interest in another's life, and several other states have enacted various forms of statutory clarification designed to address the " Chawla problem." During this process, the American College of Trust and Estate Counsel, among others, expressed the opinion that it would be best if a uniform approach could be fashioned in resolving the matter.

Consequently, the Uniform Law Commission, after studying the issue, decided to clarify the issue with respect to the Uniform Trust Code (UTC) and established a drafting committee for that purpose. The drafting committee, consisting of knowledgeable Conference members, was assisted by representatives from the American Bar Association, the American College of Trust and Estate Counsel, and the American Council of Life Insurers, consumer advocates, and other interested parties. This amendment resulted from their efforts and is designed to be inserted at the end of Article 1 of the UTC as Section 113. In keeping with the charge to the committee, the purpose of the amendment is to clarify when, for purposes of the Code, a trustee has an insurable interest in an individual whose life is to be the subject of an insurance policy to fund the trust. Clarification of this area of law that was subjected to uncertainty by the Chawla decision will provide a reliable basis upon which trust and estate planning practitioners may draft trust instruments that involve the eventual payment of expected death benefits.

It should be noted that the entire amendment is placed in brackets to indicate that each state should consider whether it is needed or its adoption would be appropriate. In some states Chawla may not present serious problems under pre-existing insurable interest law because it may be clear that a trustee already has an appropriate insurable interest for estate planning purposes. In other states, Chawla would present problems but, as indicated above, the state may have already addressed the issue so that the amendment may not be needed. Currently there are at least ten states that have enacted legislation on the subject (Delaware, Florida, Illinois, Georgia, Maine, Maryland, Minnesota, South Dakota, Virginia, and Washington). In those states that do need to respond to Chawla (plus those that may want to revisit the matter) the amendment offers a reasonable solution that has the support of many in the estate planning field, as well as the life insurance industry.

With regard to language of the amendment, subsection (a) provides that the term "settlor" is limited to a person who executes the trust instrument. This is narrower than the UTC definition of "settlor," which, in addition to the person who executes the trust instrument, would include a person who merely contributes property to the trust. See UTC Section 103(15). As explained in the comment to Section 103(15), the broader definition serves a useful purpose in connection with the UTC generally; however, none of those situations relates to the issue of whose life should properly be the subject of a life insurance policy that is used to fund a trust. Moreover, to use the broader definition would needlessly complicate the issue of whose life should be the subject of insurance because it would be rare, if ever, that a life insurance policy used to fund a trust for estate planning purposes would be on the life of someone other than the settlor signing the trust or someone in whose life that settlor would have an insurable interest. Because there are situations in which a trust instrument will be executed by a fiduciary or agent for the creator of the trust, subsection (a) also makes clear that in such circumstances the fiduciary or agent is deemed to be the equivalent of the settlor.

Subsection (b) carries forward the widely approved rule that the time at which insurable interest in a life insurance policy is determined is the date the policy is issued, otherwise understood as the inception of the policy. Thus, if on the date the policy is issued the trustee has an insurable interest in the individual whose life is insured, the policy is not subject to being declared void for lack of such an interest. Under the reasoning that an individual has an unlimited insurable interest in his or her own life, subsection (b) provides that a trustee has an insurable interest in the settlor's own life. If an individual, as settlor, has created a trust to hold a life insurance policy on his or her own life, has funded that trust with the policy or with money to pay its premiums, and has selected the trustee of the trust, it follows that the trustee should have the same insurable interest that the settlor has in his or her own life. Similarly, recognizing that an individual may purchase insurance on the life of anyone in whom that individual has an insurable interest up to, generally speaking, the amount of that interest, subsection (b) provides that the trustee has an insurable interest in an individual in whom the settlor has, or would have had if living at the time the policy was issued, an insurable interest.

Moreover, paragraph (1) of subsection (b) addresses the Chawla issue by referring to the jurisdiction's insurance code or other law regarding insurable interest as a separate, independent source of law for determining whether a trustee has an insurable interest in the life of an individual on whose life the trust has purchased insurance. This means that the trustee would be entitled to apply for and purchase an insurance policy not only on the life of a settlor but also on the life of any other individual in whom the settlor has an insurable interest, e.g., the spouse or children of the settlor, in the enacting jurisdiction. Exactly whose lives may be insured depends on the law of the enacting jurisdiction. In short, the amendment does not change the enacting jurisdiction's pre-existing law of insurable interest.

Paragraph (2) of subsection (b) addresses a somewhat different issue, although it also references the insurable interest law of the enacting jurisdiction. It is designed to ensure that irrevocable life insurance trusts (ILITs) are created to serve bona fide estate planning purposes by restricting who may be a beneficiary of insurance proceeds from a policy purchased to fund an ILIT. It establishes the requirement that the proceeds of such a life insurance policy used to fund the trust be payable primarily to certain types of trust beneficiaries. As to the latter, paragraph (2) contains bracketed language designed to provide states with a choice with regard to who those beneficiaries might be.

One choice may be exercised by deleting all the brackets, and all the language contained within the brackets, in paragraph (2) of subsection (b). By doing so, the class of beneficiaries for whom the insurance proceeds must primarily benefit is limited to those who, in the enacting state, have an insurable interest in the life of the settlor.

. . . .

It should also be noted that, regardless of the decision relating to the choices presented by the bracketed language in paragraph (2) of subsection (b), the test concerning whether the beneficiaries designated in paragraph (2) are the primary beneficiaries of the policy proceeds takes place at the inception of the life insurance policy, i.e., when the policy is issued. The fact that there may be contingent trust beneficiaries or that the proceeds would be payable to different beneficiaries based on subsequent events or conditions is not relevant to the determination. One need only identify those trust beneficiaries that would receive the policy proceeds were the insured life to expire immediately after the policy is issued and the trust were to terminate at the same time. Among these beneficiaries, the proceeds must be payable primarily to those specified in paragraph (2) of subsection (b). If that is so, the condition is satisfied and may not be challenged thereafter or on the basis that subsequent events might change who would receive the proceeds.

As for the term "primarily," it will often be the case that one is able to calculate that more than fifty percent of the policy proceeds will be payable to the required class of beneficiaries under paragraph (2), but this may not always be the situation. For example, if the purpose of the trust is to provide a lifetime benefit to a spouse or funds for children to obtain an education, the amount may be indeterminate. This, however, does not mean that the policy proceeds are not primarily for the benefit of these individuals if upon the inception of the policy they are the people who will immediately and mainly benefit from the trust, even though there are others not designated in paragraph (2) who may also benefit concurrently or benefit subsequently upon the satisfaction of some condition in the future. In short, the term is intended to be applied in a common sense manner rather than in a hyper-technical manner that would require that a precise dollar amount be payable to certain beneficiaries.

Finally, the amendment is drafted as it would appear in the UTC were it to be part of the Code when the latter is enacted or as it would appear as an amendment to a previously enacted version of the Code. In either case, since Section 1106 of the UTC, as originally drafted, already deals with the applicability of the UTC to trusts existing at the time of enactment, there may be no need to address that issue in this amendment.

. . . .

NORTH CAROLINA COMMENT

Effective June 12, 2013, subsection (a) and subdivisions (b)(1) and (2) of this section incorporate the provisions of subsections (a), (b)(1) and subparagraph (A) of (b)(2) of the Insurable Interest Amendments to the Uniform Trust Code drafted by the National Conference of Commissioners on Uniform State Laws. The purpose of this section is to clarify when, for purposes of the North Carolina Uniform Trust Code, a trustee of an irrevocable trust has an insurable interest in an individual whose life is the subject of an insurance policy that is trust property.

Subdivision (b)(2) of this section establishes a requirement that the life insurance proceeds be payable primarily for the benefit of one or more trust beneficiaries that "have an insurable interest in the life of the insured." As explained in the Comment to the Insurable Interest Amendments, the Uniform Law Commission gave the states a choice of deleting the bracketed language of subparagraph (B) of subsection (b)(2) of the Insurable Interest Amendments providing that the requirement that the life insurance be primarily for the benefit of the beneficiaries could also be satisfied by beneficiaries that have "a substantial interest engendered by love and affection in the continuation of the life of the insured" and who are related to the insured to a certain degree or are stepchildren of the insured.

The drafters chose not to include the bracketed language of subparagraph (B) of subsection (b)(2) of the Insurable Interest Amendments. The drafters added subsection (c), which is not a part of the Insurable Interest Amendments. This subsection applies to this section the rule of liberal construction to sustain insurable interest set out in G.S. 58-58-90 for other insurable interest statutes.

Editor's Note. - Session Laws 2013-91, s. 4, provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the North Carolina Uniform Trust Code and all explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

OFFICIAL COMMENT

While the Uniform Trust Code encourages the resolution of disputes without resort to the courts by providing such options as the nonjudicial settlement authorized by Section 111, the court is always available to the extent its jurisdiction is invoked by interested persons. The jurisdiction of the court with respect to trust matters is inherent and historical and also includes the ability to act on its own initiative, to appoint a special master to investigate the facts of a case, and to provide a trustee with instructions even in the absence of an actual dispute.

Contrary to the trust statutes in some States, the Uniform Trust Code does not create a system of routine or mandatory court supervision. While subsection (b) authorizes a court to direct that a particular trust be subject to continuing court supervision, the court's intervention will normally be confined to the particular matter brought before it.

Subsection (c) makes clear that the court's jurisdiction may be invoked even absent an actual dispute. Traditionally, courts in equity have heard petitions for instructions and have issued declaratory judgments if there is a reasonable doubt as to the extent of the trustee's powers or duties. The court will not ordinarily instruct trustees on how to exercise discretion, however. See Restatement (Second) of Trusts §§ 187, 259 (1959). This section does not limit the court's equity jurisdiction. Beyond mentioning petitions for instructions and actions to declare rights, subsection (c) does not attempt to list the types of judicial proceedings involving trust administration that might be brought by a trustee or beneficiary. Such an effort is made in California Probate Code § 17200. Excluding matters not germane to the Uniform Trust Code, the California statute lists the following as items relating to the "internal affairs" of a trust: determining questions of construction; determining the existence or nonexistence of any immunity, power, privilege, duty, or right; determining the validity of a trust provision; ascertaining beneficiaries and determining to whom property will pass upon final or partial termination of the trust; settling accounts and passing upon the acts of a trustee, including the exercise of discretionary powers; instructing the trustee; compelling the trustee to report information about the trust or account to the beneficiary; granting powers to the trustee; fixing or allowing payment of the trustee's compensation or reviewing the reasonableness of the compensation; appointing or removing a trustee; accepting the resignation of a trustee; compelling redress of a breach of trust by any available remedy; approving or directing the modification or termination of a trust; approving or directing the combination or division of trusts; and authorizing or directing transfer of a trust or trust property to or from another jurisdiction.

NORTH CAROLINA COMMENT

In subsection (a) the word "party" was substituted for the words "an interested person". See the North Carolina Comment to G.S. 36C-2-205.

In subsection (b) the words "except as provided in G.S. 36C-2-208 and G.S. 36C-2-209" were added after the word "supervision" to acknowledge that the trustee may be required to account to the clerk of superior court if required by those sections.

Effective Date and Applicability. - Session Laws 2005-192, which enacted Chapter 36C, in s. 7(a) provides: "Section 2 of this act becomes effective January 1, 2006, and except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, applies to (i) all trusts created before, on, or after that date; (ii) all judicial proceedings concerning trusts commenced on or after that date; and (iii) judicial proceedings concerning trusts commenced before that date unless the court finds that application of a particular provision of Chapter 36C of the General Statutes would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of Chapter 36C of the General Statutes does not apply and the superseded law applies.

"Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, any rule of construction or presumption provided in Chapter 36C of the General Statutes applies to trust instruments executed before the effective date of Section 2 of this act unless there is a clear indication of a contrary intent in the terms of the trust or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary. Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, an act done before the effective date of Section 2 of this act is not affected by Chapter 36C of the General Statutes. If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before the effective date of Section 2 of this act, that statute continues to apply to the right even if it has been repealed or superseded."

Official Comment on Effective Date and Applicability. - The Uniform Trust Code is intended to have the widest possible effect within constitutional limitations. Specifically, the Code applies to all trusts whenever created, to judicial proceedings concerning trusts commenced on or after its effective date, and unless the court otherwise orders, to judicial proceedings in progress on the effective date. In addition, any rules of construction or presumption provided in the Code apply to preexisting trusts unless there is a clear indication of a contrary intent in the trust's terms. By applying the Code to preexisting trusts, the need to know two bodies of law will quickly lessen.

This Code cannot be fully retroactive, however. Constitutional limitations preclude retroactive application of rules of construction to alter property rights under trusts that became irrevocable prior to the effective date. Also, rights already barred by a statute of limitation or rule under former law are not revived by a possibly longer statute or more liberal rule under this Code. Nor is an act done before the effective date of the Code affected by the Code's enactment.

The Uniform Trust Code contains an additional effective date provision. Pursuant to Section 602(a), prior law will determine whether a trust executed prior to the effective date of the Code is presumed to be revocable or irrevocable.

For a comparable uniform law effective date provision, see Uniform Probate Code Section 8 101.

North Carolina Comment on Effective Date and Applicability. - The drafters modified the provisions of the Uniform Trust Code relating to its application to trust instruments executed before its effective date by adding the phrase "or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary" to the end of the first sentence of the second paragraph. Although this Chapter is intended to have broad application, the drafters concluded that a rule of construction or presumption provided in this Chapter should not be applied to a trust instrument executed before the effective date of this Chapter if the application of such rule or presumption would impair the substantial rights of a beneficiary of a trust established under such a trust instrument.

Editor's Note. - Session Laws 2005-192, which enacted Chapter 36C, in s. 6, provides: "The Revisor of Statutes shall cause to be printed along with this act all relevant portions of the Official Commentary to the Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Official Comments, copyright 2005, are reprinted in this Chapter with the permission of the National Conference of Commissioners on Uniform State Laws. It is believed that the Official Comments will prove of value to the practitioner in understanding and applying the text of this Chapter.

The Official Comments appearing under individual sections in this Chapter have been printed by the publisher as received, without editorial change, and relate to the Chapter as originally enacted. However, not all sections in this Chapter may carry Official Comments. Furthermore, Official Comments may or may not have been received or updated in conjunction with subsequent amendments to this Chapter and, therefore, may not reflect all changes to the sections under which they appear.

Where they appear in this Chapter, "Amended Comment" usually means that an error in the original comment has been corrected by a subsequent amendment, and "Supplemental Comment" pertains to a later development, such as an amendment to the statute text. North Carolina Comments explain where the General Assembly has enacted variations to the text of the Uniform Act.

OFFICIAL COMMENT

This section clarifies that the courts of the principal place of administration have jurisdiction to enter orders relating to the trust that will be binding on both the trustee and beneficiaries. Consent to jurisdiction does not dispense with any required notice, however. With respect to jurisdiction over a beneficiary, the Comment to Uniform Probate Code § 7-103, upon which portions of this section are based, is instructive:

It also seems reasonable to require beneficiaries to go to the seat of the trust when litigation has been instituted there concerning a trust in which they claim beneficial interests, much as the rights of shareholders of a corporation can be determined at a corporate seat. The settlor has indicated a principal place of administration by its selection of a trustee or otherwise, and it is reasonable to subject rights under the trust to the jurisdiction of the Court where the trust is properly administered.

The jurisdiction conferred over the trustee and beneficiaries by this section does not preclude jurisdiction by courts elsewhere on some other basis. Furthermore, the fact that the courts in a new State acquire jurisdiction under this section following a change in a trust's principal place of administration does not necessarily mean that the courts of the former principal place of administration lose jurisdiction, particularly as to matters involving events occurring prior to the transfer.

The jurisdiction conferred by this section is limited. Pursuant to subsection (b), until a distribution is made, jurisdiction over a beneficiary is limited to the beneficiary's interests in the trust. Personal jurisdiction over a beneficiary is conferred only upon the making of a distribution. Subsection (b) also gives the court jurisdiction over other recipients of distributions. This would include individuals who receive distributions in the mistaken belief they are beneficiaries.

For a discussion of jurisdictional issues concerning trusts, see 5A Austin W. Scott & William F. Fratcher, The Law of Trusts §§ 556-573 (4th ed. 1989).

OFFICIAL COMMENT

This section provides a means for distinguishing the jurisdiction of the court having primary jurisdiction for trust matters, whether denominated the probate court, chancery court, or by some other name, from other courts in a State that may on occasion resolve disputes concerning trusts. The section has been placed in brackets because the enacting jurisdiction may already address subject-matter jurisdiction by other statute or court rule. The topic also need not be addressed in States having unified court systems. For an explanation of types of proceedings which may be brought concerning the administration of a trust, see the Comment to Section 201.

NORTH CAROLINA COMMENT

Subsection (a) brings forward in place of subsection (a) of the Uniform Trust Code the provisions of former G.S. 36A-23.1 (a) regarding the jurisdiction of the clerk of superior court in trust proceedings. In addition to some minor modifications to former G.S. 36A-23.1, paragraphs (4) through (8) were added as additional examples of proceedings included in the exclusive jurisdiction of the clerk.

Subsection (b) brings forward the second sentence of former G.S. 36A-23.1(b). The first sentence providing that trust matters should proceed expeditiously consistent with the terms of the trust without judicial intervention was not brought forward in this subsection because that subject is addressed in G.S. 36C-2-201(b).

Subsection (c) brings forward in the first sentence the provisions of former G.S. 36A-23.1(c) regarding the right to file a declaratory judgment action under Article 26 of Chapter 1. The remaining provisions were added to clarify that if a party requests declaratory relief, the other party may move for a transfer of the proceeding to the superior court as provided in Article 21 of Chapter 7A and that, if not so removed, the provisions of Article 26 of Chapter 1 will apply to a trust proceeding to the extent not inconsistent with this Article.

Subsection (d) recodifies the provisions of former G.S. 36A-25.1 regarding dismissal of matters relating to foreign trusts.

Subsection (e) recodifies the provisions of former G.S. 36A-27 regarding the appeal of decisions of the clerk.

Subsection (f) is consistent with former G.S. 36A-23.1(a) in excluding from the jurisdiction of the clerk actions to modify or terminate trusts but also designates other matters excluded from the clerk's jurisdiction under case or statutory law. See State ex rel. v. Pilard v. Berniger, 154 N.C. App. 45, 571 S.E.2d 836 (2002), disc. review denied, 156 N.C. 694, 579 S.E.2d 100 (2003) where the court said: "Claims such as breach of fiduciary duty, fraud, and negligence are 'justiciable matters of a civil nature' jurisdiction over which is vested in the trial division".

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, this section is amended to make clear that the clerk of court and the superior court division of the General Court of Justice have concurrent jurisdiction over any matters involving the internal affairs of a trust which fall under subdivision (a)(9) of this section. If a subdivision (a)(9) matter is brought before the clerk of court, any party to the matter may have the matter transferred to superior court. However, if all parties desire to have the matter heard by the clerk of court, the clerk of court cannot, upon the clerk's own motion, have the matter transferred to superior court. In addition, the amendment to this section makes clear that Article 26 of Chapter 1 of the General Statutes, North Carolina's Declaratory Judgment Act, shall apply to a trust proceeding pending before the clerk of superior court to the extent consistent with Article 2 of Chapter 36C.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2009)

Effective October 1, 2009, subdivision (a)(9) of this section is amended to grant to the clerks of superior court jurisdiction to create a trust. Like other proceedings included in subdivision (a)(9), the clerk's jurisdiction to create a trust is not exclusive. Any party may file a notice of transfer of a proceeding to create a trust to superior court. The authority of superior court to create a trust is recognized in North Carolina. See Supplemental North Carolina Comment (2009) to G.S. 36C-4-401.

Effective October 1, 2009, subdivision (f)(6) of this section is added to exclude from the jurisdiction of the clerk of superior court actions involving the exercise of the trustee's special power to appoint to a second trust pursuant to G.S. 36C-8-816.1 [Repealed by S.L. 2017-121, s. 2.4], also effective October 1, 2009. An action to invoke the exercise of the trustee's special power to appoint to a second trust is analogous to an action to modify a trust, which is also excluded from the jurisdiction of the clerk of superior court under subdivision (f)(1).

SUPPLEMENTAL NORTH CAROLINA COMMENT (2020)

Effective July 11, 2019, G.S. 36C-2-203(f)(1) is amended to clarify that notwithstanding G.S. 36C-2-203(a)(1) the clerk of superior court does not have jurisdiction of actions to reform or modify a trust pursuant to G.S. 36C-4-412 through 36C-4-416 to add terms of a trust known as a "portability provision" for the removal and replacement of a trustee by one or more beneficiaries or other persons. Only the superior court may reform or modify a trust pursuant to G.S. 36C-4-412 through G.S. 36C-4-416 to add portability provisions without regard to G.S. 36C-7-706 so long as the addition satisfies the grounds prescribed for reformation or modification under the section pursuant to the reformation or modification is sought.

However, effective July 11, 2019, subsection (h) added to G.S. 36C-4-411 clarifies that the superior court lacks jurisdiction of actions based on G.S. 36C-4-411(b) and (c) to modify the terms of a trust to add a portability provision or otherwise remove or replace a trustee upon the consent of the beneficiaries. Such an action is within the exclusive jurisdiction of the clerk of superior court to remove or replace a trustee pursuant to G.S. 36C-7-706. See In re Testamentary Trust of Charnock, 158 N.C. App 35, 579 S.E.2d 887 (2003), aff'd, 358 N.C. 523, 597 S.E.2d 706 (2004) and the North Carolina Comment to G.S. 36C-4-411(h).

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2009-318, s. 3, provides in part, that the amendment to this section is applicable to (i) all trusts created, and to all conveyances, devises, beneficiary designations, or other transfers occurring before, on, or after that date; (ii) all judicial proceedings concerning trusts or transfers to or by trusts commenced on or after that date; and (iii) all judicial proceedings concerning trusts or transfers to or by trusts commenced before that date unless the court finds that application of a particular provision of this act would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the law as it existed on September 30, 2009, shall apply.

Session Laws 2010-96, s. 22, provides: "The Revisor of Statutes may cause to be printed all explanatory comments of the drafters of S.L. 2009-222, 2009-267, and 2009-318 as the Revisor deems appropriate."

Session Laws 2019-113, s. 7, made the second sentence in subdivision (f)(1) of this section, as added by Session Laws 2019-113, s. 5, effective July 11, 2019, and applicable to trusts created before, on, or after that date and to pleadings filed on or after that date.

Session Laws 2019-113, s. 6.1, as added by Session Laws 2020-69, s. 7, provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all explanatory comments of the drafters of Sections 5 and 6 of this act as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, ss. 6 and 7, effective October 1, 2007, in subsection (a), inserted "including the appointment and removal of a trustee pursuant to G.S. 36C-4-414(b)" in subdivision (1), rewrote subdivision (2), rewrote the former last sentence and added the current last sentence in subdivision (9) and made related changes; and in subsection (c), inserted "in the Superior Court Division of the General Court of Justice" in the first sentence, and deleted the former last two sentences which provided for the transfer of the trust proceeding to the superior court division of the General Court of Justice under certain circumstances. See Editor's note for applicability.

Session Laws 2009-267, s. 1, effective October 1, 2009, inserted "to create a trust" in the first sentence of subdivision (a)(9).

Session Laws 2009-318, s. 2, effective October 1, 2009, added subdivision (f)(6), and made related stylistic and punctuation changes. For applicability, see editor's note.

Session Laws 2010-126, s. 3, effective July 21, 2010, in the introductory paragraph of subsection (f), inserted "any of"; added subdivision (f)(7); and made punctuation changes in subdivisions (f)(1) through (f)(5).

Session Laws 2017-121, ss. 2.2, 2.3, effective July 18, 2017, added "and the appointment of a special fiduciary pursuant to G.S. 36C-8B-9" at the end of subdivision (a)(1), and made a related punctuation change; and substituted "decanting power pursuant to Article 8B of this Chapter" for "trustee's special power to appoint to a second trust pursuant to G.S. 36C-8-816.1" in subdivision (f)(6).

Session Laws 2019-113, s. 5, added the second sentence in subdivision (f)(1). For effective date and applicability, see Editor's note.

CASE NOTES

Editor's Note. - Many of the cases below were decided under prior law.

Jurisdiction of Clerk Is Statutory. - The equitable jurisdiction of the superior courts does not extend to the clerks of court unless expressly given by statute, and this and following sections giving clerks of court a limited power to appoint trustees in certain instances will not be extended to give them jurisdiction of any proceeding unless clearly within the provisions of the statutes. In re Smith, 200 N.C. 272, 156 S.E. 494 (1931).

When trust beneficiaries filed a petition under former G.S. 36A-125.4(a) to modify a trust to provide that it would be administered by the settlor's grand-niece and a bank, instead of the trustee appointed by the trust instrument, the proceeding was actually one to remove the trustee, over which the clerk of superior court had exclusive jurisdiction, and the superior court had no jurisdiction to hear their petition. In re Charnock, 358 N.C. 523, 597 S.E.2d 706 (2004).

Modification of a trust. - Under both the pre-and post-amendment versions of G.S. 36A-23.1, the clerk of superior court lacks original jurisdiction over proceedings to "modify or terminate" a trust, so an action that is characterized as a modification must be brought before the superior court, and the nature of an action determines whether jurisdiction over the action lies with the clerk of superior court or with the superior court. In re Charnock, 358 N.C. 523, 597 S.E.2d 706 (2004).

Special Proceeding to Resign. - A proceeding by a trustee for the purpose of resigning his trust is denominated a special proceeding. Russ v. Woodard, 232 N.C. 36, 59 S.E.2d 351 (1950).

Order Accepting Resignation Is Interlocutory. - The order of the clerk of the superior court accepting the resignation of a trustee in a special proceeding is an interlocutory order regardless of whether an appeal is taken therefrom or not, since even in the absence of an appeal former G.S. 36-12 required that such order be approved by the judge of the superior court before it becomes effective. Russ v. Woodard, 232 N.C. 36, 59 S.E.2d 351 (1950).

The clerk has power to set aside his prior order accepting the resignation of a trustee and appointing a successor when no appeal has been taken and the order has not been approved by the judge of the superior court. Russ v. Woodard, 232 N.C. 36, 59 S.E.2d 351 (1950).

Subsequent Valid Order Affirmed on Appeal. - Where the clerk of the court in the exercise of his valid discretionary power, has set aside his order accepting the resignation of a trustee, his subsequent valid order entered in proceedings consonant with statutory requirements and approved by the judge of the superior court in the exercise of judgment and discretion, will be affirmed on appeal. Russ v. Woodard, 232 N.C. 36, 59 S.E.2d 351 (1950).

Appointment by Clerk. - Where a charitable trust is created by a written instrument the court may appoint a trustee, in the exercise of its equitable jurisdiction, to execute the trust when the instrument fails to designate one, or the one designated fails or refuses to act, or one may be appointed under the provisions of this section. Ladies Benevolent Soc'y v. Orrell, 195 N.C. 405, 142 S.E. 493 (1928).

Relation to Other Statutes. - Action filed by a trust beneficiary and a settlor's siblings, pursuant to former G.S. 36A-125.4, seeking an order modifying a trust was really an action seeking replacement of the trustee for exercising discretion in managing the trust, and the trial court's judgment dismissing the action for lack of subject matter jurisdiction was upheld. In re Testamentary Trust of Charnock, 158 N.C. App. 35, 579 S.E.2d 887 (2003), aff'd, 358 N.C. 523, 597 S.E.2d 706 (2004).

Where the trustee appointed by will to administer an active trust dies, the clerk of the superior court is without authority to appoint a successor, since the clerk has no authority to administer an equity unless empowered to do so by statute, and this section authorizes the clerk to appoint a successor trustee only when the former trustee resigns. Cheshire v. First Presbyterian Church, 221 N.C. 205, 19 S.E.2d 855 (1942).

Loss of Unrecorded Order. - A finding by the court that, upon due consideration of the evidence and the available records in the office of the clerk, the order appointing a successor trustee had been approved by the court was sufficient to meet the requirements of this section though the order of approval had been lost without being recorded. State Trust Co. v. Toms, 244 N.C. 645, 94 S.E.2d 806 (1956).

Trust Pursuit Claim. - Superior court had subject matter jurisdiction to hear a beneficiary's trust pursuit claim because a claim for trust pursuit was an equitable claim and it was raised in a special proceeding by a co-trustee for the purpose of resigning his trust; therefore, it was proper for the clerk of the superior court to transfer the claim to superior court, and once the claims were properly before the superior court, the judge could hear and determine all matters in controversy under G.S. 1-301.2(c). Keith v. Wallerich, 201 N.C. App. 550, 687 S.E.2d 299 (2009).

Trust pursuit doctrine falls within the ambit of G.S. 36C-2-203(a)(9) because it is reasonably related to the administration of a trust since it allows a court to follow the wrongful distribution of trust property in order to reclaim that property from the hands of a wrongdoer. Keith v. Wallerich, 201 N.C. App. 550, 687 S.E.2d 299 (2009).

Claims Against Trustee. - District court properly dismissed plaintiff's claims against defendant as trustee of a trust, as plaintiff had already submitted to the jurisdiction of the clerk of the superior court for the adjudication of these claims. Morgan-McCoart v. Matchette, 244 N.C. App. 643, 781 S.E.2d 809 (2016).

Superior Court Had No Jurisdiction Over Constructive Trust Created for Child Support. - Under G.S. 7A-244, the district court had exclusive subject matter jurisdiction over a former husband's motion for an order requiring his former wife to show cause why she was not in contempt of a child support order requiring that monies in a fund be used solely to satisfy the husband's child support obligation and the unreimbursed medical expenses of the parties' children. That the district court referred to the fund as a constructive trust did not place the administration and accounting of the fund under the superior court's jurisdiction under G.S. 36C-2-203. Eakes v. Eakes, 194 N.C. App. 303, 669 S.E.2d 891 (2008).

Cited in In re Estate of Skinner, 370 N.C. 126, 804 S.E.2d 449 (2017).

§ 36C-2-203. Subject matter jurisdiction.

1. The clerks of superior court of this State have original jurisdiction over all proceedings concerning the internal affairs of trusts. Except as provided in subdivision (9) of this subsection, the clerk of superior court's jurisdiction is exclusive. Proceedings concerning the internal affairs of the trust are those concerning the administration and distribution of trusts, the declaration of rights, and the determination of other matters involving trustees and trust beneficiaries, to the extent that those matters are not otherwise provided for in the governing instrument. These include proceedings:
   1. To appoint or remove a trustee, including the appointment and removal of a trustee pursuant to G.S. 36C-4-414(b) and the appointment of a special fiduciary pursuant to G.S. 36C-8B-9.
   2. To approve the resignation of a trustee.
   3. To review trustees' fees under Article 6 of Chapter 32 of the General Statutes and review and settle interim or final accounts.
   4. To (i) convert an income trust to a total return unitrust, (ii) reconvert a total return unitrust to an income trust, or (iii) change the percentage used to calculate the unitrust amount or the method used to determine the fair market value of the trust as provided in G.S. 37A-1-104.3.
   5. To transfer a trust's principal place of administration.
   6. To require a trustee to provide bond and determine the amount of the bond, excuse a requirement of bond, reduce the amount of bond, release the surety, or permit the substitution of another bond with the same or different sureties.
   7. To make orders with respect to a trust for the care of animals as provided in G.S. 36C-4-408.
   8. To make orders with respect to a noncharitable trust without an ascertainable beneficiary as provided in G.S. 36C-4-409.
   9. To ascertain beneficiaries, to determine any question arising in the administration or distribution of any trust, including questions of construction of trust instruments, to create a trust, and to determine the existence or nonexistence of trusts created other than by will and the existence or nonexistence of any immunity, power, privilege, duty, or right. Any party may file a notice of transfer of a proceeding pursuant to this subdivision to the superior court division of the General Court of Justice as provided in G.S. 36C-2-205(g1). In the absence of a transfer to Superior Court, Article 26 of Chapter 1 of the General Statutes shall apply to a trust proceeding pending before the clerk of superior court to the extent consistent with this Article.
2. Nothing in this section shall be construed (i) to confer upon the clerk of superior court any authority to regulate or supervise the actions of a trustee except to the extent that the trustee's actions are inconsistent with the governing instrument or of State law; or (ii) to confer upon any party any additional right, remedy, or cause of action not otherwise conferred by law.
3. Nothing in this section affects the right of a person to file an action in the superior court division of the General Court of Justice for declaratory relief under Article 26 of Chapter 1 of the General Statutes.
4. The clerk of superior court shall not, over the objection of a party, entertain proceedings under this section involving a trust having its principal place of administration in another state, except:
   1. When all appropriate parties could not be bound by litigation in the courts of the state in which the trust had its principal place of administration; or
   2. When the interests of justice otherwise would be seriously impaired.
5. Any party to a proceeding before the clerk of superior court may appeal from the decision of the clerk to a superior court judge as provided for estate matters in G.S. 1-301.3.
6. Without otherwise limiting the jurisdiction of the superior court division of the General Court of Justice, proceedings concerning the internal affairs of trusts shall not include, and, therefore, the clerk of superior court shall not have jurisdiction under subsection (a) of this section of any of the following:
   1. Actions to reform, terminate, or modify a trust as provided by G.S. 36C-4-410 through G.S. 36C-4-416. Actions to reform or modify a trust pursuant to G.S. 36C-4-412 through G.S. 36C-4-416 shall include the addition of trust terms to provide for the removal and replacement of the trustee by one or more beneficiaries or other persons.
   2. Actions by or against creditors or debtors of a trust.
   3. Actions involving claims for monetary damages, including claims for breach of fiduciary duty, fraud, and negligence.
   4. Actions to enforce a charitable trust under  G.S. 36C-4-405.1.
   5. Actions to amend or reform a charitable trust under G.S. 36C-4A-1.
   6. Actions involving the exercise of the decanting power pursuant to Article 8B of this Chapter.
   7. Actions to construe a formula contained in a trust subject to G.S. 36C-1-113.
   8. Actions to establish the validity of a revocable trust before death pursuant to Article 4C of this Chapter.

The clerk of superior court may condition a stay or dismissal of a proceeding under this section on the consent of any party to jurisdiction of the state in which the trust has its principal place of administration, or the clerk of superior court may grant a continuance or enter any other appropriate order.

History

(1911, c. 39, s. 4; C.S. s. 4027; 1977, c. 502, s. 2; 1999-216, s. 8; 2001-413, s. 1; 2005-192, s. 2; 2007-106, ss. 6, 7; 2009-267, s. 1; 2009-318, s. 2; 2010-126, s. 3; 2017-121, ss. 2.2, 2.3; 2019-113, s. 5; 2021-53, s. 1.4.)

OFFICIAL COMMENT

This section provides a means for distinguishing the jurisdiction of the court having primary jurisdiction for trust matters, whether denominated the probate court, chancery court, or by some other name, from other courts in a State that may on occasion resolve disputes concerning trusts. The section has been placed in brackets because the enacting jurisdiction may already address subject-matter jurisdiction by other statute or court rule. The topic also need not be addressed in States having unified court systems. For an explanation of types of proceedings which may be brought concerning the administration of a trust, see the Comment to Section 201.

NORTH CAROLINA COMMENT

Subsection (a) brings forward in place of subsection (a) of the Uniform Trust Code the provisions of former G.S. 36A-23.1 (a) regarding the jurisdiction of the clerk of superior court in trust proceedings. In addition to some minor modifications to former G.S. 36A-23.1, paragraphs (4) through (8) were added as additional examples of proceedings included in the exclusive jurisdiction of the clerk.

Subsection (b) brings forward the second sentence of former G.S. 36A-23.1(b). The first sentence providing that trust matters should proceed expeditiously consistent with the terms of the trust without judicial intervention was not brought forward in this subsection because that subject is addressed in G.S. 36C-2-201(b).

Subsection (c) brings forward in the first sentence the provisions of former G.S. 36A-23.1(c) regarding the right to file a declaratory judgment action under Article 26 of Chapter 1. The remaining provisions were added to clarify that if a party requests declaratory relief, the other party may move for a transfer of the proceeding to the superior court as provided in Article 21 of Chapter 7A and that, if not so removed, the provisions of Article 26 of Chapter 1 will apply to a trust proceeding to the extent not inconsistent with this Article.

Subsection (d) recodifies the provisions of former G.S. 36A-25.1 regarding dismissal of matters relating to foreign trusts.

Subsection (e) recodifies the provisions of former G.S. 36A-27 regarding the appeal of decisions of the clerk.

Subsection (f) is consistent with former G.S. 36A-23.1(a) in excluding from the jurisdiction of the clerk actions to modify or terminate trusts but also designates other matters excluded from the clerk's jurisdiction under case or statutory law. See State ex rel. v. Pilard v. Berniger, 154 N.C. App. 45, 571 S.E.2d 836 (2002), disc. review denied, 156 N.C. 694, 579 S.E.2d 100 (2003) where the court said: "Claims such as breach of fiduciary duty, fraud, and negligence are 'justiciable matters of a civil nature' jurisdiction over which is vested in the trial division".

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, this section is amended to make clear that the clerk of court and the superior court division of the General Court of Justice have concurrent jurisdiction over any matters involving the internal affairs of a trust which fall under subdivision (a)(9) of this section. If a subdivision (a)(9) matter is brought before the clerk of court, any party to the matter may have the matter transferred to superior court. However, if all parties desire to have the matter heard by the clerk of court, the clerk of court cannot, upon the clerk's own motion, have the matter transferred to superior court. In addition, the amendment to this section makes clear that Article 26 of Chapter 1 of the General Statutes, North Carolina's Declaratory Judgment Act, shall apply to a trust proceeding pending before the clerk of superior court to the extent consistent with Article 2 of Chapter 36C.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2009)

Effective October 1, 2009, subdivision (a)(9) of this section is amended to grant to the clerks of superior court jurisdiction to create a trust. Like other proceedings included in subdivision (a)(9), the clerk's jurisdiction to create a trust is not exclusive. Any party may file a notice of transfer of a proceeding to create a trust to superior court. The authority of superior court to create a trust is recognized in North Carolina. See Supplemental North Carolina Comment (2009) to G.S. 36C-4-401.

Effective October 1, 2009, subdivision (f)(6) of this section is added to exclude from the jurisdiction of the clerk of superior court actions involving the exercise of the trustee's special power to appoint to a second trust pursuant to G.S. 36C-8-816.1 [Repealed by S.L. 2017-121, s. 2.4], also effective October 1, 2009. An action to invoke the exercise of the trustee's special power to appoint to a second trust is analogous to an action to modify a trust, which is also excluded from the jurisdiction of the clerk of superior court under subdivision (f)(1).

SUPPLEMENTAL NORTH CAROLINA COMMENT (2020)

Effective July 11, 2019, G.S. 36C-2-203(f)(1) is amended to clarify that notwithstanding G.S. 36C-2-203(a)(1) the clerk of superior court does not have jurisdiction of actions to reform or modify a trust pursuant to G.S. 36C-4-412 through 36C-4-416 to add terms of a trust known as a "portability provision" for the removal and replacement of a trustee by one or more beneficiaries or other persons. Only the superior court may reform or modify a trust pursuant to G.S. 36C-4-412 through G.S. 36C-4-416 to add portability provisions without regard to G.S. 36C-7-706 so long as the addition satisfies the grounds prescribed for reformation or modification under the section pursuant to the reformation or modification is sought.

However, effective July 11, 2019, subsection (h) added to G.S. 36C-4-411 clarifies that the superior court lacks jurisdiction of actions based on G.S. 36C-4-411(b) and (c) to modify the terms of a trust to add a portability provision or otherwise remove or replace a trustee upon the consent of the beneficiaries. Such an action is within the exclusive jurisdiction of the clerk of superior court to remove or replace a trustee pursuant to G.S. 36C-7-706. See In re Testamentary Trust of Charnock, 158 N.C. App 35, 579 S.E.2d 887 (2003), aff'd, 358 N.C. 523, 597 S.E.2d 706 (2004) and the North Carolina Comment to G.S. 36C-4-411(h).

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2009-318, s. 3, provides in part, that the amendment to this section is applicable to (i) all trusts created, and to all conveyances, devises, beneficiary designations, or other transfers occurring before, on, or after that date; (ii) all judicial proceedings concerning trusts or transfers to or by trusts commenced on or after that date; and (iii) all judicial proceedings concerning trusts or transfers to or by trusts commenced before that date unless the court finds that application of a particular provision of this act would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the law as it existed on September 30, 2009, shall apply.

Session Laws 2010-96, s. 22, provides: "The Revisor of Statutes may cause to be printed all explanatory comments of the drafters of S.L. 2009-222, 2009-267, and 2009-318 as the Revisor deems appropriate."

Session Laws 2019-113, s. 7, made the second sentence in subdivision (f)(1) of this section, as added by Session Laws 2019-113, s. 5, effective July 11, 2019, and applicable to trusts created before, on, or after that date and to pleadings filed on or after that date.

Session Laws 2019-113, s. 6.1, as added by Session Laws 2020-69, s. 7, provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all explanatory comments of the drafters of Sections 5 and 6 of this act as the Revisor may deem appropriate."

Session Laws 2021-53, s. 1.5, made subdivision (f)(8) of this section, as added by Session Laws 2021-53, s. 1.4, effective October 1, 2021, and applicable to proceedings initiated on or after that date.

Session Laws 2021-53, s. 5.1, contains a severability clause.

Effect of Amendments. - Session Laws 2007-106, ss. 6 and 7, effective October 1, 2007, in subsection (a), inserted "including the appointment and removal of a trustee pursuant to G.S. 36C-4-414(b)" in subdivision (1), rewrote subdivision (2), rewrote the former last sentence and added the current last sentence in subdivision (9) and made related changes; and in subsection (c), inserted "in the Superior Court Division of the General Court of Justice" in the first sentence, and deleted the former last two sentences which provided for the transfer of the trust proceeding to the superior court division of the General Court of Justice under certain circumstances. See Editor's note for applicability.

Session Laws 2009-267, s. 1, effective October 1, 2009, inserted "to create a trust" in the first sentence of subdivision (a)(9).

Session Laws 2009-318, s. 2, effective October 1, 2009, added subdivision (f)(6), and made related stylistic and punctuation changes. For applicability, see editor's note.

Session Laws 2010-126, s. 3, effective July 21, 2010, in the introductory paragraph of subsection (f), inserted "any of"; added subdivision (f)(7); and made punctuation changes in subdivisions (f)(1) through (f)(5).

Session Laws 2017-121, ss. 2.2, 2.3, effective July 18, 2017, added "and the appointment of a special fiduciary pursuant to G.S. 36C-8B-9" at the end of subdivision (a)(1), and made a related punctuation change; and substituted "decanting power pursuant to Article 8B of this Chapter" for "trustee's special power to appoint to a second trust pursuant to G.S. 36C-8-816.1" in subdivision (f)(6).

Session Laws 2019-113, s. 5, added the second sentence in subdivision (f)(1). For effective date and applicability, see Editor's note.

Session Laws 2021-53, s. 1.4, added subdivision (f)(8). For effective date and applicability, see editor's note.

CASE NOTES

Editor's Note. - Many of the cases below were decided under prior law.

Jurisdiction of Clerk Is Statutory. - The equitable jurisdiction of the superior courts does not extend to the clerks of court unless expressly given by statute, and this and following sections giving clerks of court a limited power to appoint trustees in certain instances will not be extended to give them jurisdiction of any proceeding unless clearly within the provisions of the statutes. In re Smith, 200 N.C. 272, 156 S.E. 494 (1931).

When trust beneficiaries filed a petition under former G.S. 36A-125.4(a) to modify a trust to provide that it would be administered by the settlor's grand-niece and a bank, instead of the trustee appointed by the trust instrument, the proceeding was actually one to remove the trustee, over which the clerk of superior court had exclusive jurisdiction, and the superior court had no jurisdiction to hear their petition. In re Charnock, 358 N.C. 523, 597 S.E.2d 706 (2004).

Modification of a trust. - Under both the pre-and post-amendment versions of G.S. 36A-23.1, the clerk of superior court lacks original jurisdiction over proceedings to "modify or terminate" a trust, so an action that is characterized as a modification must be brought before the superior court, and the nature of an action determines whether jurisdiction over the action lies with the clerk of superior court or with the superior court. In re Charnock, 358 N.C. 523, 597 S.E.2d 706 (2004).

Special Proceeding to Resign. - A proceeding by a trustee for the purpose of resigning his trust is denominated a special proceeding. Russ v. Woodard, 232 N.C. 36, 59 S.E.2d 351 (1950).

Order Accepting Resignation Is Interlocutory. - The order of the clerk of the superior court accepting the resignation of a trustee in a special proceeding is an interlocutory order regardless of whether an appeal is taken therefrom or not, since even in the absence of an appeal former G.S. 36-12 required that such order be approved by the judge of the superior court before it becomes effective. Russ v. Woodard, 232 N.C. 36, 59 S.E.2d 351 (1950).

The clerk has power to set aside his prior order accepting the resignation of a trustee and appointing a successor when no appeal has been taken and the order has not been approved by the judge of the superior court. Russ v. Woodard, 232 N.C. 36, 59 S.E.2d 351 (1950).

Subsequent Valid Order Affirmed on Appeal. - Where the clerk of the court in the exercise of his valid discretionary power, has set aside his order accepting the resignation of a trustee, his subsequent valid order entered in proceedings consonant with statutory requirements and approved by the judge of the superior court in the exercise of judgment and discretion, will be affirmed on appeal. Russ v. Woodard, 232 N.C. 36, 59 S.E.2d 351 (1950).

Appointment by Clerk. - Where a charitable trust is created by a written instrument the court may appoint a trustee, in the exercise of its equitable jurisdiction, to execute the trust when the instrument fails to designate one, or the one designated fails or refuses to act, or one may be appointed under the provisions of this section. Ladies Benevolent Soc'y v. Orrell, 195 N.C. 405, 142 S.E. 493 (1928).

Relation to Other Statutes. - Action filed by a trust beneficiary and a settlor's siblings, pursuant to former G.S. 36A-125.4, seeking an order modifying a trust was really an action seeking replacement of the trustee for exercising discretion in managing the trust, and the trial court's judgment dismissing the action for lack of subject matter jurisdiction was upheld. In re Testamentary Trust of Charnock, 158 N.C. App. 35, 579 S.E.2d 887 (2003), aff'd, 358 N.C. 523, 597 S.E.2d 706 (2004).

Where the trustee appointed by will to administer an active trust dies, the clerk of the superior court is without authority to appoint a successor, since the clerk has no authority to administer an equity unless empowered to do so by statute, and this section authorizes the clerk to appoint a successor trustee only when the former trustee resigns. Cheshire v. First Presbyterian Church, 221 N.C. 205, 19 S.E.2d 855 (1942).

Loss of Unrecorded Order. - A finding by the court that, upon due consideration of the evidence and the available records in the office of the clerk, the order appointing a successor trustee had been approved by the court was sufficient to meet the requirements of this section though the order of approval had been lost without being recorded. State Trust Co. v. Toms, 244 N.C. 645, 94 S.E.2d 806 (1956).

Trust Pursuit Claim. - Superior court had subject matter jurisdiction to hear a beneficiary's trust pursuit claim because a claim for trust pursuit was an equitable claim and it was raised in a special proceeding by a co-trustee for the purpose of resigning his trust; therefore, it was proper for the clerk of the superior court to transfer the claim to superior court, and once the claims were properly before the superior court, the judge could hear and determine all matters in controversy under G.S. 1-301.2(c). Keith v. Wallerich, 201 N.C. App. 550, 687 S.E.2d 299 (2009).

Trust pursuit doctrine falls within the ambit of G.S. 36C-2-203(a)(9) because it is reasonably related to the administration of a trust since it allows a court to follow the wrongful distribution of trust property in order to reclaim that property from the hands of a wrongdoer. Keith v. Wallerich, 201 N.C. App. 550, 687 S.E.2d 299 (2009).

Claims Against Trustee. - District court properly dismissed plaintiff's claims against defendant as trustee of a trust, as plaintiff had already submitted to the jurisdiction of the clerk of the superior court for the adjudication of these claims. Morgan-McCoart v. Matchette, 244 N.C. App. 643, 781 S.E.2d 809 (2016).

Superior Court Had No Jurisdiction Over Constructive Trust Created for Child Support. - Under G.S. 7A-244, the district court had exclusive subject matter jurisdiction over a former husband's motion for an order requiring his former wife to show cause why she was not in contempt of a child support order requiring that monies in a fund be used solely to satisfy the husband's child support obligation and the unreimbursed medical expenses of the parties' children. That the district court referred to the fund as a constructive trust did not place the administration and accounting of the fund under the superior court's jurisdiction under G.S. 36C-2-203. Eakes v. Eakes, 194 N.C. App. 303, 669 S.E.2d 891 (2008).

Cited in In re Estate of Skinner, 370 N.C. 126, 804 S.E.2d 449 (2017).

OFFICIAL COMMENT

This optional, bracketed section is made available for jurisdictions that conclude that venue for a judicial proceeding involving a trust is not adequately addressed in local rules of civil procedure. For jurisdictions enacting this section, general rules governing venue continue to apply in cases not covered by this section. This includes most proceedings where jurisdiction over a trust, trust property, or parties to a trust is based on a factor other than the trust's principal place of administration. The general rules governing venue also apply when the principal place of administration of a trust is in another locale, but jurisdiction is proper in the enacting State.

NORTH CAROLINA COMMENT

The drafters omitted the provisions of subsection (a) of the Uniform Trust Code regarding venue and brought forward in their place with minor modifications the venue provisions of former G.S. 36A-24.1. However, whereas former G.S. 36A-24.1 applied only to trust proceedings before the clerk, this section changes prior law by providing that the venue provisions apply to actions before the superior court, as well as to trust proceedings before the clerk, notwithstanding any other applicable Rules of Civil Procedure or provision of Chapter 1.

Paragraph (4) incorporates the provisions of subsection (b) of the Code but modifies them to add that where a trust has no trustee, venue to appoint one may be "in the county of this State specified in the trust instrument, if any county is so specified".

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, this section is amended (i) to delete the words "or action" in the first sentence to make the language consistent with the statutory definition of "proceeding" which includes an action and (ii) to delete paragraph (3) of this section which contained the definition of "principal place of administration." That definition is brought forward in G.S. 36C-1-103(13a) to make it applicable to other references to "principal place of administration" in Chapter 36C.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2021-53, s. 1.5, made subdivision (2a) of this section, as added by Session Laws 2021-53, s. 1.2, effective October 1, 2021, and applicable to proceedings initiated on or after that date.Session Laws 2021-53, s. 1.5, made subdivision (2a) of this section, as added by Session Laws 2021-53, s. 1.2, effective October 1, 2021, and applicable to proceedings initiated on or after that date.

Session Laws 2021-53, s. 3.6, made the amendments to this section by Session Laws 2021-53, s. 3.1, effective October 1, 2021, and applicable to proceedings initiated on or after that date.

Session Laws 2021-53, s. 5.1, contains a severability clause.

Effect of Amendments. - Session Laws 2007-106, s. 8, effective October 1, 2007, deleted "or action" following "proceeding" near the beginning of the introductory paragraph; added "either of the following" at the end of subdivision (2); made a minor punctuation change in subdivision (2)a.; deleted former subdivision (3), relating to the principal place of administration of the trust; and substituted "in the case of a testamentary trust" for "if the trust is created by will" near the end of subdivision (4). See Editor's note for applicability.

Session Laws 2021-53, s. 1.2, added subdivision (2a). For effective date and applicability, see editor's note.

Session Laws 2021-53, s. 3.1, deleted "notwithstanding any other applicable Rule of Civil Procedure or provision of Chapter 1 of the General Statutes” following "rules apply” in the introductory paragraph; deleted "then unless the terms of the governing instrument provide otherwise,” following "clerk of superior court,” in subdivision (1); and added subdivisions (5) and (6). For effective date and applicability, see editor's note.

CASE NOTES

Editor's Note. - The cases cited below were decided under prior law.

The trustee's legal existence is derived from the instrument creating the trust, not from adminicular proceedings relating to qualification, posting bond, etc. The trustee takes his position by virtue of the donative acts of the grantor and not from the authority of the court. Lentz v. Lentz, 5 N.C. App. 309, 168 S.E.2d 437 (1969).

Valid Conveyance Is Not Made Void by Failure of Trustee to Qualify. - An otherwise valid conveyance by a testamentary trustee is not made void by reason of his failure to first qualify as now required by this section. Lentz v. Lentz, 5 N.C. App. 309, 168 S.E.2d 437 (1969).

There is no requirement that a life tenant must account to the court or to a remainderman. Godfrey v. Patrick, 8 N.C. App. 510, 174 S.E.2d 674 (1970).

Actions of Trustee Not Shown by Increase in Money. - The mere fact that trust made money is not sufficient to prove that defendant trustee acted openly, fairly and honestly. Estate of Smith ex rel. Smith v. Underwood, 127 N.C. App. 1, 487 S.E.2d 807, cert. denied, 347 N.C. 398, 494 S.E.2d 410 (1997).

Opinions of Attorney General

Effect Must Be Given a Provision in a Will Which Exempts the Testamentary Trustee from Regular Accountings. - See opinion of Attorney General to Honorable C.G. Smith, 41 N.C.A.G. 757 (1952), issued under prior law.

OFFICIAL COMMENT

This section is general and introductory, laying out the scope of the article.

Subsection (a) validates substitute notice to a person who may represent and bind another person as provided in the succeeding sections of this article. Notice to the substitute has the same effect as if given directly to the other person. Subsection (a) does not apply to notice of a judicial proceeding. Pursuant to Section 109(d), notice of a judicial proceeding must be given as provided in the applicable rules of civil procedure, which may require that notice not only be given to the representative but also to the person represented. For a model statute for the giving of notice in such cases, see Unif. Probate Code Section 1-403(3). Subsection (a) may be used to facilitate the giving of notice to the qualified beneficiaries of a proposed transfer of principal place of administration (Section 108(d)), of a proposed trust combination or division (Section 417), of a temporary assumption of duties without accepting trusteeship (Section 701(c)(1)), of a trustee's resignation (Section 705(a)(1)), and of a trustee's report (Section 813(c)).

Subsection (b) deals with the effect of a consent, whether by actual or virtual representation. Subsection (b) may be used to facilitate consent of the beneficiaries to modification or termination of a trust, with or without the consent of the settlor (Section 411), agreement of the qualified beneficiaries on appointment of a successor trustee of a noncharitable trust (Section 704(c)(2)), and a beneficiary's consent to or release or affirmance of the actions of a trustee (Section 1009). A consent by a representative bars a later objection by the person represented, but a consent is not binding if the person represented raises an objection prior to the date the consent would otherwise become effective. The possibility that a beneficiary might object to a consent given on the beneficiary's behalf will not be germane in many cases because the person represented will be unborn or unascertained. However, the representation principles of this article will sometimes apply to adult and competent beneficiaries. For example, while the trustee of a revocable trust entitled to a pourover devise has authority under Section 303 to approve the personal representative's account on behalf of the trust beneficiaries, such consent 52 would not be binding on a trust beneficiary who registers an objection. Subsection (b) implements cases such as Barber v. Barber, 837 P.2d 714 (Alaska 1992), which held that the a refusal to allow an objection by an adult competent remainder beneficiary violated due process.

Subsection (c) implements the policy of Sections 411 and 602 requiring express authority in the power of attorney or approval of court before the settlor's agent, conservator or guardian may consent on behalf of the settlor to the termination or revocation of the settlor's revocable trust.

2004 Amendment. For an explanation of the new subsection (d) and of the bracketed language in subsection (c), see the comment to the amendment to Section 411.

NORTH CAROLINA COMMENT

This section has no equivalent in prior law with respect to the binding effect of nonjudicial notices to and consents by representatives.

Effective Date and Applicability. - Session Laws 2005-192, which enacted Chapter 36C, in s. 7(a) provides: "Section 2 of this act becomes effective January 1, 2006, and except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, applies to (i) all trusts created before, on, or after that date; (ii) all judicial proceedings concerning trusts commenced on or after that date; and (iii) judicial proceedings concerning trusts commenced before that date unless the court finds that application of a particular provision of Chapter 36C of the General Statutes would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of Chapter 36C of the General Statutes does not apply and the superseded law applies.

"Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, any rule of construction or presumption provided in Chapter 36C of the General Statutes applies to trust instruments executed before the effective date of Section 2 of this act unless there is a clear indication of a contrary intent in the terms of the trust or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary. Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, an act done before the effective date of Section 2 of this act is not affected by Chapter 36C of the General Statutes. If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before the effective date of Section 2 of this act, that statute continues to apply to the right even if it has been repealed or superseded."

Official Comment on Effective Date and Applicability. - The Uniform Trust Code is intended to have the widest possible effect within constitutional limitations. Specifically, the Code applies to all trusts whenever created, to judicial proceedings concerning trusts commenced on or after its effective date, and unless the court otherwise orders, to judicial proceedings in progress on the effective date. In addition, any rules of construction or presumption provided in the Code apply to preexisting trusts unless there is a clear indication of a contrary intent in the trust's terms. By applying the Code to preexisting trusts, the need to know two bodies of law will quickly lessen.

This Code cannot be fully retroactive, however. Constitutional limitations preclude retroactive application of rules of construction to alter property rights under trusts that became irrevocable prior to the effective date. Also, rights already barred by a statute of limitation or rule under former law are not revived by a possibly longer statute or more liberal rule under this Code. Nor is an act done before the effective date of the Code affected by the Code's enactment.

The Uniform Trust Code contains an additional effective date provision. Pursuant to Section 602(a), prior law will determine whether a trust executed prior to the effective date of the Code is presumed to be revocable or irrevocable.

For a comparable uniform law effective date provision, see Uniform Probate Code Section 8 101.

North Carolina Comment on Effective Date and Applicability. - The drafters modified the provisions of the Uniform Trust Code relating to its application to trust instruments executed before its effective date by adding the phrase "or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary" to the end of the first sentence of the second paragraph. Although this Chapter is intended to have broad application, the drafters concluded that a rule of construction or presumption provided in this Chapter should not be applied to a trust instrument executed before the effective date of this Chapter if the application of such rule or presumption would impair the substantial rights of a beneficiary of a trust established under such a trust instrument.

Editor's Note. - Session Laws 2005-192, which enacted Chapter 36C, in s. 6, provides: "The Revisor of Statutes shall cause to be printed along with this act all relevant portions of the Official Commentary to the Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Official Comments, copyright 2005, are reprinted in this Chapter with the permission of the National Conference of Commissioners on Uniform State Laws. It is believed that the Official Comments will prove of value to the practitioner in understanding and applying the text of this Chapter.

The Official Comments appearing under individual sections in this Chapter have been printed by the publisher as received, without editorial change, and relate to the Chapter as originally enacted. However, not all sections in this Chapter may carry Official Comments. Furthermore, Official Comments may or may not have been received or updated in conjunction with subsequent amendments to this Chapter and, therefore, may not reflect all changes to the sections under which they appear.

Where they appear in this Chapter, "Amended Comment" usually means that an error in the original comment has been corrected by a subsequent amendment, and "Supplemental Comment" pertains to a later development, such as an amendment to the statute text. North Carolina Comments explain where the General Assembly has enacted variations to the text of the Uniform Act.

OFFICIAL COMMENT

This section specifies the circumstances under which a holder of a general testamentary power of appointment may receive notices on behalf of and otherwise represent and bind persons whose interests are subject to the power, whether as permissible appointees, takers in default, or otherwise. Such representation is allowed except to the extent there is a conflict of interest with respect to the particular matter or dispute. Typically, the holder of a general testamentary power of appointment is also a life income beneficiary of the trust, oftentimes of a trust intended to qualify for the federal estate tax marital deduction. See I.R.C. § 2056(b)(5). Without the exception for conflict of interest, the holder of the power could act in a way that could enhance the holder's income interests to the detriment of the appointees or takers in default, whoever they may be.

NORTH CAROLINA COMMENT

This section modifies the Uniform Trust Code to bring forward the provisions of former G.S. 36A-26.3(2)a. with respect to representation by a holder of a power of revocation or an intervivos general power of appointment. See also G.S. 36C-6-603(a) granting the settlor of a revocable trust all rights of the beneficiaries.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2009)

Effective October 1, 2009, this section is amended to delete the reference to permissible appointees being represented by the holder of a power of revocation or power of appointment. Under the amendment to G.S. 36C-1-103(3), also effective October 1, 2009, a beneficiary as defined in that subdivision is not a permissible appointee under a power of appointment and, as such, has no need for representation under G.S. 36C-3-302.

This section is further amended in two ways. First, it is amended to delete the second sentence, originally a part of the Uniform Trust Code, which directs that to the extent there is no conflict of interest between the holder of a general power of appointment and the person represented as to the particular question or dispute, the holder of a testamentary general power of appointment may represent the permissible appointees and takers in default. Secondly, the section is amended to include in the first sentence the authority of the holder of a testamentary general power of appointment to represent takers in default. The result of these two amendments is to remove the conflict of interest limitation with respect to the representation of a taker in default by the holder of a testamentary general power of appointment. The drafters of the amendments concluded that such a conflict of interest limitation was not necessary since the power holder could appoint to the power holder's estate, his or her creditors or the creditors of his or her estate.

Editor's Note. - Session Laws 2010-96, s. 22, provides: "The Revisor of Statutes may cause to be printed all explanatory comments of the drafters of S.L. 2009-222, 2009-267, and 2009-318 as the Revisor deems appropriate."

Effect of Amendments. - Session Laws 2009-222, s. 2, effective October 1, 2009, inserted "or testamentary" and "and bind", deleted "permissible appointees," preceding "takers in default," and "or otherwise" thereafter; and deleted the former last sentence, which read: "To the extent there is no conflict of interest between the holder of a general testamentary power of appointment and the persons represented with respect to the particular question or dispute, the holder may represent and bind persons whose interests, as permissible appointees, takers in default, or otherwise, are subject to the power."

Session Laws 2010-96, s. 8, effective July 20, 2010, substituted "holder of power of revocation or general power of appointment" for "holder of general testamentary power of appointment" in the section catchline.

OFFICIAL COMMENT

This section allows for representation of persons by their fiduciaries (conservators, guardians, agents, trustees, and personal representatives), a principle that has long been part of the law. Paragraph (6), which allows parents to represent their children, is more recent, having originated in 1969 upon approval of the Uniform Probate Code. This section is not limited to representation of beneficiaries. It also applies to representation of the settlor. Representation is not available if the fiduciary or parent is in a conflict position with respect to the particular matter or dispute, however. A typical conflict would be where the fiduciary or parent seeking to represent the beneficiary is either the trustee or holds an adverse beneficial interest.

Paragraph (2) authorizes a guardian to bind and represent a ward if a conservator of the ward's estate has not been appointed. Granting a guardian authority to represent the ward with respect to interests in the trust can avoid the need to seek appointment of a conservator. This grant of authority to act with respect to the ward's trust interest may broaden the authority of a guardian in some States although not in States that have adopted the Section 1-403 of the Uniform Probate Code, from which this section was derived. Under the Uniform Trust Code, a "conservator" is appointed by the court to manage the ward's property, a "guardian" to make decisions with respect to the ward's personal affairs. See Section 103.

Paragraph (3) authorizes an agent to represent a principal only to the extent the agent has authority to act with respect to the particular question or dispute. Pursuant to Sections 411 and 602, an agent may represent a settlor with respect to the amendment, revocation or termination of the trust only to the extent this authority is expressly granted either in the trust or the power. Otherwise, depending on the particular question or dispute, a general grant of authority in the power may be sufficient to confer the necessary authority.

NORTH CAROLINA COMMENT

The representation provisions of the Uniform Trust Code reflected in this section are generally consistent with those in former G.S. 36A-26.3(2), but with the following differences:

(i) Paragraph (3), unlike former G.S. 36A-26.3(2)d., does not require court approval for an agent under a power of attorney to represent a principal.

(ii) Paragraph (4) permits a trustee to represent the beneficiaries of the trust without limitations whereas former G.S. 36A-26.3(2)b. allowed the trustee to do so only in specifically enumerated circumstances.

(iii) Paragraph (7) permits a parent to represent an unborn child which former G.S. 36A-26.3 did not allow.

This section modifies the Uniform Trust Code in three respects:

(i) In paragraphs (1), (2) and (6) the words "general guardian" and "guardian of the estate" were substituted for the word "conservator" and in paragraph (2) the words "guardian of person" were substituted for the word "guardian." In the North Carolina context, references in the Official Comments to "conservator" should be read to apply to a general guardian or a guardian of the estate, and references to a "guardian" should be read to apply to a guardian of the person.

(ii) Paragraph (6) was modified to omit the reference to a parent representing an "unborn" child in light of the addition of paragraph (7) to this section. Paragraph (6) was also modified to add the second sentence which is designed to eliminate conflicts regarding the proper parent to represent a minor child.

(iii) Paragraph (7) was added to provide that representation of unborn issue was not limited to a parent representing an unborn child as provided in the Uniform Trust Code but to any ancestor, such as a grandparent.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, this section is amended to make clear that (i) the representation rules set forth in the section apply only to matters involving the trust and (ii) the trustee may not bind a beneficiary in matters concerning a dispute with the trustee. In addition, subsection (2) of the section has been deleted because of the limited powers conferred upon a guardian of the person under Chapter 35A.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 11, effective October 1, 2007, added "involving a trust" at the end of the introductory paragraph; deleted subdivision (2) relating to wards; added "unless the question or dispute involves the internal affairs of the trust" at the end of subdivision (4); deleted "or guardian of the person" following "guardian of the estate" and made a related change in the first sentence in subdivision (6). See Editor's note for applicability.

OFFICIAL COMMENT

This section authorizes a person with a substantially identically interest with respect to a particular question or dispute to represent and bind an otherwise unrepresented minor, incapacitated or unborn individual, or person whose location is unknown and not reasonably ascertainable. This section is derived from Section 1-403(2)(iii) of the Uniform Probate Code, but with several modifications. Unlike the UPC, this section does not expressly require that the representation be adequate, the drafters preferring to leave this issue to the courts. Furthermore, this section extends the doctrine of virtual representation to representation of minors and incapacitated individuals. Finally, this section does not apply to the extent there is a conflict of interest between the representative and the person represented.

Restatement (First) of Property §§ 181 and 185 (1936) provide that virtual representation is inapplicable if the interest represented was not sufficiently protected. Representation is deemed sufficiently protective as long as it does not appear that the representative acted in hostility to the interest of the person represented. Restatement (First) of Property § 185 (1936). Evidence of inactivity or lack of skill is material only to the extent it establishes such hostility. Restatement (First) of Property § 185 cmt. b (1936).

Typically, the interests of the representative and the person represented will be identical. A common example would be a trust providing for distribution to the settlor's children as a class, with an adult child being able to represent the interests of children who are either minors or unborn. Exact identity of interests is not required, only substantial identity with respect to the particular question or dispute. Whether such identity is present may depend on the nature of the interest. For example, a presumptive remaindermen may be able to represent alternative remaindermen with respect to approval of a trustee's report but not with respect to interpretation of the remainder provision or termination of the trust. Even if the beneficial interests of the representative and person represented are identical, representation is not allowed in the event of conflict of interest. The representative may have interests outside of the trust that are adverse to the interest of the person represented, such as a prior relationship with the trustee or other beneficiaries. See Restatement (First) of Property § 185 cmt. d (1936).

NORTH CAROLINA COMMENT

This section is generally consistent with the virtual representation provisions in former G.S. 36A-26.3(2)c. but is broader in permitting a person with a substantially identical interest to represent not only unborn persons but also minors and incapacitated persons. Former section G.S. 36A-26.3(2)c. also allowed the representation of "unascertained persons" whereas this section permits representation of "a person whose identity or location is unknown and not reasonably ascertainable." Prior case law recognized the doctrine of virtual representation with respect to proceedings in superior court involving trusts. See, e.g., Waddell v. United Cigar Stores of America, 195 N.C. 434, 142 S.E. 585 (1928); McPherson v. First & Citizens Nat'l Bank, 240 N.C. 1, 81 S.E.2d 386 (1954).

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, this section is amended to substitute the word "incompetent" for the word "incapacitated" in order to be consistent with other references in Chapter 36C to that condition. In addition, the phrase "with respect to the particular question or dispute" was added at the end of the section to clarify that a conflict of interest precluding representation of a person must be with respect to the particular question or dispute involved.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 12, effective October 1, 2007, substituted "incompetent" for "incapacitated" near the beginning and added "with respect to the particular question or dispute" at the end of the paragraph. See Editor's note for applicability.

CASE NOTES

Under G.S. 36C-3-304, a residuary beneficiary's estate could be virtually represented by other residuary beneficiaries' estates, as interests of estates were substantially identical; such beneficiaries had no interest in the remainder of a charitable trust as the settlor's intent to leave the remainder charitable beneficiaries was clear. First Charter Bank v. Am. Children's Home, 203 N.C. App. 574, 692 S.E.2d 457 (2010).

OFFICIAL COMMENT

This section is derived from Section 1-403(4) of the Uniform Probate Code. However, this section substitutes "representative" for "guardian ad litem" to signal that a representative under this Code serves a different role. Unlike a guardian ad litem, under this section a representative can be appointed to act with respect to a nonjudicial settlement or to receive a notice on a beneficiary's behalf. Furthermore, in making decisions, a representative may consider general benefit accruing to living members of the family. "Representative" is placed in brackets in case the enacting jurisdiction prefers a different term. The court may appoint a representative to act for a person even if the person could be represented under another section of this article.

NORTH CAROLINA COMMENT

Subsection (a) is generally consistent with former G.S. 36A-26.3 authorizing the court to appoint a guardian ad litem to represent a minor or an incapacitated or unborn individual, but differs in also allowing the appointment of a guardian ad litem to represent a person whose identity is known but who cannot be located.

Subsection (c) modifies the Uniform Trust Code in bringing forward the more specific language of former G.S. 36A-125.5(1) with respect to a guardian ad litem basing a consent upon a finding of benefit to the beneficiary's family. The provision applies to consent by a guardian ad litem in all matters involving trusts and not just to consent to modification or termination of trusts as provided in former G.S. 36A-125.5(1).

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, subsection (a) is amended to substitute the word "incompetent" for the word "incapacitated" in order to be consistent with other references in Chapter 36C to that condition.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 13, effective October 1, 2007, substituted "an incompetent" for "incapacitated" in subsection (a). See Editor's note for applicability.

OFFICIAL COMMENT

This section is based on Restatement (Third) of Trusts Section 10 (Tentative Draft No. 1, approved 1996), and Restatement (Second) of Trusts Section 17 (1959). Under the methods specified for creating a trust in this section, a trust is not created until it receives property. For what constitutes an adequate property interest, see Restatement (Third) of Trusts Sections 40-41 (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Sections 74-86 (1959). The property interest necessary to fund and create a trust need not be substantial. A revocable designation of the trustee as beneficiary of a life insurance policy or employee benefit plan has long been understood to be a property interest sufficient to create a trust. See Section 103(12) ("property" defined). Furthermore, the property interest need not be transferred contemporaneously with the signing of the trust instrument. A trust instrument signed during the settlor's lifetime is not rendered invalid simply because the trust was not created until property was transferred to the trustee at a much later date, including by contract after the settlor's death. A pourover devise to a previously unfunded trust is also valid and may constitute the property interest creating the trust. See Unif. Testamentary Additions to Trusts Act Section 1 (1991), codified at Uniform Probate Code Section 2-511 (pourover devise to trust valid regardless of existence, size, or character of trust corpus). See also Restatement (Third) of Trusts Section 19 58 (Tentative Draft No. 1, approved 1996).

While this section refers to transfer of property to a trustee, a trust can be created even though for a period of time no trustee is in office. See Restatement (Third) of Trusts Section 2 cmt. g (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts Section 2 cmt. i (1959). A trust can also be created without notice to or acceptance by a trustee or beneficiary. See Restatement (Third) of Trusts Section 14 (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts Sections 35-36 (1959).

The methods specified in this section are not exclusive. Section 102 recognizes that trusts can also be created by special statute or court order. See also Restatement (Third) of Trusts Section 1 cmt. a (Tentative Draft No. 1, approved 1996); Unif. Probate Code Section 2-212 (elective share of incapacitated surviving spouse to be held in trust on terms specified in statute); Unif. Probate Code Section 5-411(a)(4) (conservator may create trust with court approval); Restatement (Second) of Trusts Section 17 cmt. i (1959) (trusts created by statutory right to bring wrongful death action).

A trust can also be created by a promise that creates enforceable rights in a person who immediately or later holds these rights as trustee. See Restatement (Third) of Trusts Section 10(e) (Tentative Draft No. 1, approved 1996). A trust thus created is valid notwithstanding that the trustee may resign or die before the promise is fulfilled. Unless expressly made personal, the promise can be enforced by a successor trustee. For examples of trusts created by means of promises enforceable by the trustee, see Restatement (Third) of Trusts Section 10 cmt. g (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts Sections 14 cmt. h, 26 cmt. n (1959).

A trust created by self-declaration is best created by reregistering each of the assets that comprise the trust into the settlor's name as trustee. However, such reregistration is not necessary to create the trust. See, e.g., In re Estate of Heggstad, 20 Cal. Rptr. 2d 433 (Ct. App. 1993); Restatement (Third) of Trusts Section 10 cmt. e (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts Section 17 cmt. a (1959). A declaration of trust can be funded merely by attaching a schedule listing the assets that are to be subject to the trust without executing separate instruments of transfer. But such practice can make it difficult to later confirm title with third party transferees and for this reason is not recommended.

While a trust created by will may come into existence immediately at the testator's death and not necessarily only upon the later transfer of title from the personal representative, Section 701 makes clear that the nominated trustee does not have a duty to act until there is an acceptance of the trusteeship, express or implied. To avoid an implied acceptance, a nominated testamentary trustee who is monitoring the actions of the personal representative but who has not yet made a final decision on acceptance should inform the beneficiaries that the nominated trustee has assumed only a limited role. The failure so to inform the beneficiaries could result in liability if misleading conduct by the nominated trustee causes harm to the trust beneficiaries. See 59 Restatement (Third) of Trusts Section 35 cmt. b (Tentative Draft No. 2, approved 1999).

While this section confirms the familiar principle that a trust may be created by means of the exercise of a power of appointment (paragraph (3)), this Code does not legislate comprehensively on the subject of powers of appointment but addresses only selected issues. See Sections 302 (representation by holder of general testamentary power of appointment); 505(b) (creditor claims against holder of power of withdrawal); and 603(b) (rights of holder of power of withdrawal). For the law on powers of appointment generally, see Restatement (Second) of Property: Donative Transfers Sections 11.1-24.4 (1986); Restatement (Third) of Property: Wills and Other Donative Transfers (in progress).

NORTH CAROLINA COMMENT

Paragraph (1) of this section is consistent with prior law which required a transfer of title to property by the settlor to a trustee to constitute a trust relationship. See Wescott v. First & Citizens Nat. Bank, 227 N.C. 39, 40 S.E.2d 461 (1946); Baxter v. Jones, 14 N.C. App. 296, 188 S.E.2d 622 (1972), cert. denied, 281 N.C. 621, 190 S.E.2d 465 (1972).

The Official Comment to this section states that "A trust signed during the settlor's lifetime is not rendered invalid because the trust was not created until property was transferred to the trustee at a much later date... A pourover devise to a previously unfunded trust is also valid and may constitute the property interest creating the trust." But see G.S. 31-47 which provides that a pourover devise in a will to the trustee of a trust is valid "if established in writing prior to the execution of such will."

Paragraph (1) modifies the Uniform Trust Code by adding the words "by the settlor" after the words "transfer of property" for clarification purposes.

Paragraph (2) differs from the Uniform Trust Code by adding the phrase "unless the transfer of title of such property is otherwise required by law." The Uniform Trust Code adopts the common law rule that a declaration of trust can be funded by declaring assets to be held in trust without executing separate documents of transfer. See the Official Comment to this section and authorities cited. North Carolina courts have not addressed this issue. The drafters concluded that the best practice is to require compliance with state law provisions governing the transfer of title in order to eliminate questions regarding ownership of property and provide better protection of the rights of third parties and trust beneficiaries.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, paragraph (1) of this section is amended to clarify that other dispositions taking effect upon the settlor's death include a devise or bequest to a trustee as provided in G.S. 31-47 and the designation of a trustee as beneficiary of death benefits as provided in G.S. 36-4-401.1.

Effective July 5, 2007, G.S. 31-47 is amended to provide that a pour-over devise to a trustee of a previously unfunded inter vivos trust is valid. This changes prior North Carolina law as set forth in former G.S. 31-47 which indicated that a pour-over devise to a trustee of an inter vivos trust was valid only if property was transferred to the trust prior to execution of the will. G.S. 31-47 also provides that a revocable trust funded initially by a pour-over devise is subject to Article 6 of Chapter 36C as of the date of execution of the trust.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2009)

This section is amended by adding subdivision (4) to clarify that a trust may be created by a court by judgment, order or decree, including establishment of a trust pursuant to section 1396(p)(d)(4) of Title 42 of the United States Code. For a brief explanation of a trust established pursuant to section 1396(p)(d)(4), commonly referred to as a "special needs trust," see Supplemental North Carolina Comment (2009) to G.S. 36C-4-401.2. The North Carolina Uniform Trust Code applies to any trust created by judgment or decree under which the trust is to be administered as an express trust. See G.S. 36C-1-102.

The power of the court to create a trust has been recognized in North Carolina. See, e.g. Weaver v. Weaver, 88 N.C. App. 634, 364 S.E.2d 706 (1988) (trust created as part of equitable distribution); Payne v. Reeves Comm. Ctr of Mt. Airy, Inc., 126 N.C. App. 672, 486 S.E.2d 469 (1997) (special needs trust created to allow plaintiff to continue to qualify for Medicaid benefits).

For provisions governing the methods of creating a trust by the court, including a special needs trust, see G.S. 36C-4-401.2.

Effective Date and Applicability. - Session Laws 2005-192, which enacted Chapter 36C, in s. 7(a) provides: "Section 2 of this act becomes effective January 1, 2006, and except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, applies to (i) all trusts created before, on, or after that date; (ii) all judicial proceedings concerning trusts commenced on or after that date; and (iii) judicial proceedings concerning trusts commenced before that date unless the court finds that application of a particular provision of Chapter 36C of the General Statutes would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of Chapter 36C of the General Statutes does not apply and the superseded law applies.

"Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, any rule of construction or presumption provided in Chapter 36C of the General Statutes applies to trust instruments executed before the effective date of Section 2 of this act unless there is a clear indication of a contrary intent in the terms of the trust or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary. Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, an act done before the effective date of Section 2 of this act is not affected by Chapter 36C of the General Statutes. If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before the effective date of Section 2 of this act, that statute continues to apply to the right even if it has been repealed or superseded."

Official Comment on Effective Date and Applicability. - The Uniform Trust Code is intended to have the widest possible effect within constitutional limitations. Specifically, the Code applies to all trusts whenever created, to judicial proceedings concerning trusts commenced on or after its effective date, and unless the court otherwise orders, to judicial proceedings in progress on the effective date. In addition, any rules of construction or presumption provided in the Code apply to preexisting trusts unless there is a clear indication of a contrary intent in the trust's terms. By applying the Code to preexisting trusts, the need to know two bodies of law will quickly lessen.

This Code cannot be fully retroactive, however. Constitutional limitations preclude retroactive application of rules of construction to alter property rights under trusts that became irrevocable prior to the effective date. Also, rights already barred by a statute of limitation or rule under former law are not revived by a possibly longer statute or more liberal rule under this Code. Nor is an act done before the effective date of the Code affected by the Code's enactment.

The Uniform Trust Code contains an additional effective date provision. Pursuant to Section 602(a), prior law will determine whether a trust executed prior to the effective date of the Code is presumed to be revocable or irrevocable.

For a comparable uniform law effective date provision, see Uniform Probate Code Section 8 101.

North Carolina Comment on Effective Date and Applicability. - The drafters modified the provisions of the Uniform Trust Code relating to its application to trust instruments executed before its effective date by adding the phrase "or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary" to the end of the first sentence of the second paragraph. Although this Chapter is intended to have broad application, the drafters concluded that a rule of construction or presumption provided in this Chapter should not be applied to a trust instrument executed before the effective date of this Chapter if the application of such rule or presumption would impair the substantial rights of a beneficiary of a trust established under such a trust instrument.

Editor's note. - Session Laws 2005-192, which enacted Chapter 36C, in s. 6, provides: "The Revisor of Statutes shall cause to be printed along with this act all relevant portions of the Official Commentary to the Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Official Comments, copyright 2005, are reprinted in this Chapter with the permission of the National Conference of Commissioners on Uniform State Laws. It is believed that the Official Comments will prove of value to the practitioner in understanding and applying the text of this Chapter.

The Official Comments appearing under individual sections in this Chapter have been printed by the publisher as received, without editorial change, and relate to the Chapter as originally enacted. However, not all sections in this Chapter may carry Official Comments. Furthermore, Official Comments may or may not have been received or updated in conjunction with subsequent amendments to this Chapter and, therefore, may not reflect all changes to the sections under which they appear.

Where they appear in this Chapter, "Amended Comment" usually means that an error in the original comment has been corrected by a subsequent amendment, and "Supplemental Comment" pertains to a later development, such as an amendment to the statute text. North Carolina Comments explain where the General Assembly has enacted variations to the text of the Uniform Act.

Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2010-96, s. 22, provides: "The Revisor of Statutes may cause to be printed all explanatory comments of the drafters of S.L. 2009-222, 2009-267, and 2009-318 as the Revisor deems appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 14, effective October 1, 2007, added "by any of the following methods" at the end of the introductory paragraph; added "including either of the following:" at the end of subdivision (1); added subdivisions (1)a. and b.; and made minor stylistic and punctuation changes. See Editor's note for applicability.

Session Laws 2009-267, s. 2, effective October 1, 2009, added subdivision (4).

Session Laws 2011-284, s. 45, effective June 24, 2011, deleted "or bequest" following "devise" in subdivision (1)a.

CASE NOTES

Cited in State v. Chillo, 208 N.C. App. 541, 705 S.E.2d 394 (2010).

CASE NOTES

Formality of Will Not Necessary in Executive of Insurance Trust. - The mere fact that the proceeds are not payable until the death of the insured does not make a disposition testamentary. An insurance trust will be upheld even though it has not been executed with the formality necessary to constitute a will. Ballard v. Lance, 6 N.C. App. 24, 169 S.E.2d 199 (1969)(decided under prior law).

Spendthrift Trust. - Deceased Chapter 7 debtor created a valid spendthrift trust pre-petition, pursuant to G.S. 36C-4-401.1 and G.S. 36C-5-501, when she designated the trust as the beneficiary of her life insurance policy, the debtor husband and a minor daughter were named as beneficiaries of the trust, and the life insurance policy was exempted from the estate. In re Singletary, - Bankr. - (Bankr. E.D.N.C. June 13, 2008).

OFFICIAL COMMENT

Subsection (a) codifies the basic requirements for the creation of a trust. To create a valid trust, the settlor must indicate an intention to create a trust. See Restatement (Third) of Trusts Section 13 (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts Section 23 (1959). But only such manifestations of intent as are admissible as proof in a judicial proceeding may be considered. See Section 103(18) ("terms of a trust" defined).

To create a trust, a settlor must have the requisite mental capacity. To create a revocable or testamentary trust, the settlor must have the capacity to make a will. To create an irrevocable trust, the settlor must have capacity during lifetime to transfer the property free of trust. See Section 601 (capacity of settlor to create revocable trust), and see generally Restatement (Third) of Trusts Section 11 (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts Sections 18-22 (1959); and Restatement (Third) of Property: Wills and Other Donative Transfers Section 8.1 (Tentative Draft No. 3, 2001).

Subsection (a)(3) requires that a trust, other than a charitable trust, a trust for the care of an animal, or a trust for another valid noncharitable purpose, have a definite beneficiary. While some beneficiaries will be definitely ascertained as of the trust's creation, subsection (b) recognizes that others may be ascertained in the future as long as this occurs within the applicable perpetuities period. The definite beneficiary requirement does not prevent a settlor from making a disposition in favor of a class of persons. Class designations are valid as long as the membership of the class will be finally determined within the applicable perpetuities period. For background on the definite beneficiary requirement, see Restatement (Third) of Trusts Sections 44-46 (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Sections 112-122 (1959).

Subsection (a)(4) recites standard doctrine that a trust is created only if the trustee has duties to perform. See Restatement (Third) of Trusts Section 2 (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts Section 2 (1959). Trustee duties are usually active, but a validating duty may also be passive, implying only that the trustee has an obligation not to interfere with the beneficiary's enjoyment of the trust property. Such passive trusts, while valid under this Code, may be terminable under the enacting jurisdiction's Statute of Uses. See Restatement (Third) of Trusts Section 6 (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts Sections 67-72 (1959).

Subsection (a)(5) addresses the doctrine of merger, which, as traditionally stated, provides that a trust is not created if the settlor is the sole trustee and sole beneficiary of all beneficial interests. The doctrine of merger has been inappropriately applied by the courts in some jurisdictions to invalidate self-declarations of trust in which the settlor is the sole life beneficiary but other persons are designated as beneficiaries of the remainder. The doctrine of merger is properly applicable only if all beneficial interests, both life interests and remainders, are vested in the same person, whether in the settlor or someone else. An example of a trust to which the doctrine of merger would apply is a trust of which the settlor is sole trustee, sole beneficiary for life, and with the remainder payable to the settlor's probate estate. On the doctrine of merger generally, see Restatement (Third) of Trusts Section 69 (Tentative Draft No. 3, 2001); Restatement (Second) of Trusts Section 341 (1959).

Subsection (c) allows a settlor to empower the trustee to select the beneficiaries even if the class from whom the selection may be made cannot be ascertained. Such a provision would fail under traditional doctrine; it is an imperative power with no designated beneficiary capable of enforcement. Such a provision is valid, however, under both this Code and the Restatement, if there is at least one person who can meet the description. If the trustee does not exercise the power within a reasonable time, the power fails and the property will pass by resulting trust. See Restatement (Third) of Trusts Section 46 (Tentative Draft No. 2, approved 1999). See also Restatement (Second) of Trusts Section 122 (1959); Restatement (Second) of Property: Donative Transfers Section 12.1 cmt. e (1986).

NORTH CAROLINA COMMENT

Subsection (a) is somewhat similar to prior North Carolina law which held that the elements necessary to create a valid trust are (1) sufficient words to show an intention to create a trust, (2) a definite subject, and (3) an ascertained object. See, e.g., Finch v. Honeycutt, 246 N.C. 91, 97 S.E.2d 478 (1957); Bland v. Branch Banking & Trust Co., 143 N.C. App. 282, 547 S.E.2d 62 (2001). In Williams v. Mullen, 31 N.C. App. 41, 228 S.E.2d 512 (1976), cert. granted, 291 N.C. 329, 230 S.E.2d 678 (1976), the court added "designated beneficiaries" as a fourth element.

Subsection (a)(5) applies the doctrine of merger to a trust of which the settlor is the sole trustee and sole beneficiary. North Carolina law recognizes this doctrine. See, e.g., Blades v. Norfolk Southern Ry. Co., 224 N.C. 32, 29 S.E.2d 148 (1944).

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, an agent under a power of attorney and a general guardian or guardian of the estate may create a trust notwithstanding the provisions of subdivisions (a) (1) and (2) of this section. See G.S. 36C-6-602.1(a) (agent) and G.S. 35A-1251(24) (guardian).

OFFICIAL COMMENT

The validity of a trust created by will is ordinarily determined by the law of the decedent's domicile. No such certainty exists with respect to determining the law governing the validity of inter vivos trusts. Generally, at common law a trust was created if it complied with the law of the state having the most significant contacts to the trust. Contacts for making this determination include the domicile of the trustee, the domicile of the settlor at the time of trust creation, the location of the trust property, the place where the trust instrument was executed, and the domicile of the beneficiary. See 5A Austin Wakeman Scott & William Franklin Fratcher, The Law of Trusts Sections 597, 599 (4th ed. 1987). Furthermore, if the trust has contacts with two or more states, one of which would validate the trust's creation and the other of which would deny the trust's validity, the tendency is to select the law upholding the validity of the trust. See 5A Austin Wakeman Scott & William Franklin Fratcher, The Law of Trusts Section 600 (4th ed. 1987).

Section 403 extends the common law rule by validating a trust if its creation complies with the law of any of a variety of states in which the settlor or trustee had significant contacts. Pursuant to Section 403, a trust not created by will is validly created if its creation complies with the law of the jurisdiction in which the trust instrument was executed, or the law of the jurisdiction in which, at the time of creation the settlor was domiciled, had a place of abode, or was a national; the trustee was domiciled or had a place of business; or any trust property was located.

Section 403 is comparable to Section 2-506 of the Uniform Probate Code, which validates wills executed in compliance with the law of a variety of places in which the testator had a significant contact. Unlike the UPC, however, Section 403 is not limited to execution of the instrument but applies to the entire process of a trust's creation, including compliance with the requirement that there be trust property. In addition, unlike the UPC, Section 403 validates a trust valid under the law of the domicile or place of business of the designated trustee, or if valid under the law of the place where any of the trust property is located.

The section does not supercede local law requirements for the transfer of real property, such that title can be transferred only by recorded deed.

NORTH CAROLINA COMMENT

This section is broader than former G.S. 36A-50 which validated a charitable trust created in another State only if the trust was valid under the laws of the State of the domicile of the settlor.

OFFICIAL COMMENT

For an explication of the requirement that a trust must not have a purpose that is unlawful or against public policy, see Restatement (Third) of Trusts §§ 27-30 (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts §§ 59-65 (1959). A trust with a purpose that is unlawful or against public policy is invalid. Depending on when the violation occurred, the trust may be invalid at its inception or it may become invalid at a later date. The invalidity may also affect only particular provisions. Generally, a trust has a purpose which is illegal if (1) its performance involves the commission of a criminal or tortious act by the trustee; (2) the settlor's purpose in creating the trust was to defraud creditors or others; or (3) the consideration for the creation of the trust was illegal. See Restatement (Third) of Trusts § 28 cmt. a (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts § 60 cmt. a (1959). Purposes violative of public policy include those that tend to encourage criminal or tortious conduct, that interfere with freedom to marry or encourage divorce, that limit religious freedom, or which are frivolous or capricious. See Restatement (Third) of Trusts § 29 cmt. d-h (Tentative Draft No. 2, 1999); Restatement (Second) of Trusts § 62 (1959).

Pursuant to Section 402(a), a trust must have an identifiable beneficiary unless the trust is of a type that does not have beneficiaries in the usual sense, such as a charitable trust or, as provided in Sections 408 and 409, trusts for the care of an animal or other valid noncharitable purpose. The general purpose of trusts having identifiable beneficiaries is to benefit those beneficiaries in accordance with their interests as defined in the trust's terms. The requirement of this section that a trust and its terms be for the benefit of its beneficiaries, which is derived from Restatement (Third) of Trusts § 27(2) (Tentative Draft No. 2, approved 1999), implements this general purpose. While a settlor has considerable latitude in specifying how a particular trust purpose is to be pursued, the administrative and other nondispositive trust terms must reasonably relate to this purpose and not divert the trust property to achieve a trust purpose that is invalid, such as one which is frivolous or capricious. § See Restatement (Third) of Trusts § 27 cmt. b (Tentative Draft No. 2, approved 1999).

Section 412(b), which allows the court to modify administrative terms that are impracticable, wasteful, or impair the trust's administration, is a specific application of the requirement that a trust and its terms be for the benefit of the beneficiaries. The fact that a settlor suggests or directs an unlawful or other inappropriate means for performing a trust does not invalidate the trust if the trust has a substantial purpose that can be achieved by other methods. See Restatement (Third) of Trusts § 28 cmt. e (Tentative Draft No. 2, approved 1999).

CASE NOTES

Divorce Clause In Trust Document Did Not Violate Public Policy. - Divorce clause in a trust document did not run afoul of public policy. Ward v. Fogel, 237 N.C. App. 570, 768 S.E.2d 292 (2014).

OFFICIAL COMMENT

The required purposes of a charitable trust specified in subsection (a) restate the well-established categories of charitable purposes listed in Restatement (Third) of Trusts § 28 (Tentative Draft No. 3, approved 2001), and Restatement (Second) of Trusts § 368 (1959), which ultimately derive from the Statute of Charitable Uses, 43 Eliz. I, c.4 (1601). The directive to the courts to validate purposes the achievement of which are beneficial to the community has proved to be remarkably adaptable over the centuries. The drafters concluded that it should not be disturbed.

Charitable trusts are subject to the restriction in Section 404 that a trust purpose must be legal and not contrary to public policy. This would include trusts that involve invidious discrimination. See Restatement (Third) of Trusts § 28 cmt. f (Tentative Draft No. 3, 2001).

Under subsection (b), a trust that states a general charitable purpose does not fail if the settlor neglected to specify a particular charitable purpose or organization to receive distributions. The court may instead validate the trust by specifying particular charitable purposes or recipients, or delegate to the trustee the framing of an appropriate scheme. See Restatement (Second) of Trusts § 397 cmt. d (1959). Subsection (b) of this section is a corollary to Section 413, which states the doctrine of cy pres. Under Section 413(a), a trust failing to state a general charitable purpose does not fail upon failure of the particular means specified in the terms of the trust. The court must instead apply the trust property in a manner consistent with the settlor's charitable purposes to the extent they can be ascertained.

Subsection (b) does not apply to the long-established estate planning technique of delegating to the trustee the selection of the charitable purposes or recipients. In that case, judicial intervention to supply particular terms is not necessary to validate the creation of the trust. The necessary terms instead will be supplied by the trustee. See Restatement (Second) of Trusts § 396 (1959). Judicial intervention under subsection (b) will become necessary only if the trustee fails to make a selection. See Restatement (Second) of Trusts § 397 cmt. d (1959). Pursuant to Section 110(b), the charitable organizations selected by the trustee would not have the rights of qualified beneficiaries under this Code because they are not expressly designated to receive distributions under the terms of the trust.

Contrary to Restatement (Second) of Trusts § 391 (1959), subsection (c) grants a settlor standing to maintain an action to enforce a charitable trust. The grant of standing to the settlor does not negate the right of the state attorney general or persons with special interests to enforce either the trust or their interests. For the law on the enforcement of charitable trusts, see Susan N. Gary, Regulating the Management of Charities: Trust Law, Corporate Law, and Tax Law, 21 U. Hawaii L. Rev. 593 (1999).

NORTH CAROLINA COMMENT

Subsection (a) modifies the Uniform Trust Code by adding the words "scientific benevolent, literary" after the word "health."

Subsection (b) brings forward in place of subsection (b) of the Uniform Trust Code with minor modifications the provisions of former G.S. 36A-52(a) regarding the policy of the State with respect to gifts for charity in general terms. The drafters omitted subsection (b) of the Uniform Trust Code, which provides that the court may select a charitable purpose or beneficiary if the trust does not indicate a particular purpose or beneficiary, because that subject is addressed in more detail in G.S. 36C-4-405.1 which is not a part of the Uniform Trust Code.

Subsection (c) brings forward in place of subsection (c) of the Uniform Trust Code the substance of provisions in former G.S. 36A-52(b) confirming the validity of a gift for charitable purposes when the gift is in general terms, the trustee has discretion or is given no instructions to select a charity, or the gift contravenes a statute. Subsection (c) of the Uniform Trust Code providing that the settlor, "among others," may enforce a charitable trust was omitted because that subject is also addressed in more detail in G.S. 36C-4-405.1.

Subsections (d) and (e) were added to this section to also bring forward the substance of the provisions in former G.S. 36A-52(b) granting certain authority to the trustee to select a charity or determine the means to accomplish a charitable purpose when the gift is in general terms.

Legal Periodicals. - For article, "Allowing Perpetuities in North Carolina," see 31 Campbell L. Rev. 399 (2009).

CASE NOTES

Editor's Note. - Many of the cases below were decided under prior law.

The rule against perpetuities does not apply to charitable trusts. Penick v. Bank of Wadesboro, 218 N.C. 686, 12 S.E.2d 253 (1940); American Trust Co. v. Williamson, 228 N.C. 458, 46 S.E.2d 104 (1948); Wachovia Bank & Trust Co. v. John Thomasson Constr. Co., 275 N.C. 399, 168 S.E.2d 358 (1969).

Charitable trusts are not subject to the rule against perpetuities, this section being merely declaratory of the existing law, and limitations over from one charity to another may be made to take effect after the period prescribed by the rule against perpetuities. Williams v. Williams, 215 N.C. 739, 3 S.E.2d 334 (1939).

Restraints on Alienation of Property Are Not Void. - North Carolina has tacitly recognized the right of a donor to restrain alienation of property in charitable trusts since it recognizes the right of the court, in its equitable jurisdiction, to order the sale of trust property under certain conditions, even when the trust forbids the trustee to mortgage or sell. Wachovia Bank & Trust Co. v. John Thomasson Constr. Co., 275 N.C. 399, 168 S.E.2d 358 (1969).

Charitable trusts are exceptions to the rule that a restraint on alienation is void. Wachovia Bank & Trust Co. v. John Thomasson Constr. Co., 275 N.C. 399, 168 S.E.2d 358 (1969).

Equity Courts May Modify Terms of Charitable Trust. - Courts in the exercise of their equitable jurisdiction may modify the terms of a charitable trust when it appears that some exigency, contingency, or emergency not anticipated by the trustor has arisen requiring a disregard of a specific provision of the trust in order to preserve the trust estate or protect the cestuis. Wachovia Bank & Trust Co. v. John Thomasson Constr. Co., 275 N.C. 399, 168 S.E.2d 358 (1969).

Court May Order Real Property Sold and Reinvested. - In order to accomplish the ultimate purpose or intent of the trustor, the court may order real property sold and reinvested in other property when a change in circumstances makes such sale necessary to accomplish the purposes of the trust, even though the trust forbids the trustees to mortgage or sell the property. Wachovia Bank & Trust Co. v. John Thomasson Constr. Co., 275 N.C. 399, 168 S.E.2d 358 (1969).

Courts of equity have long exercised the jurisdiction to sell property devised for charitable uses, where, on account of changed conditions, the charity would fail or its usefulness would be materially impaired without a sale. Wachovia Bank & Trust Co. v. John Thomasson Constr. Co., 275 N.C. 399, 168 S.E.2d 358 (1969).

Trusts Held Valid. - A devise of all the income and profits of lands in trust for a charitable organization of a certain church "to be used by the stewards of the church in defraying the expenses of the institution" is a sufficient designation of the stewards of that church as trustees for the execution of the trust contemplated by the instrument, and to vest in them the title and right of possession for its purposes. Ladies Benevolent Soc'y v. Orrell, 195 N.C. 405, 142 S.E. 493 (1928).

Devise establishing trust for the advancement of a religious denomination held not void for indefiniteness. Williams v. Williams, 215 N.C. 739, 3 S.E.2d 334 (1939).

A gift to the trustees of a named church, in trust for the home and foreign missions and benevolent causes of that church, was held valid under this section and good as against the contention that no cause was named capable of enforcing a lawful claim, as each benevolent cause supported by that church had an interest in the devise. King v. Richardson, 46 F. Supp. 510 (M.D.N.C. 1942), aff'd in part and rev'd in part, 136 F.2d 849 (4th Cir. 1943).

Trust Held Invalid. - Bequest of a certain sum to be held in trust, and paid out in 20 years "to such corporations or associations of individuals as will in their judgment best promote the cause of preventing cruelty to animals in the vicinity of Asheville," held void for uncertainty. Woodcock v. Wachovia Bank & Trust Co., 214 N.C. 224, 199 S.E. 20 (1938).

Devise Giving Trustees Power to Convey. - A devise of property in trust subject to an intervening life estate, with direction to the trustees to keep the principal invested and use the proceeds for purposes designated, gives the trustees the power to convey the real estate in fee, since the right to invest and use the proceeds necessarily implies the power to convert into proceeds by sale. Hall v. Wardwell, 228 N.C. 562, 46 S.E.2d 556 (1948).

Details of Administration May Be Left to Trustee. - A charity in its legal sense is a gift to be applied consistently with existing laws for the benefit of an indefinite number of persons, and it is the policy of this State, as indicated by our statutes, not to declare such gift void because created for the benefit of an indefinite class, and if the founder describes the general nature of the charitable trust he may leave details of its administration to duly appointed trustees. Whitsett v. Clapp, 200 N.C. 647, 158 S.E. 183 (1931).

The policy of protecting charitable trusts is repeatedly declared throughout the statutory provisions of former Chapter 36A. Edmisten v. Sands, 307 N.C. 670, 300 S.E.2d 387 (1983).

Policy Is to Preserve Intent of Testator or Donor. - The public policy of North Carolina is to preserve, to the fullest extent possible, the manifested intention of a testator or donor to bestow a gift for charitable purposes. Edmisten v. Sands, 307 N.C. 670, 300 S.E.2d 387 (1983).

Cited in First Charter Bank v. Am. Children's Home, 203 N.C. App. 574, 692 S.E.2d 457 (2010).

CASE NOTES

Editor's Note. - The cases below were decided under prior law.

The trustees of a charitable trust who violate its provisions are subject to the procedure prescribed by this section, and where the trust is created by will the trust estate is not forfeited in favor of a residuary legatee solely upon the ground that the moneys derived have been diverted to other uses than the testator intended. Humphrey v. Board of Trustees, 203 N.C. 201, 165 S.E. 547 (1932), decided under prior law.

Negligence or Fraud in Mismanagement of Trust. - In the absence of a showing of special interest, a party seeking enforcement of a charitable trust should have the Attorney General or district attorney commence an action pursuant to the provisions of this section when it appears that the trust is being mismanaged through negligence or fraud. Kania v. Chatham, 297 N.C. 290, 254 S.E.2d 528 (1979).

The policy of protecting charitable trusts is repeatedly declared throughout the statutory provisions of former Chapter 36A. Edmisten v. Sands, 307 N.C. 670, 300 S.E.2d 387 (1983).

Policy Is to Preserve Intent of Testator or Donor. - The public policy of North Carolina is to preserve, to the fullest extent possible, the manifested intention of a testator or donor to bestow a gift for charitable purposes. Edmisten v. Sands, 307 N.C. 670, 300 S.E.2d 387 (1983).

OFFICIAL COMMENT

This section is a specific application of Restatement (Third) of Trusts § 12 (Tentative Draft No. 1, approved 1996), and Restatement (Second) of Trusts § 333 (1959), which provide that a trust can be set aside or reformed on the same grounds as those which apply to a transfer of property not in trust, among which include undue influence, duress, and fraud, and mistake. This section addresses undue influence, duress, and fraud. For reformation of a trust on grounds of mistake, see Section 415. See also Restatement (Third) of Property: Wills and Other Donative Transfers § 8.3 (Tentative Draft No. 3, approved 2001), which closely tracks the language above. Similar to a will, the invalidity of a trust on grounds of undue influence, duress, or fraud may be in whole or in part.

NORTH CAROLINA COMMENT

This section is consistent with prior law which recognized that fraud and undue influence are grounds to set aside a trust. See Stilwell v. Walden, 70 N.C. App. 543, 320 S.E.2d 329 (1984) where, in overturning the trial court's dismissal by directed verdict of a claim alleging constructive fraud, undue influence and mental incapacity as grounds to invalidate a transfer of assets in trust, the court ruled that the evidence was sufficient to establish constructive fraud and that evidence of undue influence and mental incapacity was erroneously excluded by the trial court. With regard to the requirement of mental capacity to create a trust, see G.S. 36C-4-402(a)(1) and the Official Comment to that section.

This section substitutes the word "voidable" in place of the word "void" appearing in the Uniform Trust Code in order to preserve defenses generally available in equity to trustees, bona fide purchasers and other recipients of trust property who had no knowledge that the creation of a trust was induced by fraud, duress or undue influence. See The Restatement of Restitution and Unjust Enrichment § 13 (fraud and misrepresentation), § 14 (duress) and § 15 (undue influence) (tentative Draft No. 1 approved April 6, 2001) which provides that a transfer under these circumstances confers voidable title on the transferee subject to certain limited exceptions.

CASE NOTES

Absence of Fiduciary Duty. - Because a spouse's claims regarding a trust did not arise within the context of a distinct agreement or transaction between the spouses, there was no fiduciary duty owed to the spouse sufficient to survive summary judgment on the spouse's claims for constructive fraud and breach of fiduciary duty. Ward v. Fogel, 237 N.C. App. 570, 768 S.E.2d 292 (2014).

Fraudulent Inducement Relating to Creation of A Trust. - Because a spouse forecast evidence establishing each element of fraudulent inducement relating to the creation of a trust, regarding the transfer of assets into the trust by the trustee who was married to the spouse, the trial court erred by granting summary judgment for the trustees on the spouse's claims for fraudulent inducement, constructive fraud, and breach of fiduciary duty. Ward v. Fogel, 237 N.C. App. 570, 768 S.E.2d 292 (2014).

OFFICIAL COMMENT

While it is always advisable for a settlor to reduce a trust to writing, the Uniform Trust Code follows established law in recognizing oral trusts. Such trusts are viewed with caution, however. The requirement of this section that an oral trust can be established only by clear and convincing evidence is a higher standard than is in effect in many States. See Restatement (Third) of Trusts § 20 Reporter's Notes (Tentative Draft No. 1, approved 1996).

Absent some specific statutory provision, such as a provision requiring that transfers of real property be in writing, a trust need not be evidenced by a writing. States with statutes of frauds or other provisions requiring that the creation of certain trusts must be evidenced by a writing may wish specifically to cite such provisions.

For the Statute of Frauds generally, see Restatement (Second) of Trusts §§ 40-52 (1959). For a description of what the writing must contain, assuming that a writing is required, see Restatement (Third) of Trusts § 22 (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts § 46-49 (1959). For a discussion of when the writing must be signed, see Restatement (Third) of Trusts § 23 (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts § 41-42 (1959). For the law of oral trusts, see Restatement (Third) of Trusts § 20 (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts §§ 43-45 (1959).

NORTH CAROLINA COMMENT

This section is consistent with prior North Carolina law which recognized that express trusts of real or personal property may be oral and that the evidence of establishment of a parole trust must be "clear, cogent and convincing." See, e.g., Ellis v. Vespoint, 102 N.C. App. 739, 403 S.E.2d 542 (1991), disc. review denied, 329 N.C. 496, 407 S.E.2d 532 (1991) (real property); Bryant v. Kelly, 279 N.C. 123, 181 S.E.2d 438 (1971) (real property); and Rousseau v. Call, 169 N.C. 173, 85 S.E. 414 (1915) (personal property). Real property may be the subject of a parole trust because North Carolina has never adopted the Seventh Section of the English Statute of Frauds which required all trusts to be in writing. E.g., Bryant v. Kelly, supra.

OFFICIAL COMMENT

This section and the next section of the Code validate so called honorary trusts. Unlike honorary trusts created pursuant to the common law of trusts, which are arguably no more than powers of appointment, the trusts created by this and the next section are valid and enforceable. For a discussion of the common law doctrine, see Restatement (Third) of Trusts § 47 (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts § 124 (1959).

This section addresses a particular type of honorary trust, the trust for the care of an animal. Section 409 specifies the requirements for trusts without ascertainable beneficiaries that are created for other noncharitable purposes. A trust for the care of an animal may last for the life of the animal. While the animal will ordinarily be alive on the date the trust is created, an animal may be added as a beneficiary after that date as long as the addition is made prior to the settlor's death. Animals in gestation but not yet born at the time of the trust's creation may also be covered by its terms. A trust authorized by this section may be created to benefit one designated animal or several designated animals.

Subsection (b) addresses enforcement. Noncharitable trusts ordinarily may be enforced by their beneficiaries. Charitable trusts may be enforced by the State's attorney general or by a person deemed to have a special interest. See Restatement (Second) of Trusts § 391 (1959). But at common law, a trust for the care of an animal or a trust without an ascertainable beneficiary created for a noncharitable purpose was unenforceable because there was no person authorized to enforce the trustee's obligations.

Sections 408 and 409 close this gap. The intended use of a trust authorized by either section may be enforced by a person designated in the terms of the trust or, if none, by a person appointed by the court. In either case, Section 110(b) grants to the person appointed the rights of a qualified beneficiary for the purpose of receiving notices and providing consents. If the trust is created for the care of an animal, a person with an interest in the welfare of the animal has standing to petition for an appointment. The person appointed by the court to enforce the trust should also be a person who has exhibited an interest in the animal's welfare. The concept of granting standing to a person with a demonstrated interest in the animal's welfare is derived from the Uniform Guardianship and Protective Proceedings Act, which allows a person interested in the welfare of a ward or protected person to file petitions on behalf of the ward or protected person. See, e.g., Uniform Probate Code §§ 5-210(b), 5-414(a).

Subsection (c) addresses the problem of excess funds. If the court determines that the trust property exceeds the amount needed for the intended purpose and that the terms of the trust do not direct the disposition, a resulting trust is ordinarily created in the settlor or settlor's successors in interest. See Restatement (Third) of Trusts § 47 (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts § 124 (1959). Successors in interest include the beneficiaries under the settlor's will, if the settlor has a will, or in the absence of an effective will provision, the settlor's heirs. The settlor may also anticipate the problem of excess funds by directing their disposition in the terms of the trust. The disposition of excess funds is within the settlor's control. See Section 105(a). While a trust for an animal is usually not created until the settlor's death, subsection (a) allows such a trust to be created during the settlor's lifetime. Accordingly, if the settlor is still living, subsection (c) provides for distribution of excess funds to the settlor, and not to the settlor's successors in interest.

Should the means chosen not be particularly efficient, a trust created for the care of an animal can also be terminated by the trustee or court under Section 414. Termination of a trust under that section, however, requires that the trustee or court develop an alternative means for carrying out the trust purposes. See Section 414(c).

This section and the next section are suggested by Section 2-907 of the Uniform Probate Code, but much of this and the following section is new.

NORTH CAROLINA COMMENT

This section of the Uniform Trust Code validating the creation of trusts for the care of "an animal alive during the settlor's lifetime" was omitted, and the provisions of former G.S. 36A-147 providing for the validity of trusts for the care of "one or more designated domestic or pet animals alive at the time of creation of the trust" were brought forward in its place.

Effect of Amendments. - Session Laws 2006-259, s. 13(b), effective October 1, 2006, substituted "settlor" for "transferor" throughout the section; in subdivision (c)(3), substituted "the settlor, if then living, otherwise to the settlor's heirs" for "the transferor or the transferor's heirs"; and in subsection (d), substituted "over the trust" for "over the decedent's estate"; and made minor punctuation changes. See Editor's note for applicability.

OFFICIAL COMMENT

This section authorizes two types of trusts without ascertainable beneficiaries; trusts for general but noncharitable purposes, and trusts for a specific noncharitable purpose other than the care of an animal, on which see Section 408. Examples of trusts for general noncharitable purposes include a bequest of money to be distributed to such objects of benevolence as the trustee might select. Unless such attempted disposition was interpreted as charitable, at common law the disposition was honorary only and did not create a trust. Under this section, however, the disposition is enforceable as a trust for a period of up to 21 years, although that number is placed in brackets to indicate that States may wish to select a different time limit.

The most common example of a trust for a specific noncharitable purpose is a trust for the care of a cemetery plot. The lead-in language to the section recognizes that some special purpose trusts, particularly those for care of cemetery plots, are subject to other statutes. Such legislation will typically endeavor to facilitate perpetual care as opposed to care limited to 21 years as under this section.

For the requirement that a trust, particularly the type of trust authorized by this section, must have a purpose that is not capricious, see Section 404 Comment. For examples of the types of trusts authorized by this section, see Restatement (Third) of Trusts § 47 (Tentative Draft No. 2, approved 1999), and Restatement (Second) of Trusts § 62 cmt. w and § 124 (1959). The case law on capricious purposes is collected in 2 Austin W. Scott & William F. Fratcher, The Law of Trusts § 124.7 (4th ed. 1987).

This section is similar to Section 408, although less detailed. Much of the Comment to Section 408 also applies to this section.

NORTH CAROLINA COMMENT

Subdivision (1) is consistent with the former G.S. 36A-145 regarding a trust for a noncharitable purpose without a beneficiary.

Subdivision (2) clarifies prior law as to who may enforce such a trust.

Subdivision (3) requiring distribution to the settlor or the settlor's successors in interest of property not required for the intended use of the trust is new to North Carolina law.

Subdivision (4) was added to the section to bring forward the provisions of former G.S. 36A-146 regarding trusts and other arrangements for cemetery lots and burial structures.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, this section is amended to provide that (i) a noncharitable trust without an ascertainable beneficiary terminates after twenty-one years and (ii) the manner in which any assets remaining in the trust are to be distributed when the trust terminates.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 15, effective October 1, 2007, added the last two sentences in subdivision (1) and added subdivisions (1)a. through (1)c.; in subdivision (3), substituted "The" for "Except as otherwise provided in the terms of the trust," and substituted "shall be distributed under subdivision (1) of this section" for "must be distributed to the settlor, if then living, or otherwise to the settlor's successors in interest." See Editor's note for applicability.

OFFICIAL COMMENT

Subsection (a) lists the grounds on which trusts typically terminate. For a similar formulation, see Restatement (Third) of Trusts Section 61 (Tentative Draft No. 3, approved 2001). Terminations under subsection (a) may be in either in whole or in part. Other types of terminations, all of which require action by a court, trustee, or beneficiaries, are covered in Sections 411-414, which also address trust modification. Of these sections, all but Section 411 apply to charitable trusts and all but Section 413 apply to noncharitable trusts.

Withdrawal of the trust property is not an event terminating a trust. The trust remains in existence although the trustee has no duties to perform unless and until property is later contributed to the trust.

Subsection (b) specifies the persons who have standing to seek court approval or disapproval of proposed trust modifications, terminations, combinations, or divisions. An approval or disapproval may be sought for an action that does not require court permission, including a petition questioning the trustee's distribution upon termination of a trust under $50,000 (Section 414), and a petition to approve or disapprove a proposed trust division or consolidation (Section 417). Subsection (b) makes the settlor an interested person with respect to a judicial proceeding brought by the beneficiaries under Section 411 to terminate or modify a trust. Contrary to Restatement (Second) of Trusts Section 391 (1959), subsection (b) grants a settlor standing to petition the court under Section 413 to apply cy pres to modify the settlor's charitable trust.

2004 Amendment. For an explanation of why a portion of subsection (b) has been placed in brackets, see the comment to the 2004 Amendment to Section 411.

NORTH CAROLINA COMMENT

Subsection (b) is consistent with the provisions of former G.S. 36A-125.11(b) in allowing proceedings for modification and termination of an irrevocable trust to be commenced by a trustee or beneficiary but differs from prior law in allowing the settlor to bring an action to approve or disapprove a modification or termination of a trust by consent of the settlor and the beneficiaries. The last sentence of this subsection was added to bring forward the provision in former G.S. 36A-125.11(b) requiring the trustee to be a necessary party to any such proceeding.

Subsection (c) was added to this section to clarify the jurisdiction of a proceeding to modify or terminate a trust.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2006)

Effective October 1, 2006, this section is amended to delete the provisions of subsection (c) which are unnecessary in light of other provisions of Article 36C regarding jurisdiction.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, this section is amended to clarify that there is no requirement that a trust combination or division under G.S. 36C-4-417 must be accomplished by judicial order.

Editor's Note. - Session Laws 2006-259, s. 13(r), provides: "The Revisor of Statutes is authorized to cause to be printed any amendments to the explanatory comments of the drafters of S.L. 2005-192 that are prepared by the drafters of this section, as the Revisor deems appropriate."

Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2006-259, s. 13(c), effective October 1, 2006, repealed subsection (c), which read: "Jurisdiction of a proceeding brought under this section is as provided in G.S. 36C-2-203." See Editor's note for applicability.

Session Laws 2007-106, s. 16, effective October 1, 2007, in subsection (b), deleted "or trust combination or division under G.S. 36C-4-417" following "G.S. 36C-4-416" at the end of the first sentence, and substituted "Article" for "section" at the end of the last sentence. See Editor's note for applicability.

OFFICIAL COMMENT

This section describes the circumstances in which termination or modification of a noncharitable irrevocable trust may be compelled by the beneficiaries, with or without the concurrence of the settlor. For provisions governing modification or termination of trusts without the need to seek beneficiary consent, see Sections 412 (modification or termination due to unanticipated circumstances or inability to administer trust effectively), 414 (termination or modification of uneconomic noncharitable trust), and 416 (modification to achieve settlor's tax objectives). If the trust is revocable by the settlor, the method of revocation specified in Section 602 applies.

Subsection (a), which was placed in brackets pursuant to a 2004 amendment, states the test for termination or modification by the beneficiaries with the concurrence of the settlor. For an explanation of why subsection (a) has been placed in brackets, see the 2004 comment at the end of this section.

Subsection (b) states the test for termination or modification by unanimous consent of the beneficiaries without the concurrence of the settlor. The rules on trust termination in Subsections (a)-(b) carries forward the Claflin rule, first stated in the famous case of Claflin v. Claflin, 20 N.E. 454 (Mass. 1889). Subsection (c) addresses the effect of a spendthrift provision. Subsection (d) directs how the trust property is to be distributed following a termination under either subsection (a) or (b). Subsection (e) creates a procedure for judicial approval of a proposed termination or modification when the consent of less than all of the beneficiaries is available.

Under this section, a trust may be modified or terminated over a trustee's objection. However, pursuant to Section 410, the trustee has standing to object to a proposed termination or modification.

The settlor's right to join the beneficiaries in terminating or modifying a trust under this section does not rise to the level of a taxable power. See Treas. Reg. Section 20.2038-1(a)(2). No gift tax consequences result from a termination as long as the beneficiaries agree to distribute the trust property in accordance with the value of their proportionate interests.

The provisions of Article 3 on representation, virtual representation and the appointment and approval of representatives appointed by the court apply to the determination of whether all beneficiaries have signified consent under this section. The authority to consent on behalf of another person, however, does not include authority to consent over the other person's objection. See Section 301(b). Regarding the persons who may consent on behalf of a beneficiary, see Sections 302 through 305. A consent given by a representative is invalid to the extent there is a conflict of interest between the representative and the person represented. Given this limitation, virtual representation of a beneficiary's interest by another beneficiary pursuant to Section 304 will rarely be available in a trust termination case, although it should be routinely available in cases involving trust modification, such as a grant to the trustee of additional powers. If virtual or other form of representation is unavailable, Section 305 of the Code permits the court to appoint a representative who may give the necessary consent to the proposed modification or termination on behalf of the minor, incapacitated, unborn, or unascertained beneficiary. The ability to use virtual and other forms of representation to consent on a beneficiary's behalf to a trust termination or modification has not traditionally been part of the law, although there are some notable exceptions. Compare Restatement (Second) Section 337(1) (1959) (beneficiary must not be under incapacity), with Hatch v. Riggs National Bank, 361 F.2d 559 (D.C. Cir. 1966) (guardian ad litem authorized to consent on beneficiary's behalf).

Subsection (a) also addresses the authority of an agent, conservator, or guardian to act on a settlor's behalf. Consistent with Section 602 on revocation or modification of a revocable trust, the section assumes that a settlor, in granting an agent general authority, did not intend for the agent to have authority to consent to the termination or modification of a trust, authority that could be exercised to radically alter the settlor's estate plan. In order for an agent to validly consent to a termination or modification of the settlor's revocable trust, such authority must be expressly conveyed either in the power or in the terms of the trust.

Subsection (a), however, does not impose restrictions on consent by a conservator or guardian, other than prohibiting such action if the settlor is represented by an agent. The section instead leaves the issue of a conservator's or guardian's authority to local law. Many conservatorship statutes recognize that termination or modification of the settlor's trust is a sufficiently important transaction that a conservator should first obtain the approval of the court supervising the conservatorship. See, e.g., Unif. Probate Code Section 5-411(a)(4). Because the Uniform Trust Code uses the term "conservator" to refer to the person appointed by the court to manage an individual's property ( see Section 103(5)), a guardian may act on behalf of a settlor under this section only if a conservator has not been appointed.

Subsection (a) is similar to Restatement (Third) of Trusts Section 65(2) (Tentative Draft No. 3, approved 2001), and Restatement (Second) of Trusts Section 338(2) (1959), both of which permit termination upon joint action of the settlor and beneficiaries. Unlike termination by the beneficiaries alone under subsection (b), termination with the concurrence of the settlor does not require a finding that the trust no longer serves a material purpose. No finding of failure of material purpose is required because all parties with a possible interest in the trust's continuation, both the settlor and beneficiaries, agree there is no further need for the trust. Restatement Third goes further than subsection (b) of this section and Restatement Second, however, in also allowing the beneficiaries to compel termination of a trust that still serves a material purpose if the reasons for termination outweigh the continuing material purpose.

Subsection (b), similar to Restatement Third but not Restatement Second, allows modification by beneficiary action. The beneficiaries may modify any term of the trust if the modification is not inconsistent with a material purpose of the trust. Restatement Third, though, goes further than this Code in also allowing the beneficiaries to use trust modification as a basis for removing the trustee if removal would not be inconsistent with a material purpose of the trust. Under the Code, however, Section 706 is the exclusive provision on removal of trustees. Section 706(b)(4) recognizes that a request for removal upon unanimous agreement of the qualified beneficiaries is a factor for the court to consider, but before removing the trustee the court must also find that such action best serves the interests of all the beneficiaries, that removal is not inconsistent with a material purpose of the trust, and that a suitable cotrustee or successor trustee is available. Compare Section 706(b)(4), with Restatement (Third) Section 65 cmt. f (Tentative Draft No. 3, approved 2001).

The requirement that the trust no longer serve a material purpose before it can be terminated by the beneficiaries does not mean that the trust has no remaining function. In order to be material, the purpose remaining to be performed must be of some significance:

Material purposes are not readily to be inferred. A finding of such a purpose generally requires some showing of a particular concern or objective on the part of the settlor, such as concern with regard to the beneficiary's management skills, judgment, or level of maturity. Thus, a court may look for some circumstantial or other evidence indicating that the trust arrangement represented to the settlor more than a method of allocating the benefits of property among multiple beneficiaries, or a means of offering to the beneficiaries (but not imposing on them) a particular advantage. Sometimes, of course, the very nature or design of a trust suggests its protective nature or some other material purpose.

Restatement (Third) of Trusts Section 65 cmt. d (Tentative Draft No. 3, approved 2001).

Subsection (c) of this section deals with the effect of a spendthrift provision on the right of a beneficiary to concur in a trust termination or modification. By a 2004 amendment, subsection (c) has been placed in brackets and thereby made optional. Spendthrift terms have sometimes been construed to constitute a material purpose without inquiry into the intention of the particular settlor. For examples, see Restatement (Second) of Trusts Section 337 (1959); George G. Bogert & George T. Bogert, The Law of Trusts and Trustees Section 1008 (Rev. 2d ed. 1983); and 4 Austin W. Scott & William F. Fratcher, The Law of Trusts Section 337 (4th ed. 1989). This result is troublesome because spendthrift provisions are often added to instruments with little thought. Subsection (c), similar to Restatement (Third) of Trusts Section 65 cmt. e (Tentative Draft No. 3, approved 2001), does not negate the possibility that continuation of a trust to assure spendthrift protection might have been a material purpose of the particular settlor. The question of whether that was the intent of a particular settlor is instead a matter of fact to be determined on the totality of the circumstances.

Subsection (d) recognizes that the beneficiaries' power to compel termination of the trust includes the right to direct how the trust property is to be distributed. While subsection (a) requires the settlor's consent to terminate an irrevocable trust, the settlor does not control the subsequent distribution of the trust property. Once termination has been approved, how the trust property is to be distributed is solely for the beneficiaries to decide.

Subsection (e), similar to Restatement (Third) of Trusts Section 65 cmt. c (Tentative Draft No. 3, approved 2001), and Restatement (Second) of Trusts Sections 338(2) & 340(2) (1959), addresses situations in which a termination or modification is requested by less than all the beneficiaries, either because a beneficiary objects, the consent of a beneficiary cannot be obtained, or representation is either unavailable or its application uncertain. Subsection (e) allows the court to fashion an appropriate order protecting the interests of the nonconsenting beneficiaries while at the same time permitting the remainder of the trust property to be distributed without restriction. The order of protection for the nonconsenting beneficiaries might include partial continuation of the trust, the purchase of an annuity, or the valuation and cashout of the interest.

2003 Amendment. The amendment, which adds the language "modification or" to subsection (a), fixes an inadvertent omission. It was the intent of the drafting committee that an agent with authority or a conservator or guardian with the approval of the court be able to participate not only in a decision to terminate a trust but also in a decision to modify it.

2004 Amendments.

Section 411(a), Section 301(d), and Conforming Changes to Sections 301(c) and 410(b).

Section 411(a) was amended in 2004 on the recommendation of the Estate and Gift Taxation Committee of the American College of Trust and Estate Counsel (ACTEC). Enacting jurisdictions now have several options all of which are indicated by brackets:

ì delete subsection (a), meaning that the state's prior law would control on this issue.

ì require court approval of the modification or termination.

ì make the provision prospective and applicable only to irrevocable trusts created on or after the effective date or to revocable trusts that become irrevocable on or after the effective date of the provision.

ì enact subsection (a) in its original form.

Section 411(a), as originally drafted did not require that a court approve a joint decision of the settlor and beneficiaries to terminate or modify an irrevocable trust. The ACTEC Committee was concerned that:

ì Section 411(a), without amendment, could potentially result in the taxation for federal estate tax purposes of irrevocable trusts created in states which previously required that a court approve a settlor/beneficiary termination or modification; and

ì Because of the ability of a settlor under Section 301 to represent and bind a beneficiary with respect to a termination or modification of an irrevocable trust, Section 411(a) might result in inclusion of the trust in the settlor's gross estate. New Section 301(d) eliminates the possibility of such representation.

The Drafting Committee recommends that all jurisdictions enact the amendment to Section 301(d). The Drafting Committee recommends that jurisdictions conform Section 411(a) to prior law on whether or not court approval is necessary for the settlor and beneficiaries to jointly terminate or modify an irrevocable trust. If prior law is in doubt, the enacting jurisdiction may wish to make Section 411(a) prospective only. The enacting jurisdiction may also elect to delete Section 411(a).

States electing to delete Section 411(a) should also delete the cross-references to Section 411 found in Sections 301(c) and 410(b). These cross-references have therefore been placed in brackets. States electing to delete Section 411(a) should also not enact Section 301(d), which for this reason has similarly been placed in brackets.

Section 411(c)

Section 411(c), which by the 2004 amendment was placed in brackets and therefore made optional, provides that a spendthrift provision is not presumed to constitute a material purpose of the trust. Several states that have enacted the Code have not agreed with the provision and have either deleted it or have reversed the presumption. Given these developments, the Drafting Committee concluded that uniformity could not be achieved. The Joint Editorial Board for Uniform Trusts and Estates Acts, however, is of the view that the better approach is to enact subsection (c) in its original form for the reasons stated in the comment to this Section.

NORTH CAROLINA COMMENT

Subsection (a) is generally consistent with the provisions of former G.S. 36A-125.3 in permitting a trust to be modified or terminated by the consent of the settlor and beneficiaries, but it differs from prior law in that it expressly permits the consent of a settlor to be given by an attorney-in-fact if authorized in the power of attorney or terms of a trust and, if not, by the general guardian or guardian of the estate or guardian of the person of the settlor with court approval.

Subsection (a) of the Uniform Trust Code was modified to substitute the words "general guardian or guardian of the estate" in place of "conservator" and "guardian of the person" for "guardian" and "guardianship" for "conservatorship." In the North Carolina context, references in the Official Comments to a "conservator" should be read to apply to a general guardian or a guardian of the estate and references to "guardian" should be read to apply to a guardian of the person.

Subsection (b) is generally consistent with the provisions of former G.S. 36A-125.4(a) with respect to termination or modification upon consent of all of the beneficiaries.

Subsection (c) brings forward in place of subsection (c) of the Uniform Trust Code the provisions of former G.S. 36A-125.4(b), authorizing the court to modify or terminate a trust upon consent of the beneficiaries when the circumstances outweigh the interest in accomplishing a material purpose of the trust. The authority of the court to modify or terminate a trust under such circumstances is not a part of the Uniform Trust Code.

Subsection (c) of the Uniform Trust Code which was omitted contains a provision providing that a spendthrift provision is not presumed to constitute a material purpose. This subject is addressed in G.S. 36C-4-419 which brings forward with minor modifications the provisions of former G.S. 36A-125.8 regarding the effect of an inalienable interest on the modification or termination of a trust. Subsection (c) of the Uniform Trust Code also contains a provision directing the trustee to distribute property upon termination of a trust as agreed by the beneficiaries. This provision appears in G.S. 36C-4-418 which, in addition, brings forward the provisions of former G.S. 36A-125.10 regarding distributions if minors or incompetents become entitled to trust property upon termination of the trust.

Subsection (d), which authorizes the court to approve a modification or termination of a trust if the interest of a nonconsenting beneficiary will be adequately protected, is new to North Carolina law.

Subsection (e) was added to clarify the jurisdiction of a proceeding brought under this section.

Reference to "subsection (e)" in the Official Comment should be understood to refer to "subsection (d)" of this section.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2006)

Effective October 1, 2006, this section is amended to delete the provisions of subsection (e) which are unnecessary in light of other provisions of Article 36C regarding jurisdiction.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, subsection (a) of this section is amended to set forth a procedure by which parties seeking to modify or terminate an irrevocable trust non-judicially may obtain court appointment of a guardian ad litem where Article 3 representation cannot be obtained. The purpose of the amendment is to allow a limited court procedure for the sole purpose of ensuring that all beneficiaries of the irrevocable trust are properly represented without imposing any requirement that the court consider any other factors set forth in the other subsections of this section in determining whether to allow the modification or termination of the trust. The amendment to subsection (a) also (i) makes clear that a guardian of a settlor may consent to certain trust modifications without revoking a power of attorney granted by the settlor to another person and (ii) deletes the language allowing a guardian of the person to consent on behalf of his or her ward because of the limited powers conferred on a guardian of the person under Chapter 35A.

This section has also been amended to add new subsections (f) and (g) which bring forward the provisions of former G.S. 36A-125.5(2) and (3) in former Article 11 of Chapter 36A entitled "Modification and Termination of Irrevocable Trusts." These provisions were inadvertently left out of G.S. 36C-4-411.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2020)

Effective July 11, 2019, subsection (h) is added to this section to clarify that subsections (b) and (c) providing for the modification of a noncharitable irrevocable trust upon the consent of the beneficiaries do not permit modification of the trust to remove or replace a trustee, including the addition of trust terms providing for the removal and replacement of the trustee by one or more beneficiaries or other persons, known as a "portability" provision.

The amendment is generally consistent with the drafters' omission from G.S. 36C-7-706 of subdivision (b)(4) of section 706 of the Uniform Trust Code permitting removal of a trustee by the court upon the request of the beneficiaries. The drafters were concerned that subdivision (b)(4) may provide grounds for removal by merely dissatisfied beneficiaries contrary to the settlor's intent. See the North Carolina Comment to G.S. 36C-7-706.

The amendment is also generally consistent with the conclusions reached in at least two decisions, one in the North Carolina case of In re Testamentary Trust of Charnock, 158 N.C. App. 35, 579 S.E.2d 887 (2003), aff'd, 358 N.C. 523, 597 S.E.2d 706 (2004) and the other in the Pennsylvania case of Trust under Agreement of Taylor, 640 Pa. 629, 164 A.3d 1147 (2017), although the grounds on which the conclusions were based differ.

In Charnock the Court of Appeals held that the superior court lacked subject matter jurisdiction to modify a trust to change trustees upon consent of the beneficiaries pursuant to former G.S. 36A-125.4 (brought forward in G.S. 36C-4-411(b)) because under former G.S. 36A-23.1 (brought forward in part in G.S. 36C-2-203(a)) an action to remove or replace a trustee was within the exclusive jurisdiction of the clerk of superior court.

In the Taylor decision the Pennsylvania Supreme Court held that the Pennsylvania statute, substantially the same as G.S. 36C-4-411(b), did not extend to modification of a trust to add a "portability" clause permitting the beneficiaries to remove and replace the trustee because the Pennsylvania statute entitled "Removal of Trustee", substantially the same as G.S. 36C-7-706, was the "exclusive provision regarding removal of trustees" as the Official Comment of the Uniform Trust Code to that section reflects. As in G.S. 36C-7-706, subdivision (b)(4) of section 706 of the Uniform Trust Code was omitted from the Pennsylvania statute entitled "Removal of Trustee." The Supreme Court said that the omission reflected the legislative intent not to permit beneficiaries to exercise control over the removal and replacement of trustees.

Effective July 11, 2019, G.S. 36C-2-203(f)(1) was amended to provide that actions by the superior court to reform or modify a trust pursuant to G.S. 36C-4-412 through 36C-4-416 extended to the addition of a portability clause. Such an action is to be distinguished from an action based on G.S. 36C-4-411 to modify a trust to remove or replace a trustee upon consent of the beneficiaries which is within the exclusive jurisdiction of the clerk of superior court to remove a trustee pursuant to G.S. 36C-7-706. Moreover, the amendment to G.S. 36C-2-203(f)(1) differs from the Official Comment to G.S. 36C-4-411 that under the Uniform Trust Code Section 706 (adopted in part in G.S. 36C-7-706) is the exclusive provision for removal of a trustee to the extent that it may be interpreted to include an action to reform or modify a trust to add a portability provision pursuant to G.S. 36C-4-412 through G.S. 36C-4-416.

Editor's Note. - This section was amended by Session Laws 2007-106, s. 17, in the coded bill drafting format provided by G.S. 120-20.1. The word "an" in subsection (c) was not stricken through. The subsection has been set out in the form above at the direction of the Revisor of Statutes.

Session Laws 2006-259, s. 13(r), provides: "The Revisor of Statutes is authorized to cause to be printed any amendments to the explanatory comments of the drafters of S.L. 2005-192 that are prepared by the drafters of this section, as the Revisor deems appropriate."

Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2019-113, s. 7, made subsection (h) as added by Session Laws 2019-113, s. 6, effective July 11, 2019, and applicable to trusts created before, on, or after that date and to pleadings filed on or after that date.

Session Laws 2019-113, s. 6.1, as added by Session Laws 2020-69, s. 7, provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all explanatory comments of the drafters of Sections 5 and 6 of this act as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2006-259, s. 13(d), effective October 1, 2006, repealed subsection (e), which read: "Jurisdiction of a proceeding brought under this section shall be as provided in G.S. 36C-2-203." See Editor's note for applicability.

Session Laws 2007-106, s. 17, effective October 1, 2007, rewrote subsection (a); inserted "a noncharitable" preceding "irrevocable trust" in subsection (b); added "all of the following apply" at the end of the introductory paragraph of subsection (d); made a minor stylistic change in subdivision (d)(1); and added subsections (f) and (g). See Editor's note for applicability.

Session Laws 2019-113, s. 6, added subsection (h). For effective date and applicability, see Editor's note.

CASE NOTES

Editor's Note. - Some of the cases cited below were decided under prior law.

Illustrative Cases. - Action filed by a trust beneficiary and a settlor's siblings, pursuant to G.S. 36A-125.4, seeking an order modifying a trust was really an action seeking replacement of the trustee for exercising discretion in managing the trust, and the trial court's judgment dismissing the action for lack of subject matter jurisdiction was upheld. In re Testamentary Trust of Charnock, 158 N.C. App. 35, 579 S.E.2d 887 (2003), aff'd, 358 N.C. 523, 597 S.E.2d 706 (2004).

Removal of trustee. - Legislature did not intend for "modification of a trust," under G.S. 36A-125.4(a), to include the removal and appointment of a trustee or for G.S. 36A-125.4 to be an alternative mechanism for removal of a trustee without cause by consent of the trust beneficiaries. In re Charnock, 358 N.C. 523, 597 S.E.2d 706 (2004).

Bankruptcy trustee did not have authority to terminate a spendthrift trust made by a deceased debtor wife, in which a debtor husband was a beneficiary, because the debtor wife exempted her interest in the life insurance policy from the estate and that interest was not property of the estate. In re Singletary, - Bankr. - (Bankr. E.D.N.C. June 13, 2008).

Jurisdiction. - When trust beneficiaries filed a petition under G.S. 36A-125.4(a) to modify a trust to provide that it would be administered by the settlor's grand-niece and a bank, instead of the trustee appointed by the trust instrument, the proceeding was actually one to remove the trustee, over which the clerk of superior court had exclusive jurisdiction, and the superior court had no jurisdiction to hear their petition. In re Charnock, 358 N.C. 523, 597 S.E.2d 706 (2004).

OFFICIAL COMMENT

This section broadens the court's ability to apply equitable deviation to terminate or modify a trust. Subsection (a) allows a court to modify the dispositive provisions of the trust as well as its administrative terms. For example, modification of the dispositive provisions to increase support of a beneficiary might be appropriate if the beneficiary has become unable to provide for support due to poor health or serious injury. Subsection (a) is similar to Restatement (Third) of Trusts Section 66(1) (Tentative Draft No. 3, approved 2001), except that this section, unlike the Restatement, does not impose a duty on the trustee to petition the court if the trustee is aware of circumstances justifying judicial modification. The purpose of the "equitable deviation" authorized by subsection (a) is not to disregard the settlor's intent but to modify inopportune details to effectuate better the settlor's broader purposes. Among other things, equitable deviation may be used to modify administrative or dispositive terms due to the failure to anticipate economic change or the incapacity of a beneficiary. For numerous illustrations, see Restatement (Third) of Trusts Section 66 cmt. b (Tentative Draft No. 3, approved 2001). While it is necessary that there be circumstances not anticipated by the settlor before the court may grant relief under subsection (a), the circumstances may have been in existence when the trust was created. This section thus complements Section 415, which allows for reformation of a trust based on mistake of fact or law at the creation of the trust.

Subsection (b) broadens the court's ability to modify the administrative terms of a trust. The standard under subsection (b) is similar to the standard for applying cy pres to a charitable trust. See Section 413(a). Just as a charitable trust may be modified if its particular charitable purpose becomes impracticable or wasteful, so can the administrative terms of any trust, charitable or noncharitable. Subsections (a) and (b) are not mutually exclusive. Many situations justifying modification of administrative terms under subsection (a) will also justify modification under subsection (b). Subsection (b) is also an application of the requirement in Section 404 that a trust and its terms must be for the benefit of its beneficiaries. See also Restatement (Third) of Trusts Section 27(2) & cmt. b (Tentative Draft No. 2, approved 1999). Although the settlor is granted considerable latitude in defining the purposes of the trust, the principle that a trust have a purpose which is for the benefit of its beneficiaries precludes unreasonable restrictions on the use of trust property. An owner's freedom to be capricious about the use of the owner's own property ends when the property is impressed with a trust for the benefit of others. See Restatement (Second) of Trusts Section 124 cmt. g (1959). Thus, attempts to impose unreasonable restrictions on the use of trust property will fail. See Restatement (Third) of Trusts Section 27 Reporter's Notes to cmt. b (Tentative Draft No. 2, approved 1999). Subsection (b), unlike subsection (a), does not have a direct precedent in the common law, but various states have insisted on such a measure by statute. See, e.g., Mo. Rev. Stat. Section 456.590.1.

Upon termination of a trust under this section, subsection (c) requires that the trust be distributed in a manner consistent with the purposes of the trust. As under the doctrine of cy pres, effectuating a distribution consistent with the purposes of the trust requires an examination of what the settlor would have intended had the settlor been aware of the unanticipated circumstances. Typically, such terminating distributions will be made to the qualified beneficiaries, often in proportion to the actuarial value of their interests, although the section does not so prescribe. For the definition of qualified beneficiary, see Section 103(13).

Modification under this section, because it does not require beneficiary action, is not precluded by a spendthrift provision.

NORTH CAROLINA COMMENT

Subsection (a) is generally consistent with former G.S. 36A-125.7(a)(2) in authorizing a court to modify or terminate a trust because of circumstances not anticipated by the settlor.

Subsection (b), however, differs from former G.S. 36A-125.7(a)(1) in that it allows modification of the administrative terms of a trust "if continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust's administration." In contrast former G.S. 36A-125.7(a)(1) allowed modification in any term of the trust "if the purpose of the trust has been fulfilled or has become illegal or impossible of fulfillment."

Subsection (c) substitutes in place of subsection (c) of the Uniform Trust Code provisions clarifying the jurisdiction of a proceeding brought under this section. The omitted provision of subsection (c) of the Uniform Trust Code directs the trustee to distribute property upon termination of the trust in a manner consistent with the purposes of the trust. This provision appears in G.S. 36C-4-418 which, in addition, brings forward the provisions of former G.S. 36A-125.10 regarding distributions if minors or incompetents become entitled to trust property upon termination of the trust.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2006)

Effective October 1, 2006, this section is amended to delete the provisions of subsection (c) which are unnecessary in light of other provisions of Article 36C regarding jurisdiction.

Editor's Note. - Session Laws 2006-259, s. 13(r), provides: "The Revisor of Statutes is authorized to cause to be printed any amendments to the explanatory comments of the drafters of S.L. 2005-192 that are prepared by the drafters of this section, as the Revisor deems appropriate."

Effect of Amendments. - Session Laws 2006-259, s. 13(e), effective October 1, 2006, repealed subsection (c), which read: "Jurisdiction of a proceeding brought under this section shall be as provided in G.S. 36C-2-203." See Editor's note for applicability.

CASE NOTES

Editor's Note. - One of the cases below was decided under prior law.

Court May Relieve Trustee of Restriction on Purchasing Trust Property. - This section, by allowing a court of competent jurisdiction to relieve the trustee of "any or all of the duties and restrictions" placed upon him by this Article, gives statutory authority to the court to relieve the trustee of the restriction that he cannot purchase property from the trust. Wachovia Bank & Trust Co. v. Johnston, 269 N.C. 701, 153 S.E.2d 449 (1967);.

Not Entitled to Modification. - States were not entitled to modification of the National Tobacco Grower Settlement Trust under G.S. 36C-4-412(a) because the States knew they were treated differently as a result of their choice to not participate in the federal price control and quota system and knew that they could not be covered by any federal buyout legislation targeting that system, and unfortunately, during the political process resulting in the Fair and Equitable Tobacco Reform Act of 2004 (FETRA), 7 U.S.C.S. §§ 518 to 519a, the benefits that would have been provided to the States under the Senate amendment to the buyout bill were not included in the final version signed into law; the inclusion of the Tax Offset Adjustment (TOA) provision of the Trust indicated that a federal buyout like FETRA was an anticipated circumstance for which the parties created a plan. State v. Philip Morris USA Inc., 363 N.C. 623, 685 S.E.2d 85 (2009).

OFFICIAL COMMENT

Subsection (a) codifies the court's inherent authority to apply cy pres. The power may be applied to modify an administrative or dispositive term. The court may order the trust terminated and distributed to other charitable entities. Partial termination may also be ordered if the trust property is more than sufficient to satisfy the trust's current purposes. Subsection (a), which is similar to Restatement (Third) of Trusts § 67 (Tentative Draft No. 3, approved 2001), modifies the doctrine of cy pres by presuming that the settlor had a general charitable intent when a particular charitable purpose becomes impossible or impracticable to achieve. Traditional doctrine did not supply that presumption, leaving it to the courts to determine whether the settlor had a general charitable intent. If such an intent is found, the trust property is applied to other charitable purposes. If not, the charitable trust fails. See Restatement (Second) of Trusts § 399 (1959). In the great majority of cases the settlor would prefer that the property be used for other charitable purposes. Courts are usually able to find a general charitable purpose to which to apply the property, no matter how vaguely such purpose may have been expressed by the settlor. Under subsection (a), if the particular purpose for which the trust was created becomes impracticable, unlawful, impossible to achieve, or wasteful, the trust does not fail. The court instead must either modify the terms of the trust or distribute the property of the trust in a manner consistent with the settlor's charitable purposes.

The settlor, with one exception, may mandate that the trust property pass to a noncharitable beneficiary upon failure of a particular charitable purpose. Responding to concerns 79 about the clogging of title and other administrative problems caused by remote default provisions upon failure of a charitable purpose, subsection (b) invalidates a gift over to a noncharitable beneficiary upon failure of a particular charitable purpose unless the trust property is to revert to a living settlor or fewer than 21 years have elapsed since the trust's creation. Subsection (b) will not apply to a charitable lead trust, under which a charity receives payments for a term certain with a remainder to a noncharity. In the case of a charitable lead trust, the settlor's particular charitable purpose does not fail upon completion of the specified trust term and distribution of the remainder to the noncharity. Upon completion of the specified trust term, the settlor's particular charitable purpose has instead been fulfilled. For a discussion of the reasons for a provision such as subsection (b), see Ronald Chester, Cy Pres of Gift Over: The Search for Coherence in Judicial Reform of Failed Charitable Trusts, 23 Suffolk U. L. Rev. 41 (1989).

The doctrine of cy pres is applied not only to trusts, but also to other types of charitable dispositions, including those to charitable corporations. This section does not control dispositions made in nontrust form. However, in formulating rules for such dispositions, the courts often refer to the principles governing charitable trusts, which would include this Code.

For the definition of charitable purpose, see Section 405(a). Pursuant to Sections 405(c) and 410(b), a petition requesting a court to enforce a charitable trust or to apply cy pres may be maintained by a settlor. Such actions can also be maintained by a cotrustee, the state attorney general, or by a person having a special interest in the charitable disposition. See Restatement (Second) of Trusts § 391 (1959).

NORTH CAROLINA COMMENT

Subsection (a) is generally consistent with provisions in North Carolina's former cy pres statute, G.S. 36A-53(a).

Subsection (b) brings forward in place of subsection (b) of the Uniform Trust Code the substance of provisions of former G.S. 36A-52(a) authorizing a settlor, trustee, attorney, beneficiaries or interested party to maintain a cy pres proceeding. The drafters omitted subsection (b) of the Uniform Trust Code regarding when the terms of the trust providing for distribution of property to a noncharitable beneficiary prevail over the power of the court to apply cy pres. This subject is addressed in subsection (d).

Subsection (c) was added to the section to bring forward the provisions of former G.S. 36A-53(a) concerning notification of the Attorney General of a cy pres proceeding.

Subsection (d) was added to the section to bring forward the provisions of former G.S. 36A-53(a) regarding distributions pursuant to alternative plans of the settlor.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2009)

Effective March 19, 2009, this section is amended to add subsection (c1), which makes applicable to charitable trusts the provisions of the Uniform Prudent Management of Institutional Funds Act as set forth in G.S. 36E-6(d) regarding the modification of restrictions on charitable funds if the value of the fund is less than $100,000 and more than 10 years have elapsed since the fund was established.

Effect of Amendments. - Session Laws 2007-106, s. 17.1, effective October 1, 2007, deleted subsection (c) which read: "In every cy pres proceeding, the Attorney General shall be notified and given an opportunity to be heard."

Session Laws 2009-8, s. 4, effective March 19, 2009, in subsection (a) substituted "subsections (c1) and (d)" for "subsection (d)"; and added subsection (c1).

Legal Periodicals. - As to the doctrine of cy pres in North Carolina, see 27 N.C.L. Rev. 591 (1949).

CASE NOTES

Editor's Note. - Many of the cases cited below were decided under prior law.

The General Assembly acted within its competence in enacting this section. Banner v. North Carolina Nat'l Bank, 266 N.C. 337, 146 S.E.2d 89 (1966).

Funds Turned Over to National Charity by County Chapter. - Where a county chapter of a national charity was required to turn over surplus funds to the national office, such funds were not impressed with a trust restricting use of the money to care of persons in the county, since the county chapter agreed to be governed by national regulations and the national organization did not mislead the county chapter into a belief that a certain percentage of funds would be retained within the county. National Found. v. First Nat'l Bank, 288 F.2d 831 (4th Cir. 1961).

Section Sanctions and Defines Public Policy. - It has long been a strong public policy that, if possible, gifts for charitable purposes should not fail because of unforeseen events, but that the courts should assist in carrying out charitable purposes. This section lends statutory sanction and definition to that policy. Special Report of the General Statutes Commission on Chapter 119, Session Laws 1967. Wachovia Bank & Trust Co. v. Morgan, 279 N.C. 265, 182 S.E.2d 356 (1971).

Legislative Intent. - This section represents an obvious intent on the part of the legislature to invest the superior courts of this State with the power of cy pres. Wachovia Bank & Trust Co. v. Morgan, 9 N.C. App. 460, 176 S.E.2d 860 (1970), aff'd, 279 N.C. 265, 182 S.E.2d 356 (1971).

The cy pres doctrine is the rule which courts of equity use when a gift given for a particular charitable purpose cannot be applied according to the exact intention of the donor. In such cases, the court will direct that the gift be applied as nearly as possible in conformity with the original purpose and intent of the testator. Cy pres literally means "as near as possible." Wachovia Bank & Trust Co. v. Morgan, 279 N.C. 265, 182 S.E.2d 356 (1971).

Courts May Apply Cy Pres Doctrine. - This section expressly gives the courts the power to apply the cy pres doctrine to charitable trusts. YWCA v. Morgan, 281 N.C. 485, 189 S.E.2d 169 (1972).

G.S. 36A-53(a) expressly gives the courts the power to apply the cy pres doctrine to charitable trusts, but the statute applies only when three conditions have been met: (1) the testator manifested a general charitable intent; (2) the trust has become illegal, impossible, or impracticable; (3) the testator has not provided for an alternative disposition if the trust fails. Changes in the management, administration, and distribution of funds by a foundation that was the remainder beneficiary of a charitable trust did not make the trust impossible or impracticable where the foundation continued to comply with the trust's purpose of making gifts to a wide variety of nonprofit organizations. Morris v. E.A. Morris Charitable Found., 161 N.C. App. 673, 589 S.E.2d 414 (2003), cert. denied, 358 N.C. 235, 593 S.E.2d 592 (2004).

The cy pres doctrine came into the law of North Carolina in 1967 when this section became effective. Wilson v. First Presbyterian Church, 284 N.C. 284, 200 S.E.2d 769 (1973).

Prior Law. - Before October 1, 1967 North Carolina rejected the cy pres doctrine as such, while upholding modification of charitable trusts provisions under the court's general equitable power to supervise trust administration. Wachovia Bank & Trust Co. v. Morgan, 279 N.C. 265, 182 S.W.2d 356 (1971).

"Charity" Defined. - A charity may be defined as a gift to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds or hearts under the influence of education or religion, by relieving their bodies from disease, suffering or constraint, by assisting them to establish themselves in life, or by erecting or maintaining public buildings or works or otherwise lessening the burdens of government. Wachovia Bank & Trust Co. v. Morgan, 9 N.C. App. 460, 176 S.E.2d 860 (1970), aff'd, 279 N.C. 265, 182 S.E.2d 356 (1971).

"Charitable Trust". - A charitable trust has been defined as a fiduciary relationship with respect to property, arising as a result of a manifestation of an intent to create it, and subjecting the person by whom the property is held to equitable duties to deal with the property for a charitable purpose. YWCA v. Morgan, 281 N.C. 485, 189 S.E.2d 169 (1972).

Generally, when a trust is created for any lawful purpose which promotes the well-being of mankind and does not contravene public policy, it is charitable in its purpose. YWCA v. Morgan, 281 N.C. 485, 189 S.E.2d 169 (1972).

Limitations on Use of Funds. - Property conveyed to a trustee for a charitable purpose is limited to the uses set forth in the terms of the trust, and that property conveyed to a charitable corporation, free of a trust, is limited to the purposes set forth in its corporate charter. YWCA v. Morgan, 281 N.C. 485, 189 S.E.2d 169 (1972).

Failure of method designed by trust for carrying out a general charitable purpose does not destroy the trust. Wachovia Bank & Trust Co. v. Morgan, 9 N.C. App. 460, 176 S.E.2d 860 (1970), aff'd, 279 N.C. 265, 182 S.E.2d 356 (1971).

The substantial intention shall not depend on the insufficiency of the formal intention. Wachovia Bank & Trust Co. v. Morgan, 9 N.C. App. 460, 176 S.E.2d 860 (1970), aff'd, 279 N.C. 265, 182 S.E.2d 356 (1971).

And the general intent of the testator must prevail over the particular mode prescribed. Wachovia Bank & Trust Co. v. Morgan, 9 N.C. App. 460, 176 S.E.2d 860 (1970), aff'd, 279 N.C. 265, 182 S.E.2d 356 (1971).

Fulfillment of Settlor's Primary Objective. - Where the construction of a new dramatic arts facility at a university, made possible by the legislative grant of sufficient funds, expressly made "impracticable" the achievement of a trust, in that the settlor's primary objective had been fulfilled, the trial court did not err in ruling that this charitable trust had become "impossible or impracticable of fulfillment" within the meaning of this section. Board of Trustees v. Unknown & Unascertained Heirs, 311 N.C. 644, 319 S.E.2d 239 (1984).

Mode for Administering Trust Must Be Either Impossible or Impracticable. - In order for this section to apply, the evidence presented must establish that the mode directed by the settlor for administering the trust has become either impossible or impracticable for the reasons asserted in the petition, or because of the facts found by the court. Wachovia Bank & Trust Co. v. Morgan, 9 N.C. App. 460, 176 S.E.2d 860 (1970), aff'd, 279 N.C. 265, 182 S.E.2d 356 (1971).

Power of Court to Modify Trust. - When there is a charitable trust, bequest, or devise evidencing a general charitable intent by the grantor, and the specific, express purpose cannot be fulfilled because of illegality, impossibility or impracticability, this section specifically empowers the court, in the absence of alternate disposition, to modify the trust so as to apply the fund to a purpose as nearly as possible like the originally expressed purpose. YWCA v. Morgan, 281 N.C. 485, 189 S.E.2d 169 (1972).

Where the trust provisions no longer serve the intended purpose of providing medical and hospital services to people who cannot afford to pay for such services, and where the will itself contains no alternative plan, the superior court may order an administration of the trust which would as nearly as possible fulfill the general charitable intention of the testatrix. Wachovia Bank & Trust Co. v. Morgan, 279 N.C. 265, 182 S.E.2d 356 (1971).

The statutory scheme of subsection (a) of this section, and the strong public policy embodied therein, is merely reflective of the well-established principle that courts, in the exercise of their equitable powers, may modify the terms of a trust instrument, consistent with the settlor's intentions, in order to preserve the trust. Edmisten v. Sands, 307 N.C. 670, 300 S.E.2d 387 (1983).

All that need be shown to enable a superior court judge to order an administration of the trust is that: (1) the trust is a charitable trust, i.e., that the settlor, or testator, manifested a general intention to devote the property to charity; (2) the trust is or becomes illegal, or impossible or impracticable of fulfillment; and (3) no alternative disposition is made of the corpus in the event the charitable trust fails. Edmisten v. Sands, 307 N.C. 670, 300 S.E.2d 387 (1983).

Application of Section. - The legislature has clearly indicated that the prohibition against self-dealing is not the only administrative requirement the omission of which will invoke the application of this section. Edmisten v. Sands, 307 N.C. 670, 300 S.E.2d 387 (1983).

The failure to include the prohibition against self-dealing and the failure to include the other required administrative provisions renders a trust "impracticable of fulfillment" under this section. Edmisten v. Sands, 307 N.C. 670, 300 S.E.2d 387 (1983).

To invoke the application of this section, plaintiff must show that the three following conditions exist: (1) That the testatrix manifested a general charitable intent; (2) that the trust has become either illegal, impossible or impracticable of fulfillment; and (3) that the testatrix made no provision for alternative disposition of the trust corpus in the event that the charitable trust fails. Board of Trustees v. Unknown & Unascertained Heirs, 311 N.C. 644, 319 S.E.2d 239 (1984).

Application of Cy Pres Doctrine Held Erroneous. - Where testator's will itself clearly reflected only the testator's specific intent to aid a particular hospital, and there was no other evidence to the contrary, the trial court's finding that the testator manifested a general charitable intent was not supported by the evidence, and the trial court erred in finding and concluding that the cy pres doctrine was applicable. Trustees of L.C. Wagner Trust v. Barium Springs Home for Children, Inc., 102 N.C. App. 136, 401 S.E.2d 807, rev'd on other grounds, 330 N.C. 187, 409 S.E.2d 913 (1991).

Superior Court Cannot Modify Every Trust Becoming Impracticable. - Under the doctrine of this section, the superior court does not have authority to modify every charitable trust when it becomes impracticable to carry out the original purpose of the settlor or testator. Wilson v. First Presbyterian Church, 284 N.C. 284, 200 S.E.2d 769 (1973).

When Power to Modify Is Conferred. - Power to modify a charitable trust when it becomes impracticable to carry out the original purpose of the settlor or testator is conferred upon the superior court only where the instrument creating the trust, interpreted in the light of all the circumstances known to the settlor or testator, manifests a "general intention to devote the property to charity." Wilson v. First Presbyterian Church, 284 N.C. 284, 200 S.E.2d 769 (1973).

Equitable Jurisdiction to Supervise Administration of Fund. - Notwithstanding the impossibility of effectuating a particular method prescribed for carrying out the provisions of a trust, the court will exercise its equitable jurisdiction and supervise the administration of the fund so as to accomplish the purposes expressed in the will. Wachovia Bank & Trust Co. v. Morgan, 9 N.C. App. 460, 176 S.E.2d 860 (1970), aff'd, 279 N.C. 265, 182 S.E.2d 356 (1971).

Cited in First Charter Bank v. Am. Children's Home, 203 N.C. App. 574, 692 S.E.2d 457 (2010).

OFFICIAL COMMENT

Subsection (a) assumes that a trust with a value of $50,000 or less is sufficiently likely to be inefficient to administer that a trustee should be able to terminate it without the expense of a judicial termination proceeding. The amount has been placed in brackets to signal to enacting jurisdictions that they may wish to designate a higher or lower figure. Because subsection (a) is a default rule, a settlor is free to set a higher or lower figure or to specify different procedures or to prohibit termination without a court order. See Section 105 and Article 4 General Comment.

Subsection (b) allows the court to modify or terminate a trust if the costs of administration would otherwise be excessive in relation to the size of the trust. The court may terminate a trust under this section even if the settlor has forbidden it. See Section 105(b)(4). Judicial termination under this subsection may be used whether or not the trust is larger or smaller than $50,000.

When considering whether to terminate a trust under either subsection (a) or (b), the trustee or court should consider the purposes of the trust. Termination under this section is not always wise. Even if administrative costs may seem excessive in relation to the size of the trust, protection of the assets from beneficiary mismanagement may indicate that the trust be continued. The court may be able to reduce the costs of administering the trust by appointing a new trustee.

Upon termination of a trust under this section, subsection (c) requires that the trust property be distributed in a manner consistent with the purposes of the trust. In addition to outright distribution to the beneficiaries, Section 816(21) authorizes payment to be made by a variety of alternate payees. Distribution under this section will typically be made to the qualified beneficiaries in proportion to the actuarial value of their interests.

Even though not accompanied by the usual trappings of a trust, the creation and transfer of an easement for conservation or preservation will frequently create a charitable trust. The organization to whom the easement was conveyed will be deemed to be acting as trustee of what will ostensibly appear to be a contractual or property arrangement. Because of the fiduciary obligation imposed, the termination or substantial modification of the easement by the "trustee" could constitute a breach of trust. The drafters of the Uniform Trust Code concluded that easements for conservation or preservation are sufficiently different from the typical cash and securities found in small trusts that they should be excluded from this section, and subsection (d) so provides. Most creators of such easements, it was surmised, would prefer that the easement be continued unchanged even if the easement, and hence the trust, has a relatively low market value. For the law of conservation easements, see Restatement (Third) of Property: Servitudes § 1.6 (2000).

While this section is not directed principally at honorary trusts, it may be so applied. See Sections 408, 409.

Because termination of a trust under this section is initiated by the trustee or ordered by the court, termination is not precluded by a spendthrift provision.

NORTH CAROLINA COMMENT

The first sentence of subsection (a) is generally consistent with the provisions of former G.S. 36A-125.6(b) authorizing the trustee to terminate a trust if the value of the assets is $50,000 or less. The remaining sentences of subsection (a) were added to subsection (a) to bring forward the provisions of former G.S. 36A-125.6(b).

Subsection (b) is generally consistent with the provisions of former G.S. 36A-125.6(a).

The drafters omitted the first sentence of subsection (c) of the Uniform Trust Code which directed the trustee to distribute property upon termination of the trust in a manner consistent with the purpose of the trust. This provision appears in G.S. 36C-4-418 which, in addition, brings forward the provisions of former G.S. 36A-125.10 regarding distributions if minors or incompetents become entitled to trust property upon termination of the trust.

Subsection (d) was added to the section to clarify the jurisdiction of a proceeding brought under this section.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2006)

Effective October 1, 2006, this section is amended to delete the provisions of subsection (d) which are unnecessary in light of other provisions of Article 36C regarding jurisdiction.

Editor's Note. - Session Laws 2006-259, s. 13(r), provides: "The Revisor of Statutes is authorized to cause to be printed any amendments to the explanatory comments of the drafters of S.L. 2005-192 that are prepared by the drafters of this section, as the Revisor deems appropriate."

Effect of Amendments. - Session Laws 2006-259, s. 13(f), effective October 1, 2006, repealed subsection (d), which read: "Jurisdiction of a proceeding brought under this section is as provided in G.S. 36C-2-203." See Editor's note for applicability.

OFFICIAL COMMENT

Reformation of inter vivos instruments to correct a mistake of law or fact is a long-established remedy. Restatement (Third) of Property: Donative Transfers Section 12.1 (Tentative Draft No. 1, approved 1995), which this section copies, clarifies that this doctrine also applies to wills.

This section applies whether the mistake is one of expression or one of inducement. A mistake of expression occurs when the terms of the trust misstate the settlor's intention, fail to include a term that was intended to be included, or include a term that was not intended to be included. A mistake in the inducement occurs when the terms of the trust accurately reflect what the settlor intended to be included or excluded but this intention was based on a mistake of fact or law. See Restatement (Third) of Property: Donative Transfers Section 12.1 cmt. i (Tentative Draft No. 1, approved 1995). Mistakes of expression are frequently caused by scriveners' errors while mistakes of inducement often trace to errors of the settlor.

Reformation is different from resolving an ambiguity. Resolving an ambiguity involves the interpretation of language already in the instrument. Reformation, on the other hand, may involve the addition of language not originally in the instrument, or the deletion of language originally included by mistake, if necessary to conform the instrument to the settlor's intent. Because reformation may involve the addition of language to the instrument, or the deletion of language that may appear clear on its face, reliance on extrinsic evidence is essential. To guard against the possibility of unreliable or contrived evidence in such circumstance, the higher standard of clear and convincing proof is required. See Restatement (Third) of Property: Donative Transfers Section 12.1 cmt. e (Tentative Draft No. 1, approved 1995).

In determining the settlor's original intent, the court may consider evidence relevant to the settlor's intention even though it contradicts an apparent plain meaning of the text. The objective of the plain meaning rule, to protect against fraudulent testimony, is satisfied by the requirement of clear and convincing proof. See Restatement (Third) of Property: Donative 82 Transfers Section 12.1 cmt. d and Reporter's Notes (Tentative Draft No. 1, approved 1995). See also John H. Langbein & Lawrence W. Waggoner, Reformation of Wills on the Ground of Mistake: Change of Direction in American Law?, 130 U. Pa. L. Rev. 521 (1982).

For further discussion of the rule of this section and its application to illustrative cases, see Restatement (Third) of Property: Donative Transfers Section 12.1 cmts. and Reporter's Notes (Tentative Draft No. 1, approved 1995).

2011 Amendment. This section was revised by technical amendment in 2011. The amendment better conforms the language of the section to the language of the Restatement (Third) of Property provision on which the section is based.

NORTH CAROLINA COMMENT

This section, which has no statutory equivalent in prior North Carolina law, is generally consistent with prior case law regarding reformation of instruments. Although no published court decision has addressed the reformation of a trust, there is a substantial body of case law in North Carolina to the effect that equity will reform an instrument when a mistake of fact has been made and the mistake does not express the true intent of the parties. See, e.g., Matthews v. Shamrock Van Lines, Inc., 264 N.C. 722, 142 S.E.2d 665 (1965); Branch Banking & Trust Co. v. Gill, 286 N.C. 342, 211 S.E.2d 327 (1975). Under prior law, although a "bare, naked" mistake of law affords no grounds for reformation, this was a general rule subject to many exceptions, such as where a mistake of law induces a mistake of fact. See, e.g., State Trust Co. v. Brasnell, 227 N.C. 211, 41 S.E.2d 744 (1947).

This section modifies the Uniform Trust Code by adding the second sentence to clarify the jurisdiction of a proceeding brought under this section.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2017)

Effective for actions to reform trusts filed on or after January 1, 2018, this section is amended to delete the words "even if unambiguous" and substitute in place of them the words "if the terms of the trust are ambiguous" appearing after the words "the terms of a trust" in the first line of the section. This amendment represents a significant change in North Carolina law provided by this section which, prior to this amendment, was based on Section 415 of the Uniform Trust Code allowing the admission of extrinsic evidence to prove the settlor's intent with respect to a mistake even if the terms of the trust were unambiguous. The drafters of the amendment were concerned that this rule would provide grounds for attempts to contradict or vary the plain meaning of the terms of a trust contrary to the settlor's intention despite the requirement that evidence be "clear and convincing."

Under this section, as amended, the court may consider extrinsic evidence relevant to the settlor's intention with respect to mistakes only if the terms of the trust are ambiguous. The statements in the Official Comment to this section to the effect that the court may consider extrinsic evidence with respect to the settlor's intent even though it contradicts the apparent plain meaning of the text should be disregarded. For provisions authorizing a court to reform the terms of a will to correct a mistake which are consistent with the provisions of this section, as amended, with regard to a trust, see G.S. 31-61.

In addition to this change, the first sentence of this section was amended to make minor clarifying changes, and the second sentence of this section stating that G.S. 36C-2-203 will govern jurisdiction of a proceeding brought under this section was deleted as unnecessary because Article 2 of this Chapter was already applicable to this section.

Editor's Note. - Session Laws 2017-152, s. 5, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of Section 4 of this act, as the Revisor may deem appropriate."

Session Laws 2017-152, s. 6 made the amendment to this section by Session Laws 2017-152, s. 4, effective January 1, 2018, and applicable to actions for the reformation of trusts filed on or after that date.

Effect of Amendments. - Session Laws 2017-152, s. 4, rewrote the section, which formerly read: "The court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor's intention if it is proved by clear and convincing evidence that both the settlor's intent and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement. Jurisdiction of a proceeding brought under this section shall be as provided in G.S. 36C-2-203." For effective date and applicability, see editor's note.

OFFICIAL COMMENT

This section is copied from Restatement (Third) of Property: Donative Transfers § 12.2 (Tentative Draft No. 1, approved 1995). "Modification" under this section is to be distinguished from the "reformation" authorized by Section 415. Reformation under Section 415 is available when the terms of a trust fail to reflect the donor's original, particularized intention. The mistaken terms are then reformed to conform to this specific intent. The modification authorized here allows the terms of the trust to be changed to meet the settlor's tax-saving objective as long as the resulting terms, particularly the dispositive provisions, are not inconsistent with the settlor's probable intent. The modification allowed by this subsection is similar in concept to the cy pres doctrine for charitable trusts ( see Section 413), and the deviation doctrine for unanticipated circumstances ( see Section 412).

Whether a modification made by the court under this section will be recognized under federal tax law is a matter of federal law. Absent specific statutory or regulatory authority, binding recognition is normally given only to modifications made prior to the taxing event, for example, the death of the testator or settlor in the case of the federal estate tax. See Rev. Rul. 73-142, 1973-1 C.B. 405. Among the specific modifications authorized by the Internal Revenue Code or Service include the revision of split-interest trusts to qualify for the charitable deduction, modification of a trust for a noncitizen spouse to become eligible as a qualified domestic trust, and the splitting of a trust to utilize better the exemption from generation-skipping tax.

For further discussion of the rule of this section and the relevant case law, see Restatement (Third) of Property: Donative Transfers § 12.2 cmts. and Reporter's Notes 83 (Tentative Draft No. 1, approved 1995).

NORTH CAROLINA COMMENT

This section has no statutory equivalent in prior North Carolina law and changes prior law at least as expressed by the court in Davison v. Duke Univ., 282 N.C. 676, 717, 194 S.E.2d 761, 786 (1973) where the court, quoting with approval In re Estate of Benson, 447 Pa. 62, 285 A.2d 101 (1971) said: "As to the obviation of taxes, it is incontestable that almost every settlor and testator desires to minimize his tax burden to the greatest extent possible. However, courts cannot be placed in a position of estate planners, charged with the task of reinterpreting deeds of trust and testamentary dispositions so as to generate the most favorable possible tax consequences for the estate." Although former G.S. 36A-125.9, enacted after the Davison decision, directed the court to consider tax consequences of modifying or terminating a trust, North Carolina law did not expressly authorize modification to achieve the settlor's tax objectives.

This section modifies the Uniform Trust Code by adding the second sentence to clarify the jurisdiction of proceedings brought under this section.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2006)

Effective October 1, 2006, this section is amended to delete the provisions of the third sentence which are unnecessary in light of other provisions of Article 36C regarding jurisdiction.

Editor's Note. - Session Laws 2006-259, s. 13(r), provides: "The Revisor of Statutes is authorized to cause to be printed any amendments to the explanatory comments of the drafters of S.L. 2005-192 that are prepared by the drafters of this section, as the Revisor deems appropriate."

Effect of Amendments. - Session Laws 2006-259, s. 13(g), effective October 1, 2006, deleted the last sentence, which read: "Jurisdiction of a proceeding brought under this section shall be as provided in G.S. 36C-2-203." See Editor's note for applicability.

OFFICIAL COMMENT

This section, which authorizes the combination or division of trusts, is subject to contrary provision in the terms of the trust. See Section 105 and Article 4 General Comment. Many trust instruments and standardized estate planning forms include comprehensive provisions governing combination and division of trusts. Except for the requirement that the qualified beneficiaries receive advance notice of a proposed combination or division, this section is similar to Restatement (Third) of Trusts § 68 (Tentative Draft No. 3, approved 2001).

This section allows a trustee to combine two or more trusts even though their terms are not identical. Typically the trusts to be combined will have been created by different members of the same family and will vary on only insignificant details, such as the presence of different perpetuities savings periods. The more the dispositive provisions of the trusts to be combined differ from each other the more likely it is that a combination would impair some beneficiary's interest, hence the less likely that the combination can be approved. Combining trusts may prompt more efficient trust administration and is sometimes an alternative to terminating an uneconomic trust as authorized by Section 414. Administrative economies promoted by combining trusts include a potential reduction in trustees' fees, particularly if the trustee charges a minimum fee per trust, the ability to file one trust income tax return instead of multiple returns, and the ability to invest a larger pool of capital more effectively. Particularly if the terms of the trust are identical, available administrative economies may suggest that the trustee has a responsibility to pursue a combination. See Section 805 (duty to incur only reasonable costs).

Division of trusts is often beneficial and, in certain circumstances, almost routine. Division of trusts is frequently undertaken due to a desire to obtain maximum advantage of exemptions available under the federal generation-skipping tax. While the terms of the trusts which result from such a division are identical, the division will permit differing investment objectives to be pursued and allow for discretionary distributions to be made from one trust and not the other. Given the substantial tax benefits often involved, a failure by the trustee to pursue a division might in certain cases be a breach of fiduciary duty. The opposite could also be true if the division is undertaken to increase fees or to fit within the small trust termination provision. See Section 414.

This section authorizes a trustee to divide a trust even if the trusts that result are dissimilar. Conflicts among beneficiaries, including differing investment objectives, often invite such a division, although as in the case with a proposed combination of trusts, the more the terms of the divided trusts diverge from the original plan, the less likely it is that the settlor's purposes would be achieved and that the division could be approved.

This section does not require that a combination or division be approved either by the court or by the beneficiaries. Prudence may dictate, however, that court approval under Section 410 be sought and beneficiary consent obtained whenever the terms of the trusts to be combined or the trusts that will result from a division differ substantially one from the other. For the provisions relating to beneficiary consent or ratification of a transaction, or release of trustee from liability, see Section 1009.

While the consent of the beneficiaries is not necessary before a trustee may combine or divide trusts under this section, advance notice to the qualified beneficiaries of the proposed combination or division is required. This is consistent with Section 813, which requires that the trustee keep the beneficiaries reasonably informed of trust administration, including the giving of advance notice to the qualified beneficiaries of several specified actions that may have a major impact on their interests.

Numerous States have enacted statutes authorizing division of trusts, either by trustee action or upon court order. For a list of these statutes, see Restatement (Third) Property: Donative Transfers § 12.2 Statutory Note (Tentative Draft No. 1, approved 1995). Combination or division has also been authorized by the courts in the absence of authorizing statute. See, e.g., In re Will of Marcus, 552 N.Y.S. 2d 546 (Surr. Ct.1990) (combination); In re Heller Inter Vivos Trust, 613 N.Y.S. 2d 809 (Surr. Ct. 1994) (division); and BankBoston v. Marlow, 701 N.E. 2d 304 (Mass. 1998) (division).

For a provision authorizing a trustee, in distributing the assets of the divided trust, to make non-pro-rata distributions, see Section 816(22).

NORTH CAROLINA COMMENT

The drafters omitted the provisions of this section of the Uniform Trust Code providing that after notice to the "qualified beneficiaries" the trustee may divide and combine two or more trusts if this does not impair the rights of a beneficiary or adversely affect the achievement of the purposes of the trust. In its place the drafters brought forward (i) the provisions of former G.S. 32-27(25b) granting the trustee the power to consolidate two or more trusts when the terms of the trust are substantially similar and the beneficiaries are identical, and (ii) with modifications, the provisions of former G.S. 36A-136(24) granting a trustee the power to divide a single trust into several trusts and to make distributions from the trusts in a certain manner. This section retains the requirement in the Uniform Trust Code to notify the qualified beneficiaries of a consolidation or division. Such notifications were not required in prior law.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2006)

Effective October 1, 2006, subsection (a) is amended to delete the requirement that notice of a consolidation of trusts or division of a trust be given to qualified beneficiaries of the trust being consolidated or divided.

Editor's Note. - Session Laws 2006-259, s. 13(r), provides: "The Revisor of Statutes is authorized to cause to be printed any amendments to the explanatory comments of the drafters of S.L. 2005-192 that are prepared by the drafters of this section, as the Revisor deems appropriate."

Effect of Amendments. - Session Laws 2006-259, s. 13(h), effective October 1, 2006, in subsection (a), substituted "a trustee may do any of the following:" for "after notice to the qualified beneficiaries, a trustee may:" in the introductory language; and deleted "or" at the end of subdivision (a)(1). See Editor's note for applicability.

CASE NOTES

Cited in First Charter Bank v. Am. Children's Home, 203 N.C. App. 574, 692 S.E.2d 457 (2010).

OFFICIAL COMMENT

This section applies only if the trust does not contain a spendthrift provision or the spendthrift provision does not apply to a particular beneficiary's interest. A settlor may subject to spendthrift protection the interests of certain beneficiaries but not others. A settlor may also subject only a portion of the trust to spendthrift protection such as an interest in the income but not principal. For the effect of a spendthrift provision on creditor claims, see Section 503.

Absent a valid spendthrift provision, a creditor may ordinarily reach the interest of a beneficiary the same as any other of the beneficiary's assets. This does not necessarily mean that the creditor can collect all distributions made to the beneficiary. The interest may be too indefinite or contingent for the creditor to reach or the interest may qualify for an exemption under the state's general creditor exemption statutes. See (Third) of Trusts § 56 (2003); Restatement (Second) of Trusts §§ 147-149, 162 (1959). Other creditor law of the State may limit the creditor to a specified percentage of a distribution. See, e.g., Cal. Prob. Code Section 15306.5. This section does not prescribe the procedures ("other means") for reaching a beneficiary's interest or of priority among claimants, leaving those issues to the enacting State's laws on creditor rights. The section does clarify, however, that an order obtained against the trustee, whatever state procedure may have been used, may extend to future distributions whether made directly to the beneficiary or to others for the beneficiary's benefit. By allowing an order to extend to future payments, the need for the creditor periodically to return to court will be reduced.

Because proceedings to satisfy a claim are equitable in nature, the second sentence of this section ratifies the court's discretion to limit the award as appropriate under the circumstances. In exercising its discretion to limit relief, the court may appropriately consider the circumstances of a beneficiary and the beneficiary's family. See Restatement (Third) of Trusts Section 56 cmt. e (Tentative Draft No. 2, approved 1999).

2005 Amendment. A 2005 amendment changes "protected by" to "subject to" in the first sentence of the section. No substantive change is intended. The amendment was made to negate an implication that this section allowed an exception creditor to reach a beneficiary's interest even though the trust contained a spendthrift provision. The list of exception creditors and their remedies are contained in Section 503. Clarifying changes are also made in the comments and unnecessary language on creditor remedies omitted.

NORTH CAROLINA COMMENT

This section of the Uniform Trust Code was modified to include interests in a "discretionary trust interest" as defined in G.S. 36C-5-504(a)(2) and a "protective trust" as defined in G.S. 36C-5-508 as interests in trusts to which the provisions of subsection (a) of this section do not apply, in addition to an interest subject to a spendthrift provision as provided in the Uniform Trust Code.

Former G. S. 36A-115 provided creditor protection for a "discretionary trust," a "support trust" and a "protective trust." The definition of "discretionary trust interest" in G.S. 36C-5-504(a)(2) includes a discretionary trust and a support trust described in former G.S. 36A-115. It was the intention of the drafters to preserve in this Article the same creditor protection afforded a discretionary trust, support trust, and protective trust by former G.S. 36A-115, except as otherwise provided in this Article. The recognition of a spendthrift provision as also providing creditor protection changes North Carolina law. See G.S. 36C-5-502 and the N.C. Comment.

The reference in the Official Comment to a "spendthrift provision" providing creditor protection should be understood to include the creditor protection afforded by a discretionary trust interest and protective trust.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, subsection (b) of this section is amended to clarify that subsection (a), which addresses the rights of creditors to reach a beneficiary's interest, does not apply to the extent that the beneficiary's interest is "protected or restricted by" a spendthrift provision, discretionary trust interest or protective trust interest. Article 5 of Chapter 36C provides for exceptions to protection of the beneficiary's interest. The drafters thought that the former wording of subsection (a) without the added words "protected or restricted by" could be construed as indicating that these exceptions did not apply.

Effective Date and Applicability. - Session Laws 2005-192, which enacted Chapter 36C, in s. 7(a) provides: "Section 2 of this act becomes effective January 1, 2006, and except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, applies to (i) all trusts created before, on, or after that date; (ii) all judicial proceedings concerning trusts commenced on or after that date; and (iii) judicial proceedings concerning trusts commenced before that date unless the court finds that application of a particular provision of Chapter 36C of the General Statutes would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of Chapter 36C of the General Statutes does not apply and the superseded law applies.

"Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, any rule of construction or presumption provided in Chapter 36C of the General Statutes applies to trust instruments executed before the effective date of Section 2 of this act unless there is a clear indication of a contrary intent in the terms of the trust or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary. Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, an act done before the effective date of Section 2 of this act is not affected by Chapter 36C of the General Statutes. If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before the effective date of Section 2 of this act, that statute continues to apply to the right even if it has been repealed or superseded."

Official Comment on Effective Date and Applicability. - The Uniform Trust Code is intended to have the widest possible effect within constitutional limitations. Specifically, the Code applies to all trusts whenever created, to judicial proceedings concerning trusts commenced on or after its effective date, and unless the court otherwise orders, to judicial proceedings in progress on the effective date. In addition, any rules of construction or presumption provided in the Code apply to preexisting trusts unless there is a clear indication of a contrary intent in the trust's terms. By applying the Code to preexisting trusts, the need to know two bodies of law will quickly lessen.

This Code cannot be fully retroactive, however. Constitutional limitations preclude retroactive application of rules of construction to alter property rights under trusts that became irrevocable prior to the effective date. Also, rights already barred by a statute of limitation or rule under former law are not revived by a possibly longer statute or more liberal rule under this Code. Nor is an act done before the effective date of the Code affected by the Code's enactment.

The Uniform Trust Code contains an additional effective date provision. Pursuant to Section 602(a), prior law will determine whether a trust executed prior to the effective date of the Code is presumed to be revocable or irrevocable.

For a comparable uniform law effective date provision, see Uniform Probate Code Section 8 101.

North Carolina Comment on Effective Date and Applicability. - The drafters modified the provisions of the Uniform Trust Code relating to its application to trust instruments executed before its effective date by adding the phrase "or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary" to the end of the first sentence of the second paragraph. Although this Chapter is intended to have broad application, the drafters concluded that a rule of construction or presumption provided in this Chapter should not be applied to a trust instrument executed before the effective date of this Chapter if the application of such rule or presumption would impair the substantial rights of a beneficiary of a trust established under such a trust instrument.

Editor's Note. - Session Laws 2005-192, which enacted Chapter 36C, in s. 6, provides: "The Revisor of Statutes shall cause to be printed along with this act all relevant portions of the Official Commentary to the Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Official Comments, copyright 2005, are reprinted in this Chapter with the permission of the National Conference of Commissioners on Uniform State Laws. It is believed that the Official Comments will prove of value to the practitioner in understanding and applying the text of this Chapter.

The Official Comments appearing under individual sections in this Chapter have been printed by the publisher as received, without editorial change, and relate to the Chapter as originally enacted. However, not all sections in this Chapter may carry Official Comments. Furthermore, Official Comments may or may not have been received or updated in conjunction with subsequent amendments to this Chapter and, therefore, may not reflect all changes to the sections under which they appear.

Where they appear in this Chapter, "Amended Comment" usually means that an error in the original comment has been corrected by a subsequent amendment, and "Supplemental Comment" pertains to a later development, such as an amendment to the statute text. North Carolina Comments explain where the General Assembly has enacted variations to the text of the Uniform Act.

Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 19, effective October 1, 2007, in the introductory paragraph of subsection (b), added "Subsection (a) of" at the beginning and added "is protected or restricted by any of the following" at the end; deleted "Is subject to" at the beginning of subdivision (b)(2); deleted "Is" at the beginning of subdivisions (b)(2) and (3); and made minor stylistic and punctuation changes. See Editor's note for applicability.

Legal Periodicals. - For article, "The Rule Against Perpetuities in North Carolina, " see 57 N.C.L. Rev. 727 (1979).

For survey of 1979 property law, see 58 N.C.L. Rev. 1509 (1980).

For article on ERISA spendthrift rules, see 11 Campbell L. Rev. 29 (1988).

For comment, "And Now for Something Completely Different: Spendthrift, Discretionary, and Protective Trusts in North Carolina and the Federal Tax Lien," see 29 Campbell L. Rev. 737 (2007).

CASE NOTES

Formation of Trust. - Deceased Chapter 7 debtor created a valid spendthrift trust pre-petition, pursuant to G.S. 36C-4-401.1 and G.S. 36C-5-501, when she designated the trust as the beneficiary of her life insurance policy, the debtor husband and a minor daughter were named as beneficiaries of the trust, and the life insurance policy was exempted from the estate. In re Singletary, - Bankr. - (Bankr. E.D.N.C. June 13, 2008).

OFFICIAL COMMENT

Under this section, a settlor has the power to restrain the transfer of a beneficiary's interest, regardless of whether the beneficiary has an interest in income, in principal, or in both. Unless one of the exceptions under this article applies, a creditor of the beneficiary is prohibited from attaching a protected interest and may only attempt to collect directly from the beneficiary after payment is made. This section is similar to Restatement (Third) of Trusts § 58 (Tentative Draft No. 2, approved 1999), and Restatement (Second) of Trusts §§ 152-153 (1959). For the definition of spendthrift provision, see Section 103(15).

For a spendthrift provision to be effective under this Code, it must prohibit both the voluntary and involuntary transfer of the beneficiary's interest, that is, a settlor may not allow a beneficiary to assign while prohibiting a beneficiary's creditor from collecting, and vice versa. See Restatement (Third) of Trusts § 58 cmt. b (Tentative Draft No. 2, approved 1999). See also Restatement (Second) of Trusts § 152(2) (1959). A spendthrift provision valid under this Code will also be recognized as valid in a federal bankruptcy proceeding. See 11 U.S.C. § 541(c)(2).

Subsection (b), which is derived from Texas Property Code § 112.035(b), allows a settlor to provide maximum spendthrift protection simply by stating in the instrument that all interests are held subject to a "spendthrift trust" or words of similar effect.

A disclaimer, because it is a refusal to accept ownership of an interest and not a transfer of an interest already owned, is not affected by the presence or absence of a spendthrift provision. Most disclaimer statutes expressly provide that the validity of a disclaimer is not affected by a spendthrift protection. See, e.g., Uniform Probate Code § 2-801(a). Releases and exercises of powers of appointment are also not affected because they are not transfers of property. See Restatement (Third) of Trusts § 58 cmt. c (Tentative Draft No. 2, approved 1999).

A spendthrift provision is ineffective against a beneficial interest retained by the settlor. See Restatement (Third) of Trusts § 58(2), (Tentative Draft No. 2, approved 1999). This is a necessary corollary to Section 505(a)(2), which allows a creditor or assignee of the settlor to reach the maximum amount that can be distributed to or for the settlor's benefit. This right to reach the trust applies whether or not the trust contains a spendthrift provision.

A valid spendthrift provision makes it impossible for a beneficiary to make a legally binding transfer, but the trustee may choose to honor the beneficiary's purported assignment. The trustee may recommence distributions to the beneficiary at anytime. The beneficiary, not having made a binding transfer, can withdraw the beneficiary's direction but only as to future payments. See Restatement (Third) of Trusts § 58 cmt. d (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts § 152 cmt. i (1959).

NORTH CAROLINA COMMENT

This section represents a major change in North Carolina law by recognizing that a valid "spendthrift provision" restrains both the voluntary and involuntary transfer of a beneficiary's interest in a trust. Former G.S. 36A-115 provided an exception from alienability, whether voluntary or involuntary, only for interests in a discretionary trust, support trust and protective trust described in the statute. In Swink v. Swink , 6 N.C. App. 161, 169 S.E.2d 539 (1969), a case decided before the enactment of former G.S. 36A-115 in 1979, the court held that an interest in a common law spendthrift trust could be reached to satisfy claims for alimony and child support under North Carolina law because our courts did not recognize such spendthrift trusts as being effective to provide creditor protection.

Under subsection (c) of this section, the effect of the restraint of a spendthrift provision is to prohibit a creditor from reaching a distribution by the trustee before its receipt by a beneficiary. G.S. 36C-5-504(b) provides creditor protection for a "discretionary trust interest" in language identical to that in this subsection. The definition of "discretionary trust interest" in G.S. 36C-5-504(a)(2) includes a discretionary trust and a support trust in language brought forward from former G.S. 36A-115. Interests in discretionary trusts and support trusts and in protective trusts defined in G.S. 36C-5-508 do not have to be restrained by a spendthrift provision to be provided creditor protection.

OFFICIAL COMMENT

This section exempts the claims of certain categories of creditors from the effects of a spendthrift restriction and specifies the remedies such exemption creditors may take to satisfy their claims.

The exception in subsection (b)(1) for judgments or orders to support a beneficiary's child or current or former spouse is in accord with Restatement (Third) of Trusts Section 59(a) (Tentative Draft No. 2, approved 1999), Restatement (Second) of Trusts Section 157(a) (1959), and numerous state statutes. It is also consistent with federal bankruptcy law, which exempts such support orders from discharge. The effect of this exception is to permit the claimant for unpaid support to attach present or future distributions that would otherwise be made to the beneficiary. Distributions subject to attachment include distributions required by the express terms of the trust, such as mandatory payments of income, and distributions the trustee has otherwise decided to make, such as through the exercise of discretion. Subsection (b)(1), unlike Section 504, does not authorize the spousal or child claimant to compel a distribution from the trust. Section 504 authorizes a spouse or child claimant to compel a distribution to the extent the trustee has abused a discretion or failed to comply with a standard for distribution.

Subsection (b)(1) refers both to "support" and "maintenance" in order to accommodate differences among the States in terminology employed. No difference in meaning between the two terms is intended.

The definition of "child" in subsection (a) accommodates the differing approaches States take to defining the class of individuals eligible for child support, including such issues as whether support can be awarded to stepchildren. However the State making the award chooses to define "child" will be recognized under this Code, whether the order sought to be enforced was entered in the same or different State. For the definition of "state," which includes Puerto Rico and other American possessions, see Section 103(17).

The definition of "child" in subsection (a) is not exclusive. The definition clarifies that a "child" includes an individual awarded child support in any state. The definition does not expressly include but neither does it exclude persons awarded child support in some other country or political subdivision, such as a Canadian province.

The exception in subsection (b)(2) for a judgment creditor who has provided services for the protection of a beneficiary's interest in the trust is in accord with Restatement (Third) of Trusts Section 59(b) (Tentative Draft No. 2, approved 1999), and Restatement (Second) of Trusts Section 157(c) (1959). This exception allows a beneficiary of modest means to overcome an obstacle preventing the beneficiary's obtaining services essential to the protection or enforcement of the beneficiary's rights under the trust. See Restatement (Third) of Trusts Section 59 cmt. d (Tentative Draft No. 2, approved 1999).

Subsection (b)(3), which is similar to Restatement (Third) of Trusts Section 59 cmt. a (Tentative Draft No. 2, approved 1999), exempts certain governmental claims from a spendthrift restriction. Federal preemption guarantees that certain federal claims, such as claims by the Internal Revenue Service, may bypass a spendthrift provision no matter what this Code might say. The case law and relevant Internal Revenue Code provisions on the exception for federal tax claims are collected in George G. Bogert & George T. Bogert, The Law of Trusts and Trustees Section 224 (Rev. 2d ed. 1992); and 2A Austin W. Scott & William F. Fratcher, The Law of Trusts Section 157.4 (4th ed. 1987). Regarding claims by state governments, this subsection recognizes that States take a variety of approaches with respect to collection, depending on whether the claim is for unpaid taxes, for care provided at an institution, or for other charges. Acknowledging this diversity, subsection (c) does not prescribe a rule, but refers to other statutes of the State on whether particular claims are subject to or exempted from spendthrift provisions.

Unlike Restatement (Third) of Trusts Section 59(2) (Tentative Draft No. 2, approved 1999), and Restatement (Second) of Trusts Section 157(b) (1959), this Code does not create an exception to the spendthrift restriction for creditors who have furnished necessary services or supplies to the beneficiary. Most of these cases involve claims by governmental entities, which the drafters concluded are better handled by the enactment of special legislation as authorized by subsection (b)(3). The drafters also declined to create an exception for tort claimants. For a discussion of the exception for tort claims, which has not generally been recognized, see Restatement (Third) of Trusts Section 59 Reporter's Notes to cmt. a (Tentative Draft No. 2, approved 1999). For a discussion of other exceptions to a spendthrift restriction, recognized in some States, see George G. Bogert & George T. Bogert, The Law of Trusts and Trustees Section 224 (Rev. 2d ed. 1992); and 2A Austin W. Scott & William F. Fratcher, The Law of Trusts Sections 157-157.5 (4th ed. 1987).

Subsection (c) provides that the only remedy available to an exception creditor is attachment of present or future distributions of present or future distributions. Depending on other creditor law of the state, additional remedies may be available should a beneficiary's interest not be subject to a spendthrift provision. Section 501, which applies in such situations, provides that the creditor may reach the beneficiary's interest under that section by attachment or "other means." Subsection (c), similar to Section 501, clarifies that the court has the authority to limit the creditor's relief as appropriate under the circumstances.

NORTH CAROLINA COMMENT

This section is new to North Carolina law. Our courts never addressed the question of whether any category of creditor, such as minor children or spouses who have a claim for support, was exempt from the creditor protection provided a discretionary trust, a support trust, or protective trust by former G.S. 36 115. In Swink v. Swink , 6 N.C. App. 161,169 S.E.2d 539 (1969) the court ruled that a beneficiary's interest in a trust restrained by a spendthrift provision was subject to attachment for child support and alimony both (i) under the laws of the District of Columbia, which was in accord with the cases holding that these interests may be reached "because of the strong equity of these claims and because of repugnancy to public policy," and (ii) under the laws of North Carolina which did not recognize common law spendthrift trusts as providing creditor protection since in this State "[t]raditional notions of public policy and fair play have remained predominant." Whether these considerations would have led our courts to allow such a creditor to attach present or future distributions from a discretionary trust, support trust or protective trust described in former G.S. 36A 115 is problematic.

Subsection (b) differs significantly from the Uniform Trust Code in limiting the exception from creditor protection to a beneficiary's child who has a judgment or court order against a beneficiary for support and maintenance. The drafters omitted provisions in this section of the Uniform Trust Code which would have provided additional exceptions for (1) a spouse or former spouse having a judgment against a beneficiary for support, (2) a judgment creditor who had provided services for the protection of the beneficiary's interest, and (3) a claim of the State or United States to the extent a statute so provided. In balancing the need to respect the intent of settlors who desire to provide creditor protection for beneficiaries with "traditional notions of public policy and fair play," the drafters concluded that such notions should encompass an exception for a child with a support order but not for a spouse with a support order and a judgment creditor who provided services to protect a beneficiary's interest. The drafters omitted the exception for a claim based on state and federal laws because it was unnecessary.

Subsection (b) of the Uniform Trust Code provided for exceptions only with respect to an interest in a trust subject to spendthrift provision which under the Uniform Trust Code is the only interest recognized as being protected from attachment of a present or future distribution from the trust. In addition to limiting the exception to a child with a support order, the drafters modified subsection (b) of the Uniform Trust Code to extend that exception to a beneficiary's interest in a discretionary trust as defined in G.S. 36C-5-504(a)(2), which includes an interest in a discretionary trust and support trust described in former G.S. 36A-115, and in a protective trust as defined in G.S. 35C-5-508. The interests in these trusts do not have to be subject to a spendthrift provision to be protected from attachment by creditors.

OFFICIAL COMMENT

This section addresses the ability of a beneficiary's creditor to reach the beneficiary's discretionary trust interest, whether or not the exercise of the trustee's discretion is subject to a standard. This section, similar to the Restatement, eliminates the distinction between discretionary and support trusts, unifying the rules for all trusts fitting within either of the former categories. See Restatement (Third) of Trusts Section 60 Reporter's Notes to cmt. a (Tentative Draft No. 2, approved 1999). By eliminating this distinction, the rights of a creditor are the same whether the distribution standard is discretionary, subject to a standard, or both. Other than for a claim by a child, spouse or former spouse, a beneficiary's creditor may not reach the beneficiary's interest. Eliminating this distinction affects only the rights of creditors. The affect of this change is limited to the rights of creditors. It does not affect the rights of a beneficiary to compel a distribution. Whether the trustee has a duty in a given situation to make a distribution depends on factors such as the breadth of the discretion granted and whether the terms of the trust include a support or other standard. See Section 814 comment.

For a discussion of the definition of "child" in subsection (a), see Section 503 Comment.

Subsection (b), which establishes the general rule, forbids a creditor from compelling a distribution from the trust, even if the trustee has failed to comply with the standard of distribution or has abused a discretion. Under subsection (d), the power to force a distribution due to an abuse of discretion or failure to comply with a standard belongs solely to the beneficiary. Under Section 814(a), a trustee must always exercise a discretionary power in good faith and with regard to the purposes of the trust and the interests of the beneficiaries.

Subsection (c) creates an exception for support claims of a child, spouse, or former spouse who has a judgment or order against a beneficiary for support or maintenance. While a creditor of a beneficiary generally may not assert that a trustee has abused a discretion or failed to comply with a standard of distribution, such a claim may be asserted by the beneficiary's child, spouse, or former spouse enforcing a judgment or court order against the beneficiary for unpaid support or maintenance. The court must direct the trustee to pay the child, spouse or former spouse such amount as is equitable under the circumstances but not in excess of the amount the trustee was otherwise required to distribute to or for the benefit of the beneficiary. Before fixing this amount, the court having jurisdiction over the trust should consider that in setting the respective support award, the family court has already considered the respective needs and assets of the family. The Uniform Trust Code does not prescribe a particular procedural method for enforcing a judgment or order against the trust, leaving that matter to local collection law.

Subsection (e), which was added by a 2004 amendment, is discussed below.

2004 Amendment

Section 504(e), 103(11)

Trusts are frequently drafted in which a trustee is also a beneficiary. A common example is what is often referred to as a bypass trust, under which the settlor's spouse will frequently be named as both trustee and beneficiary. An amount equal to the exemption from federal estate tax will be placed in the bypass trust, and the trustee, who will often be the settlor's spouse, will be given discretion to make distributions to the beneficiaries, a class which will usually include the spouserustee. To prevent the inclusion of the trust in the spouse-trustee's gross estate, the spouse's discretion to make distributions for the spouse's own benefit will be limited by an ascertainable standard relating to health, education, maintenance, or support.

The UTC, as previously drafted, did not specifically address the issue of whether a creditor of a beneficiary may reach the beneficial interest of a beneficiary who is also a trustee. However, Restatement (Third) of Trusts § 60, comment g, which was approved by the American law Institute in 1999, provides that the beneficial interest of a beneficiaryrustee may be reached by the beneficiaryrustee's creditors. Because the UTC is supplemented by the common law (see UTC Section 106), this Restatement rule might also apply in states enacting the UTC. The drafting committee has concluded that adoption of the Restatement rule would unduly disrupt standard estate planning and should be limited. Consequently, Section 504 is amended to provide that the provisions of this section, which generally prohibit a creditor of a beneficiary from reaching a beneficiary's discretionary interest, apply even if the beneficiary is also a trustee or cotrustee. The beneficiary-trustee is protected from creditor claims to the extent the beneficiary-trustee's discretion is protected by an ascertainable standard as defined in the relevant Internal Revenue Code sections. The result is that the beneficiary's trustee's interest is protected to the extent it is also exempt from federal estate tax. The amendment thereby achieves its main purpose, which is to protect the trustee-beneficiary of a bypass trust from creditor claims.

The protection conferred by this subsection, however, is no greater than if the beneficiary had not been named trustee. If an exception creditor can reach the beneficiary's interest under some other provision, the interest is not insulated from creditor claims by the fact the beneficiary is or becomes a trustee.

In addition, the definition of "power of withdrawal" in Section 103 is amended to clarify that a power of withdrawal does not include a power exercisable by the trustee that is limited by an ascertainable standard. The purpose of this amendment is to preclude a claim that the power of a trustee-beneficiary to make discretionary distributions for the trustee-beneficiary's own benefit results in an enforceable claim of the trustee-beneficiary's creditors to reach the trustee-beneficiary's interest as provided in Section 505(b). Similar to the amendment to Section 504, the amendment to "power of withdrawal" is being made because of concerns that Restatement (Third) of Trusts Section 60, comment g, otherwise might allow a beneficiary-trustee's creditors to reach the trustee's beneficial interest.

The Code does not specifically address the extent to which a creditor of a trustee/beneficiary may reach a beneficial interest of a beneficiary/trustee that is not limited by an ascertainable standard.

For the definition of "ascertainable standard," see Section 103(2).

NORTH CAROLINA COMMENT

Subsection (a) of the Uniform Trust Code was modified to add paragraph (2) defining a "discretionary trust interest" which includes an interest in a "discretionary trust" and a "support trust" described in language brought forward from former G.S. 36A-115(b)(1) and (2) with minor modifications.

Subsection (b), not a part of the Uniform Trust Code, was added to this section to provide for the inalienability of a discretionary trust interest in language identical to that in G.S. 36C-5-502(c) with respect to an interest subject to a spendthrift provision. It was the drafters' intent to provide the same creditor protection for interests in discretionary trusts and support trusts that was afforded by former G.S. 36A-115, except as otherwise provided in this Article. Interests in a discretionary trust and a support trust and in a protective trust defined in G.S. 36C-5-508 do not have to have a spendthrift provision for creditor protection.

Subsection (c) incorporates the provisions of subsection (b) of the Uniform Trust Code and is new to North Carolina law. No court in this State has addressed the question of whether a creditor can compel a distribution from a discretionary trust even if the trustee has abused its discretion. The Uniform Trust Code provisions were modified to state that a creditor may not compel a distribution "from a trust in which the beneficiary has a discretionary trust interest" in place of the reference in the Uniform Trust Code to a distribution "that is subject to the trustee's discretion even ... if ... expressed in the form of a standard" because the definition of discretionary trust interest includes these matters. Any reference in the Official Comment to "subsection (b)" should be understood to refer to subsection (c) of this section.

Subsection (d), which incorporates the provisions of subsection (c) of the Uniform Trust Code, is also new to North Carolina law. The Uniform Trust Code provisions were modified to provide that only a child who has a judgment or court order against the beneficiary for support or maintenance may assert a claim that the trustee has not complied with the standard of distribution or abused a discretion. The provisions of the Uniform Trust Code giving a spouse or former spouse that right were omitted to be consistent with the omission of spouses as exception creditors under G.S. 36C-5-503. The criteria to determine whether a trustee has abused a discretion in exercising or failing to exercise a discretionary power are set forth in G.S. 36C-8-814. Any reference in the Official Comment to "subsection (c)" should be understood to refer to subsection (d) of this section.

Subsection (e) incorporates the provisions of subsection (d) of the Uniform Trust Code with respect to the right of a beneficiary to maintain a judicial proceeding against the trustee for abuse of discretion. Any reference in the Official Comment to "subsection (d)" should be understood to refer to subsection (e) of this section.

Subsection (f) incorporates the provisions of subsection (e) of the Uniform Trust Code with respect to the interest of a beneficiary who is also a trustee or cotrustee. Any reference in the Official Comment to "subsection (e)" should be understood to refer to subsection (f) of this section.

CASE NOTES

Trust which was created prior to October 1, 1979, was not subject to this section. - Lineback ex rel. Hutchens v. Stout, 79 N.C. App. 292, 339 S.E.2d 103 (1986), decided under law in effect prior to this section.

Testamentary trust created for "the lifetime" of beneficiary, the disabled daughter of settlor, containing provision for the distribution of the trust corpus remaining upon beneficiary's death, which was designed so that trust funds would be used to provide supplemental, rather than total, support for the beneficiary, was a discretionary trust and the superior court erred in requiring trustee to expend funds from the trust for the general welfare, support, maintenance and benefit of the beneficiary. Lineback ex rel. Hutchens v. Stout, 79 N.C. App. 292, 339 S.E.2d 103 (1986), decided under law in effect prior to this section.

OFFICIAL COMMENT

Subsection (a)(1) states what is now a well accepted conclusion, that a revocable trust is subject to the claims of the settlor's creditors while the settlor is living. See Restatement (Third) of Trusts Section 25 cmt. e (Tentative Draft No. 1, approved 1996). Such claims were not allowed at common law, however. See Restatement (Second) of Trusts Section 330 cmt. o (1959). Because a settlor usually also retains a beneficial interest that a creditor may reach under subsection (a)(2), the common law rule, were it retained in this Code, would be of little significance. See Restatement (Second) of Trusts Section 156(2) (1959).

Subsection (a)(2), which is based on Restatement (Third) of Trusts Section 58(2) and cmt. e (Tentative Draft No. 2, approved 1999), and Restatement (Second) of Trusts Section 156 (1959), follows traditional doctrine in providing that a settlor who is also a beneficiary may not use the trust as a shield against the settlor's creditors. The drafters of the Uniform Trust Code concluded that traditional doctrine reflects sound policy. Consequently, the drafters rejected the approach taken in States like Alaska and Delaware, both of which allow a settlor to retain a beneficial interest immune from creditor claims. See Henry J. Lischer, Jr., Domestic Asset Protection Trusts: Pallbearers to Liability, 35 Real Prop. Prob. & Tr. J. 479 (2000); John E. Sullivan, III, Gutting the Rule Against Self-Settled Trusts: How the Delaware Trust Law Competes with Offshore Trusts, 23 Del. J. Corp. L. 423 (1998). Under the Code, whether the trust contains a spendthrift provision or not, a creditor of the settlor may reach the maximum amount that the trustee could have paid to the settlor-beneficiary. If the trustee has discretion to distribute the entire income and principal to the settlor, the effect of this subsection is to place the settlor's creditors in the same position as if the trust had not been created. For the definition of "settlor," see Section 103(15).

This section does not address possible rights against a settlor who was insolvent at the time of the trust's creation or was rendered insolvent by the transfer of property to the trust. This subject is instead left to the State's law on fraudulent transfers. A transfer to the trust by an insolvent settlor might also constitute a voidable preference under federal bankruptcy law.

Subsection (a)(3) recognizes that a revocable trust is usually employed as a will substitute. As such, the trust assets, following the death of the settlor, should be subject to the settlor's debts and other charges. However, in accordance with traditional doctrine, the assets of the settlor's probate estate must normally first be exhausted before the assets of the revocable trust can be reached. This section does not attempt to address the procedural issues raised by the need first to exhaust the decedent's probate estate before reaching the assets of the revocable trust. Nor does this section address the priority of creditor claims or liability of the decedent's other nonprobate assets for the decedent's debts and other charges. Subsection (a)(3), however, does ratify the typical pourover will, revocable trust plan. As long as the rights of the creditor or family member claiming a statutory allowance are not impaired, the settlor is free to shift liability from the probate estate to the revocable trust. Regarding other issues associated with potential liability of nonprobate assets for unpaid claims, see Section 6-102 of the Uniform Probate Code, which was added to that Code in 1998.

Subsection (b)(1) treats a power of withdrawal as the equivalent of a power of revocation because the two powers are functionally identical. This is also the approach taken in Restatement (Third) of Trusts Section 56 cmt. b (Tentative Draft No. 2, approved 1999). If the power is unlimited, the property subject to the power will be fully subject to the claims of the power holder's creditors, the same as the power holder's other assets. If the power holder retains the power until death, the property subject to the power may be liable for claims and statutory allowances to the extent the power holder's probate estate is insufficient to satisfy those claims and allowances. For powers limited either in time or amount, such as a right to withdraw a $10,000 annual exclusion contribution within 30 days, this subsection would limit the creditor to the $10,000 contribution and require the creditor to take action prior to the expiration of the 30-day period.

Upon the lapse, release, or waiver of a power of withdrawal, the property formerly subject to the power will normally be subject to the claims of the power holder's creditors and assignees the same as if the power holder were the settlor of a now irrevocable trust. Pursuant to subsection (a)(2), a creditor or assignee of the power holder generally may reach the power holder's entire beneficial interest in the trust, whether or not distribution is subject to the trustee's discretion. However, following the lead of Arizona Revised Statutes Section 14-7705(g) and Texas Property Code Section 112.035(e), subsection (b)(2) creates an exception for trust property which was subject to a Crummey or five and five power. Upon the lapse, release, or waiver of a power of withdrawal, the holder is treated as the settlor of the trust only to the extent the value of the property subject to the power at the time of the lapse, release, or waiver exceeded the greater of the amounts specified in IRC Sections 2041(b)(2) or 2514(e) [greater of 5% or $5,000], or IRC Section 2503(b) [$10,000 in 2001].

The Uniform Trust Code does not address creditor issues with respect to property subject to a special power of appointment or a testamentary general power of appointment. For creditor rights against such interests, see Restatement (Property) Second: Donative Transfers Sections 13.1-13.7 (1986).

AMENDED NORTH CAROLINA COMMENT (2007)

Subsection (a) is generally consistent with North Carolina case law with respect to the ability of a creditor to reach the property in a trust for the benefit of the settlor. See Pilkington v. West, 246 N.C. 575, 580, 99 S.E.2d 798, 802 (1957) where the court stated that "one cannot remove his property from liability for his debts or restrict his rights of alienation by conveyance to a trustee for the sole use and benefit of the owner, grantor." Subsection (a) of the Uniform Trust Code was modified to provide that the subsection applies whether or not the interest in the trust is a discretionary interest as defined in G.S. 36C-5-504(a)(2) or a protected trust interest as defined in G.S. 36C-5-508.

Effective October 1, 2007, subsection (a) is amended (i) to add the phrase "subject to the other applicable law" in the first sentence to clarify that the adoption of the Uniform Trust Code does not change the existing North Carolina law with respect to the exemptions from creditors, such as exemptions relating to life insurance and homestead protection and (ii) to add a new subdivision (a) (2a) to clarify that the trustee's discretionary authority to pay the tax on a trust's income or principal that is payable by the settlor is not an amount that can be distributed to or for the settlor's benefit within the meaning of subdivision (a) (2).

The drafters omitted the provisions of subsection (b) of the Uniform Trust Code and substituted in their place the provisions, effective October 1, 2007, that (i) a power of withdrawal by the holder of the power other than the settlor is subject to the claims of creditors only when and to the extent that the holder exercises the power and (ii) the lapse, release or waiver of the power shall not be deemed to be an exercise of the power and shall not cause the holder to be treated as the settlor of the trust. In contrast, subsection (b) of the Uniform Trust Code provides that a holder of a power of withdrawal is to be treated as a settlor of a revocable trust to the extent of the property subject to the power, except that upon the lapse, release or waiver of the power, the holder is treated as a settlor only to the extent that the value of the property affected by the lapse, release or waiver exceeds the greater of the amount specified in sections 2041(b)(2) or 2514(e) of the Internal Revenue Code.

In substituting the provisions of subsection (b) in place of those in the Uniform Trust Code, the drafters intended to codify the common law rule that assets subject to an unexercised general power of appointment not created by the donee of the power cannot be reached by the donee's creditors. This common law rule was adopted by Restatement (Second) of Property § 13.2 (1986) stating that the rationale of the rule is that until the donee exercises the power, the donee has not accepted the control over the assets that gives the donee the equivalent of ownership. The Reporters Notes to section 13.2 cite case law of jurisdictions that generally have recognized the rule. However, the Reporters Notes also point out that cases do exist reaching the opposite result which is also the position taken in Restatement (Third) of Trusts § 56 note b. (2003) with respect to the presently exercisable general powers of appointment. Prior North Carolina law on the subject of whether a creditor can reach assets subject to an unexercised general power of appointment is not clear. In holding that creditors could reach an exercised testamentary general power of appointment, the court in Roger v. Hinton, 62 N.C. 101 (1867), rehearing dismissed, 63 N.C. 78 (1868), recognized the common law rule only by implication, if at all.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2012)

Effective October 1, 2011, a new subsection (c) is added providing that for purposes of 36C-5-505 the assets in a qualified terminable interest property ("QTIP") trust held in further trust for the settlor following the death of the settlor's spouse shall be deemed contributed by the settlor's spouse and not by the settlor.

The purpose of subsection (c) is to preclude any argument by the Internal Revenue Service based on G.S. 36C-5-505(a)(2) that if the settlor's creditors could reach the assets in the QTIP Trust for the settlor after the death of the settlor's spouse, the assets would be included in the settlor's estate under section 2041 of the Internal Revenue Code. Under Treasury Regulation section 25.2523(f)1(f), Example 11, such assets would not otherwise be included in the settlor's estate under sections 2036 and 2038 of the Internal Revenue Code.

To provide additional possible estate planning benefits subsection (c) also extends its protection to an inter vivos general power of appointment marital trust and to a inter vivos trust of which the settlor's spouse is the sole beneficiary but which does not qualify for the federal gift tax marital deduction.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2013)

Effective June 12, 2013, subsection (c) of this section is amended to clarify that the settlor's spouse refers to the person to whom the settlor was married at the time the irrevocable trust was created notwithstanding a subsequent dissolution of the marriage. Under the amendment if the marriage is dissolved by divorce or annulment after the creation of the trust, and if the settlor is a beneficiary of the trust after the death of the settlor's former spouse, the dissolution of the marriage will not prevent the property of the trust after the death of the former spouse from being deemed to have been contributed by the former spouse and not by the settlor.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2015)

Effective October 1, 2015, subsection (c) of this section is amended to modify sub-subdivision (1)c. (formerly subdivision (3)) to extend the provisions of subsection (c) to an inter vivos trust of which the spouse and the settlor's issue are the only beneficiaries so that the property of the trust after the death of the settlor's spouse is not deemed to be contributed by the settlor and thus for purposes of this section is not subject to the settlor's creditors. The subdivision continues to apply such provisions to a trust of which the spouse is the only beneficiary.

Effective October 1, 2015, subsection (c) is also amended to add subdivision (2) that property contributed to a trust by a person's spouse for the benefit of the person is not deemed to be contributed by the person even if the person contributes property to a reciprocal trust for the benefit of the person's spouse, and thus for purposes of this section the property so contributed to the trust by the person's spouse is not subject to the person's creditors. For example, if each spouse creates a trust for the other spouse for life with remainder to their children, then each spouse is not considered the settlor or the deemed settlor of the trust created by the other spouse. The purpose of this addition is to preclude the argument that reciprocal trusts for spouses should be "uncrossed" for purposes of creditor claims.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2013-91, s. 4, provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the North Carolina Uniform Trust Code and all explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2015-205, s. 11(a), as amended by Session Laws 2015-264, s. 31(b), provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Commentary to the Uniform Powers of Appointment Act and of the Official Commentary to the Uniform Trust Code and all explanatory comments of the drafters of Part III and Parts VI through X-A of this act, as the Revisor may deem appropriate."

Session Laws 2017-212, s. 8.5(b), provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this section, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 20, effective October 1, 2007, added "Subject to the other applicable law" at the beginning of subsection (a); added subdivision (a)(2a); substituted "applicable law" for "G.S. 28A-19-3" at the end of subdivision (a)(3); added present subsection (b) and subdivision (b)(1); redesignated the provisions of former subsection (b) as present subdivision (b)(2), and in subdivision (b)(2), substituted "shall not be deemed to be an exercise of the power and" for "of withdrawal" in the middle of the subdivision.

Session Laws 2011-339, s. 2, effective October 1, 2011, and applicable to all trusts created before, on, or after that date, added subsection (c).

Session Laws 2013-91, s. 2(b), effective June 12, 2013, added "and the 'settlor's spouse' refers to the person to whom the settlor was married at the time the irrevocable intervivos trust was created, notwithstanding a subsequent dissolution of the marriage" at the end of the second paragraph in subsection (c).

Session Laws 2015-205, s. 9, effective October 1, 2015, rewrote subsection (c). For applicability and effective date, see editor's note.

Session Laws 2017-212, s. 8.5(a), effective October 8, 2017, substituted "any issue of the settlor or the settlor's spouse, or both" for "the settlor's issue" near the end of sub-subdivision (c)(1)c.

CASE NOTES

Trial Court Properly Applied Section. - In granting partial summary judgment in favor of the administrator of a decedent's estate and creditors, a trial court did not err in finding that the Uniform Trust Act, G.S. 36C-5-505(a)(3), applied to the trustee's action seeking a declaration that trust assets were not subject to the debts of the decedent's estate because the decedent died with the power to alter, amend, revoke, or terminate the trust; therefore, the trust would be included in his gross estate for estate tax purposes, and irrespective of the fate of the trust after the decedent's death, until the moment of his death, the trust was revocable. Livesay v. Carolina First Bank, 192 N.C. App. 234, 665 S.E.2d 158 (2008), review dismissed, as moot, 363 N.C. 655, 686 S.E.2d 517 (2009).

OFFICIAL COMMENT

The effect of a spendthrift provision is generally to insulate totally a beneficiary's interest until a distribution is made and received by the beneficiary. See Section 502. But this section, along with several other sections in this article, recognizes exceptions to this general rule. Whether a trust contains a spendthrift provision or not, a trustee should not be able to avoid creditor claims against a beneficiary by refusing to make a distribution required to be made by the express terms of the trust. On the other hand, a spendthrift provision would become largely a nullity were a beneficiary's creditors able to attach all required payments as soon as they became due. This section reflects a compromise between these two competing principles. A creditor can reach a mandatory distribution, including a distribution upon termination, if the trustee has failed to make the payment within a reasonable time after the designated distribution date. Following this reasonable period, payments mandated by the express terms of the trust are in effect being held by the trustee as agent for the beneficiary and should be treated as part of the beneficiary's personal assets.

This section is similar to Restatement (Third) of Trusts Section 58 cmt. d (Tentative Draft No. 2, approved 1999).

2001 AMENDMENT.

By amendment in 2001, "designated distribution date" was substituted for "required distribution date" in subsection (b). The amendment conforms the language of this section to terminology used elsewhere in the Code.

2005 AMENDMENT.

The amendment adds a clarifying definition of "mandatory distribution" in subsection (a), which is based on an Ohio proposal. The amendment:

ì tracks the traditional understanding that a mandatory distribution includes a provision requiring that a beneficiary be paid the income of a trust or receive principal upon termination;

ì correlates the definition of "mandatory distribution" in this section to the broad definition of discretionary trust used in Section 504. Under both Sections 504 and 506, a trust is discretionary even if the discretion is expressed in the form of a standard, such as a provision directing a trustee to pay for a beneficiary's support;

ì addresses the situation where the terms of the trust couple language of discretion with language of direction. An example of such a provision is "my trustees shall, in their absolute discretion, distribute such amounts as are necessary for the beneficiary's support." Despite the presence of the imperative "shall," the provision is discretionary, not mandatory. For a more elaborate example of such a discretionary "shall" provision, see Marsman. Nasca, 573 N.E. 2d 1025 (Mass. Ct. App. 1991).

ì is clarifying. No change of substance is intended by this amendment. This amendment merely clarifies that a mandatory distribution is to be understood in its traditional sense such as a provision requiring that the beneficiary receive an income or receive principal upon termination of the trust.

NORTH CAROLINA COMMENT

Common examples of a "mandatory distribution" defined in this section may be found in a qualified terminal interest property trust, a charitable remainder trust and a grantor retained annuity trust where the trustee is required to make a distribution of income or an annuity or unitrust amount. The exclusion from the term "mandatory distribution" for a distribution subject to the exercise of the trustee's discretion includes a distribution from a trust in which the beneficiary interest is a "discretionary trust interest" as defined in G.S. 36C-5-504(a)(2).

OFFICIAL COMMENT

Because the beneficiaries of the trust hold the beneficial interest in the trust property and the trustee holds only legal title without the benefits of ownership, the creditors of the trustee have only a personal claim against the trustee. See Restatement (Third) § 5 cmt. k (Tentative Draft No.1, approved 1996); Restatement (Second) of Trusts § 12 cmt. a (1959). Similarly, a personal creditor of the trustee who attaches trust property to satisfy the debt does not acquire title as a bona fide purchaser even if the creditor is unaware of the trust. See Restatement (Second) of Trusts § 308 (1959). The protection afforded by this section is consistent with that provided by the Bankruptcy Code. Property in which the trustee holds legal title as trustee is not part of the trustee's bankruptcy estate. 11 U.S.C. § 541(d).

The exemption of the trust property from the personal obligations of the trustee is the most significant feature of Anglo-American trust law by comparison with the devices available in civil law countries. A principal objective of the Hague Convention on the Law Applicable to Trusts and on their Recognition is to protect the Anglo-American trust with respect to transactions in civil law countries. See Hague Convention art. 11. See also Henry Hansmann & Ugo Mattei, The Functions of Trust Law: A Comparative Legal and Economic Analysis, 73 N.Y.U. L. Rev. 434 (1998); John H. Langbein, The Secret Life of the Trust: The Trust as an Instrument of Commerce, 107 Yale L.J. 165, 179-80 (1997).

OFFICIAL COMMENT

This section is patterned after Restatement (Third) of Trusts § 11(1) (Tentative Draft No. 1, approved 1996). The revocable trust is used primarily as a will substitute, with its key provision being the determination of the persons to receive the trust property upon the settlor's death. To solidify the use of the revocable trust as a device for transferring property at death, the settlor usually also executes a pourover will. The use of a pourover will assures that property not transferred to the trust during life will be combined with the property the settlor did manage to convey. Given this primary use of the revocable trust as a device for disposing of property at death, the capacity standard for wills rather than that for lifetime gifts should apply. The application of the capacity standard for wills does not mean that the revocable trust must be executed with the formalities of a will. There are no execution requirements under this Code for a trust not created by will, and a trust not containing real property may be created by an oral statement. See Section 407 and Comment.

The Uniform Trust Code does not explicitly spell out the standard of capacity necessary to create other types of trusts, although Section 402 does require that the settlor have capacity. This section includes a capacity standard for creation of a revocable trust because of the uncertainty in the case law and the importance of the issue in modern estate planning. No such uncertainty exists with respect to the capacity standard for other types of trusts. To create a testamentary trust, the settlor must have the capacity to make a will. To create an irrevocable trust, the settlor must have the capacity that would be needed to transfer the property free of trust. See generally Restatement (Third) of Trusts § 11 (Tentative Draft No. 1, approved 1996); Restatement (Third) of Property: Wills and Other Donative Transfers § 8.1 (Tentative Draft No. 3, approved 2001).

NORTH CAROLINA COMMENT

This section has no counterpart in prior North Carolina law. The capacity to make a will is found in G.S. 31-1 which provides that "[a]ny person of sound mind, and 18 years of age or over, may make a will".

Effective Date and Applicability. - Session Laws 2005-192, which enacted Chapter 36C, in s. 7(a) provides: "Section 2 of this act becomes effective January 1, 2006, and except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, applies to (i) all trusts created before, on, or after that date; (ii) all judicial proceedings concerning trusts commenced on or after that date; and (iii) judicial proceedings concerning trusts commenced before that date unless the court finds that application of a particular provision of Chapter 36C of the General Statutes would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of Chapter 36C of the General Statutes does not apply and the superseded law applies.

"Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, any rule of construction or presumption provided in Chapter 36C of the General Statutes applies to trust instruments executed before the effective date of Section 2 of this act unless there is a clear indication of a contrary intent in the terms of the trust or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary. Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, an act done before the effective date of Section 2 of this act is not affected by Chapter 36C of the General Statutes. If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before the effective date of Section 2 of this act, that statute continues to apply to the right even if it has been repealed or superseded."

Official Comment on Effective Date and Applicability. - The Uniform Trust Code is intended to have the widest possible effect within constitutional limitations. Specifically, the Code applies to all trusts whenever created, to judicial proceedings concerning trusts commenced on or after its effective date, and unless the court otherwise orders, to judicial proceedings in progress on the effective date. In addition, any rules of construction or presumption provided in the Code apply to preexisting trusts unless there is a clear indication of a contrary intent in the trust's terms. By applying the Code to preexisting trusts, the need to know two bodies of law will quickly lessen.

This Code cannot be fully retroactive, however. Constitutional limitations preclude retroactive application of rules of construction to alter property rights under trusts that became irrevocable prior to the effective date. Also, rights already barred by a statute of limitation or rule under former law are not revived by a possibly longer statute or more liberal rule under this Code. Nor is an act done before the effective date of the Code affected by the Code's enactment.

The Uniform Trust Code contains an additional effective date provision. Pursuant to Section 602(a), prior law will determine whether a trust executed prior to the effective date of the Code is presumed to be revocable or irrevocable.

For a comparable uniform law effective date provision, see Uniform Probate Code Section 8 101.

North Carolina Comment on Effective Date and Applicability. - The drafters modified the provisions of the Uniform Trust Code relating to its application to trust instruments executed before its effective date by adding the phrase "or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary" to the end of the first sentence of the second paragraph. Although this Chapter is intended to have broad application, the drafters concluded that a rule of construction or presumption provided in this Chapter should not be applied to a trust instrument executed before the effective date of this Chapter if the application of such rule or presumption would impair the substantial rights of a beneficiary of a trust established under such a trust instrument.

Editor's Note. - Session Laws 2005-192, which enacted Chapter 36C, in s. 6, provides: "The Revisor of Statutes shall cause to be printed along with this act all relevant portions of the Official Commentary to the Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Official Comments, copyright 2005, are reprinted in this Chapter with the permission of the National Conference of Commissioners on Uniform State Laws. It is believed that the Official Comments will prove of value to the practitioner in understanding and applying the text of this Chapter.

The Official Comments appearing under individual sections in this Chapter have been printed by the publisher as received, without editorial change, and relate to the Chapter as originally enacted. However, not all sections in this Chapter may carry Official Comments. Furthermore, Official Comments may or may not have been received or updated in conjunction with subsequent amendments to this Chapter and, therefore, may not reflect all changes to the sections under which they appear.

Where they appear in this Chapter, "Amended Comment" usually means that an error in the original comment has been corrected by a subsequent amendment, and "Supplemental Comment" pertains to a later development, such as an amendment to the statute text. North Carolina Comments explain where the General Assembly has enacted variations to the text of the Uniform Act.

OFFICIAL COMMENT

Subsection (a), which provides that a settlor may revoke or modify a trust unless the terms of the trust expressly state that the trust is irrevocable, changes the common law. Most States follow the rule that a trust is presumed irrevocable absent evidence of contrary intent. See Restatement (Second) of Trusts § 330 (1959). California, Iowa, Montana, Oklahoma, and Texas presume that a trust is revocable. The Uniform Trust Code endorses this minority approach, but only for trusts created after its effective date. This Code presumes revocability when the instrument is silent because the instrument was likely drafted by a nonprofessional, who intended the trust as a will substitute. The most recent revision of the Restatement of Trusts similarly reverses the former approach. A trust is presumed revocable if the settlor has retained a beneficial interest. See Restatement (Third) of Trusts § 63 cmt. c (Tentative Draft No. 3, 103 approved 2001). Because professional drafters habitually spell out whether or not a trust is revocable, subsection (a) will have limited application.

A power of revocation includes the power to amend. An unrestricted power to amend may also include the power to revoke a trust. See Restatement (Third) of Trusts § 63 cmt. g (Tentative Draft No. 3, approved 2001); Restatement (Second) of Trusts § 331 cmt. g and h (1959).

Subsection (b), which is similar to Restatement (Third) of Trusts § 63 cmt. k (Tentative Draft No. 3, approved 2001), provides default rules for revocation or amendment of a trust having several settlors. The settlor's authority to revoke or modify the trust depends on whether the trust contains community property. To the extent the trust contains community property, the trust may be revoked by either spouse acting alone but may be amended only by joint action of both spouses. The purpose of this provision, and the reason for the use of joint trusts in community property States, is to preserve the community character of property transferred to the trust. While community property does not prevail in a majority of States, contributions of community property to trusts created in noncommunity property States does occur. This is due to the mobility of settlors, and the fact that community property retains its community character when a couple move from a community to a noncommunity State. For this reason, subsection (b), and its provision on contributions of community property, should be enacted in all States, whether community or noncommunity.

With respect to separate property contributed to the trust, or all property of the trust if none of the trust property consists of community property, subsection (b) provides that each settlor may revoke or amend the trust as to the portion of the trust contributed by that settlor. The inclusion of a rule for contributions of separate property does not mean that the drafters of this Code concluded that the use of joint trusts should be encouraged. The rule is included because of the widespread use of joint trusts in noncommunity property States in recent years. Due to the desire to preserve the community character of trust property, joint trusts are a necessity in community property States. Unless community property will be contributed to the trust, no similarly important reason exists for the creation of a joint trust in a noncommunity property State. Joint trusts are often poorly drafted, confusing the dispositive provisions of the respective settlors. Their use can also lead to unintended tax consequences. See Melinda S. Merk, Joint Revocable Trusts for Married Couples Domiciled in Common-Law Property States, 32 Real Prop. Prob. & Tr. J. 345 (1997).

Subsection (b) does not address the many technical issues that can arise in determining the settlors' proportionate contribution to a joint trust. Most problematic are contributions of jointly-owned property. In the case of joint tenancies in real estate, each spouse would presumably be treated as having made an equal contribution because of the right to sever the interest and convert it into a tenancy in common. This is in contrast to joint accounts in financial institutions, ownership of which in most States is based not on fractional interest but on actual dollar contribution. See, e.g., Uniform Probate Code § 6-211. Most difficult may be determining a contribution rule for entireties property. In Holdener v. Fieser, 971 S.W. 2d 946 (Mo. Ct. App. 1998), the court held that a surviving spouse could revoke the trust with respect to the entire interest but did not express a view as to revocation rights while both spouses were living.

Subsection (b)(3) requires that the other settlor or settlors be notified if a joint trust is revoked by less than all of the settlors. Notifying the other settlor or settlors of the revocation or amendment will place them in a better position to protect their interests. If the revocation or amendment by less than all of the settlors breaches an implied agreement not to revoke or amend the trust, those harmed by the action can sue for breach of contract. If the trustee fails to notify the other settlor or settlors of the revocation or amendment, the parties aggrieved by the trustee's failure can sue the trustee for breach of trust.

Subsection (c), which is similar to Restatement (Third) of Trusts § 63 cmt. h and i (Tentative Draft No. 3, approved 2001), specifies the method of revocation and amendment. Revocation of a trust differs fundamentally from revocation of a will. Revocation of a will, because a will is not effective until death, cannot affect an existing fiduciary relationship. With a trust, however, because a revocation will terminate an already existing fiduciary relationship, there is a need to protect a trustee who might act without knowledge that the trust has been revoked. There is also a need to protect trustees against the risk that they will misperceive the settlor's intent and mistakenly assume that an informal document or communication constitutes a revocation when that was not in fact the settlor's intent. To protect trustees against these risks, drafters habitually insert provisions providing that a revocable trust may be revoked only by delivery to the trustee of a formal revoking document. Some courts require strict compliance with the stated formalities. Other courts, recognizing that the formalities were inserted primarily for the trustee's and not the settlor's benefit, will accept other methods of revocation as long as the settlor's intent is clear. See Restatement (Third) of Trusts § 63 Reporter's Notes to cmt. h-j (Tentative Draft No. 3, approved 2001).

This Code tries to effectuate the settlor's intent to the maximum extent possible while at the same time protecting a trustee against inadvertent liability. While notice to the trustee of a revocation is good practice, this section does not make the giving of such notice a prerequisite to a trust's revocation. To protect a trustee who has not been notified of a revocation or amendment, subsection (g) provides that a trustee who does not know that a trust has been revoked or amended is not liable to the settlor or settlor's successors in interest for distributions made and other actions taken on the assumption that the trust, as unamended, was still in effect. However, to honor the settlor's intent, subsection (c) generally honors a settlor's clear expression of intent even if inconsistent with stated formalities in the terms of the trust.

Under subsection (c), the settlor may revoke or amend a revocable trust by substantial compliance with the method specified in the terms of the trust or by a later will or codicil or any other method manifesting clear and convincing evidence of the settlor's intent. Only if the method specified in the terms of the trust is made exclusive is use of the other methods prohibited. Even then, a failure to comply with a technical requirement, such as required notarization, may be excused as long as compliance with the method specified in the terms of the trust is otherwise substantial.

While revocation of a trust will ordinarily continue to be accomplished by signing and delivering a written document to the trustee, other methods, such as a physical act or an oral statement coupled with a withdrawal of the property, might also demonstrate the necessary intent. These less formal methods, because they provide less reliable indicia of intent, will often be insufficient, however. The method specified in the terms of the trust is a reliable safe harbor and should be followed whenever possible.

Revocation or amendment by will is mentioned in subsection (c) not to encourage the practice but to make clear that it is not precluded by omission. See Restatement (Third) of Property: Will and Other Donative Transfers § 7.2 cmt. e (Tentative Draft No. 3, approved 2001), which validates revocation or amendment of will substitutes by later will. Situations do arise, particularly in death-bed cases, where revocation by will may be the only practicable method. In such cases, a will, a solemn document executed with a high level of formality, may be the most reliable method for expressing intent. A revocation in a will ordinarily becomes effective only upon probate of the will following the testator's death. For the cases, see Restatement (Third) of Trusts § 63 Reporter's Notes to cmt. h-i (Tentative Draft No. 3, approved 2001).

A residuary clause in a will disposing of the estate differently than the trust is alone insufficient to revoke or amend a trust. The provision in the will must either be express or the will must dispose of specific assets contrary to the terms of the trust. The substantial body of law on revocation of Totten trusts by will offers helpful guidance. The authority is collected in William H. Danne, Jr., Revocation of Tentative ("Totten") Trust of Savings Bank Account by Inter Vivos Declaration or Will, 46 A.L.R. 3d 487 (1972).

Subsection (c) does not require that a trustee concur in the revocation or amendment of a trust. Such a concurrence would be necessary only if required by the terms of the trust. If the trustee concludes that an amendment unacceptably changes the trustee's duties, the trustee may resign as provided in Section 705.

Subsection (d), providing that upon revocation the trust property is to be distributed as the settlor directs, codifies a provision commonly included in revocable trust instruments.

A settlor's power to revoke is not terminated by the settlor's incapacity. The power to revoke may instead be exercised by an agent under a power of attorney as authorized in subsection (e), by a conservator or guardian as authorized in subsection (f), or by the settlor personally if the settlor regains capacity.

Subsection (e), which is similar to Restatement (Third) of Trusts § 63 cmt. l (Tentative Draft No. 3, approved 2001), authorizes an agent under a power of attorney to revoke or modify a revocable trust only to the extent the terms of the trust or power of attorney expressly so permit. An express provision is required because most settlors usually intend that the revocable trust, and not the power of attorney, to function as the settlor's principal property management device. The power of attorney is usually intended as a backup for assets not transferred to the revocable trust or to address specific topics, such as the power to sign tax returns or apply for government benefits, which may be beyond the authority of a trustee or are not customarily granted to a trustee.

Subsection (f) addresses the authority of a conservator or guardian to revoke or amend a revocable trust. Under the Uniform Trust Code, a "conservator" is appointed by the court to manage the ward's party, a "guardian" to make decisions with respect to the ward's personal affairs. See Section 103. Consequently, subsection (f) authorizes a guardian to exercise a settlor's power to revoke or amend a trust only if a conservator has not been appointed.

Many state conservatorship statutes authorize a conservator to exercise the settlor's power of revocation with the prior approval of the court supervising the conservatorship. See, e.g., Uniform Probate Code § 411(a)(4). Subsection (f) ratifies this practice. Under the Code, a conservator may exercise a settlor's power of revocation, amendment, or right to withdraw trust property upon approval of the court supervising the conservatorship. Because a settlor often creates a revocable trust for the very purpose of avoiding conservatorship, this power should be exercised by the court reluctantly. Settlors concerned about revocation by a conservator may wish to deny a conservator a power to revoke. However, while such a provision in the terms of the trust is entitled to considerable weight, the court may override the restriction if it concludes that the action is necessary in the interests of justice. See Section 105(b)(13).

Steps a conservator can take to stem possible abuse is not limited to petitioning to revoke the trust. The conservator could petition for removal of the trustee under Section 706. The conservator, acting on the settlor-beneficiary's behalf, could also bring an action to enforce the trust according to its terms. Pursuant to Section 303, a conservator may act on behalf of the beneficiary whose estate the conservator controls whenever a consent or other action by the beneficiary is required or may be given under the Code.

If a conservator has not been appointed, subsection (f) authorizes a guardian to exercise a settlor's power to revoke or amend the trust upon approval of the court supervising the guardianship. The court supervising the guardianship will need to determine whether it can grant a guardian authority to revoke a revocable trust under local law or whether it will be necessary to appoint a conservator for that purpose.

2001 Amendment. By amendment in 2001, revocation by "executing a later will or codicil" in subsection (c)(2)(A) was changed to revocation by a "later will or codicil" to avoid an implication that the trust is revoked immediately upon execution of the will or codicil and not at the testator's death.

NORTH CAROLINA COMMENT

Subsection (a) reverses the rule of prior case law to the effect that a trust is presumed irrevocable unless it contains language to the contrary. See Starling v. Taylor, 1 N.C. App. 287 161 S.E.2d 204 (1968). See also City of Washington v. Ellsworth, 253 N.C. 25, 116 S.E.2d 167 (1960). This subsection of the Uniform Trust Code was modified by adding the words "without regard to the actual capacity of the settlor" to the end of the first sentence to clarify that the incapacity of the settlor, which in a particular case may be difficult to determine, does not result in the trust becoming irrevocable. The power to revoke may still be exercised by the settlor's agent or guardian. See subsections (e) and (f) of this section.

Subsection (b) providing default rules for revocation or amendment of a trust with more than one settlor has no counterpart in prior North Carolina law.

Sub-subdivision (c)(2)a. providing that a settlor may amend or revoke a trust by a later will that expressly refers to the trust changes prior North Carolina law to the effect that, unless the trust instrument provides otherwise, a power to revoke a trust must be exercised before the death of the settlor. See Ridge v. Bright , 244 N.C. 345, 93 S.E.2d 607 (1956).

Subdivision (c)(2) of the Uniform Trust Code was modified by adding a new sub-subdivision "b.", redesigning the Code's subparagraph "B" as sub-subdivision "c.", and inserting in sub-subdivision c. the words "written" before and the words "delivered to the trustee" after the word "method". These changes were made to clarify that an oral statement may only revoke a trust created orally and not one created in a writing.

Subsection (e) of the Uniform Trust Code was modified by adding the proviso denying the settlor's agent acting under a power of attorney the authority to amend or revoke a revocable trust in such a manner as to alter the designation of beneficiaries to receive property on the settlor's death under the settlor's existing estate plan. Since many revocable trusts serve as will substitutes, the drafters did not desire to change current North Carolina law precluding an attorney in fact for the testator from making or altering a will. This restriction on amending or revoking a revocable trust relates only to an agent under a power of attorney and not to any other person who may have a power of amendment or termination with respect to the trust. See G.S. 36C-8-808(c).

Subsection (f) of the Uniform Trust Code was modified to substitute the words "general guardian or guardian of the estate" in place of "conservator" and "guardian of the person" for "guardian" and "guardianship" for "conservatorship". In the North Carolina context, references in the Official Comments to a "conservator" should be read to apply to a general guardian or a guardian of the estate and references to "guardian" should be read to apply to a guardian of the person.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, subsections (e) relating to the exercise of a settlor's power by an agent under the power of attorney with respect to revocation and amendment of a revocable trust and distribution of the trust property is repealed and brought forward in substance in G.S. 36C-6-602.1(a) which also grants the agent additional powers to make additions to a revocable trust and to create a revocable trust.

Also effective October 1, 2007, subsection (f) relating to the exercise of the powers of the settlor with respect to a revocable trust by a general guardian or guardian of the estate is repealed and brought forward in G.S. 35A-1251(24) which authorizes such a guardian to exercise upon approval by the court the same powers with respect to a revocable trust that an agent under a power of attorney may exercise pursuant to G.S. 36C-6-602.1(a).

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, ss. 21 and 22, effective October 1, 2007, deleted subsection (e), which related to the exercise of certain settlor's powers by an agent under power of attorney under certain circumstances; and deleted subsection (f), which related to the exercise of certain settlor's powers only with the approval of the court supervising the guardianship. See Editor's note for applicability.

OFFICIAL COMMENT

This section recognizes that the settlor of a revocable trust is in control of the trust and should have the right to enforce the trust. Pursuant to this section, the duty under Section 813 to inform and report to beneficiaries is owed to the settlor of a revocable trust as long as the settlor has capacity.

If the settlor loses capacity, subsection (a) no longer applies, with the consequence that the rights of the beneficiaries are no longer subject to the settlor's control. The beneficiaries are then entitled to request information concerning the trust and the trustee must provide the beneficiaries with annual trustee reports and whatever other information may be required under Section 813. However, because this section may be freely overridden in the terms of the trust, a settlor is free to deny the beneficiaries these rights, even to the point of directing the trustee not to inform them of the existence of the trust. Also, should an incapacitated settlor later regain capacity, the beneficiaries' rights will again be subject to the settlor's control.

Typically, the settlor of a revocable trust will also be the sole or primary beneficiary of the trust, and the settlor has control over whether to take action against a trustee for breach of trust. Upon the settlor's incapacity, any right of action the settlor-trustee may have against the trustee for breach of trust occurring while the settlor had capacity will pass to the settlor's agent or conservator, who would succeed to the settlor's right to have property restored to the trust. Following the death or incapacity of the settlor, the beneficiaries would have a right to maintain an action against a trustee for breach of trust. However, with respect to actions occurring prior to the settlor's death or incapacity, an action by the beneficiaries could be barred by the settlor's consent or by other events such as approval of the action by a successor trustee. For the requirements of a consent, see Section 1009.

Subsection (b) makes clear that a holder of a power of withdrawal has the same powers over the trust as the settlor of a revocable trust. Equal treatment is warranted due to the holder's equivalent power to control the trust. For the definition of power of withdrawal, see Section 103(11).

2001 Amendment. By a 2001 amendment, former subsection (b) was deleted. Former subsection (b) provided: "While a trust is revocable and the settlor does not have capacity to revoke the trust, rights of the beneficiaries are held by the beneficiaries." No substantive change was intended by this amendment. Former subsection (b) was superfluous. Rights of the beneficiaries are always held by the beneficiaries unless taken away by some other provision. Subsection (a) grants these rights to the settlor of a revocable trust while the settlor has capacity. Upon a settlor's loss of capacity, these rights are held by the beneficiaries with or without former subsection (b).

2003 Amendment. The purpose of former subsection (b), which was deleted in 2003, was to make certain that upon revocation of amendment of a joint trust by fewer than all of its settlors, that the trustee would notify the nonparticipating settlor or settlors. The subsection, which provided that "If a revocable trust has more than one settlor, the duties of the trustee are owed to all of the settlors having capacity to revoke the trust," imposed additional duties upon a trustee and unnecessarily raised interpretative questions as to its scope. The drafter's original intent is restored, and in a much clearer form, by repealing former subsection (b), and by amending Section 602 to add a subsection (b)(3) that states explicitly what former subsection (b) was trying to achieve.

2004 Amendment. The amendment places in brackets and makes optional the language in subsection (a) dealing with the settlor's capacity.

Section 603 generally provides that while a trust is revocable, all rights that the trust's beneficiaries would otherwise possess are subject to the control of the settlor. This section, however, negates the settlor's control if the settlor is incapacitated. In such case, the beneficiaries are entitled to assert all rights provided to them under the Code, including the right to information concerning the trust.

Two issues have arisen concerning this incapacity limitation. First, because determining when a settlor is incapacitated is not always clear, concern has been expressed that it will often be difficult in a particular case to determine whether the settlor has become incapacitated and the settlor's control of the beneficiary's rights have ceased. Second, concern has been expressed that this section prescribes a different rule for revocable trusts than for wills and that the rules for both should instead be the same. In the case of a will, the devisees have no right to know of the dispositions made in their favor until the testator's death, whether or not the testator is incapacitated. Under Section 603, however, the remainder beneficiary's right to know commences on the settlor's incapacity.

Concluding that uniformity among the states on this issue is not essential, the drafting committee has decided to place the reference to the settlor's incapacity in Section 603(a) in brackets. Enacting jurisdictions are free to strike the incapacity limitation or to provide a more precise definition of when a settlor is incapacitated, as has been done in the Missouri enactment (Mo. Stat. Ann. § 456.6-603).

NORTH CAROLINA COMMENT

This section has no equivalent in prior law.

Subsection (a) of the Uniform Trust Code was modified by deleting the optional words "and the settlor has capacity to revoke the trust" following the word "revocable".

Subsection (b) of the Uniform Trust Code was also modified by deleting the words "having capacity to revoke the trust" following the word "settlors".

In modifying subsections (a) and (b) the drafters concluded that the incapacity of the settlor should not negate the settlor's control of the beneficiary's rights or the trustee's duty to the settlor for the reasons stated in the Official Comment regarding the 2004 amendment to this section.

Subsection (c) of the Uniform Trust Code which provided that the holder of a power of withdrawal has the rights of a settlor of a revocable trust was omitted to avoid any inference that creditors of the power holder could reach property subject to an unexercised power of withdrawal. Under North Carolina law such property is not subject to the claims of the creditors. See the North Carolina Comment to G.S. 36C-5-505(b).

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, subsection (a), which provides that the duties of the trustee of a revocable trust are owed exclusively to the settlor, is amended to clarify that if the trustee of a revocable trust is the same person as the settlor, an action taken by the trustee is presumed to be directed by the settlor.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 24, effective October 1, 2007, substituted "control of revocable trust" for "powers; powers of withdrawal" in the section heading; and added the second sentence in subsection (a). See Editor's note for applicability.

OFFICIAL COMMENT

This section provides finality to the question of when a contest of a revocable trust may be brought. The section is designed to allow an adequate time in which to bring a contest while at the same time permitting the expeditious distribution of the trust property following the settlor's death.

A trust can be contested on a variety of grounds. For example, the contestant may allege that no trust was created due to lack of intent to create a trust or lack of capacity ( see Section 402), that undue influence, duress, or fraud was involved in the trust's creation ( see Section 406), or that the trust had been revoked or modified ( see Section 602). A "contest" is an action to invalidate all or part of the terms of the trust or of property transfers to the trustee. An action against a beneficiary or other person for intentional interference with an inheritance or gift, not being a contest, is not subject to this section. For the law on intentional interference, see Restatement (Second) of Torts § 774B (1979). Nor does this section preclude an action to determine the validity of a trust that is brought during the settlor's lifetime, such as a petition for a declaratory judgment, if such action is authorized by other law. See Section 106 (Uniform Trust Code supplemented by common law of trusts and principles of equity).

This section applies only to a revocable trust that becomes irrevocable by reason of the settlor's death. A trust that became irrevocable by reason of the settlor's lifetime release of the power to revoke is outside its scope. A revocable trust does not become irrevocable upon a settlor's loss of capacity. Pursuant to Section 602, the power to revoke may be exercised by the settlor's agent, conservator, or guardian, or personally by the settlor if the settlor regains capacity.

Subsection (a) specifies a time limit on when a contest can be brought. A contest is barred upon the first to occur of two possible events. The maximum possible time for bringing a contest is three years from the settlor's death. This should provide potential contestants with ample time in which to determine whether they have an interest that will be affected by the trust, even if formal notice of the trust is lacking. The three-year period is derived from Section 3-108 of the Uniform Probate Code. Three years is the maximum limit under the UPC for contesting a nonprobated will. Enacting jurisdictions prescribing shorter or longer time limits for contest of a nonprobated will should substitute their own time limit. To facilitate this process, the "three-year" period has been placed in brackets.

A trustee who wishes to shorten the contest period may do so by giving notice. Drawing from California Probate Code § 16061.7, subsection (a)(2) bars a contest by a potential contestant 120 days after the date the trustee sent that person a copy of the trust instrument and informed the person of the trust's existence, of the trustee's name and address, and of the time allowed for commencing a contest. The reference to "120" days is placed in brackets to suggest to the enacting jurisdiction that it substitute its statutory time period for contesting a will following notice of probate. The 120 day period in subsection (a)(2) is subordinate to the threeyear bar in subsection (a)(1). A contest is automatically barred three years after the settlor's death even if notice is sent by the trustee less than 120 days prior to the end of that period.

Because only a small minority of trusts are actually contested, trustees should not be restrained from making distributions because of concern about possible liability should a contest later be filed. Absent a protective statute, a trustee is ordinarily absolutely liable for misdelivery of the trust assets, even if the trustee reasonably believed that the distribution was proper. See Restatement (Second) of Trusts § 226 (1959). Subsection (b) addresses liability concerns by allowing the trustee, upon the settlor's death, to proceed expeditiously to distribute the trust property. The trustee may distribute the trust property in accordance with the terms of the trust until and unless the trustee receives notice of a pending judicial proceeding contesting the validity of the trust, or until notified by a potential contestant of a possible contest, followed by its filing within 60 days.

Even though a distribution in compliance with subsection (b) discharges the trustee from potential liability, subsection (c) makes the beneficiaries of what later turns out to have been an invalid trust liable to return any distribution received. Issues as to whether the distribution must be returned with interest, or with income earned or profit made are not addressed in this section but are left to the law of restitution.

For purposes of notices under this section, the substitute representation principles of Article 3 are applicable. The notice by the trustee under subsection (a)(2) or by a potential contestant under subsection (b)(2) must be given in a manner reasonably suitable under the circumstances and likely to result in its receipt. See Section 109(a).

This section does not address possible liability for the debts of the deceased settlor or a trustee's possible liability to creditors for distributing trust assets. For possible liability of the trust, see Section 505(a)(3) and Comment. Whether a trustee can be held personally liable for creditor claims following distribution of trust assets is addressed in Uniform Probate Code § 6-102, which was added to that Code in 1998.

NORTH CAROLINA COMMENT

Subsection (a) of this section is new to North Carolina law.

With regard to the three year rule of subdivision (a)(1), although current law in G.S. 1-52 provides that an action to enforce an express trust must be commenced within three years, there was no provision in prior law specifying the time in which to contest the validity of a revocable trust after the settlor's death. In comparison, under G.S. 31-32 a caveat to a will must be filed within three years after the time of application for the probate of the will.

Under subdivision (a)(2) the trustee may shorten the three year contest period to 120 days by giving notice. The three year period to contest the validity of a will may also be shortened by probating the will in solemn form.

The provisions of subsection (b) concerning the liability of the trustee with respect to distributions of trust property of a revocable trust after the settlor's death are also new to North Carolina.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2012)

Effective January 1, 2012, G.S. 36C-6-604(a)(2) is amended to provide that the notice informing a person that the person has 120 days to contest the validity of a trust must be a written notice pursuant to Rule 4 of the Rules of Civil Procedure.

Editor's Note. - Session Laws 2012-18, s. 4, provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the North Carolina Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2011-344, s. 13, substituted "and a written notice pursuant to G.S. 1A-1, Rule 4 of the Rules of Civil Procedure" for "and a notice" in subdivision (a)(2). For effective date and applicability, see editor's note.

OFFICIAL COMMENT

This section, which specifies the requirements for a valid acceptance of the trusteeship, implicates many of the same issues that arise in determining whether a trust has been revoked. Consequently, the two provisions track each other closely. Compare Section 701(a), with Section 602(c) (procedure for revoking or modifying trust). Procedures specified in the terms of the trust are recognized, but only substantial, not literal compliance is required. A failure to meet technical requirements, such as notarization of the trustee's signature, does not result in a failure to accept. Ordinarily, the trustee will indicate acceptance by signing the trust instrument or signing a separate written instrument. However, this section validates any other method demonstrating the necessary intent, such as by knowingly exercising trustee powers, unless the terms of the trust make the specified method exclusive. This section also does not preclude an acceptance by estoppel. For general background on issues relating to trustee acceptance and rejection, see Restatement (Third) of Trusts § 35 (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts § 102 (1959). Consistent with Section 201(b), which emphasizes that continuing judicial supervision of a trust is the rare exception, not the rule, the Uniform Trust Code does not require that a trustee qualify in court.

To avoid the inaction that can result if the person designated as trustee fails to communicate a decision either to accept or to reject the trusteeship, subsection (b) provides that a failure to accept within a reasonable time constitutes a rejection of the trusteeship. What will constitute a reasonable time depends on the facts and circumstances of the particular case. A major consideration is possible harm that might occur if a vacancy in a trusteeship is not filled in a timely manner. A trustee's rejection normally precludes a later acceptance but does not cause the trust to fail. See Restatement (Third) of Trusts § 35 cmt. c (Tentative Draft No. 2, approved 1999). Regarding the filling of a vacancy in the event of a rejection, see Section 704.

A person designated as trustee who decides not to accept the trusteeship need not provide a formal rejection, but a clear and early communication is recommended. The appropriate recipient of the rejection depends upon the circumstances. Ordinarily, it would be appropriate to communicate the rejection to the person who informed the designee of the proposed trusteeship. If judicial proceedings involving the trust are pending, the rejection could be filed with the court. In the case of a person named as trustee of a revocable trust, it would be appropriate to communicate the rejection to the settlor. In any event, it would be best to inform a beneficiary with a significant interest in the trust because that beneficiary might be more motivated than others to seek appointment of a new trustee.

Subsection (c)(1) makes clear that a nominated trustee may act expeditiously to protect the trust property without being considered to have accepted the trusteeship. However, upon conclusion of the intervention, the nominated trustee must send a rejection of office to the settlor, if living and competent, otherwise to a qualified beneficiary.

Because of the potential liability that can inhere in trusteeship, subsection (c)(2) allows a person designated as trustee to inspect the trust property without accepting the trusteeship. The condition of real property is a particular concern, including possible tort liability for the condition of the premises or liability for violation of state or federal environmental laws such as CERCLA, 42 U.S.C. § 9607. For a provision limiting a trustee's personal liability for obligations arising from ownership or control of trust property, see Section 1010(b).

NORTH CAROLINA COMMENT

Subdivision (a)(1) is generally consistent with former G.S. 36A-23.1(b) in contemplating that acceptance of the trusteeship may proceed in accordance with the terms of the trust without judicial intervention.

Subdivision (a)(2) providing for the methods of acceptance of the trusteeship if terms of the trust do not provide a method or the method is not expressly made exclusive has no counterpart in prior law.

Subsection (b) of the Uniform Trust Code was modified to provide a 120 day limitation on the reasonable time a trustee has to accept the trusteeship. This is new to North Carolina law.

Subsection (c) specifying the actions a trustee may take without accepting the trusteeship is also new to North Carolina law.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2006)

Effective October 1, 2006, subsection (b) is amended to provide a 120 day limitation on the time a trustee has to accept the trusteeship without regard to whether acceptance is "within a reasonable time."

Effective Date and Applicability. - Session Laws 2005-192, which enacted Chapter 36C, in s. 7(a) provides: "Section 2 of this act becomes effective January 1, 2006, and except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, applies to (i) all trusts created before, on, or after that date; (ii) all judicial proceedings concerning trusts commenced on or after that date; and (iii) judicial proceedings concerning trusts commenced before that date unless the court finds that application of a particular provision of Chapter 36C of the General Statutes would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of Chapter 36C of the General Statutes does not apply and the superseded law applies.

"Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, any rule of construction or presumption provided in Chapter 36C of the General Statutes applies to trust instruments executed before the effective date of Section 2 of this act unless there is a clear indication of a contrary intent in the terms of the trust or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary. Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, an act done before the effective date of Section 2 of this act is not affected by Chapter 36C of the General Statutes. If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before the effective date of Section 2 of this act, that statute continues to apply to the right even if it has been repealed or superseded."

Official Comment on Effective Date and Applicability. - The Uniform Trust Code is intended to have the widest possible effect within constitutional limitations. Specifically, the Code applies to all trusts whenever created, to judicial proceedings concerning trusts commenced on or after its effective date, and unless the court otherwise orders, to judicial proceedings in progress on the effective date. In addition, any rules of construction or presumption provided in the Code apply to preexisting trusts unless there is a clear indication of a contrary intent in the trust's terms. By applying the Code to preexisting trusts, the need to know two bodies of law will quickly lessen.

This Code cannot be fully retroactive, however. Constitutional limitations preclude retroactive application of rules of construction to alter property rights under trusts that became irrevocable prior to the effective date. Also, rights already barred by a statute of limitation or rule under former law are not revived by a possibly longer statute or more liberal rule under this Code. Nor is an act done before the effective date of the Code affected by the Code's enactment.

The Uniform Trust Code contains an additional effective date provision. Pursuant to Section 602(a), prior law will determine whether a trust executed prior to the effective date of the Code is presumed to be revocable or irrevocable.

For a comparable uniform law effective date provision, see Uniform Probate Code Section 8-101.

North Carolina Comment on Effective Date and Applicability. - The drafters modified the provisions of the Uniform Trust Code relating to its application to trust instruments executed before its effective date by adding the phrase "or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary" to the end of the first sentence of the second paragraph. Although this Chapter is intended to have broad application, the drafters concluded that a rule of construction or presumption provided in this Chapter should not be applied to a trust instrument executed before the effective date of this Chapter if the application of such rule or presumption would impair the substantial rights of a beneficiary of a trust established under such a trust instrument.

Editor's Note. Session Laws 2005-192, which enacted Chapter 36C, in s. 6, provides: "The Revisor of Statutes shall cause to be printed along with this act all relevant portions of the Official Commentary to the Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Official Comments, copyright 2005, are reprinted in this Chapter with the permission of the National Conference of Commissioners on Uniform State Laws. It is believed that the Official Comments will prove of value to the practictioner in understanding and applying the text of this Chapter.

The Official Comments appearing under individual sections in this Chapter have been printed by the publisher as received, without editorial change, and relate to the Chapter as originally enacted. However, not all sections in this Chapter may carry Official Comments. Furthermore, Official Comments may or may not have been received or updated in conjunction with subsequent amendments to this Chapter and, therefore, may not reflect all changes to the sections under which they appear.

Where they appear in this Chapter, "Amended Comment" usually means that an error in the original comment has been corrected by a subsequent amendment, and "Supplemental Comment" pertains to a later development, such as an amendment to the statute text. North Carolina Comments explain where the General Assembly has enacted variations to the text of the Uniform Act.

Session Laws 2006-259, s. 13(r), provides: "The Revisor of Statutes is authorized to cause to be printed any amendments to the explanatory comments of the drafters of S.L. 2005-192 that are prepared by the drafters of this section, as the Revisor deems appropriate."

Effect of Amendments. - Session Laws 2006-259, s. 13(j), effective October 1, 2006, substituted "120 days after written notice to accept the trusteeship is provided" for "a reasonable time, after receiving written notice of the trusteeship" in subsection (b). See Editor's note for applicability.

OFFICIAL COMMENT

This provision is consistent with the Restatement Third and with the bonding provisions of the Uniform Probate Code. See Restatement (Third) of Trusts § 34(3) and cmt. a (Tentative Draft No. 2, approved 1999); Uniform Probate Code §§ 3-604 (personal representatives), 5-415 (conservators), and 7-304 (trustees). Because a bond is required only if the terms of the trust require bond or a bond is found by the court to be necessary to protect the interests of beneficiaries, bond should rarely be required under this Code.

Despite the ability of the court pursuant to Section 105(b)(6) to override a term of the trust waiving bond, the court should order bond in such cases only for good reasons. Similarly, the court should rarely dispense with bond if the settlor directed that the trustee give bond.

This section does not attempt to detail all of the technical bonding requirements that the court may impose. Typical requirements are listed in the Uniform Probate Code sections cited above. The amount of a bond otherwise required may be reduced by the value of trust property deposited in a manner that prevents its unauthorized disposition, and by the value of real property which the trustee, by express limitation of power, lacks power to convey without court authorization. Also, the court may excuse or otherwise modify a requirement of a bond, reduce or increase the amount of a bond, release a surety, or permit the substitution of another bond with the same or different sureties.

Subsection (c) clarifies that a regulated financial-service institution need not provide bond for individual trusts. Such institutions must meet detailed financial responsibility requirements in order to do trust business in the State, thereby obviating the need to post bonds in individual trusts. Subsection (c) is placed in brackets because the enacting jurisdiction may have already dealt with the subject in separate legislation, such as in its statutes on regulation of financial institutions. Instead of the phrase "regulated financial-service institution," enacting jurisdictions may wish to substitute their own term for institutions qualified to engage in trust business in the State.

NORTH CAROLINA COMMENT

The drafters omitted subsection (a) of the Uniform Trust Code which provided that a trustee gives bond to protect the interests of the beneficiary or if required by the trust. The drafters also omitted subsection (b) of the Uniform Trust Code which authorized the court to specify the amount of the bond and to modify or terminate it. In their place the drafters brought forward the more specific provisions of former G.S. 36A-31 as follows:

(i) Subsection (a) brings forward the substance of the provisions of former G.S. 36A-31(a) regarding when a bond is required and the first sentence of former G.S. 36A-31(b) directing that in no event shall a bond be required if the trust directs otherwise. The drafters omitted the mandatory rule in Section 105(b)(6) of the Uniform Trust Code which would have allowed the court to require a bond even if the trust did not do so.

(ii) Subsection (b) brings forward the provisions of the third and fourth sentences of former G.S. 36A-31(b) relating to the amount of the bond and the filing of bonds with the clerk of court.

(iii) Subsection (c) brings forward the provisions of the second sentence of former G.S. 36A-31(b) but substituting "qualified beneficiary" for "interested person".

Subsection (d) incorporates the provisions of subsection (c) of the Uniform Trust Code modified to substitute in place of "a regulated financial-service institution" the reference to banks and trust companies which need not give bond as provided in G.S. 53-159 and G.S. 53-366(a)(10).

CASE NOTES

Laches in Objecting to Lack of Bond. - Failure of order appointing successor trustee to include provision for the giving of a bond could not be raised by beneficiaries of the trust 16 years after the order was entered. State Trust Co. v. Toms, 244 N.C. 645, 94 S.E.2d 806 (1956), decided under prior law.

OFFICIAL COMMENT

This section contains most but not all of the Code's provisions on cotrustees. Other provisions relevant to cotrustees include Sections 704 (vacancy in trusteeship need not be filled if cotrustee remains in office), 705 (notice of resignation must be given to cotrustee), 706 (lack of cooperation among cotrustees as ground for removal), 707 (obligations of resigning or removed trustee), 813 (reporting requirements upon vacancy in trusteeship), and 1013 (authority of cotrustees to authenticate documents).

Cotrustees are appointed for a variety of reasons. Having multiple decision-makers serves as a safeguard against eccentricity or misconduct. Cotrustees are often appointed to gain the advantage of differing skills, perhaps a financial institution for its permanence and professional skills, and a family member to maintain a personal connection with the beneficiaries. On other occasions, cotrustees are appointed to make certain that all family lines are represented in the trust's management.

Cotrusteeship should not be called for without careful reflection. Division of responsibility among cotrustees is often confused, the accountability of any individual trustee is uncertain, obtaining consent of all trustees can be burdensome, and unless an odd number of trustees is named deadlocks requiring court resolution can occur. Potential problems can be reduced by addressing division of responsibilities in the terms of the trust. Like the other sections of this article, this section is freely subject to modification in the terms of the trust. See Section 105.

Much of this section is based on comparable provisions of the Restatement of Trusts, although with extensive modifications. Reference should also be made to ERISA § 405 (29 U.S.C. § 1105), which in recent years has been the statutory base for the most significant case law on the powers and duties of cotrustees.

Subsection (a) is in accord with Restatement (Third) of Trusts § 39 (Tentative Draft No. 2, approved 1999), which rejects the common law rule, followed in earlier Restatements, requiring unanimity among the trustees of a private trust. See Restatement (Second) of Trusts § 194 (1959). This section is consistent with the prior Restatement rule applicable to charitable trusts, which allowed for action by a majority of trustees. See Restatement (Second) of Trusts § 383 (1959).

Under subsection (b), a majority of the remaining trustees may act for the trust when a vacancy occurs in a cotrusteeship. Section 704 provides that a vacancy in a cotrusteeship need be filled only if there is no trustee remaining in office.

Pursuant to subsection (c), a cotrustee must participate in the performance of a trustee function unless the cotrustee has properly delegated performance to another cotrustee, or the cotrustee is unable to participate due to temporary incapacity or disqualification under other law. Other laws under which a cotrustee might be disqualified include federal securities law and the ERISA prohibited transactions rules. Subsection (d) authorizes a cotrustee to assume some or all of the functions of another trustee who is unavailable to perform duties as provided in subsection (c).

Subsection (e) addresses the extent to which a trustee may delegate the performance of functions to a cotrustee. The standard differs from the standard for delegation to an agent as provided in Section 807 because the two situations are different. Section 807, which is identical to Section 9 of the Uniform Prudent Investor Act, recognizes that many trustees are not professionals. Consequently, trustees should be encouraged to delegate functions they are not competent to perform. Subsection (e) is premised on the assumption that the settlor selected cotrustees for a specific reason and that this reason ought to control the scope of a permitted delegation to a cotrustee. Subsection (e) prohibits a trustee from delegating to another trustee functions the settlor reasonably expected the trustees to perform jointly. The exact extent to which a trustee may delegate functions to another trustee in a particular case will vary depending on the reasons the settlor decided to appoint cotrustees. The better practice is to address the division of functions in the terms of the trust, as allowed by Section 105. Subsection (e) is based on language derived from Restatement (Second) of Trusts § 171 (1959). This section of the Restatement Second, which applied to delegations to both agents and cotrustees, was superseded, as to delegation to agents, by Restatement (Third) of Trusts: Prudent Investor Rule § 171 (1992).

By permitting the trustees to act by a majority, this section contemplates that there may be a trustee or trustees who might dissent. Trustees who dissent from the acts of a cotrustee are in general protected from liability. Subsection (f) protects trustees who refused to join in the action. Subsection (h) protects a dissenting trustee who joined the action at the direction of the majority, such as to satisfy a demand of the other side to a transaction, if the trustee expressed the dissent to a cotrustee at or before the time of the action in question. However, the protections provided by subsections (f) and (h) no longer apply if the action constitutes a serious breach of trust. In that event, subsection (g) may impose liability against a dissenting trustee for failing to take reasonable steps to rectify the improper conduct. The responsibility to take action against a breaching cotrustee codifies the substance of Sections 184 and 224 of the Restatement (Second) of Trusts (1959).

NORTH CAROLINA COMMENT

Subsection (a) is generally consistent with former G.S. 36A-73(d). Subsection (a) was modified to clarify that unanimity is required if there are only two trustees acting.

Subsection (b) is generally consistent with former G.S. 36A-39 and with G.S. 41-3 in allowing remaining cotrustees to act for the trust, but subsection (b) modifies the Uniform Trust Code to bring forward the provisions of former G.S. 36A-39 excepting powers which the remaining trustees are prohibited from exercising under the terms of the trust or by law.

Subsection (e) differs from the Uniform Trust Code by including a list of functions, similar to those in former G.S. 36A-73(b), which may be delegated to a cotrustee as functions the settlor does not expect the trustees to perform jointly. However, subsection (e) as modified changes North Carolina law in two respects:

(i) Approval by the clerk of superior court of the delegation of the functions which are listed is no longer required; and

(ii) The list of functions which may be delegated includes investment of trust funds and is not exclusive, thus allowing a broader range of matters to be delegated which the settlor did not reasonably expect to the trustee to perform jointly.

Subsection (g)(1) of the Uniform Trust Code was modified to provide that a cotrustee shall use reasonable care to "avoid enabling a cotrustee to commit" a serious breach of trust rather than to "prevent" a cotrustee from "committing" such a breach as provided in the Uniform Trust Code. This modification recognizes the difficulty a cotrustee may have in preventing a cotrustee from committing such a breach and is more closely in accordance with Section 224(2)(d) of the Restatement (Second) of Trusts (1959).

Subsection (h) differs from the Uniform Trust Code in the following two respects:

(i) It brings forward the language in former G.S. 36A-73(d) that protects from liability a trustee who has not joined in an action approved by the majority.

(ii) It differs from the Uniform Trust Code with respect to the liability of a dissenting trustee who joins in the action at the direction of the majority and notifies any cotrustee in writing of the dissent. The Uniform Trust Code provides that such a trustee is not liable "unless the action is a serious breach of trust," whereas subsection (h) provides that such a trustee is not liable "unless such trustee had knowledge that the action taken involved intentional misconduct or was taken with an intention to directly or indirectly provide an improper personal benefit to one or more trustees approving the action." The drafters were concerned that the reference to "serious breach of trust" was too general in scope and did not expressly require actual knowledge or intentional misconduct or of an improper personal benefit. The drafters concluded that such knowledge was necessary to impose liability on a dissenting trustee who joins in the action at the direction of the majority.

Subsection (i) was added to bring forward the provisions of former G.S. 36A-73(c) with minor modifications. It does not appear in the Uniform Trust Code.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, subsection (f) is repealed and subsections (g) and (h) are amended in order to clarify the duty and liability of a co-trustee. As revised, a trustee must exercise reasonable care with respect to actions of a co-trustee with two exceptions. First, a trustee is not required to exercise reasonable care with respect to matters for which that trustee has no authority under the terms of the trust. Second, a trustee who does not join in an action of a majority of other trustees is not liable for that action, and a trustee who joins in the action of a majority of the other trustees (for example, by signing a deed the majority wants to sign) and who dissents will not be liable for the action unless the trustee knows the action involves intentional misconduct or improper benefits to other trustees.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2012)

Effective June 11, 2012, subsection (e1) is added to G.S. 36C-7-703 to provide for the duty and liability of cotrustees when the terms of the trust confer upon a cotrustee, to the exclusion of another cotrustee, the power to take certain actions with respect to the trust, including the power to direct or prevent certain actions of the trust. It replaces the former provisions of G.S. 36C-8-808(b), (c) and (d), repealed effective June 11, 2012, insofar as the power holder in those subsections included a cotrustee.

The drafters concluded that the duty and liability of the excluded cotrustee should be generally consistent with the duty and liability of a trustee subject to direction by a power holder who is not a trustee. Therefore, under subdivision (1)a. if a cotrustee has power to direct actions of the excluded cotrustee, the duty and liability of the excluded cotrustee is identical to the duty and liability of a trustee under G.S. 36C-8A-4(a) when the power holder is not a trustee.

Also, under subdivision (1)b., if the cotrustee has any other power, the excluded trustee is exonerated from liability in the same manner as a trustee subject to such a power of a power holder who is not a trustee is exonerated under G.S. 36C-8A-4(c).

Finally, under subdivision (1)c., the excluded trustee is not required to monitor the conduct of or consult with the cotrustees or give notice to any beneficiaries of any action taken or not taken. This exoneration is identical to the one provided in G.S. 36C-8A-4(d) applicable to a trustee subject to the power of a power holder who is not a trustee.

If a cotrustee has the power to consent to or veto specific actions of another cotrustee, the liability of the cotrustee whose actions are subject to such power is governed by the provisions of G.S. 36C-7-703(g). For this reason, the drafters did not include in this section a provision like the one in G.S. 36C-8A-4(b) which provides that the trustee is not liable for failure to take any action subject to a power holder's consent not provided upon request within a reasonable time.

See the North Carolina General Comment to Article 8A of this Chapter for a detailed explanation of the modifications made in the provisions of former G.S. 36C-8-808(b) concerning the duty and liability of a directed trustee.

Subdivision (2) makes it clear that the cotrustee who has the power to take certain actions with respect to the trust to the exclusion of the other cotrustee is liable for the exercise of the power as if the excluded trustee were not in office and has the exclusive obligation to account to and defend any action brought by the beneficiaries with respect to the exercise of the power. Under G.S. 36C-8-801 the cotrustee having a power to direct the excluded cotrustee has the duty to administer the trust in good faith, a duty similar to the duty under G.S. 36C-8A-3 of a power holder who is not a trustee. However, unlike the duty of the power holder, the terms of the instrument cannot override the duty of the cotrustee to act in good faith.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2015)

Effective October 1, 2015 subsection (e1) is repealed. Sub-subdivision (e1)(1)a. was repealed to correct an inconsistency in the liability of a directed trustee as described below. The provisions of sub-subdivisions (e1)(1)b. and c. and subdivision (e1)(2) are carried forward for the most part in new section (g1).

Effective October 1, 2015, subsection (g1) is added to make it clear that when the terms of the trust confer upon a cotrustee an exclusive power, such as the power to make distributions, that does not involve any action on the part of the excluded cotrustee, the excluded cotrustee is not liable for the actions taken by the cotrustee holding the exclusive power. Subsection (g1) carries forward (i) the former provisions of sub-subdivision (e1)(1)c. that the excluded cotrustee has no duty to monitor the conduct of, give advice to, consult with, or request directions from, the cotrustee holding the exclusion power, or give advice to beneficiaries, and (ii) the former provisions of subdivision (e1)(2) that the cotrustee holding the exclusive power is liable to the beneficiaries for the exercise of the power and has the exclusive obligation to account to them or defend any action by them with respect to the exercise of the power.

Also effective October 1, 2015, subsection (h) is amended to provide that if the terms of the trust confer the power to take actions on both or all trustees, but under the terms of the trust the decision of one or more of the trustees controls in the event of a disagreement, then unless the dissenting trustee had actual knowledge of the action constituting a serious breach of trust, the cotrustee who dissents from the action taken by one or more trustees is not liable if he did not join in the action or joined in the action but gave actual notice of such trustee's dissent to the other trustees.

The repeal of sub-subdivision (e1)(1)a. and the amendment of subsection (h) was intended to correct an inconsistency under sub-subdivision (e1)(1)a. providing that when a trustee is directed by one other trustee, the liability of the cotrustee depends on "intentional misconduct on the part of the directed cotrustee" and under former subsection (h) which provided that where a cotrustee is directed by a majority of the trustees, the cotrustee's liability depends on the cotrustee's knowledge that any action taken involved intentional misconduct or was taken with an intent to provide an improper benefit on the trustees approving the action. There should be no difference in the liability of a cotrustee whose actions are directed by one trustee and a cotrustee whose actions are directed by a majority of the trustees.

In addition to correcting this inconsistency, subsection (h) is amended to bring the standard of liability of a cotrustee who does not join in the action or give notice of dissent more in line with the standard imposing liability for a "serious breach of trust" recognized by the Uniform Trust Code and amendments, but with the qualification that the cotrustee must have actual knowledge of the serious breach of trust.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2012-18, s. 4, provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the North Carolina Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Session Laws 2015-205, s. 11(a), as amended by Session Laws 2015-264, s. 31(b), provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Commentary to the Uniform Powers of Appointment Act and of the Official Commentary to the Uniform Trust Code and all explanatory comments of the drafters of Part III and Parts VI through X-A of this act, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, ss. 27 through 29, effective October 1, 2007, deleted subsection (f) which read: "Except as otherwise provided in subsection (g) of this section, a trustee who does not join in an action of another trustee is not liable for the action"; in the introductory paragraph of subsection (g), substituted "A" for "Each" at the beginning and inserted "in connection with matters for which the trustee is given authority under the terms of a trust"; rewrote the introductory paragraph of subsection (h); and added subdivisions (h)(1) and (h)(2). See Editor's note for applicability.

Session Laws 2012-18, s. 3.2, effective June 11, 2012, added subsection (e1).

Session Laws 2015-205, s. 10, effective October 1, 2015, deleted former subsection (e1); rewrote subsection (g); added subsection (g1); and rewrote subsection (h). For applicability and effective date, see editor's note.

OFFICIAL COMMENT

This section lists the ways in which a trusteeship becomes vacant and the rules on filling the vacancy. See also Sections 701 (accepting or declining trusteeship), 705 (resignation), and 706 (removal). Good drafting practice suggests that the terms of the trust deal expressly with the problem of vacancies, naming successors and specifying the procedure for filling vacancies. This section applies only if the terms of the trust fail to specify a procedure.

The disqualification of a trustee referred to in subsection (a)(4) would include a financial institution whose right to engage in trust business has been revoked or removed. Such disqualification might also occur if the trust's principal place of administration is transferred to a jurisdiction in which the trustee, whether an individual or institution, is not qualified to act.

Subsection (b) provides that a vacancy in the cotrusteeship must be filled only if the trust has no remaining trustee. If a vacancy in the cotrusteeship is not filled, Section 703 authorizes the remaining cotrustees to continue to administer the trust. However, as provided in subsection (e), the court, exercising its inherent equity authority, may always appoint additional trustees if the appointment would promote better administration of the trust. See Restatement (Third) of Trusts Section 34 cmt. e (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Section 108 cmt. e (1959).

Subsection (c) provides a procedure for filling a vacancy in the trusteeship of a noncharitable trust. Absent an effective provision in the terms of the trust, subsection (c)(2) permits a vacancy in the trusteeship to be filled, without the need for court approval, by a person selected by unanimous agreement of the qualified beneficiaries. An effective provision in the terms of the trust for the designation of a successor trustee includes a procedure under which the successor trustee is selected by a person designated in those terms. Pursuant to Section 705(a)(1), the qualified beneficiaries may also receive the trustee's resignation. If a trustee resigns following notice as provided in Section 705, the trust may be transferred to a successor appointed pursuant to subsection (c)(2) of this section, all without court involvement. A nonqualified beneficiary who is displeased with the choice of the qualified beneficiaries may petition the court for removal of the trustee under Section 706.

If the qualified beneficiaries fail to make an appointment, subsection (c)(3) authorizes the court to fill the vacancy. In making the appointment, the court should consider the objectives and probable intention of the settlor, the promotion of the proper administration of the trust, and the interests and wishes of the beneficiaries. See Restatement (Third) of Trusts Section 34 cmt. f (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Section 108 cmt. d (1959).

Subsection (d) specifies a procedure for filling a vacancy in the trusteeship of a charitable trust. Absent an effective designation in the terms of the trust, a successor trustee may be selected by the charitable organizations expressly designated to receive distributions in the terms of the trust but only if the attorney general concurs in the selection. If the attorney general does not concur in the selection, however, or if the trust does not designate a charitable organization to receive distributions, the vacancy may be filled only by the court. For the reason why the reference to the Attorney General is placed in brackets, see 2004 Amendment below.

In the case of a revocable trust, the appointment of a successor will normally be made directly by the settlor. As to the duties of a successor trustee with respect to the actions of a predecessor, see Section 812.

2001 Amendment. Subsection (d), which creates a procedure for the filling of a vacancy in the trusteeship of a charitable trust, was added by a 2001 amendment.

2004 Amendment. The amendment to Section 704(d)(2) is a conforming amendment to the amendment to Section 110(d). Section 110(d) provides that the attorney general has the rights of a qualified beneficiary with respect to charitable trusts having a principal place of administration in the state. If the enacting jurisdiction elects to delete or modify Section 110(d), then the enacting jurisdiction may wish to also modify subsection Section 704(d)(2) of this Section, which requires that the attorney general concur in the selection of a successor trustee nominated by a designated charitable organization.

NORTH CAROLINA COMMENT

Subdivision (a)(6) was modified to substitute the words "general guardian" and "guardian of the estate" for "conservator" and the words "guardian of the person" for "guardian". In the North Carolina context, references in the Official Comments to a "conservator" should be read to apply to a general guardian or a guardian of the estate and references to "guardian" should be read to apply to a guardian of the person.

Subdivision (c)(1) of the Uniform Trust Code was modified to clarify that a person designated in the terms of a noncharitable trust to act as successor trustee may also be a person appointed pursuant to the terms of the trust. This subdivision is consistent with North Carolina case law holding that if the terms of the trust provide a procedure for appointment of a successor trustee, court approval is not required. Cutter v. American Trust Co., 213 N.C. 686, 197 S.E. 542 (1938).

Subdivision (c)(2) makes an important change in prior law by allowing a vacancy in the trusteeship of a noncharitable trust to be filled by the unanimous agreement of the qualified beneficiaries if no person could be designated pursuant to the terms of the trust. Under prior law it was necessary in this instance for the clerk of superior court to appoint a successor trustee.

Subdivision (d)(1) of the Uniform Trust Code was also modified to clarify that a person designated in the terms of a charitable trust to act as successor trustee may also be a person appointed pursuant to the terms of the trust.

Subdivision (d)(2) of the Uniform Trust Code was modified to clarify that a vacancy in the trusteeship of a charitable trust may be filled by "majority agreement" of the charitable organizations designated to receive trust distributions.

Subsection (e) is generally consistent with former G.S. 36A-36 in authorizing the clerk of superior court to appoint a special trustee.

Subsection (f) was added to bring forward the provisions of former G.S. 36A-32 with minor modifications. It does not appear in the Uniform Trust Code.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, this section is amended to clarify that if a trust is a split-interest trust, the qualified beneficiaries (both charitable beneficiaries and individual beneficiaries) have the right to appoint a successor trustee by majority vote.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2012)

Effective October 1, 2011, this section is amended to add the last sentence of subsection (f) to clarify that a successor trustee is vested with the title to property of the former trustee. The amendment brings forward the provisions of former G.S. 36A-40 to this effect. As a result, no documents are necessary to transfer title to trust property from the former trustee to the successor trustee.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2012-18, s. 4, provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the North Carolina Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 30, effective October 1, 2007, redesignated the existing provisions of subdivision (d)(2) as subdivisions (d)(2) and (d)(2a); in subdivision (d)(2), added "qualified beneficiaries, if the trust is a split-interest charitable trust" at the end; and in subdivision (d)(2a), added "By a person selected by majority agreement of the" at the beginning.

Session Laws 2011-339, s. 3, effective October 1, 2011, and applicable to all trusts created before, on, or after that date, added the last sentence in subsection (f).

CASE NOTES

Editor's Note. - Some of the cases cited below were decided under prior law.

Appointment Prior to Effective Date of Section. - Prior to the enactment of former G.S. 36-18.1 (now this section) a clerk of the superior court had no power to appoint successor trustees of a charitable trust such authority being vested solely in the superior court under former G.S. 36-21 (now G.S. 36A-49) and not in the respective clerks thereof. Mast v. Blackburn, 248 N.C. 231, 102 S.E.2d 812 (1958), decided under prior law.

The appointment by the clerk of successor trustees of a charitable trust in ex parte proceeding prior to the effective date of former G.S. 36-18.1 (now this section) section is void, and such appointees may not maintain an action to restrain others from interfering with their asserted rights as trustees, but successor trustees may be appointed by the judge of the superior court nunc pro tunc under former G.S. 36-21 (now G.S. 36A-49) or by the clerk under this section. Mast v. Blackburn, 248 N.C. 231, 102 S.E.2d 812 (1958), decided under prior law.

Appointment of Trustee upon Occurrence of Vacancy. - Where land is conveyed to trustees and their successors for specified charitable purposes, the court may appoint trustees upon failure of the successors to the original trustees, since equity will not permit a trust to fail for want of a trustee, but said trustees should be appointed by the court upon proper application. Lassiter v. Jones, 215 N.C. 298, 1 S.E.2d 845 (1939).

When a trustee was properly removed for breach of the duty of loyalty, the appointment of a successor trustee did not meet statutory requirements because (1) the trustee's proper removal triggered the requirements of G.S. 36C-7-704(a)(4), but (2) the court did not look to the relevant terms of the trust instrument before appointing a successor. THZ Holdings, LLC v. McCrea, 231 N.C. App. 482, 753 S.E.2d 344 (2013).

OFFICIAL COMMENT

This section rejects the common law rule that a trustee may resign only with permission of the court, and goes further than the Restatements, which allow a trustee to resign with the consent of the beneficiaries. See Restatement (Third) of Trusts § 36 (Tentative Draft No.2, approved 1999); Restatement (Second) of Trusts § 106 (1959). Concluding that the default rule ought to approximate standard drafting practice, the Drafting Committee provided in subsection (a) that a trustee may resign by giving notice to the qualified beneficiaries, a living settlor, and any cotrustee. A resigning trustee may also follow the traditional method and resign with approval of the court.

Restatement (Third) of Trusts § 36 cmt. d (Tentative Draft No. 2, approved 1999), and Restatement (Second) of Trusts § 106 cmt. b (1959), provide, similar to subsection (c), that a resignation does not release the resigning trustee from potential liabilities for acts or omissions while in office. The act of resignation can give rise to liability if the trustee resigns for the purpose of facilitating a breach of trust by a cotrustee. See Ream v. Frey, 107 F.3d 147 (3rd Cir. 1997).

Regarding the residual responsibilities of a resigning trustee until the trust property is delivered to a successor trustee, see Section 707.

In the case of a revocable trust, because the rights of the qualified beneficiaries are subject to the settlor's control ( see Section 603), resignation of the trustee is accomplished by giving notice to the settlor instead of the beneficiaries.

2001 Amendment. By a 2001 amendment, subsection (a)(1) was amended to require that 122 notice of a trustee's resignation be given to a living settlor. Previously, notice to a living settlor was required for a revocable but not irrevocable trust. Notice to the settlor of a revocable trust was required because the rights of the qualified beneficiaries, including the right to receive a trustee's resignation, are subject to the settlor's exclusive control. See Section 603.

NORTH CAROLINA COMMENT

Subsection (a)(1) makes an important change in prior law by allowing the trustee to resign without court approval upon at least 30 days written notice to qualified beneficiaries, the settlor, if living, and all cotrustees. Former G.S. 36A-23.1(b) apparently allowed a resignation to be made in accordance with the terms of the trust without judicial intervention, but the trustee could not resign without the approval of the clerk of superior court absent authority to do so in the trust.

Subsection (a)(1) of the Uniform Trust Code was modified by adding the words "in writing" after the word "notice" because the use of a writing is a reasonable and customary choice for notification.

OFFICIAL COMMENT

Subsection (a), contrary to the common law, grants the settlor of an irrevocable trust the right to petition for removal of a trustee. The right to petition for removal does not give the settlor of an irrevocable trust any other rights, such as the right to an annual report or to receive other information concerning administration of the trust. The right of a beneficiary to petition for removal does not apply to a revocable trust while the settlor has capacity. Pursuant to Section 603(a), while a trust is revocable and the settlor has capacity, the rights of the beneficiaries are subject to the settlor's exclusive control.

Trustee removal may be regulated by the terms of the trust. See Section 105. In fashioning a removal provision for an irrevocable trust, the drafter should be cognizant of the danger that the trust may be included in the settlor's federal gross estate if the settlor retains the power to be appointed as trustee or to appoint someone who is not independent. See Rev. Rul. 95-58, 1995-2 C.B. 191.

Subsection (b) lists the grounds for removal of the trustee. The grounds for removal are similar to those found in Restatement (Third) of Trusts Section 37 cmt. e (Tentative Draft No. 2, approved 1999). A trustee may be removed for untoward action, such as for a serious breach of trust, but the section is not so limited. A trustee may also be removed under a variety of circumstances in which the court concludes that the trustee is not best serving the interests of the beneficiaries. The term "interests of the beneficiaries" means the beneficial interests as provided in the terms of the trust, not as defined by the beneficiaries. See Section 103(8). Removal for conduct detrimental to the interests of the beneficiaries is a well-established standard for removal of a trustee. See Restatement (Third) of Trusts Section 37 cmt. d (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Section 107 cmt. a (1959).

Subsection (b)(1), consistent with Restatement (Third) of Trusts Section 37 cmt. e and g (Tentative Draft No, 2, approved 1999), makes clear that not every breach of trust justifies removal of the trustee. The breach must be "serious." A serious breach of trust may consist of a single act that causes significant harm or involves flagrant misconduct. A serious breach of trust may also consist of a series of smaller breaches, none of which individually justify removal when considered alone, but which do so when considered together. A particularly appropriate circumstance justifying removal of the trustee is a serious breach of the trustee's duty to keep the beneficiaries reasonably informed of the administration of the trust or to comply with a beneficiary's request for information as required by Section 813. Failure to comply with this duty may make it impossible for the beneficiaries to protect their interests. It may also mask more serious violations by the trustee.

The lack of cooperation among trustees justifying removal under subsection (b)(2) need not involve a breach of trust. The key factor is whether the administration of the trust is significantly impaired by the trustees' failure to agree. Removal is particularly appropriate if the naming of an even number of trustees, combined with their failure to agree, has resulted in deadlock requiring court resolution. The court may remove one or more or all of the trustees. If a cotrustee remains in office following the removal, under Section 704 appointment of a successor trustee is not required.

Subsection (b)(2) deals only with lack of cooperation among cotrustees, not with friction between the trustee and beneficiaries. Friction between the trustee and beneficiaries is ordinarily not a basis for removal. However, removal might be justified if a communications breakdown is caused by the trustee or appears to be incurable. See Restatement (Third) of Trusts Section 37 cmt. e (Tentative Draft No. 2, approved 1999).

Subsection (b)(3) authorizes removal for a variety of grounds, including unfitness, unwillingness, or persistent failure to administer the trust effectively. Removal in any of these cases is allowed only if it best serves the interests of the beneficiaries. For the definition of "interests of the beneficiaries," see Section 103(8). "Unfitness" may include not only mental incapacity but also lack of basic ability to administer the trust. Before removing a trustee for unfitness the court should consider the extent to which the problem might be cured by a delegation of functions the trustee is personally incapable of performing. "Unwillingness" includes not only cases where the trustee refuses to act but also a pattern of indifference to some or all of the beneficiaries. See Restatement (Third) of Trusts Section 37 cmt. e (Tentative Draft No. 2, approved 1999). A "persistent failure to administer the trust effectively" might include a long-term pattern of mediocre performance, such as consistently poor investment results when compared to comparable trusts.

It has traditionally been more difficult to remove a trustee named by the settlor than a trustee named by the court, particularly if the settlor at the time of the appointment was aware of the trustee's failings. See Restatement (Third) of Trusts Section 37 cmt. f (Tentative Draft No.2, approved 1999); Restatement (Second) of Trusts Section 107 cmt. f-g (1959). Because of the discretion normally granted to a trustee, the settlor's confidence in the judgment of the particular person whom the settlor selected to act as trustee is entitled to considerable weight. This deference to the settlor's choice can weaken or dissolve if a substantial change in the trustee's circumstances occurs. To honor a settlor's reasonable expectations, subsection (b)(4) lists a substantial change of circumstances as a possible basis for removal of the trustee. Changed circumstances justifying removal of a trustee might include a substantial change in the character of the service or location of the trustee. A corporate reorganization of an institutional trustee is not itself a change of circumstances if it does not affect the service provided the individual trust account. Before removing a trustee on account of changed circumstances, the court must also conclude that removal is not inconsistent with a material purpose of the trust, that it will best serve the interests of the beneficiaries, and that a suitable cotrustee or successor trustee is available.

Subsection (b)(4) also contains a specific but more limited application of Section 411. Section 411 allows the beneficiaries by unanimous agreement to compel modification of a trust if the court concludes that the particular modification is not inconsistent with a material purpose of the trust. Subsection (b)(4) of this section similarly allows the qualified beneficiaries to request removal of the trustee if the designation of the trustee was not a material purpose of the trust. Before removing the trustee the court must also find that removal will best serve the interests of the beneficiaries and that a suitable cotrustee or successor trustee is available.

Subsection (c) authorizes the court to intervene pending a final decision on a request to remove a trustee. Among the relief that the court may order under Section 1001(b) is an injunction prohibiting the trustee from performing certain acts and the appointment of a special fiduciary to perform some or all of the trustee's functions. Pursuant to Section 1004, the court may also award attorney's fees as justice and equity may require.

NORTH CAROLINA COMMENT

Subsection (a) is generally consistent with former G.S. 36A 23.1(a)(1) which authorized interested parties, including beneficiaries and trustees, to invoke the jurisdiction of the clerk of superior court to remove a trustee. However, subsection (a) apparently changes former law in allowing the settlor to remove a trustee and in not expressly providing for removal by a creditor of the trust.

Subsection (a) of the Uniform Trust Code was modified for purposes of clarification in two respects:

(i) The language "For the reasons set forth in subsection (b)" was added to the beginning of the subsection.

(ii) The words "of an irrevocable trust" were added after the word "beneficiary".

Subsection (b) is generally consistent with North Carolina case law which allowed removal of a trustee for a breach of trust and other grounds of malfeasance. See, e.g., In re Testamentary Trust of Charnock, 158 N.C. App. 35, 579 S.E.2d 887 (2003), aff'd, 358 N.C. 523, 597 S.E.2d 706 (2004) listing grounds for removal recognized in North Carolina.

Subdivision (b)(4) broadens the grounds for removal of the trustee by providing for removal where there has been a substantial change in circumstance if removal is not inconsistent with a material purpose of the trust. A substantial change in circumstance was not recognized in prior law as grounds for removal of a trustee. not previously recognized in prior law by providing for removal where there has been a substantial change in circumstance if removal is not inconsistent with a material purpose of the trust.

Subdivision (b)(4) omits the provisions in the Uniform Trust Code permitting removal of the trustee at the request of beneficiaries if not inconsistent with a material purpose of the trust. The drafters were concerned that such a provision may provide grounds for removing a trustee contrary to the settlor's intent by beneficiaries who were merely dissatisfied with the trustee's administration of the trust and that it may be difficult to determine in a particular case whether or not the settlor's choice of the trustee was a material purpose of the trust.

CASE NOTES

Removal Proper. - Reversing an assistant clerk's order removing a guardian of an estate and trustee under a special needs trust for breach of fiduciary duty was error where the appropriate standard of review was whether the assistant clerk committed an error of law, the unchallenged findings of fact showed that the guardian and trustee had spent more than 90 percent of the monies that had been deposited in the trust for purposes for which he received some, if not all, of the benefit, and thus, he was removed based on waste and mismanagement of the assets committed to his care. In re Estate of Skinner, 370 N.C. 126, 804 S.E.2d 449 (2017).

OFFICIAL COMMENT

This section addresses the continuing authority and duty of a resigning or removed trustee. Subject to the power of the court to make other arrangements or unless a cotrustee remains in office, a resigning or removed trustee has continuing authority until the trust property is delivered to a successor. If a cotrustee remains in office, there is no reason to grant a resigning or removed trustee any continuing authority, and none is granted under this section. In addition, if a cotrustee remains in office, the former trustee need not submit a final trustee's report. See Section 813(c).

There is ample authority in the Uniform Trust Code for the appointment of a special fiduciary, an appointment which can avoid the need for a resigning or removed trustee to exercise residual powers until a successor can take office. See Sections 704(e) (court may appoint additional trustee or special fiduciary whenever court considers appointment necessary for administration of trust), 705(b) (in approving resignation, court may impose conditions necessary for protection of trust property), 706(c) (pending decision on petition for removal, court may order appropriate relief), and 1001(b)(5) (to remedy breach of trust, court may appoint special fiduciary as necessary to protect trust property or interests of beneficiary).

If the former trustee has died, the Uniform Trust Code does not require that the trustee's personal representative windup the deceased trustee's administration. Nor is a trustee's 126 conservator or guardian required to complete the former trustee's administration if the trustee's authority terminated due to an adjudication of incapacity. However, to limit the former trustee's liability, the personal representative, conservator or guardian may submit a trustee's report on the former trustee's behalf as authorized by Section 813(c). Otherwise, the former trustee remains liable for actions taken during the trustee's term of office until liability is otherwise barred.

NORTH CAROLINA COMMENT

Subsection (a) granting continuing powers to a trustee who has resigned or is removed has no statutory equivalent in prior law.

The second sentence of subsection (b) brings forward the provisions in former G.S. 36A 40 directing a former trustee to transfer title to trust property and, upon the trustee's failure to do so, authorizing the court to transfer title.

Effect of Amendments. - Session Laws 2012-18, s. 3.5, effective June 11, 2012, in the second sentence of subsection (b), substituted "acknowledging the transfer of" for "transferring" and "reasonably requested by the cotrustee, successor trustee, or other person entitled to it" for "appropriate" near the middle, and deleted "or the clerk of superior court may transfer title" from the end.

OFFICIAL COMMENT

Subsection (a) establishes a standard of reasonable compensation. Relevant factors in determining this compensation, as specified in the Restatement, include the custom of the community; the trustee's skill, experience, and facilities; the time devoted to trust duties; the amount and character of the trust property; the degree of difficulty, responsibility and risk assumed in administering the trust, including in making discretionary distributions; the nature and costs of services rendered by others; and the quality of the trustee's performance. See Restatement (Third) of Trusts Section 38 cmt. c (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Section 242 cmt. b (1959).

In setting compensation, the services actually performed and responsibilities assumed by the trustee should be closely examined. A downward adjustment of fees may be appropriate if a trustee has delegated significant duties to agents, such as the delegation of investment authority to outside managers. See Section 807 (delegation by trustee). On the other hand, a trustee with special skills, such as those of a real estate agent, may be entitled to extra compensation for performing services that would ordinarily be delegated. See Restatement (Third) of Trusts Section 38 cmt. d (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Section 242 cmt. d (1959).

Because "trustee" as defined in Section 103(20) includes not only an individual trustee but also cotrustees, each trustee, including a cotrustee, is entitled to reasonable compensation under the circumstances. The fact that a trust has more than one trustee does not mean that the trustees together are entitled to more compensation than had either acted alone. Nor does the appointment of more than one trustee mean that the trustees are eligible to receive the compensation in equal shares. The total amount of the compensation to be paid and how it will be divided depend on the totality of the circumstances. Factors to be considered include the settlor's reasons for naming more than one trustee and the level of responsibility assumed and exact services performed by each trustee. Often the fees of cotrustees will be in the aggregate higher than the fees for a single trustee because of the duty of each trustee to participate in administration and not delegate to a cotrustee duties the settlor expected the trustees to perform jointly. See Restatement (Third) of Trusts Section 38 cmt. i (Tentative Draft No. 2, approved 1999). The trust may benefit in such cases from the enhanced quality of decision-making resulting from the collective deliberations of the trustees.

Financial institution trustees normally base their fees on published fee schedules. Published fee schedules are subject to the same standard of reasonableness under the Uniform Trust Code as are other methods for computing fees. The courts have generally upheld published fee schedules but this is not automatic. Among the more litigated topics is the issue of termination fees. Termination fees are charged upon termination of the trust and sometimes upon transfer of the trust to a successor trustee. Factors relevant to whether the fee is appropriate include the actual work performed; whether a termination fee was authorized in the terms of the trust; whether the fee schedule specified the circumstances in which a termination fee would be charged; whether the trustee's overall fees for administering the trust from the date of the trust's creation, including the termination fee, were reasonable; and the general practice in the community regarding termination fees. Because significantly less work is normally involved, termination fees are less appropriate upon transfer to a successor trustee than upon termination of the trust. For representative cases, see Cleveland Trust Co. v. Wilmington Trust Co., 258 A.2d 58 (Del. 1969); In re Trusts Under Will of Dwan, 371 N.W. 2d 641 (Minn. Ct. App. 1985); Mercer v. Merchants National Bank, 298 A.2d 736 (N.H. 1972); In re Estate of Payson, 562 N.Y.S. 2d 329 (Surr. Ct. 1990); In re Indenture Agreement of Lawson, 607 A. 2d 803 (Pa. Super. Ct. 1992); In re Estate of Ischy, 415 A.2d 37 (Pa. 1980); Memphis Memorial Park v. Planters National Bank, 1986 Tenn. App. LEXIS 2978 (May 7, 1986); In re Trust of Sensenbrenner, 252 N.W. 2d 47 (Wis. 1977).

This Code does not take a specific position on whether dual fees may be charged when a trustee hires its own law firm to represent the trust. The trend is to authorize dual compensation as long as the overall fees are reasonable. For a discussion, see Ronald C. Link, Developments Regarding the Professional Responsibility of the Estate Administration Lawyer: The Effect of the Model Rules of Professional Conduct, 26 Real Prop. Prob. & Tr. J. 1, 22-38 (1991).

Subsection (b) permits the terms of the trust to override the reasonable compensation standard, subject to the court's inherent equity power to make adjustments downward or upward in appropriate circumstances. Compensation provisions should be drafted with care. Common questions include whether a provision in the terms of the trust setting the amount of the trustee's compensation is binding on a successor trustee, whether a dispositive provision for the trustee in the terms of the trust is in addition to or in lieu of the trustee's regular compensation, and whether a dispositive provision for the trustee is conditional on the person performing services as trustee. See Restatement (Third) of Trusts Section 38 cmt. e (Tentative Draft No.2, approved 1999); Restatement (Second) of Trusts Section 242 cmt. f (1959).

Compensation may be set by agreement. A trustee may enter into an agreement with the beneficiaries for lesser or increased compensation, although an agreement increasing compensation is not binding on a nonconsenting beneficiary. See Section 111(d) (matters that may be the resolved by nonjudicial settlement). See also Restatement (Third) of Trusts Section 38 cmt. f (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Section 242 cmt. i (1959). A trustee may also agree to waive compensation and should do so prior to rendering significant services if concerned about possible gift and income taxation of the compensation accrued prior to the waiver. See Rev. Rul. 66-167, 1966-1 C.B. 20. See also Restatement (Third) of Trusts Section 38 cmt. g (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Section 242 cmt. j (1959).

Section 816(15) grants the trustee authority to fix and pay its compensation without the necessity of prior court review, subject to the right of a beneficiary to object to the compensation in a later judicial proceeding. Allowing the trustee to pay its compensation without prior court approval promotes efficient trust administration but does place a significant burden on a beneficiary who believes the compensation is unreasonable. To provide a beneficiary with time to take action, and because of the importance of trustee's fees to the beneficiaries' interests, Section 813(b)(4) requires a trustee to provide the qualified beneficiaries with advance notice of any change in the method or rate of the trustee's compensation. Failure to provide such advance notice constitutes a breach of trust, which, if sufficiently serious, would justify the trustee's removal under Section 706.

Under Sections 501-502 of the Uniform Principal and Income Act (1997), one-half of a trustee's regular compensation is charged to income and the other half to principal. Chargeable to principal are fees for acceptance, distribution, or termination of the trust, and fees charged on disbursements made to prepare property for sale.

NORTH CAROLINA COMMENT

Subsection (a) of the Uniform Trust Code, which provided for compensation that is "reasonable under the circumstances" when the compensation was not specified in the trust, was modified to refer to Article 6 of Chapter 32 which also provides for compensation that is "reasonable under the circumstances" when the trust is silent. However, unlike the Uniform Trust Code the provisions of Article 6 contain specific requirements for obtaining such compensation and, among other things, allows a beneficiary to initiate a proceeding for denial or approval of trustee fees by the clerk of court.

Subsection (b) differs from the Uniform Trust Code by omitting provisions allowing the court to adjust compensation specified by the terms of the trust. This is consistent with the deletion of the mandatory rule in Section 105(7) of the Uniform Trust Code that would have prevented the settlor from overriding the power of the court to adjust compensation specified in the terms of the trust. The drafters concluded that the settlor should have the right to compensate a trustee in whatever amount the settlor chooses, regardless of whether a court would find such compensation to be unreasonably high or low.

OFFICIAL COMMENT

A trustee has the authority to expend trust funds as necessary in the administration of the trust, including expenses incurred in the hiring of agents. See Sections 807 (delegation by trustee) and 816(15) (trustee to pay expenses of administration from trust).

NORTH CAROLINA COMMENT

Subsection (a)(1) clarifies that a trustee is entitled to reimbursement from the trust for incurring expenses within the trustee's authority. The trustee may also withhold appropriate reimbursement for expenses before making distributions to the beneficiaries. See Restatement (Third) of Trusts § 38 cmt. b (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts § 244 cmt. b (1959). A trustee is ordinarily not entitled to reimbursement for incurring unauthorized expenses. Such expenses are normally the personal responsibility of the trustee.

As provided in subsection (a)(2), a trustee is entitled to reimbursement for unauthorized expenses only if the unauthorized expenditures benefitted the trust The purpose of this provision, which is derived from Restatement (Second) of Trusts § 245 (1959), is not to ratify the unauthorized conduct of the trustee, but to prevent unjust enrichment of the trust. Given this purpose, a court, on appropriate grounds, may delay or even deny reimbursement for expenses which benefitted the trust. Appropriate grounds include: (1) whether the trustee acted in bad faith in incurring the expense; (2) whether the trustee knew that the expense was inappropriate; (3) whether the trustee reasonably believed the expense was necessary for the preservation of the trust estate; (4) whether the expense has resulted in a benefit; and (5) whether indemnity can be allowed without defeating or impairing the purposes of the trust. See Restatement (Second) of Trusts § 245 cmt. g (1959).

Subsection (b) implements Section 802(h)(5), which creates an exception to the duty of loyalty for advances by the trustee for the protection of the trust if the transaction is fair to the beneficiaries.

Reimbursement under this section may include attorney's fees and expenses incurred by the trustee in defending an action. However, a trustee is not ordinarily entitled to attorney's fees and expenses if it is determined that the trustee breached the trust. See 3A Austin W. Scott & William F. Fratcher, The Law of Trusts § 245 (4th ed. 1988).

CASE NOTES

Cited in In re Clark, 202 N.C. App. 151, 688 S.E.2d 484 (2010).

OFFICIAL COMMENT

This section confirms that a primary duty of a trustee is to follow the terms and purposes of the trust and to do so in good faith. Only if the terms of a trust are silent or for some reason invalid on a particular issue does this Code govern the trustee's duties. This section also confirms that a trustee does not have a duty to act until the trustee has accepted the trusteeship. For the procedure for accepting a trusteeship, see Section 701.

In administering the trust, the trustee must not only comply with this section but also with the other duties specified in this article, particularly the obligation not to place the interests of others above those of the beneficiaries (Section 802), the duty to act with prudence (Section 804), and the duty to keep the qualified beneficiaries reasonably informed about the administration of the trust (Section 813).

While a trustee generally must administer a trust in accordance with its terms and purposes, the purposes and particular terms of the trust can on occasion conflict. If such a conflict occurs because of circumstances not anticipated by the settlor, it may be appropriate for the trustee to petition under Section 412 to modify or terminate the trust. Pursuant to Section 404, the trustee is not required to perform a duty prescribed by the terms of the trust if performance would be impossible, illegal or contrary to public policy.

For background on the trustee's duty to administer the trust, see Restatement (Second) of Trusts §§ 164-169 (1959).

NORTH CAROLINA COMMENT

This section has no statutory equivalent in North Carolina although the duty to act in good faith is reflected in North Carolina case law. See, e.g., Miller v. McLean, 252 N.C. 171, 113 S.E.2d 359 (1960).

Effective Date and Applicability. - Session Laws 2005-192, which enacted Chapter 36C, in s. 7(a) provides: "Section 2 of this act becomes effective January 1, 2006, and except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, applies to (i) all trusts created before, on, or after that date; (ii) all judicial proceedings concerning trusts commenced on or after that date; and (iii) judicial proceedings concerning trusts commenced before that date unless the court finds that application of a particular provision of Chapter 36C of the General Statutes would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of Chapter 36C of the General Statutes does not apply and the superseded law applies.

"Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, any rule of construction or presumption provided in Chapter 36C of the General Statutes applies to trust instruments executed before the effective date of Section 2 of this act unless there is a clear indication of a contrary intent in the terms of the trust or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary. Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, an act done before the effective date of Section 2 of this act is not affected by Chapter 36C of the General Statutes. If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before the effective date of Section 2 of this act, that statute continues to apply to the right even if it has been repealed or superseded."

Official Comment on Effective Date and Applicability. - The Uniform Trust Code is intended to have the widest possible effect within constitutional limitations. Specifically, the Code applies to all trusts whenever created, to judicial proceedings concerning trusts commenced on or after its effective date, and unless the court otherwise orders, to judicial proceedings in progress on the effective date. In addition, any rules of construction or presumption provided in the Code apply to preexisting trusts unless there is a clear indication of a contrary intent in the trust's terms. By applying the Code to preexisting trusts, the need to know two bodies of law will quickly lessen.

This Code cannot be fully retroactive, however. Constitutional limitations preclude retroactive application of rules of construction to alter property rights under trusts that became irrevocable prior to the effective date. Also, rights already barred by a statute of limitation or rule under former law are not revived by a possibly longer statute or more liberal rule under this Code. Nor is an act done before the effective date of the Code affected by the Code's enactment.

The Uniform Trust Code contains an additional effective date provision. Pursuant to Section 602(a), prior law will determine whether a trust executed prior to the effective date of the Code is presumed to be revocable or irrevocable.

For a comparable uniform law effective date provision, see Uniform Probate Code Section 8 101.

North Carolina Comment on Effective Date and Applicability. - The drafters modified the provisions of the Uniform Trust Code relating to its application to trust instruments executed before its effective date by adding the phrase "or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary" to the end of the first sentence of the second paragraph. Although this Chapter is intended to have broad application, the drafters concluded that a rule of construction or presumption provided in this Chapter should not be applied to a trust instrument executed before the effective date of this Chapter if the application of such rule or presumption would impair the substantial rights of a beneficiary of a trust established under such a trust instrument.

Editor's Note. - Session Laws 2005-192, which enacted Chapter 36C, in s. 6, provides: "The Revisor of Statutes shall cause to be printed along with this act all relevant portions of the Official Commentary to the Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Official Comments, copyright 2005, are reprinted in this Chapter with the permission of the National Conference of Commissioners on Uniform State Laws. It is believed that the Official Comments will prove of value to the practitioner in understanding and applying the text of this Chapter.

The Official Comments appearing under individual sections in this Chapter have been printed by the publisher as received, without editorial change, and relate to the Chapter as originally enacted. However, not all sections in this Chapter may carry Official Comments. Furthermore, Official Comments may or may not have been received or updated in conjunction with subsequent amendments to this Chapter and, therefore, may not reflect all changes to the sections under which they appear.

Where they appear in this Chapter, "Amended Comment" usually means that an error in the original comment has been corrected by a subsequent amendment, and "Supplemental Comment" pertains to a later development, such as an amendment to the statute text. North Carolina Comments explain where the General Assembly has enacted variations to the text of the Uniform Act.

OFFICIAL COMMENT

This section addresses the duty of loyalty, perhaps the most fundamental duty of the trustee. Subsection (a) states the general principle, which is copied from Restatement (Second) of Trusts Section 170(1) (1959). A trustee owes a duty of loyalty to the beneficiaries, a principle which is sometimes expressed as the obligation of the trustee not to place the trustee's own interests over those of the beneficiaries. Most but not all violations of the duty of loyalty concern transactions involving the trust property, but breaches of the duty can take other forms. For a discussion of the different types of violations, see George G. Bogert & George T. Bogert, The Law of Trusts and Trustees Section 543 (Rev. 2d ed. 1993); and 2A Austin W. Scott & William F. Fratcher, The Law of Trusts Sections 170-170.24 (4th ed. 1987). The "interests of the beneficiaries" to which the trustee must be loyal are the beneficial interests as provided in the terms of the trust. See Section 103(8).

The duty of loyalty applies to both charitable and noncharitable trusts, even though the beneficiaries of charitable trusts are indefinite. In the case of a charitable trust, the trustee must administer the trust solely in the interests of effectuating the trust's charitable purposes. See Restatement (Second) of Trusts Section 379 cmt. a (1959).

Duty of loyalty issues often arise in connection with the settlor's designation of the trustee. For example, it is not uncommon that the trustee will also be a beneficiary. Or the settlor will name a friend or family member who is an officer of a company in which the settlor owns stock. In such cases, settlors should be advised to consider addressing in the terms of the trust how such conflicts are to be handled. Section 105 authorizes a settlor to override an otherwise applicable duty of loyalty in the terms of the trust. Sometimes the override is implied. The grant to a trustee of authority to make a discretionary distribution to a class of beneficiaries that includes the trustee implicitly authorizes the trustee to make distributions for the trustee's own benefit.

Subsection (b) states the general rule with respect to transactions involving trust property that are affected by a conflict of interest. A transaction affected by a conflict between the trustee's fiduciary and personal interests is voidable by a beneficiary who is affected by the transaction. Subsection (b) carries out the "no further inquiry" rule by making transactions involving trust property entered into by a trustee for the trustee's own personal account voidable without further proof. Such transactions are irrebuttably presumed to be affected by a conflict between personal and fiduciary interests. It is immaterial whether the trustee acts in good faith or pays a fair consideration. See Restatement (Second) of Trusts Section 170 cmt. b (1959).

The rule is less severe with respect to transactions involving trust property entered into with persons who have close business or personal ties with the trustee. Under subsection (c), a transaction between a trustee and certain relatives and business associates is presumptively voidable, not void. Also presumptively voidable are transactions with corporations or other enterprises in which the trustee, or a person who owns a significant interest in the trustee, has an interest that might affect the trustee's best judgment. The presumption is rebutted if the trustee establishes that the transaction was not affected by a conflict between personal and fiduciary interests. Among the factors tending to rebut the presumption are whether the consideration was fair and whether the other terms of the transaction are similar to those that would be transacted with an independent party.

Even where the presumption under subsection (c) does not apply, a transaction may still be voided by a beneficiary if the beneficiary proves that a conflict between personal and fiduciary interests existed and that the transaction was affected by the conflict. The right of a beneficiary to void a transaction affected by a conflict of interest is optional. If the transaction proves profitable to the trust and unprofitable to the trustee, the beneficiary will likely allow the transaction to stand. For a comparable provision regulating fiduciary investments by national banks, see 12 C.F.R. Section 9.12(a).

As provided in subsection (b), no breach of the duty of loyalty occurs if the transaction was authorized by the terms of the trust or approved by the court, or if the beneficiary failed to commence a judicial proceeding within the time allowed or chose to ratify the transaction, either prior to or subsequent to its occurrence. In determining whether a beneficiary has consented to a transaction, the principles of representation from Article 3 may be applied.

Subsection (b)(5), which is derived from Section 3-713(1) of the Uniform Probate Code, allows a trustee to implement a contract or pursue a claim that the trustee entered into or acquired before the person became or contemplated becoming trustee. While this subsection allows the transaction to proceed without automatically being voidable by a beneficiary, the transaction is not necessarily free from scrutiny. In implementing the contract or pursuing the claim, the trustee must still complete the transaction in a way that avoids a conflict between the trustee's fiduciary and personal interests. Because avoiding such a conflict will frequently be difficult, the trustee should consider petitioning the court to appoint a special fiduciary, as authorized by subsection (i), to work out the details and complete the transaction.

Subsection (d) creates a presumption that a transaction between a trustee and a beneficiary not involving trust property is an abuse by the trustee of a confidential relationship with the beneficiary. This subsection has limited scope. If the trust has terminated, there must be proof that the trustee's influence with the beneficiary remained. Furthermore, whether or not the trust has terminated, there must be proof that the trustee obtained an advantage from the relationship. The fact the trustee profited is insufficient to show an abuse if a third party would have similarly profited in an arm's length transaction. Subsection (d) is based on Cal. Prob. Code Section16004(c). See also 2A Austin W. Scott & William F. Fratcher Section 170.25 (4th ed. 1987), which states the same principle in a slightly different form: "Where he deals directly with the beneficiaries, the transaction may stand, but only if the trustee makes full disclosure and takes no advantage of his position and the transaction is in all respects fair and reasonable."

Subsection (e), which allows a beneficiary to void a transaction entered into by the trustee that involved an opportunity belonging to the trust, is based on Restatement (Second) of Trusts Section 170 cmt. k (1959). While normally associated with corporations and with their directors and officers, what is usually referred to as the corporate opportunity doctrine also applies to other types of fiduciary. The doctrine prohibits the trustee's pursuit of certain business activities, such as entering into a business in direct competition with a business owned by the trust, or the purchasing of an investment that the facts suggest the trustee was expected to purchase for the trust. For discussion of the corporate opportunity doctrine, see Kenneth B. Davis, Jr., Corporate Opportunity and Comparative Advantage, 84 Iowa L. Rev. 211 (1999); and Richard A. Epstein, Contract and Trust in Corporate Law: The Case of Corporate Opportunity, 21 Del. J. Corp. L. 5 (1996). See also Principles of Corporate Governance: Analysis and Recommendations Section 5.05 (American Law Inst. 1994).

Subsection (f) creates an exception to the no further inquiry rule for trustee investment in mutual funds. This exception applies even though the mutual fund company pays the financial-service institution trustee a fee for providing investment advice and other services, such as custody, transfer agent, and distribution, that would otherwise be provided by agents of the fund. Mutual funds offer several advantages for fiduciary investing. By comparison with common trust funds, mutual fund shares may be distributed in-kind when trust interests terminate, avoiding liquidation and the associated recognition of gain for tax purposes. Mutual funds commonly offer daily pricing, which gives trustees and beneficiaries better information about performance. Because mutual funds can combine fiduciary and nonfiduciary accounts, they can achieve larger size, which can enhance diversification and produce economies of scale that can lower investment costs.

Mutual fund investment also has a number of potential disadvantages. It adds another layer of expense to the trust, and it causes the trustee to lose control over the nature and timing of transactions in the fund. Trustee investment in mutual funds sponsored by the trustee, its affiliate, or from which the trustee receives extra fees has given rise to litigation implicating the trustee's duty of loyalty, the duty to invest with prudence, and the right to receive only reasonable compensation. Because financial institution trustees ordinarily provide advisory services to and receive compensation from the very funds in which they invest trust assets, the contention is made that investing the assets of individual trusts in these funds is imprudent and motivated by the effort to generate additional fee income. Because the financial institution trustee often will also charge its regular fee for administering the trust, the contention is made that the financial institution trustee's total compensation, both direct and indirect, is excessive.

Subsection (f) attempts to retain the advantages of mutual funds while at the same time making clear that such investments are subject to traditional fiduciary responsibilities. Nearly all of the States have enacted statutes authorizing trustees to invest in funds from which the trustee might derive additional compensation. Portions of subsection (f) are based on these statutes. Subsection (f) makes clear that such dual investment fee arrangements are not automatically presumed to involve a conflict between the trustee's personal and fiduciary interests, but subsection (f) does not otherwise waive or lessen a trustee's fiduciary obligations. The trustee, in deciding whether to invest in a mutual fund, must not place its own interests ahead of those of the beneficiaries. The investment decision must also comply with the enacting jurisdiction's prudent investor rule. To obtain the protection afforded by subsection (f), the trustee must disclose at least annually to the beneficiaries entitled to receive a copy of the trustee's annual report the rate and method by which the additional compensation was determined. . . .

Subsection (f) applies whether services to the fund are provided directly by the trustee or by an affiliate. While the term "affiliate" is not used in subsection (c), the individuals and entities listed there are examples of affiliates. The term is also used in the regulations under ERISA. An "affiliate" of a fiduciary includes (1) any person who directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the fiduciary; (2) any officer, director, partner, employee, or relative of the fiduciary, and any corporation or partnership of which the fiduciary is an officer, director or partner. See 29 C.F.R. Section 2510.3-21(e).

Subsection (g) addresses an overlap between trust and corporate law. It is based on Restatement of Trusts (Second) Section 193 cmt. a (1959), which provides that "[i]t is the duty of the trustee in voting shares of stock to use proper care to promote the interest of the beneficiary," and that the fiduciary responsibility of a trustee in voting a control block "is heavier than where he holds only a small fraction of the shares." Similarly, the Department of Labor construes ERISA's duty of loyalty to make share voting a fiduciary function. See 29 C.F.R. Section 2509.94-2. When the trust owns the entirety of the shares of a corporation, the corporate assets are in effect trust assets that the trustee determines to hold in corporate form. The trustee may not use the corporate form to escape the fiduciary duties of trust law. Thus, for example, a trustee whose duty of impartiality would require the trustee to make current distributions for the support of current beneficiaries may not evade that duty by holding assets in corporate form and pleading the discretion of corporate directors to determine dividend policy. Rather, the trustee must vote for corporate directors who will follow a dividend policy consistent with the trustee's trust-law duty of impartiality.

Subsection (h) contains several exceptions to the general duty of loyalty, which apply if the transaction was fair to the beneficiaries. Subsection (h)(1)-(2) clarify that a trustee is free to contract about the terms of appointment and rate of compensation. Consistent with Restatement (Second) of Trusts Section 170 cmt. r (1959), subsection (h)(3) authorizes a trustee to engage in a transaction involving another trust of which the trustee is also trustee, a transaction with a decedent's estate or a conservatorship estate of which the trustee is personal representative or conservator, or a transaction with another trust or other fiduciary relationship in which a beneficiary of the trust has an interest. The authority of a trustee to deposit funds in a financial institution operated by the trustee, as provided in subsection (h)(4), is recognized as an exception to the duty of loyalty in a number of state statutes although deemed to be a breach of trust in Restatement (Second) of Trusts Section 170 cmt. m (1959). The power to deposit funds in its own institution does not negate the trustee's responsibility to invest prudently, including the obligation to earn a reasonable rate of interest on deposits. Subsection (h)(5) authorizes a trustee to advance money for the protection of the trust. Such advances usually are of small amounts and are made in emergencies or as a matter of convenience. Pursuant to Section 709(b), the trustee has a lien against the trust property for any advances made.

2003 Amendment. The amendment revises subsection (f) to clarify that compensation received from a mutual fund for providing services to the fund is in addition to the trustee's regular compensation. It also clarifies that the trustee obligation to notify certain of the beneficiaries of compensation received from the fund applies only to compensation received for providing investment management or advisory services. The amendment conforms subsection (f) to the drafters' original intent.

Subsection (f) formerly provided:

(f) An investment by a trustee in securities of an investment company or investment trust to which the trustee, or its affiliate, provides services in a capacity other than as trustee is not presumed to be affected by a conflict between personal and fiduciary interests if the investment complies with the prudent investor rule of [Article] 9. The trustee may be compensated by the investment company or investment trust for providing those services out of fees charged to the trust if the trustee at least annually notifies the persons entitled under Section 813 to receive a copy of the trustee's annual report of the rate and method by which the compensation was determined.

2004 Amendment. Section 802(f) creates an exception to the prohibition on self-dealing for certain investments in mutual funds in which the trustee, or its affiliate, provides services in a capacity other than that as trustee. As originally drafted, Section 802(f) provided that the exception applied only if the investment complied with the Uniform Prudent Investor Act and the trustee notified the qualified beneficiaries of the additional compensation received for providing the services. However, the Uniform Prudent Investor Act itself contains its own duty of loyalty provision (Section 5), thereby arguably limiting or undoing this exception to the UTC's loyalty provision. The amendment, by providing that the investment does not violate the duty of loyalty under the UTC if it "otherwise" complies with the Uniform Prudent Investor Act, is intended to negate the implication that the investment must also comply with the Uniform Prudent Investor Act's own duty of loyalty provision.

OFFICIAL COMMENT TO FORMER G.S. 36A-165 =nl OF THE NORTH CAROLINA UNIFORM PRUDENT INVESTOR ACT

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)(l)(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 Wall 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."

NORTH CAROLINA COMMENT

Subsection (a) addresses the duty of loyalty in language similar to that in former G.S. 36A 165 of the North Carolina Prudent Investor Act with respect to the investment and management of trust assets but applies the duty to all actions of the trustee in the administration of the trust. For this reason the Official Comment to former G.S. 36A 165 of the North Carolina Uniform Prudent Investor Act is included in addition to the Official Comment to this section of the Uniform Trust Code.

The duty of loyalty is well recognized in North Carolina case law. See, e.g., Wachovia Bank & Trust Co. v. Johnston, 269 N.C. 701, 153 S.E.2d 449 (1967); In re Testamentary Trust of Jacobs, 91 N.C. App. 138, 370 S.E.2d 860 (1988), disc. review denied, 323 N.C. 476, 373 S.E.2d 863 (1988).

Subsection (b) represents the modernization of prior law in former Article 5 of Chapter 36A, the Uniform Trusts Act, with respect to the trustee's duty of loyalty and conflicts of interest. It changes prior North Carolina law by providing that any conflict of interest transaction can be waived by a beneficiary. Former G.S. 36A 79 permitted a beneficiary to waive restrictions imposed by the Uniform Trusts Act, except the prohibition against loaning trust funds to the trustee and against buying or selling trust property from or to the trustee and related parties. Such prohibition created difficulties in effecting legitimate financial transactions that the beneficiaries desired.

The application of the representation rules of Article 3 in obtaining the consent from beneficiaries to a conflict of interest transaction facilitates these matters. Under former law even if a conflict of interest could be consented to or waived, it was often difficult to obtain the consent or waiver if minor or unborn beneficiaries were involved.

Subsection (c) of the Uniform Trust Code was modified to clarify that transactions involving investment or management of the trust property and entered into by the trustee and the persons or the entities listed in paragraphs (1) through (4) are "rebuttably presumed" to be affected by a conflict of interest.

In addition, subsection (c) of the Uniform Trust Code was modified as follows:

(i) In paragraph (1) the words "or a parent of the trustee's spouse" were added at the end.

(ii) In paragraph (2) the word "ancestors" was substituted for "parents".

(iii) In paragraph (3) the words "employee, officer, director, member, manager or partner of the trustee, or an entity that controls, is controlled by, or is under the common control with the trustee" were inserted after the word "attorney".

(iv) In paragraph (4) the reference to "corporation" was deleted, and the word "entity" was substituted in place of the word "enterprise".

Subsection (f) was modified in two respects:

(i) A reference to pooled investment vehicles in which the trustee has an investment was added to paragraph (1).

(ii) Paragraph (2) was added to clarify that the presumption of a conflict of interest in subdivision (c)(3) does not include transactions involving payments made to business persons that regularly provide services to the trustee if payment is consistent with that made in the community for similar services.

Subsection (h) modifies the Uniform Trust Code by substituting the words "guardianship, or similar relationship" for "conservatorship" in paragraph (3) and by adding the words "or an affiliate of the trustee" after the word "trustee" in paragraph (4).

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, subsection (d) is amended to clarify that the rule allowing a beneficiary to void under the circumstances described in the subsection a transaction between the trustee and the beneficiary that does not concern trust property does not apply to a transaction with the trustee that is in the ordinary course of business and on terms and conditions as favorable as those the trustee generally offers similarity situated customers.

Effective October 1, 2007, subdivision (f)(1) is amended to clarify that an investment of trust assets by the trustee in investment vehicles in which an affiliate of the trustee, as well as the trustee, also invests or to which the trustee, or its affiliate, provides services for compensation is not presumed to be a conflict of interest if the investment otherwise complies with the prudent investor rules.

Also effective October 1, 2007, subdivision (f)(2) is amended to delete the requirement that in order for payment by the trustee for the services of those specified in the section not to be considered a conflict of interest, the payments must be consistent with payments for the same or similar services made "in the community." The drafters thought that the amendment deleting the reference to 'in the community' was necessary because the trust may be in a community or location where those services are not usually rendered.

Also effective October 1, 2007, subsection (h) is amended to clarify that it does not impose an additional "fairness" standard on the transactions described in the subsection, including payment of the trustee's compensation, that are not precluded by the conflict of interest rules of the section and are governed by other standards. Subdivision (h)(3), as amended, retains the fairness standard as to transactions between a trust and another fiduciary relationship of which the trustee is a fiduciary or in which the beneficiary has an interest.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2015)

Effective October 1, 2015, subdivision (f)(1) of this section is amended to clarify to whom the trustee is required to provide notice of the rate and method of compensation in order to be compensated for services to an investment company, investment trust or pooled investment vehicle in which the trustee or its affiliate has an investment. Under subdivision (f)(1), as amended, the trustee is required to provide such notice to each beneficiary of the trust to whom the trustee owes a duty under G.S. 36C-8-813(a)(1) to provide information described in that subdivision. Under G.S. 36C-8-813(a)(1) the trustee is under a duty to provide information to any qualified beneficiary "who is a distributee or permissible distributee of trust income or trust principal." Therefore, under subdivision (f)(1), as amended, the trustee is required to give the notice regarding the trustee's compensation only to each such qualified beneficiary and not to any other qualified beneficiary. The trustee owes no duty under G.S. 36C-8-813(a)(1) to provide information to any other qualified beneficiaries, including remaindermen.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2015-205, s. 11(a), as amended by Session Laws 2015-264, s. 31(b), provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Commentary to the Uniform Powers of Appointment Act and of the Official Commentary to the Uniform Trust Code and all explanatory comments of the drafters of Part III and Parts VI through X-A of this act, as the Revisor may deem appropriate."

Session Laws 2015-264, s. 91.7, is a severability clause.

Effect of Amendments. - Session Laws 2007-106, ss. 31 through 33, effective October 1, 2007, inserted "and which is outside the ordinary course of the trustee's business or on terms and conditions substantially less favorable than those the trustee generally offers similarly situated customers," in subsection (d); in the first sentence of subdivision (f)(1), inserted "or its affiliate" following "in which the trustee" and inserted "for compensation"; deleted "in the community" following "payments generally made" near the end of subdivision (f)(2); in the introductory paragraph of subsection (h), inserted "any of" and deleted "if fair to the beneficiaries" from the end; in subdivision (h)(2), deleted "reasonable" following "Payment of," inserted "which," and added "is entitled under G.S. 36C-7-708."; inserted "that is fair to the beneficiaries" in subdivision (h)(3); and made minor punctuation and stylistic changes. See Editor's note for applicability.

Session Laws 2015-205, s. 10.5, as added by Session Laws 2015-264, s. 31(a), substituted "provides notice of the rate and method by which the compensation was determined to each beneficiary of the trust to whom the trustee owes a duty under G.S. 36C-8-813(a)(1) to provide the information described in that subdivision" for "notifies the persons entitled under G.S. 36C-8-813 to receive a copy of the trustee's annual report of the rate and method by which the compensation was determined" at the end of subdivision (f)(1). For effective date, see editor's note.

Legal Periodicals. - For article, "The Punctilio of An Honor the Most 'Cents'-itive: Trustees, Broker-Dealers, and North Carolina's Self-Dealing Ban", see 78 N.C.L. Rev. 1965 (2000).

CASE NOTES

Editor's Note. - Many of the cases below were decided under prior law.

The purpose of this section is to clarify and strengthen rules regarding loyalty by a trustee to the interests of his cestuis que trust. Wachovia Bank & Trust Co. v. Johnston, 269 N.C. 701, 153 S.E.2d 449 (1967), decided under prior law.

Court May Relieve Trustee of Restriction of This Section. - G.S. 36A-80, by allowing a court of competent jurisdiction to relieve the trustee of "any or all of the duties and restrictions" placed upon him by this Article, gives statutory authority to the court to relieve the trustee of the restriction that he cannot purchase property from the trust. Wachovia Bank & Trust Co. v. Johnston, 269 N.C. 701, 153 S.E.2d 449 (1967), decided under prior law.

Recognizing and reaffirming the stern rule of equity that a trustee cannot be both vendor and vendee, there are rare and justifiable exceptions when the court, in the exercise of its inherent equitable powers, may authorize a purchase of trust property by the trustee, upon full findings of fact that (1) complete disclosure of all facts was made by the trustee, (2) the sale would materially promote the best interests of the trust and its beneficiaries, and (3) there are no other purchasers willing to pay the same or a greater price than offered by the trustee. Wachovia Bank & Trust Co. v. Johnston, 269 N.C. 701, 153 S.E.2d 449 (1967), decided under prior law.

Breach of Fiduciary Duty. - Trial court erred in dismissing minority condominium unit owners' claim for breach of fiduciary duty because they alleged that a condominium association arranged for, approved, and proceeded with the forced sale of the entire condominium for an inadequate price; the owners also alleged that the association failed to have an independent appraiser generate the allocation appraisal, ensure that the appraisal used was without bias, and distribute it within the statutory time frame. Howe v. Links Club Condo. Ass'n, 263 N.C. App. 130, 823 S.E.2d 439 (2018).

Breach of Duty of Loyalty. - Trustee breached the trustee's duty of loyalty to trust beneficiaries because the trustee transferred trust property to satisfy the trust's debt to the trustee personally. THZ Holdings, LLC v. McCrea, 231 N.C. App. 482, 753 S.E.2d 344 (2013).

Trustee breached the trustee's duty of loyalty to trust beneficiaries when the trustee transferred trust property to satisfy the trust's debt to the trustee personally because the exception in G.S. 36C-8-802(b)(5) for contracts entered into before becoming a trustee did not apply, as the trustee had no claim to the trust property before becoming trustee. THZ Holdings, LLC v. McCrea, 231 N.C. App. 482, 753 S.E.2d 344 (2013).

Trustee breached the trustee's duty of loyalty to trust beneficiaries when the trustee transferred trust property to satisfy the trust's debt to the trustee personally because the trustee willingly transferred the property, since nothing in the trustee's loan agreement required that the debt be satisfied by a transfer of trust property. THZ Holdings, LLC v. McCrea, 231 N.C. App. 482, 753 S.E.2d 344 (2013).

Voidable Transfer. - Trustee's transfer of trust property to satisfy the trust's debt to the trustee personally was voidable because the trust beneficiaries were affected by the transaction, since the transfer conveyed the property, on which the beneficiaries resided, to a party that sought the beneficiaries' ejectment. THZ Holdings, LLC v. McCrea, 231 N.C. App. 482, 753 S.E.2d 344 (2013).

OFFICIAL COMMENT

The duty of impartiality is an important aspect of the duty of loyalty. This section is identical to Section 6 of the Uniform Prudent Investor Act, except that this section also applies to all aspects of trust administration and to decisions by a trustee with respect to distributions. The Prudent Investor Act is limited to duties with respect to the investment and management of trust property. The differing beneficial interests for which the trustee must act impartially include those of the current beneficiaries versus those of beneficiaries holding interests in the remainder; and among those currently eligible to receive distributions. In fulfilling the duty to act impartially, the trustee should be particularly sensitive to allocation of receipts and disbursements between income and principal and should consider, in an appropriate case, a reallocation of income to the principal account and vice versa, if allowable under local law. For an example of such authority, see Uniform Principal and Income Act § 104 (1997).

The duty to act impartially does not mean that the trustee must treat the beneficiaries equally. Rather, the trustee must treat the beneficiaries equitably in light of the purposes and terms of the trust. A settlor who prefers that the trustee, when making decisions, generally favor the interests of one beneficiary over those of others should provide appropriate guidance in the terms of the trust. See Restatement (Second) of § 183 cmt. a (1959).

OFFICIAL COMMENT TO FORMER G.S. 36A-166 =nl OF THE NORTH CAROLINA UNIFORMED PRUDENT INVESTORS ACT

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).

NORTH CAROLINA COMMENT

This section addresses the duty of impartiality in language similar to that in former G.S. 36A-166 of the North Carolina Prudent Investor Act with respect to the investment and management of the trust assets but applies such duty to all actions of the trustee in the administration of the trust. For this reason the Official Comment to former G.S. 36A-166 of the North Carolina Uniform Prudent Investor Act is included above in addition to the Official Comment to this section of the Uniform Trust Code.

OFFICIAL COMMENT

The duty to administer a trust with prudence is a fundamental duty of the trustee. This duty does not depend on whether the trustee receives compensation. The duty may be altered by the terms of the trust. See Section 105. This section is similar to Section 2(a) of the Uniform Prudent Investor Act and Restatement (Third) of Trusts: Prudent Investor Rule § 227 (1992).

The language of this section diverges from the language of the previous Restatement. The prior Restatement can be read as applying the same standard - "man of ordinary prudence would exercise in dealing with his own property" - regardless of the type or purposes of the trust. See Restatement (Second) of Trusts § 174 cmt. a (1959). This section appropriately bases the standard on the purposes and other circumstances of the particular trust.

A settlor who wishes to modify the standard of care specified in this section is free to do so, but there is a limit. Section 1008 prohibits a settlor from exculpating a trustee from liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or to the interests of the beneficiaries.

NORTH CAROLINA COMMENT

This section addresses the standard of care the trustee must use with respect to the administration of the trust in language similar to that in G.S. 36C 9 902(a) with respect to investment and management of trust assets but applies the same standard to all aspects of the trust administration.

OFFICIAL COMMENT

This section is similar to Section 7 of the Uniform Prudent Investor Act and is consistent with the rules concerning costs in Restatement (Third) of Trusts: Prudent Investor Rule § 227(c)(3) (1992). For related rules concerning compensation and reimbursement of trustees, see Sections 708 and 709. The duty not to incur unreasonable costs applies when a trustee decides whether and how to delegate to agents, as well as to other aspects of trust administration. In deciding whether and how to delegate, the trustee must be alert to balancing projected benefits against the likely costs. To protect the beneficiary against excessive costs, the trustee should also be alert to adjusting compensation for functions which the trustee has delegated to others. The obligation to incur only necessary or appropriate costs of administration has long been part of the law of trusts. See Restatement (Second) of Trusts § 188 (1959).

OFFICIAL COMMENT TO FORMER G.S. 36A-167 =nl OF THE NORTH CAROLINA UNIFORM PRUDENT INVESTOR ACT

Wasting beneficiaries' money is imprudent. In devising and implementing strategies for the investment and management of trust asset, 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).

NORTH CAROLINA COMMENT

This section addresses the trustee's duty with respect to the costs the trustee may incur in administering a trust in language similar to that in former G.S. 36A-167 of the North Carolina Prudent Investor Act with respect to the investment and management of trust assets but applies the duty to all aspects of trust administration. For this reason the Official Comment to former G.S. 36A-167 of the North Carolina Uniform Prudent Investor Act is included above in addition to the Official Comment to this section of the Uniform Trust Code.

OFFICIAL COMMENT

This section is similar to Section 7-302 of the Uniform Probate Code, Restatement (Second) of Trusts § 174 (1959), and Section 2(f) of the Uniform Prudent Investor Act.

OFFICIAL COMMENT TO FORMER G.S. 36A-162(F) =nl OF THE NORTH CAROLINA UNIFORM PRUDENT INVESTOR ACT

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.

NORTH CAROLINA COMMENT

This section addresses the duty of a trustee who has special skills in language similar to that in former G.S. 36A-162(f) of the North Carolina Prudent Investor Act with respect to the investment and management of trust assets but applies the duty to all aspects of trust administration. For this reason the Official Comment to former G.S. 36A-162(f) of the North Carolina Uniform Prudent Investor Act is included above in addition to the Official Comment to this section of the Uniform Trust Code. G.S.32-71(a), which recodifies former G.S. 36A-2(a), also addresses the duty of a trustee with special skills with respect to investment and management of trust property.

OFFICIAL COMMENT

This section permits trustees to delegate various aspects of trust administration to agents, subject to the standards of the section. The language is derived from Section 9 of the Uniform Prudent Investor Act. See also John H. Langbein, Reversing the Nondelegation Rule of Trust- Investment Law, 59 Mo. L. Rev. 105 (1994) (discussing prior law).

This section encourages and protects the trustee in making delegations appropriate to the facts and circumstances of the particular trust. Whether a particular function is delegable is based on whether it is a function that a prudent trustee might delegate under similar circumstances. For example, delegating some administrative and reporting duties might be prudent for a family trustee but unnecessary for a corporate trustee.

This section applies only to delegation to agents, not to delegation to a cotrustee. For the provision regulating delegation to a cotrustee, see Section 703(e).

OFFICIAL COMMENT TO FORMER G.S. 36A-169 =nl OF THE NORTH CAROLINA UNIFORM PRUDENT INVESTOR ACT

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 (1969). 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) (1998).

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. 708 (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) (1998).

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 (1969), 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 ... act with prudence in 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.

NORTH CAROLINA COMMENT

This section permits the delegation of the trustee's duties and powers to agents in language similar to that in former G.S. 36A-169 of the North Carolina Prudent Investor Act with respect to investment and management functions but extends the authority to delegate in all aspects of trust administration. For this reason the Official Comment to former G.S. 36A 169 of the North Carolina Uniform Prudent Investor Act is included above in addition to the Official Comment to this section of the Uniform Trust Code. This section is somewhat consistent with prior law concerning delegation of duties and powers. See Wachovia Bank & Trust Co. v. Morgan, 279 N.C. 265, 182 S.E.2d 356 (1971).

OFFICIAL COMMENT

Subsection (a) is an application of Section 603(a), which provides that a revocable trust is subject to the settlor's exclusive control as long as the settlor has capacity. Because of the settlor's degree of control, subsection (a) of this section authorizes a trustee to rely on a direction from the settlor even if it is contrary to the terms of the trust. The direction of the settlor might be regarded as an amendment of the trust. Subsection (a) has limited application upon a settlor's incapacity. An agent, conservator, or guardian has authority to give the trustee instructions contrary to the terms of the trust only if the agent, conservator, or guardian succeeds to the settlor's powers with respect to revocation, amendment, or distribution as provided in Section 602(e).

Subsections (b)-(d) ratify the use of trust protectors and advisers. Subsections (b) and (d) are based in part on Restatement (Second) of Trusts § 185 (1959). Subsection (c) is similar to Restatement (Third) of Trusts § 64(2) (Tentative Draft No. 3, approved 2001). "Advisers" have long been used for certain trustee functions, such as the power to direct investments or manage a closely-held business. "Trust protector," a term largely associated with offshore trust practice, is more recent and usually connotes the grant of greater powers, sometimes including the power to amend or terminate the trust. Subsection (c) ratifies the recent trend to grant third persons such broader powers.

A power to direct must be distinguished from a veto power. A power to direct involves action initiated and within the control of a third party. The trustee usually has no responsibility other than to carry out the direction when made. But if a third party holds a veto power, the trustee is responsible for initiating the decision, subject to the third party's approval. A trustee who administers a trust subject to a veto power occupies a position akin to that of a cotrustee and is responsible for taking appropriate action if the third party's refusal to consent would result in a serious breach of trust. See Restatement (Second) of Trusts § 185 cmt. g (1959); Section 703(g)(duties of cotrustees).

Frequently, the person holding the power is directing the investment of the holder's own beneficial interest. Such self-directed accounts are particularly prevalent among trusts holding interests in employee benefit plans or individual retirement accounts. See ERISA § 404(c) (29 U.S.C. § 1104(c)). But for the type of donative trust which is the primary focus of this Code, the holder of the power to direct is frequently acting on behalf of others. In that event and as provided in subsection (d), the holder is presumptively acting in a fiduciary capacity with respect to the powers granted and can be held liable if the holder's conduct constitutes a breach of trust, whether through action or inaction. Like a trustee, liability cannot be imposed if the holder has not accepted the grant of the power either expressly or informally through exercise of the power. See Section 701.

Powers to direct are most effective when the trustee is not deterred from exercising the power by fear of possible liability. On the other hand, the trustee does have overall responsibility for seeing that the terms of the trust are honored. For this reason, subsection (b) imposes only minimal oversight responsibility on the trustee. A trustee must generally act in accordance with the direction. A trustee may refuse the direction only if the attempted exercise would be manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would constitute a serious breach of a fiduciary duty owed by the holder of the power to the beneficiaries of the trust.

The provisions of this section may be altered in the terms of the trust. See Section 105. A settlor can provide that the trustee must accept the decision of the power holder without question. Or a settlor could provide that the holder of the power is not to be held to the standards of a fiduciary. A common technique for assuring that a settlor continues to be taxed on all of the income of an irrevocable trust is for the settlor to retain a nonfiduciary power of administration. See I.R.C. § 675(4).

NORTH CAROLINA COMMENT

Subsection (a) introduces a concept that was not clear under prior North Carolina law in allowing a trustee to follow a direction of the settlor that is contrary to the terms of the trust even though such direction may constitute a breach of trust.

Subsections (b), (c) and (d) introduce a concept of the trust protector or advisor that has not been addressed by statute in prior North Carolina law but was being used by practitioners in drafting trust instruments.

Subsection (c) authorizing the terms of the trust to confer upon a trustee or other person the power to direct the modification or termination of the trust represents a nonjudicial alternative to the methods of modifying and terminating a trust under Article 4 of this Chapter.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, subsection (a) is amended to clarify that a direction of the settlor that the trustee of a revocable trust may follow includes a direction that is not authorized by the terms of the trust.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2012)

Effective June 11, 2012, subsection (a) is amended to clarify that the settlor of a revocable trust has the power to direct or consent to actions of the trustee whether or not the power is conferred by the trust instrument. In addition, subdivision (2) is added to clarify that the trustee is not liable for any loss resulting from compliance with the direction of a settlor or for any loss resulting from the trustee's failure to take any action that required the settlor's consent if the settlor does not provide the consent within a reasonable time after the trustee has made a timely request for the settlor's consent.

Also effective June 11, 2012, subsections (b), (c) and (d) are repealed. These subsections provided for the duty and liability of a trustee subject to a power to direct by a person other than the settlor and the duty and liability of the person with the power to direct. As explained in detail in the North Carolina General Comment to Article 8A of this Chapter, these subsections were replaced with substantial revisions and additions by the provisions in Article 8A regarding power holders who are not trustees and in G.S. 36C-7-703(e1) regarding cotrustees with the power to direct another cotrustee.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2012-18, s. 4, provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the North Carolina Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 34, effective October 1, 2007, in subsection (a), inserted "not authorized by or" following "settlor that is" and inserted "by" preceding "doing so (i)." See Editor's note for applicability.

Session Laws 2012-18, s. 3.1, effective June 11, 2012, rewrote the section.

OFFICIAL COMMENT

This section codifies the substance of Sections 175 and 176 of the Restatement (Second) of Trusts (1959). The duty to take control of and safeguard trust property is an aspect of the trustee's duty of prudent administration as provided in Section 804. See also Sections 816(1) (power to collect trust property), 816(11) (power to insure trust property), and 816(12) (power to abandon trust property). The duty to take control normally means that the trustee must take physical possession of tangible personal property and securities belonging to the trust, and must secure payment of any choses in action. See Restatement (Second) of Trusts § 175 cmt. a, c and d (1959). This section, like the other sections in this article, is subject to alteration by the terms of the trust. See Section 105. For example, the settlor may provide that the spouse may occupy the settlor's former residence rent free, in which event the spouse's occupancy would prevent the trustee from taking possession.

NORTH CAROLINA COMMENT

This section codifies the duties to control and protect trust property that have been implicit in the prudent person rule of former G.S. 36A-162(a) of the North Carolina Uniform Prudent Investor Act and G.S. 32-71(a), which recodifies former G.S. 36A-2(a).

OFFICIAL COMMENT

The duty to keep adequate records stated in subsection (a) is implicit in the duty to act with prudence (Section 804) and the duty to report to beneficiaries (Section 813). For an application, see Green v. Lombard, 343 A. 2d 905, 911 (Md. Ct. Spec. App. 1975). See also Restatement (Second) of Trusts §§ 172, 174 (1959).

The duty to earmark trust assets and the duty of a trustee not to mingle the assets of the trust with the trustee's own are closely related. Subsection (b), which addresses the duty not to mingle, is derived from Section 179 of the Restatement (Second) of Trusts (1959). Subsection (c) makes the requirement that assets be earmarked more precise than that articulated in Restatement (Second) § 179 by requiring that the interest of the trust must appear in the records of a third party, such as a bank, brokerage firm, or transfer agent. Because of the serious risk of mistake or misappropriation even if disclosure is made to the beneficiaries, showing the interest of the trust solely in the trustee's own internal records is insufficient. Section 816(7)(B), which allows a trustee to hold securities in nominee form, is not inconsistent with this requirement. While securities held in nominee form are not specifically registered in the name of the trustee, they are properly earmarked because the trustee's holdings are indicated in the records maintained by an independent party, such as in an account at a brokerage firm.

Earmarking is not practical for all types of assets. With respect to assets not subject to registration, such as tangible personal property and bearer bonds, arranging for the trust's ownership interest to be reflected on the records of a third-party custodian would not be feasible. For this reason, subsection (c) waives separate recordkeeping for these types of assets. Under subsection (b), however, the duty of the trustee not to mingle these or any other trust assets with the trustee's own remains absolute.

Subsection (d), following the lead of a number of state statutes, allows a trustee to use the property of two or more trusts to make joint investments, even though under traditional principles a joint investment would violate the duty to earmark. A joint investment frequently is more economical than attempting to invest the funds of each trust separately. Also, the risk of misappropriation or mistake is less when the trust property is invested jointly with the property of another trust than when pooled with the property of the trustee or other person.

NORTH CAROLINA COMMENT

Subsections (a) and (b) are generally consistent with former G.S. 36A-71 requiring a trust company to keep trust assets separate from its own assets and to keep records showing proper ownership of trust assets but apply these requirements to all trustees.

Subsection (d) has no express corresponding provision in prior law that would operate as a default provision. G.S. 32-27(25) authorizes a trustee to hold property of two or more separate trusts undivided but only if the power is incorporated by reference.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, subsection (d), which provides that a trustee may invest as a whole the property of multiple trusts if the trustee maintains records clearly indicating the respective interests, is amended to add that a trustee may also administer as a whole the property of multiple trusts under such circumstances. For example, a trustee may insure properties of multiple trusts in a master insurance policy so long as the trustee keeps separate records of the interest of each trust.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 34.1, effective October 1, 2007, inserted "and administer" in subsection (d). See Editor's note for applicability.

OFFICIAL COMMENT

This section codifies the substance of Sections 177 and 178 of the Restatement (Second) of Trusts (1959). It may not be reasonable to enforce a claim depending upon the likelihood of recovery and the cost of suit and enforcement. It might also be reasonable to settle an action or suffer a default rather than to defend an action. See also Section 816(14) (power to pay, contest, settle, or release claims).

NORTH CAROLINA COMMENT

Although this section applies a reasonableness standard in enforcing and defending claims that has not been expressly stated in prior North Carolina law, our courts have approved a trustee's compromise of a claim in the best interest of the trust estate where "bad faith was not suggested". See Wachovia Bank & Trust Co. v. Buchan, 261 N.C. 595, 135 S.E.2d 559 (1964).

CASE NOTES

Claim by Trustee. - In light of the complaint's allegations and a daughter's insistence on appeal that a trustee's conveyance to a county board was purely an individual act that in no way bound the trust, the facts did not compel the legal conclusion that the trustee was legally estopped from asserting the trust's claim to oust the board in her capacity as trustee. Bauman v. Pasquotank Cty. ABC Bd., - N.C. App. - , 842 S.E.2d 166 (2020).

OFFICIAL COMMENT

This section is a specific application of Section 811 on the duty to enforce claims, which includes a claim for trust property held by a former trustee or others, and a claim against a predecessor trustee for breach of trust. The duty imposed by this section is not absolute. Pursuit of a claim is not required if the amount of the claim, costs of suit and enforcement, and likelihood of recovery, make such action uneconomic. Unlike Restatement (Second) of Trusts § 223 (1959), this section only requires a successor trustee to redress breaches of trust "known" to have been committed by the predecessor. For the definition of "know," see Section 104. Limiting the successor's obligation to known breaches is a common feature of state trust statutes. See, e.g., Mo. Rev. Stat. § 456.187.2.

As authorized by Section 1009, the beneficiaries may relieve the trustee from potential liability for failing to pursue a claim against a predecessor trustee or other person holding trust property. The obligation to pursue a predecessor trustee can also be addressed in the terms of the trust. See Section 105.

NORTH CAROLINA COMMENT

This section has no counterpart in North Carolina statutes.

OFFICIAL COMMENT

The duty to keep the beneficiaries reasonably informed of the administration of the trust is a fundamental duty of a trustee. This duty, which is stated in subsection (a), is derived from Section 7-303(a) of the Uniform Probate Code, which was approved in 1969 and which has been enacted in about a third of the states. This provision of the UPC has also been enacted in states that have not otherwise enacted the Uniform Probate Code. See, e.g., Cal. Prob. Code. Sections 16060-16061. Unlike the cited provision of the UPC, subsection (a) of this section limits the duty to keep the beneficiaries informed to the qualified beneficiaries. For the definition of qualified beneficiary, see Section 103(13). The result of this limitation is that the information need not be furnished to beneficiaries with remote remainder interests unless they have made a request to the trustee.

For the extent to which a settlor may waive the requirements of this section in the terms of the trust, see Section 105(b)(8)-(9).

Subsection (a) requires that the trustee keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. This may include a duty to communicate to a qualified beneficiary information about the administration of the trust that is reasonably necessary to enable the beneficiary to enforce the beneficiary's rights and to prevent or redress a breach of trust. See Restatement (Second) of Trusts Section 173 cmt. c (1959). With respect to the permissible distributees, the duty articulated in subsection (a) would ordinarily be satisfied by providing the beneficiary with a copy of the annual report mandated by subsection (c). Otherwise, the trustee is not ordinarily under a duty to furnish information to a beneficiary in the absence of a specific request for the information. See Restatement (Second) of Trusts Section 173 cmt. d (1959). However, special circumstances may require that the trustee take affirmative steps to provide additional information. For example, if the trustee is dealing with the beneficiary on the trustee's own account, the trustee must communicate material facts relating to the transaction that the trustee knows or should know. See Restatement (Second) of Trusts Section 173 cmt. d (1959). Furthermore, to enable the beneficiaries to take action to protect their interests, the trustee may be required to provide advance notice of transactions involving real estate, closelyheld business interests, and other assets that are difficult to value or to replace. See In re Green Charitable Trust, 431 N.W. 2d 492 (Mich. Ct. App. 1988); Allard v. Pacific National Bank, 663 P.2d 104 (Wash. 1983). The trustee is justified in not providing such advance disclosure if disclosure is forbidden by other law, as under federal securities laws, or if disclosure would be seriously detrimental to the interests of the beneficiaries, for example, when disclosure would cause the loss of the only serious buyer.

Subsection (a) also requires that the trustee promptly respond to the request of any beneficiary, whether qualified or not, for information related to the administration of the trust . Performance is excused only if compliance is unreasonable under the circumstances. Within the bounds of the reasonableness limit, this provision allows the beneficiary to determine what information is relevant to protect the beneficiary's interest. Should a beneficiary so request, subsection (b)(1) also requires the trustee to furnish the beneficiary with a complete copy of the trust instrument and not merely with those portions the trustee deems relevant to the beneficiary's interest. For a case reaching the same result, see Fletcher v. Fletcher, 480 S.E.2d 488 (Va. Ct. App. 1997). Subsection (b)(1) is more expansive Section 7-303(b) of the Uniform Probate Code, which provides that "[u]pon reasonable request, the trustee shall provide the beneficiary with a copy of the terms of the trust which describe or affect his interest...."

The drafters of this Code decided to leave open for further consideration by the courts the extent to which a trustee may claim attorney-client privilege against a beneficiary seeking discovery of attorney-client communications between the trustee and the trustee's attorney. The courts are split because of the important values that are in tension on this question. "The [attorney-client] privilege recognizes that sound legal advice or advocacy serves public ends and that such advice or advocacy depends upon the lawyer's being fully informed by the client." Upjohn Co. v. United States, 449 U.S. 383 (1981). On the other hand, subsection (a) of this section requires that a trustee keep the qualified beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests, which could include facts that the trustee has revealed only to the trustee's attorney. There is authority for the view that the trustee is estopped from pleading attorney-client privilege in such circumstances. In the leading case, Riggs National Bank v. Zimmer, 355 A.2d 709, 713 (Del. Ch. 1976), the court reasoned that the beneficiary, not the trustee, is the attorney's client: "As a representative for the beneficiaries of the trust which he is administering, the trustee is not the real client...." This beneficiary-as-client theory has been criticized on the ground that it conflicts with the trustee's fiduciary duty to implement the intentions of the settlor, which are sometimes in tension with the wishes of one or more beneficiaries. See Louis H. Hamel, Jr., Trustee's Privileged Counsel: A Rebuttal, 21 ACTEC Notes 156 (1995); Charles F. Gibbs & Cindy D. Hanson, The Fiduciary Exception to a Trustee's Attorney/Client Privilege, 21 ACTEC Notes 236 (1995). Prominent decisions in California and Texas have refused to follow Delaware in recognizing an exception for the beneficiary against the trustee's attorney-client privilege. Wells Fargo Bank v. Superior Court (Boltwood), 990 P.2d 591 (Cal. 2000); Huie v. De Shazo, 922 S.W. 2d 920 (Tex. 1996). The beneficiary-as-client theory continues to be applied to ERISA trusts. See, e.g., United States v. Mett, 178 F.3d 1058, 1062-64 (9th Cir. 1999). However, in a pension trust the beneficiaries are the settlors of their own trust because the trust is funded with their own earnings. Accordingly, in ERISA attorney-client cases "[t]here are no competing interests such as other stockholders or the intentions of the Settlor." Gibbs & Hanson, 21 ACTEC Notes at 238. For further discussion of the attorney-client privilege and whether there is a duty to disclose to the beneficiaries, see ACTEC Commentaries on the Model Rules of Professional Conduct, Commentary on MRPC 1.2 (3d ed. 1999); Rust E. Reid et al., Privilege and Confidentiality Issues When a Lawyer Represents a Fiduciary, 30 Real Prop. Prob. & Tr. J. 541 (1996).

To enable beneficiaries to protect their interests effectively, it is essential that they know the identity of the trustee. Subsection (b)(2) requires that a trustee inform the qualified beneficiaries within 60 days of the trustee's acceptance of office and of the trustee's name, address and telephone number. Similar to the obligation imposed on a personal representative following admission of the will to probate, subsection (b)(3) requires the trustee of a revocable trust to inform the qualified beneficiaries of the trust's existence within 60 days after the settlor's death. These two duties can overlap. If the death of the settlor happens also to be the occasion for the appointment of a successor trustee, the new trustee of the formerly revocable trust would need to inform the qualified beneficiaries both of the trustee's acceptance and of the trust's existence.

Subsection (b)(4) deals with the sensitive issue of changes, usually increases, in trustee compensation. Changes can include changes in a periodic base fee, rate of percentage compensation, hourly rate, termination fee, or transaction charge. Regarding the standard for setting trustee compensation, see Section 708 and Comment.

Subsection (c) requires the trustee to furnish the current beneficiaries and other beneficiaries who request it with a copy of a trustee's report at least annually and upon termination of the trust. Unless a cotrustee remains in office, the former trustee also must provide a report to all of the qualified beneficiaries upon the trustee's resignation or removal. If the vacancy occurred because of the former trustee's death or adjudication of incapacity, a report may, but need not be provided by the former trustee's personal representative, conservator, or guardian.

The Uniform Trust Code employs the term "report" instead of "accounting" in order to negate any inference that the report must be prepared in any particular format or with a high degree of formality. The reporting requirement might even be satisfied by providing the beneficiaries with copies of the trust's income tax returns and monthly brokerage account statements if the information on those returns and statements is complete and sufficiently clear. The key factor is not the format chosen but whether the report provides the beneficiaries with the information necessary to protect their interests. For model account forms, together with practical advice on how to prepare reports, see Robert Whitman, Fiduciary Accounting Guide (2d ed. 1998).

Subsection (d) allows trustee reports and other required information to be waived by a beneficiary. A beneficiary may also withdraw a consent. However, a waiver of a trustee's report or other information does not relieve the trustee from accountability and potential liability for matters that the report or other information would have disclosed.

Subsection (e), which was added to the Code in 2004, is discussed in 2004 Amendment below.

2004 Amendment. Subsection (b)(2) and (b)(3) require that certain notices be sent by the trustee to the qualified beneficiaries within 60 days of the trustee's acceptance of office, or within 60 days after the creation of an irrevocable trust or the date a revocable trust becomes irrevocable. Subsection (e) is added to make clear the drafting committee's intent that these requirements are not to be retroactively applied to trustee acceptances of office occurring prior to the effective date of the Code and to trusts which have become irrevocable prior to the effective date.

NORTH CAROLINA COMMENTS

This section departs significantly from the Uniform Trust Code.

The drafters omitted subsection (a) of the Uniform Trust Code requiring the trustee to keep qualified beneficiaries reasonably informed about the trust administration and the material facts necessary for the beneficiaries to protect their interests and, unless unreasonable under the circumstances, to respond to a beneficiary's request for information. The drafters thought this duty was too general in its scope and raised a number of questions. The drafters preferred, and inserted in place of the provisions of the Uniform Trust Code, the rule in section 173 of the Restatement (Second) of Trusts (1959) requiring the trustees to give beneficiaries certain information upon request and to permit the beneficiaries to inspect trust documents. This rule was recognized and quoted with approval in Taylor v. NationsBank Corp., 125 N.C. App. 515, 481 S.E.2d 358 (1997). The rule was modified in this subsection to apply only to qualified beneficiaries.

The drafters also omitted subsection (b) of the Uniform Trust Code consisting of four paragraphs for the following reasons:

(i) The drafters concluded that paragraphs (2) and (3) of subsection (b) of the Code would impose new and unnecessary burdens on the trustee not previously recognized in North Carolina. Paragraph (2) required the trustee to notify the qualified beneficiaries within 60 days of the acceptance of the trust and the trustee's identity and address. Paragraph (3) required the trustee to notify the beneficiary within 60 days after acquiring knowledge that the trust is irrevocable of the trust's existence, the identity of the settlor, the right to request a copy of the trust and the right to a report described in subsection (c) of the Uniform Trust Code.

(ii) The drafters concluded that the requirements in paragraph (1) to furnish a copy of the trust to the beneficiary upon request and in paragraph (4) to notify the beneficiary in advance of the change in the trustee's compensation were not necessary. The duty to furnish information imposed by subsection (a) was deemed to be sufficient.

In place of paragraphs (1)-(4) of subsection (b) of the Uniform Trust Code, the drafters inserted paragraph (1) clarifying that the duty of the trustee does not include advance notice of transactions and paragraph (2) concerning the trustee's report the contents of which are described in language similar to that in subsection (c) of the Uniform Trust Code which the drafters also omitted. Unlike subsection (c) of the Uniform Trust Code, subsection (b) provides that the report would be deemed to discharge the trustee's duty in subsection (a) and does not require a former trustee to send the report to the beneficiaries.

The settlor is free to override the provisions of subsections (a) and (b) regarding the information to be furnished to the beneficiaries by directing the trustee not to provide a beneficiary with any of the information otherwise required. This approach is consistent with the statement in the Taylor decision where the court said that "trust beneficiaries are entitled to view the trust instrument from which their interest is derived" so long as that right is not waived by the settlor through "an explicit provision in the trust instrument to the contrary". The mandatory rules in Section 105(b)(8) and (9) of the Uniform Trust Code would have prevented a settlor from overriding the provisions of Section 813(a) and (b)(2) and (3) of the Uniform Trust Code. The drafters omitted these mandatory rules and decided not to apply any such rule to the provisions of subsections (a) and (b) of this section. See the North Carolina Comment to G.S. 36C-1-105.

The reference in the Official Comment to "subsection (d)" should be understood to refer to subsection (c) of this section.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, subsection (a) is amended to provide that a trustee is under a duty (i) to provide accounting information to a qualified beneficiary to whom the trust property is or may be currently distributable and (ii) upon request by any qualified beneficiary, whether a current beneficiary or remainderman, to provide accounting information and a copy of the trust instrument and, in addition, to allow reasonable inspection of matters relating to the trust. Former subsection (a) was interpreted as requiring an affirmative duty of the trustee to provide information to all qualified beneficiaries not dependent upon a request by the beneficiary. Under subsection (a), as amended, the trustee has a duty to provide information to a remainder beneficiary only upon request by the beneficiary.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2012)

In Wilson v. Wilson , 203 N.C. App. 45, 690 S.B. 2d 710 (2010), where the terms of the trust instrument provided that the trustee was not required to provide accountings to any beneficiary, the Court of Appeals held that the information sought by the plaintiffs through discovery in an action for breach of trust by a trustee was reasonably necessary to enforce their rights under the trust and, therefore, could not be legally withheld, notwithstanding the North Carolina Comments to G.S. 36C-8-813 implying that the settlor by the terms of the trust could prevent disclosure to the beneficiaries.

The Court of Appeals noted that the North Carolina Comments are not binding and held that an express override of the provisions in G.S. 36C-8-813 by the settlor does not override the mandatory duty of a trustee under G.S. 36C-1-105(b)(2) to act in good faith. In addition the Court of Appeals held that under G.S. 36C-1-105(b)(9) the trial court always has the power to take such action as may be necessary in the interest of justice. This includes the power to compel discovery that will assist a beneficiary in enforcing the beneficiary's rights under the trust.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2012-18, s. 4, provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the North Carolina Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 35, effective October 1, 2007, rewrote the introductory paragraph of subsection (a); added subdivisions (a)(1) and (a)(2); inserted "subdivision (1) of" both times it appears in subdivision (b)(2); inserted "qualified" near the beginning of subsection (c); and deleted subsection (d), which read: "Subsection (b) of this section applies only to a trust created under a trust instrument executed on or after the effective date of this Chapter." See Editor's note for applicability.

Legal Periodicals. - For article, "Back to the Future: An Empirical Study of Child Custody Outcomes," see 85 N.C.L. Rev. 1629 (2007).

CASE NOTES

Provision Limiting Trustee's Obligation to Provide Accounting Did Not Limit Beneficiaries' Rights to Discover Trust Information in Suit for Accounting. - G.S. 36C-8-813 did not override the duty of the trustee to act in good faith, nor could it obstruct the power of the trial court to take such action as was necessary in the interests of justice, pursuant to G.S. 36C-1-105(b)(2), (9), including compelling discovery where necessary to enforce the beneficiary's rights under the trust. Therefore, a trial court erred in granting the trustee a protective order on the beneficiaries' discovery requests seeking information about their trusts' assets. Wilson v. Wilson, 203 N.C. App. 45, 690 S.E.2d 710 (2010).

OFFICIAL COMMENT

Despite the breadth of discretion purportedly granted by the wording of a trust, no grant of discretion to a trustee, whether with respect to management or distribution, is ever absolute. A grant of discretion establishes a range within which the trustee may act. The greater the grant of discretion, the broader the range. Pursuant to subsection (a), a trustee's exercise of discretion must be in good faith. Consistent with the trustee's duty to administer the trust ( see Section 801), the trustee's exercise must also be in accordance with the terms and purposes of the trust and the interests of the beneficiaries. "Interests of the beneficiaries" means the beneficial interests provided in the terms of the trust. See Section 103(8). Subsection (a) does not otherwise address the obligations of a trustee to make distributions, leaving that issue to the caselaw. Regarding the standards for exercising discretion and construing particular language of discretion, with numerous case citations, see Restatement (Third) of Trusts Section 50 (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts Section 187 (1959). See also Edward C. Halbach, Jr., Problems of Discretion in Discretionary Trusts, 61 Colum. L. Rev. 1425 (1961). Under these standards, whether the trustee has a duty in a given situation to make a distribution depends on the exact language used, whether the standard grants discretion and its breadth, whether this discretion is coupled with a standard, whether the beneficiary has other available resources, and, more broadly, the overriding purposes of the trust. For example, distilling the results of scores of cases, the Restatement (Third) of Trusts concludes that there is a presumption that the "trustee's discretion should be exercised in a manner that will avoid either disqualifying the beneficiary for other benefits or expending trust funds for purposes for which public funds would otherwise be available." Restatement (Third) of Trusts Section 50 cmt. e & Reporter's Notes (Tentative Draft No. 2, 1999).

Subsection (a) requires a trustee exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries. Similar to Restatement (Second) of Trusts Section 187 (1959), subsection (a) does not impose an obligation that a trustee's decision be within the bounds of a reasonable judgment, although such an interpretive standard may be imposed by the courts if the document adds a standard whereby the reasonableness of the trustee's judgment can be tested. Restatement (Second) of Trusts Section 187 cmt. f (1959).

The obligation of a trustee to act in good faith is a fundamental concept of fiduciary law although there are different ways that it can be expressed. Sometimes different formulations appear in the same source. Scott, in his treatise on trusts, states that the court will not interfere with the trustee's exercise of discretion if the trustee "acts in good faith and does not act capriciously," but Scott then states that the trustee will interfere if the trustee "acts dishonestly or in good faith, or where he acts from an improper motive." 3 Austin W. Scott & William F. Fratcher, The Law of Trusts Section 187.2 (4th ed. 1988).

Sometimes different formulations are used in the same case:

[If] the "sole discretion" vested in and exercised by the trustees in this case ... were exercised fraudulently, in bad faith or in an abuse of discretion, it is subject to ... review. Whether good faith has been exercised, or whether fraud, bad faith or an abuse of discretion has been committed is always subject to consideration by the court upon appropriate allegations and proof.

In re Ferrall's Estate, 258 P.2d 1009 (Cal. 1953).

An abuse by the trustee of the discretion granted in the terms of the trust is a breach of trust that can result in surcharge. See Section 1001(b) (remedies for breach of trust). The standard stated in subsection (a) applies only to powers which are to be exercised in a fiduciary as opposed to a nonfiduciary capacity.

Subsections (b) through (d) rewrite the terms of a trust that might otherwise result in adverse estate and gift tax consequences to a beneficiary-trustee. This Code does not generally address the subject of tax curative provisions. These are provisions that automatically rewrite the terms of trusts that might otherwise fail to qualify for probable intended tax benefits. Such provisions, because they apply to all trusts using or failing to use specified language, are often overbroad, applying not only to trusts intended to qualify for tax benefits but also to smaller trust situations where taxes are not a concern. Enacting tax-curative provisions also requires special diligence by state legislatures to make certain that these provisions are periodically amended to account for the frequent changes in federal tax law. Furthermore, many failures to draft with sufficient care may be correctable by including a tax savings clause in the terms of the trust or by seeking modification of the trust using one or more of the methods authorized by Sections 411-417. Notwithstanding these reasons, the unintended inclusion of the trust in the beneficiary-trustee's gross estate is a frequent enough occurrence that the drafters concluded that it is a topic that this Code should address. It is also a topic on which numerous States have enacted corrective statutes.

A tax curative provision differs from a statute such as Section 416 of this Code, which allows a court to modify a trust to achieve an intended tax benefit. Absent Congressional or regulatory authority authorizing the specific modification, a lower court decree in state court modifying a trust is controlling for federal estate tax purposes only if the decree was issued before the taxing event, which in the case of the estate tax would be the decedent's death. See Rev. Rul. 73-142, 1973-1 C.B. 405. There is specific federal authority authorizing modification of trusts for a number of reasons ( see Comment to Section 416) but not on the specific issues addressed in this section. Subsections (b) through (d), by interpreting the original language of the trust instrument in a way that qualifies for intended tax benefits, obviates the need to seek a later modification of the trust.

Subsection (b)(1) states the main rule. Unless the terms of the trust expressly indicate that the rule in this subsection is not to apply, the power to make discretionary distributions to a beneficiary-trustee is automatically limited by the requisite ascertainable standard necessary to avoid inclusion of the trust in the trustee's gross estate or result in a taxable gift upon the trustee's release or exercise of the power. Trusts of which the trustee-beneficiary is also a settlor are not subject to this subsection. In such a case, limiting the discretion of a settlor-trustee to an ascertainable standard would not be sufficient to avoid inclusion of the trust in the settlor's gross estate. See generally John J. Regan, Rebecca C. Morgan & David M. English, Tax, Estate and Financial Planning for the Elderly Section 17.07[2][h]. Furthermore, the inadvertent inclusion of a trust in a settlor-trustee's gross estate is a far less frequent and better understood occurrence than is the inadvertent inclusion of the trust in the estate of a nonsettlor trustee-beneficiary.

Subsection (b)(2) addresses a common trap, the trustee who is not a beneficiary but who has power to make discretionary distributions to those to whom the trustee owes a legal obligation of support. Discretion to make distributions to those to whom the trustee owes a legal obligation of support, such as to the trustee's minor children, results in inclusion of the trust in the trustee's gross estate even if the power is limited by an ascertainable standard. The applicable regulation provides that the ascertainable standard exception applies only to distributions for the benefit of the decedent, not to distributions to those to whom the decedent owes a legal obligation of support. See Treas. Reg. Section 20.2041-1(c)(2).

Subsection (c) deals with cotrustees and adopts the common planning technique of granting the broader discretion only to the independent trustee. Cotrustees who are beneficiaries of the trust or who have a legal obligation to support a beneficiary may exercise the power only as limited by subsection (b). If all trustees are so limited, the court may appoint a special fiduciary to make a decision as to whether a broader exercise is appropriate.

Subsection (d) excludes certain trusts from the operation of this section. Trusts qualifying for the marital deduction will be includable in the surviving spouse's gross estate regardless of whether this section applies. Consequently, if the spouse is acting as trustee, there is no need to limit the power of the spouse-trustee to make discretionary distributions for the spouse's benefit. Similar reasoning applies to the revocable trust, which, because of the settlor's power to revoke, is automatically includable in the settlor's gross estate even if the settlor is not named as a beneficiary.

QTIP marital trusts are subject to this section, however. QTIP trusts qualify for the marital deduction only if so elected on the federal estate tax return. Excluding a QTIP for which an election has been made from the operation of this section would allow the terms of the trust to be modified after the settlor's death. By not making the QTIP election, an otherwise unascertainable standard would be limited. By making the QTIP election, the trustee's discretion would not be curtailed. This ability to modify a trust depending on elections made on the federal estate tax return could itself constitute a taxable power of appointment resulting in inclusion of the trust in the surviving spouse's gross estate.

The exclusion of the Section 2503(c) minors trust is necessary to avoid loss of gift tax benefits. While preventing a trustee from distributing trust funds in discharge of a legal obligation of support would keep the trust out of the trustee's gross estate, such a restriction might result in loss of the gift tax annual exclusion for contributions to the trust, even if the trustee were otherwise granted unlimited discretion. See Rev. Rul. 69-345, 1969-1 C.B. 226.

2004 Amendment. The amendment substitutes "ascertainable standard" which is now a defined term in Section 103(2), for the former and identical definition in this section. No substantive change is intended.

NORTH CAROLINA COMMENT

Subsection (a) of the Uniform Trust Code was modified to omit the provisions requiring a trustee to exercise a discretionary power "in good faith" and to substitute, instead, the common law rule expressed in case law regarding the actions of the trustee that constitute an abuse of discretion. See Woodard v. Mordecai, 234 N.C. 463, 67 S.E.2d 639 (1951); Lineback v. Stout, 79 N.C. App. 292, 339 S.E.2d 103 (1986).

Subsection (b) modifies the provisions of the Uniform Trust Code by referring in paragraph (1) to the power conferred on the trustee as a "general power of appointment" and to bring forward the language in former G.S. 32-34 defining a "general power of appointment".

Subsection (b) changes North Carolina law by permitting the trustee to exercise a power to make discretionary distributions to or for the trustee's personal benefit as if the power were limited by an ascertainable standard, a familiar federal tax concept.

Subsection (c) is consistent with former G.S. 32-34 allowing a prohibited power to be exercised by a majority of the nondisqualified trustees, or if all are disqualified, authorizing the court to appoint a special trustee.

Subsection (e) was added to the Uniform Trust Code to bring forward the provisions of former G.S. 36A-130(a) intended to save the marital deduction treatment for estate and gift tax purposes with regard to trusts that would otherwise qualify for the marital deduction but do not expressly provide that the spouse may require that the assets be made productive of income or be converted within a reasonable period of time.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, subsection (b) is amended (i) to clarify that an express reference to this subsection must be made for its rules not to apply, (ii) to clarify in subdivision (a) (2) that the power of the trustee to make distributions to the trustee must constitute a general power of appointment and (iii) to bring forward in subdivision (a) (4) the provisions in former G.S. 32-34 requiring a trustee who has the power to allocate receipts and disbursements in the trustee's own favor to exercise such power in accordance with the provisions of Chapter 37A.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2007-106, s. 36, effective October 1, 2007, in the introductory paragraph of subsection (b), deleted "expressly" following "terms of the trust" and inserted "by an express reference to this subsection"; inserted "that would, except for this subsection, constitute in whole or in part a general power of appointment" in subdivision (b)(2); and added subdivision (b)(4). See Editor's note for applicability.

CASE NOTES

Editor's Note. - The case below was decided under prior law.

Withdrawal of Money for Legal Fees Held Proper. - Where lawyer placed settlement proceeds into an account and later withdrew money for services rendered by law firm, lawyer did not violate subsection (a) of this section which prohibits fiduciaries from making distributions to themselves; plaintiff's argument that the definition of fiduciary in G.S. 32-2 applies to subsection (a) was not supported by the statute and the payment by a lawyer to himself of the legal fee for services rendered in a piece of litigation out of the proceeds of settlement of that litigation is not the discretionary disbursement of principal or income to oneself prohibited by this section. Williams v. Randolph, 94 N.C. App. 413, 380 S.E.2d 553, cert. denied, 325 N.C. 437, 384 S.E.2d 547 (1989).

OFFICIAL COMMENT

This section is intended to grant trustees the broadest possible powers, but to be exercised always in accordance with the duties of the trustee and any limitations stated in the terms of the trust. This broad authority is denoted by granting the trustee the powers of an unmarried competent owner of individually owned property, unlimited by restrictions that might be placed on it by marriage, disability, or cotenancy.

The powers conferred elsewhere in this Code that are subsumed under this section include all of the specific powers listed in Section 816 as well as other powers described elsewhere in this Code. See Sections 108(c) (transfer of principal place of administration), 414(a) (termination of uneconomic trust with value less than $50,000), 417 (combination and division of trusts), 703(e) (delegation to cotrustee), 802(h) (exception to duty of loyalty), 807 (delegation to agent of powers and duties), 810(d) (joint investments), and Article 9 (Uniform Prudent Investor Act). The powers conferred by this Code may be exercised without court approval. If court approval of the exercise of a power is desired, a petition for court approval should be filed.

A power differs from a duty. A duty imposes an obligation or a mandatory prohibition. A power, on the other hand, is a discretion, the exercise of which is not obligatory. The existence of a power, however created or granted, does not speak to the question of whether it is prudent under the circumstances to exercise the power.

2003 Amendment. The amendment, which changes an "or" to an "and" between subsections (a)(1) and (a)(2), corrects an inadvertent style glitch. As the comments to Section 815 make clear, the drafters intended that the trustee have both the powers stated in the terms of the trust and the powers specified in this Act, not that they be alternatives.

NORTH CAROLINA COMMENT

Subsection (a) is similar to former G.S. 36A-136 but is broader in scope. Former G.S. 36A-136 granted powers that a reasonable and prudent person would perform "incident to the collection, preservation, management, use and distribution of the trust to accomplish the best desired result of administering the trust estate legally and in the best interest of the trust beneficiaries". In contrast, subsection (a) not only grants powers to achieve proper management and distribution of the trust, but also all powers "that an unmarried competent owner has over individually owned property".

Subsection (a)(2)b. of the Uniform Trust Code was modified by adding the words "administration, or" following the word "management".

SUPPLEMENTAL NORTH CAROLINA COMMENT (2006)

Effective October 1, 2006, subsection (a) is amended to clarify that a trustee may exercise any of the powers described in subsections (a)(1) and (2). In addition, subsection (b) is amended to clarify that, consistent with the provisions of G.S. 36C-10-1012, third parties may rely upon the trustee's exercise of power without confirming that the trustee exercised the powers in accordance with the trustee's fiduciary duties.

Editor's Note. - Session Laws 2006-259, s. 13(r), provides: "The Revisor of Statutes is authorized to cause to be printed any amendments to the explanatory comments of the drafters of S.L. 2005-192 that are prepared by the drafters of this section, as the Revisor deems appropriate."

Effect of Amendments. - Session Laws 2006-259, s. 13(k), effective October 1, 2006, in subsection (a), added "any of the following" at the end of the introductory language, and made a punctuation change in subdivision (a)(1); and rewrote subsection (b), which read: "The exercise of a power is subject to the fiduciary duties prescribed by this Article." See Editor's note for applicability.

OFFICIAL COMMENT

This section enumerates specific powers commonly included in trust instruments and in trustee powers legislation. All the powers listed are subject to alteration in the terms of the trust. See Section 105. The powers listed are also subsumed under the general authority granted in Section 815(a)(2) to exercise all powers over the trust property which an unmarried competent owner has over individually owned property, and any other powers appropriate to achieve the proper management, investment, and distribution of the trust property. The powers listed add little of substance not already granted by Section 815 and powers conferred elsewhere in the Code, which are listed in the Comment to Section 815. While the Committee drafting this Code discussed dropping the list of specific powers, it concluded that the demand of third parties to see language expressly authorizing specific transactions justified retention of a detailed list.

As provided in Section 815(b), the exercise of a power is subject to fiduciary duties except as modified in the terms of the trust. The fact that the trustee has a power does not imply a duty that the power must be exercised.

Many of the powers listed in this section are similar to the powers listed in Section 3 of the Uniform Trustees' Powers Act (1964). Several are new, however, and other powers drawn from that Act have been updated. The powers enumerated in this section may be divided into categories. Certain powers, such as the powers to acquire or sell property, borrow money, and deal with real estate, securities, and business interests, are powers that any individual can exercise. Other powers, such as the power to collect trust property, are by their very nature only applicable to trustees. Other specific powers, particularly those listed in other sections of the Uniform Trust Code, modify a trustee duty that would otherwise apply. See, e.g., Sections 802(h) (exceptions to duty of loyalty) and 810(d) (joint investments as exception to earmarking requirement).

Paragraph (1) authorizes a trustee to collect trust property and collect or decline additions to the trust property. The power to collect trust property is an incident of the trustee's duty to administer the trust as provided in Section 801. The trustee has a duty to enforce claims as provided in Section 811, the successful prosecution of which can result in collection of trust property. Pursuant to Section 812, the trustee also has a duty to collect trust property from a former trustee or other person holding trust property. For an application of the power to reject additions to the trust property, see Section 816(13) (power to decline property with possible environmental liability).

Paragraph (2) authorizes a trustee to sell trust property, for cash or on credit, at public or private sale. Under the Restatement, a power of sale is implied unless limited in the terms of the trust. Restatement (Third) of Trusts: Prudent Investor Rule Section 190 (1992). In arranging a sale, a trustee must comply with the duty to act prudently as provided in Section 804. This duty may dictate that the sale be made with security.

Paragraph (4) authorizes a trustee to deposit funds in an account in a regulated financial-service institution. This includes the right of a financial institution trustee to deposit funds in its own banking department as authorized by Section 802(h)(4).

Paragraph (5) authorizes a trustee to borrow money. Under the Restatement, the sole limitation on such borrowing is the general obligation to invest prudently. See Restatement (Third) of Trusts: Prudent Investor Rule Section 191 (1992). Language clarifying that the loan may extend beyond the duration of the trust was added to negate an older view that the trustee only had power to encumber the trust property for the period that the trust was in existence.

Paragraph (6) authorizes the trustee to continue, contribute additional capital to, or change the form of a business. Any such decision by the trustee must be made in light of the standards of prudent investment stated in Article 9.

Paragraph (7), regarding powers with respect to securities, codifies and amplifies the principles of Restatement (Second) of Trusts Section 193 (1959).

Paragraph (9), authorizing the leasing of property, negates the older view, reflected in Restatement (Second) of Trusts Section 189 cmt. c (1959), that a trustee could not lease property beyond the duration of the trust. Whether a longer term lease is appropriate is judged by the standards of prudence applicable to all investments.

Paragraph (10), authorizing a trustee to grant options with respect to sales, leases or other dispositions of property, negates the older view, reflected in Restatement (Second) of Trusts Section 190 cmt. k (1959), that a trustee could not grant another person an option to purchase trust property. Like any other investment decision, whether the granting of an option is appropriate is a question of prudence under the standards of Article 9.

Paragraph (11), authorizing a trustee to purchase insurance, empowers a trustee to implement the duty to protect trust property. See Section 809. The trustee may also insure beneficiaries, agents, and the trustee against liability, including liability for breach of trust.

Paragraph (13) is one of several provisions in the Uniform Trust Code designed to address trustee concerns about possible liability for violations of environmental law. This paragraph collects all the powers relating to environmental concerns in one place even though some of the powers, such as the powers to pay expenses, compromise claims, and decline property, overlap with other paragraphs of this section (decline property, paragraph (1); compromise claims, paragraph (14); pay expenses, paragraph (15)). Numerous States have legislated on the subject of environmental liability of fiduciaries. For a representative state statute, see Tex. Prop. Code Ann. Section 113.025. See also Sections 701(c)(2) (designated trustee may inspect property to determine potential violation of environmental or other law or for any purpose) and 1010(b) (trustee not personally liable for violation of environmental law arising from ownership or control of trust property).

Paragraph (14) authorizes a trustee to pay, contest, settle, or release claims. Section 811 requires that a trustee need take only "reasonable" steps to enforce claims, meaning that a trustee may release a claim not only when it is uncollectible, but also when collection would be uneconomic. See Restatement (Second) of Trusts Section 192 (1959) (power to compromise, arbitrate and abandon claims).

Paragraph (15), among other things, authorizes a trustee to pay compensation to the trustee and agents without prior approval of court. Regarding the standard for setting trustee compensation, see Section 708. See also Section 709 (repayment of trustee expenditures). While prior court approval is not required, Section 813(b)(4) requires the trustee to inform the qualified beneficiaries in advance of a change in the method or rate of compensation.

Paragraph (16) authorizes a trustee to make elections with respect to taxes. The Uniform Trust Code leaves to other law the issue of whether the trustee, in making such elections, must make compensating adjustments in the beneficiaries' interests.

Paragraph (17) authorizes a trustee to take action with respect to employee benefit or retirement plans, or annuities or life insurance payable to the trustee. Typically, these will be beneficiary designations which the settlor has made payable to the trustee, but this Code also allows the trustee to acquire ownership of annuities or life insurance.

Paragraphs (18) and (19) allow a trustee to make loans to a beneficiary or to guarantee loans of a beneficiary upon such terms and conditions as the trustee considers fair and reasonable. The determination of what is fair and reasonable must be made in light of the fiduciary duties of the trustee and the purposes of the trust. Frequently, a trustee will make loans to a beneficiary which might be considered less than prudent in an ordinary commercial sense although of great benefit to the beneficiary and which help carry out the trust purposes. If the trustee requires security for the loan to the beneficiary, adequate security under this paragraph may consist of a charge on the beneficiary's interest in the trust. See Restatement (Second) of Trusts Section 255 (1959). However, the interest of a beneficiary subject to a spendthrift restraint may not be pledged as security for a loan. See Section 502.

Paragraph (20) authorizes the appointment of ancillary trustees in jurisdictions in which the regularly appointed trustee is unable or unwilling to act. Normally, an ancillary trustee will be appointed only when there is a need to manage real estate located in another jurisdiction. This paragraph allows the regularly appointed trustee to select the ancillary trustee and to confer on the ancillary trustee such powers and duties as may be necessary. The appointment of ancillary trustees is a topic which a settlor may wish to address in the terms of the trust.

Paragraph (21) authorizes a trustee to make payments to another person for the use or benefit of a beneficiary who is under a legal disability or who the trustee reasonably believes is incapacitated. Although an adult relative or other person receiving funds is required to spend it on the beneficiary's behalf, it is preferable that the trustee make the distribution to a person having more formal fiduciary responsibilities. For this reason, payment may be made to an adult relative only if the trustee does not know of a conservator, guardian, custodian, or custodial trustee capable of acting for the beneficiary.

Paragraph (22) authorizes a trustee to make non-pro-rata distributions and allocate particular assets in proportionate or disproportionate shares. This power provides needed flexibility and lessens the risk that a non-pro-rata distribution will be treated as a taxable sale.

Paragraph (23) authorizes a trustee to resolve disputes through mediation, arbitration or other methods of alternate dispute resolution. The drafters of this Code encourage the use of such alternate methods for resolving disputes. Arbitration is a form of nonjudicial settlement agreement authorized by Section 111. In representing beneficiaries and others in connection with arbitration or in approving settlements obtained through mediation or other methods of ADR, the representation principles of Article 3 may be applied. Settlors wishing to encourage use of alternate dispute resolution may draft to provide it. For sample language, see American Arbitration Association, Arbitration Rules for Wills and Trusts (1995).

Paragraph (24) authorizes a trustee to prosecute or defend an action. As to the propriety of reimbursement for attorney's fees and other expenses of an action or judicial proceeding, see Section 709 and Comment. See also Section 811 (duty to defend actions).

Paragraph (26), which is similar to Section 344 of the Restatement (Second) of Trusts (1959), clarifies that even though the trust has terminated, the trustee retains the powers needed to wind up the administration of the trust and distribute the remaining trust property.

NORTH CAROLINA COMMENT

The specific powers of the Uniform Trust Code were modified (i) to ensure inclusion of the substance of all of the powers in G.S. 32-27 and former G.S. 36A-136, (ii) to add a few specific powers not in current or former law, and (iii) to make other clarifying changes.

Two notable changes in the specific powers in former G.S. 36A-136 include the following:

(i) If the terms of the will did not provide otherwise, under former G.S. 36A-136(8) a trustee could dispose of real property only pursuant to court order or without court order as provided in Article 28A of Chapter 1 of the General Statutes entitled "Judicial Sales", whereas under paragraph (2) of this section the disposition of real property is not so restricted.

(ii) The specific power in former G.S. 36A-136(20) authorized the trustee to borrow money for the sole purpose of paying debts, taxes and other claims against the trust property whereas paragraph (5) of this section does not restrict borrowing to these purposes.

Some of the more significant changes and additions made in the Uniform Trust Code are:

(i) Subparagraph e. was added to paragraph (7) concerning the exercise of rights to consent to mergers, consolidation or other adjustment or disposition of a business enterprise and to elect to participate as a member of a class in any litigation involving securities.

(ii) Paragraphs (19a), (19b) and (19c) were added to clarify and expand provisions concerning the pledge of trust property and guaranty of loans to a beneficiary and to an entity in which the trust has an ownership interest.

(iii) Paragraph (22) was amended to permit dispositions of trust property without regard to the income tax basis and other tax attributes as provided in G.S. 32-27(27).

(iv) Paragraph (27) was added to bring forward the substance of provisions of G.S. 32-27(24) and former G.S. 36A-136(14).

(v) Paragraph (28) was added to bring forward provisions in former G.S. 36A-136(19).

(vi) Paragraph (29) was added to refer to G.S. 36C-4-417 bringing forward the substance of provisions of G.S. 32-27(25b) and former G.S. 36A-136(24) with modifications.

(vii) Paragraph (30) was added to authorize but not require the trustee to request an order from the court for the sale or other disposition of real or personal property as provided in former G.S. 36A-138 and former G.S. 36A-140.

(viii) Paragraph (31) was added to bring forward the provisions of former G.S. 36A-141.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2007)

Effective October 1, 2007, paragraphs (19b) and (19c) are amended to clarify that a trustee may guarantee loans and pledge property to guarantee loans made by others to an entity in which the beneficiary has an ownership interest.

In addition, also effective October 1, 2007, paragraph (21) is amended to grant to a trustee the power to apply distributions for a beneficiary's benefit even though the beneficiary may not be under a legal disability, except that a beneficiary must consent to the application for the beneficiary's benefit of any amount required to be paid to the beneficiary.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2009)

Effective October 1, 2009, this section is amended to delete subparagraph (13)c. and to add a new paragraph (32). Subparagraph (13)c. authorized a trustee to decline to accept property into trust or disclaim any power with respect to property that is or may be burdened with liability for violation of environmental law. This authority is subsumed under new paragraph (32) which authorizes the trustee to renounce, in accordance with Chapter 31B of the General Statutes, an interest in or power over property, including property that is or may be burdened with liability for violation of environmental law.

Effective October 1, 2009, paragraphs (19), (19a), (19b), and (19c) of this section are amended to clarify that a trustee who makes a loan with the trustee's own funds may guarantee the loan and pledge trust property to guarantee the loan, but as provided in G.S. 36C-8-815(b), the exercise of these powers does not relieve the trustee of fiduciary duties under this Chapter, including the duty of loyalty addressed in G.S. 36C-8-802.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2012)

Effective October 1, 2011, paragraph (26) is amended to clarify that upon termination of the trust the trustee may exercise all the powers otherwise exercisable by the trustee during the administration of the trust, as well as additional powers appropriate to wind up the administration of the trust and distribute the bust property. The amendment is intended to make it clear that North Carolina law does not follow authorities that would impose limitations on the trustee's administration and distribution powers following an event causing termination of a trust.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2013)

Effective June 12, 2013, paragraph (16) is amended to clarify that the trustee's power to exercise tax elections includes, but is not limited to, considering discretionary distributions to a beneficiary as being made from capital gains realized during the year. A trustee may desire to include capital gains in distributable net income so that the tax liability for the gains is passed to beneficiaries who, for example, may be in lower marginal tax bracket than the trust. Paragraph (16) as clarified by the amendment is intended to satisfy the requirement of Treasury Regulations section 1.643(a)-3 that including capital gains in distributable net income under the alternatives set forth in that section pursuant to "a reasonable and impartial exercise of discretion" by the fiduciary must be "in accordance with a power granted to the fiduciary by applicable local law or by the governing instrument if not prohibited by local law."

SUPPLEMENTAL NORTH CAROLINA COMMENT (2016)

Effective June 30, 2016, this section is amended to add subdivision (33), which provides a cross-reference concerning trustees in Chapter 36F of the General Statutes, the Revised Uniform Fiduciary Access to Digital Assets Act.

Editor's Note. - Session Laws 2007-106, s. 55, provides: "The Revisor of Statutes shall cause to be printed all explanatory comments of the drafters of this act, or revisions to existing explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2009-48, s. 18, provides: "The Revisor of Statutes shall cause to be printed along with this act all explanatory comments of the drafters of this act as the Revisor deems appropriate."

Session Laws 2010-96, s. 22, provides: "The Revisor of Statutes may cause to be printed all explanatory comments of the drafters of S.L. 2009-222, 2009-267, and 2009-318 as the Revisor deems appropriate."

Session Laws 2012-18, s. 4, provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the North Carolina Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Session Laws 2013-91, s. 4, provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the North Carolina Uniform Trust Code and all explanatory comments of the drafters of this act, as the Revisor may deem appropriate."

Session Laws 2016-53, s. 11, is a severability clause.

Effect of Amendments. - Session Laws 2007-106, s. 37, effective October 1, 2007, substituted "any beneficiary" for "a beneficiary" in subdivisions (19) and (19a); substituted "any proprietorship" for "a proprietorship" in subdivision (19a); inserted "or any beneficiary" in subdivisions (19b) and (19c); and in subdivision (21), rewrote the introductory paragraph, deleted "or, if the beneficiary does not have a general guardian or guardian of the beneficiary's estate, the guardian of the beneficiary's person" at the end of subdivision (21)a., and in the last paragraph, substituted "including a minor" for "including the minor" in the first sentence, and added the last sentence.

Session Laws 2009-48, ss. 16 and 17, effective October 1, 2009, and applicable to renunciations and powers of attorney executed on or after that date, repealed subdivision (13)c., added subdivision (32), and made related grammatical and punctuation changes.

Session Laws 2009-222, s. 1, effective October 1, 2009, deleted "by others" preceding "to any" in subdivisions (19) through (19c) and made a minor stylistic change in subdivision (19c).

Session Laws 2011-339, s. 4, effective October 1, 2011, and applicable to all trusts created before, on, or after that date, rewrote subdivision (26), which formerly read: "On termination of the trust, exercise the powers appropriate to wind up the administration of the trust and distribute the trust property to the persons entitled to it."

Session Laws 2013-91, s. 2(c), effective June 12, 2013, added "including, but not limited to, considering discretionary distributions to a beneficiary as being made from capital gains realized during the year" in subdivision (16).

Session Laws 2016-53, s. 9, effective June 30, 2016, deleted "and" at the end of subdivision (31); substituted "law, and" for "law" at the end of subdivision (32); and added subdivision (33).

Session Laws 2017-25, s. 3, effective June 2, 2017, substituted "G.S. 28A-22-10" for "G.S. 28A-22-110" in subsection (31).

OFFICIAL COMMENT

This section contains several independent provisions governing distribution upon termination. Other provisions of the Uniform Trust Code relevant to distribution upon termination include Section 816(26) (powers upon termination to windup administration and distribution), and 1005 (limitation of action against trustee).

Subsection (a) is based on Section 3-906(b) of the Uniform Probate Code. It addresses the dilemma that sometimes arises when the trustee is reluctant to make distribution until the beneficiary approves but the beneficiary is reluctant to approve until the assets are in hand. The procedure made available under subsection (a) facilitates the making of non-pro-rata distributions. However, whenever practicable it is normally better practice to obtain the advance written consent of the beneficiaries to a proposed plan of distribution. Similar to other notices under the Code, the right of a beneficiary to object may be barred by delivery of the proposal to another person if that other person may represent and bind the beneficiary as provided in Article 3.

The failure of a beneficiary to object to a plan of distribution pursuant to subsection (a) is not a release as provided in subsection (c) or Section 1009. A release requires an affirmative act by a beneficiary and is not accomplished upon a mere failure to object. Furthermore, a failure of a beneficiary to object does not preclude the beneficiary from bringing an action with respect to matters not disclosed in the proposal for distribution.

Subsection (b) recognizes that upon an event terminating or partially terminating a trust, expeditious distribution should be encouraged to the extent reasonable under the circumstances. However, a trustee is entitled to retain a reasonable reserve for payment of debts, expenses, and taxes. Sometimes these reserves must be quite large, for example, upon the death of the beneficiary of a QTIP trust that is subject to federal estate tax in the beneficiary's estate. Not infrequently, a substantial reserve must be retained until the estate tax audit is concluded several years after the beneficiary's death.

Subsection (c) is an application of Section 1009. Section 1009 addresses the validity of any type of release that a beneficiary might give. Subsection (c) is more limited, dealing only with releases given upon termination of the trust. Factors affecting the validity of a release include adequacy of disclosure, whether the beneficiary had a legal incapacity and was not represented under Article 3, and whether the trustee engaged in any improper conduct. See Restatement (Second) of Trusts Section 216 (1959).

Comment Amended in 2005.

NORTH CAROLINA COMMENT

This section, which incorporates the provisions of subsection (b) of the Uniform Trust Code, is generally consistent with prior North Carolina law. See First-Citizens Bank & Trust Co. v. Carr, 279 N.C. 539, 184 S.E.2d 269 (1971) where the court said that upon termination of a trust "it is the duty of the trustee to distribute, with reasonable care and prudence, the corpus of the trust to those entitled to such property by virtue of the trust instrument".

The drafters omitted subsection (a) of the Uniform Trust Code providing that upon termination of a trust the trustee may send to the beneficiaries a proposal for distribution and that the right of the beneficiary to object to the proposed distribution terminates if no objection is made within 30 days but only if the report informed the beneficiary of the right to object and of the time allowed to object. The drafters thought this provision would rarely, if ever, be used and was therefore unnecessary.

Subsection (c) of the Uniform Trust Code was also omitted because the drafters considered it to be a duplication of the provisions contained in G.S. 36C-10-1009.

OFFICIAL COMMENT

The Uniform Trust Decanting Act applies to all express trusts that are irrevocable or that are revocable by the settlor only with the consent of the trustee or a person holding an adverse interest. The act does not apply to a trust revocable by the settlor without the consent of the trustee or a person holding an adverse interest, even if the settlor is incapacitated and thus unable to exercise the power to amend or revoke. Thus the act does not apply to a revocable trust as that term is defined in Section 103(14) of the Uniform Trust Code.

Section 5-411(a)(4) of the Uniform Guardianship and Protective Proceedings Act allows a conservator to amend (and revoke) the terms of a protected person's revocable trust. Section 201(a)(1) of the Uniform Power of Attorney Act allows a settlor to grant a power to amend or revoke to an agent. Accordingly, while the settlor is alive, there are uniform rules for modifying a revocable trust. States that have not adopted these uniform rules may have other provisions for modification of a revocable trust when the settlor is incapacitated.

The act does not permit decanting a trust held solely for charitable purposes (a "wholly charitable trust"). Section 3(b). A private foundation structured as a trust would be a wholly charitable trust that could not be decanted pursuant to the act.

A wholly charitable trust is subject to different public policy concerns than a private trust. Private trusts have identifiable beneficiaries who may enforce their interests in the trust. Charitable trusts have as beneficiaries the community as a whole or charitable organizations, and enforcement may be left to the state's Attorney General or another official. Further, charitable trusts often have particular charitable purposes, and conditions or restrictions on the use of the trust assets. Settlors of wholly charitable trusts often have particularly strong interests in seeing that these purposes, conditions and restrictions are not changed. Special legal doctrines, such as cy pres , are available when it becomes unlawful, impossible, or impracticable to carry out the purposes of a wholly charitable trust.

If an irrevocable trust that has noncharitable beneficiaries will in the future be used to fund a wholly charitable trust, the decanting power may be exercised over the irrevocable trust, subject to Section 14, but the decanting may not change the terms of the wholly charitable trust.

To the extent a conservation easement or other restricted gift is considered to be an express trust, such an interest would be a wholly charitable trust that could not be decanted pursuant to the act.

While a split interest trust such as a charitable remainder trust or charitable lead trust would not be a wholly charitable trust, in almost all cases the trustee of such a trust would not have discretion to distribute principal to a current beneficiary and therefore there would not be an authorized fiduciary (see Section 2(3)) who would have authority to exercise the decanting power under Section 11 or Section 12.

If an authorized fiduciary has discretion to distribute principal of a trust that is not a wholly charitable trust but that contains a charitable interest (see Section 2(5)), the charitable interest may not be diminished, the charitable purpose set forth in the first trust may not be changed and any conditions or restrictions on the charitable interest may not be changed. See subsection 14(c).

The Uniform Trust Decanting Act is not the exclusive way to decant a trust and is not the exclusive way to modify a trust. The terms of the trust instrument may grant a fiduciary or other person the power to modify the trust. This act does not supplant any authority granted under such a trust provision. Any such authority granted under the trust instrument does not affect the application of this act unless the trust instrument imposes an express restriction on the exercise of the decanting power under this act or other state statute authorizing a fiduciary to decant. See Section 15(b).

A decanting statute of another state may apply to a trust and, even if this act could also apply to the trust, this act does not supplant the right of a trustee to decant under the statute of such other state. Thus in some situations a fiduciary may have the option of decanting under this act or the decanting statute of another state.

Common law in some states may permit a trustee to decant. This act does not supplant any right to decant under common law. Thus in some cases a fiduciary may have the option of decanting under this act or under common law.

Section 111 of the Uniform Trust Code and statutes in many states permit certain matters regarding a trust to be resolved by a nonjudicial settlement agreement among the interested persons. Those statutes generally permit certain beneficiaries of a trust to approve an exercise of a power by a trustee and thus would permit certain beneficiaries to approve an exercise of the decanting power. In some cases the modification made by an exercise of the decanting power could also have been made by a virtual representation agreement, and in those cases an exercise of the decanting power sometimes might be combined with a nonjudicial settlement agreement. Generally, the nonjudicial settlement agreement would prevent any subsequent challenges to the decanting. The tax consequences of having the beneficiaries consent to the nonjudicial settlement agreement should be considered.

NORTH CAROLINA COMMENT

Subsection (a) is consistent with former G.S. 36C-8-816.1, which was applicable to a trust established under an irrevocable trust instrument. G.S. 36C-1-103(16) provides that the term "revocable" when applicable to a trust means revocable by the settlor without the consent of the trustee or a person holding an adverse interest.

Subsection (b) has no counterpart in prior North Carolina decanting law. The drafters modified subsection (b) of the Uniform Trust Decanting Act to include a reference to G.S. 36C-4-405(a), which sets forth the purposes for which a charitable trust may be created.

Subsection (c) is consistent with prior North Carolina decanting law, as G.S. 36C-1-105(b) provides that this Article and former G.S. 36C-8-816.1 are primarily default statutes that could be prohibited or restricted by the terms of a trust.

Subsection (d) is consistent with former G.S. 36C-8-816.1(g), which provided that nothing in that section shall be construed to abridge the right of any trustee to decant under the terms of a trust or common law, thereby clarifying that the statutory power to decant is nonexclusive and in addition to any power to decant under the trust instrument or common law.

OFFICIAL COMMENT

Except as noted below, in exercising the decanting power, the authorized fiduciary is subject to the same fiduciary duties as in exercising any other discretionary power. For example, Section 801 of the Uniform Trust Code provides that the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries. Section 814(a) of the Uniform Trust Code provides that a trustee shall exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries. Section 76 of the Restatement Third of Trusts provides that a trustee has a duty to administer the trust diligently and in good faith, in accordance with the terms of the trust and applicable law.

An exercise of the decanting power must be in accordance with the purposes of the first trust. The purpose of decanting is not to disregard the settlor's intent but to modify the trust to better effectuate the settlor's broader purposes or the settlor's probable intent if the settlor had anticipated the circumstances in place at the time of the decanting. The settlor's purposes generally include efficient administration of the trust. The settlor's purposes may also include achieving certain tax objectives or generally minimizing overall tax liabilities. The settlor's purposes often include avoiding fruitless, needless dissipation of the trust assets should a beneficiary develop dependencies such as substance abuse or gambling, have creditor problems, or otherwise be unfit to prudently manage assets that might be distributed from the trust.

The exercise of the decanting power need not be in accord with the literal terms of the first-trust instrument because decanting by definition is a modification of the terms of the first trust. Therefore subsection 4(c) provides that the terms of the first trust shall be deemed to include the decanting power for purposes of determining the fiduciary duties of the authorized fiduciary. Nonetheless, the other terms of the first trust may provide insight into the purposes of the first trust and the settlor's probable intent under current circumstances.

Section 802 of the Uniform Trust Code and Section 78 of the Restatement Third of Trusts impose a duty of loyalty on the trustee. Thus in exercising a decanting power the trustee cannot place the trustee's own interests over those of the beneficiaries. For example, an authorized fiduciary may breach its fiduciary duties if the authorized fiduciary decants to permit self-dealing. While Sections 16, 17 and 18 expressly prohibit making certain changes that benefit the authorized fiduciary and are not likely to be in the beneficiaries' interests, these sections do not include all of the changes that may be breaches of the authorized fiduciary's fiduciary duties.

Section 803 of the Uniform Trust Code and Section 79 of the Restatement Third of Trusts impose a duty to treat the beneficiaries impartially. The duty to act impartially does not mean that the trustee must treat the beneficiaries equally. Rather the trustee must treat the beneficiaries equitably in light of the purposes and terms of the trust.

Section 804 of the Uniform Trust Code imposes a duty to administer the trust as a prudent person would and to exercise reasonable care, skill and caution. See also Restatement Third of Trusts: Prudent Investor Rule § 90 (2007).

Decanting may be appropriate in many situations in which judicial modification would be appropriate such as (1) when modification, because of circumstances not anticipated by the settlor, would further the purposes of the trust (see Uniform Trust Code § 412(a) and Restatement Third of Trusts § 66); (2) when continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust's administration (see Uniform Trust Code § 412(b)); (3) to replace the trustee if the value of the trust is insufficient to justify the costs of administration with the current trustee (see Uniform Trust Code § 414(b)); (4) to correct mistakes (see Uniform Trust Code § 415); (5) to achieve the settlor's tax objectives (see Uniform Trust Code § 416); and (6) to combine or divide trusts (see Uniform Trust Code § 417 and Restatement Third of Trusts § 68).

The Uniform Trust Decanting Act does not impose a duty on the authorized fiduciary to decant. To impose a duty on the authorized fiduciary to consider whether any possible decanting could improve the administration of the trust or further the trust purposes would create unfair risks and burdens for fiduciaries and also might, in some situations, present impartiality issues. A trustee cannot possibly consider all the possible ways in which a trust could be improved by decanting. While this act does not create a presumption in favor of the terms of the first trust, an authorized fiduciary generally should not be penalized for not modifying the terms of the trust.

There may be, however, circumstances in which the authorized fiduciary or trustee has a duty under general trust law to seek a deviation from the terms of the trust even if the authorized fiduciary or trustee does not have a duty to exercise a decanting power. Subsection 66(2) of the Restatement Third of Trusts provides:

(2) If a trustee knows or should know of circumstances that justify judicial action under Subsection (1) with respect to an administrative provision, and of the potential of those circumstances to cause substantial harm to the trust or its beneficiaries, the trustee has a duty to petition the court for appropriate modification of or deviation from the terms of the trust.

While subsection 66(2) is literally limited to deviations involving administrative provisions, Comment e to subsection 66(2) extends the trustee's duty to distribution provisions when the trustee is actually aware that a purpose of the settlor would be jeopardized by adhering to the existing provision regarding distributions.

The Reporter's Note to Comment e to subsection 66(2) of the Restatement Third of Trusts notes that the situations that might result in a duty to seek a deviation if the trustee has actual knowledge of the circumstances include extraordinary needs of the life beneficiary or irresponsibility of a potential distributee. See Illustration 2 in the Comments on subsection 66(1) of the Restatement Third of Trusts and the last paragraph of the Reporter's Note to Comment b to Section 66 of the Restatement Third of Trusts. In the Reporter's Notes to Comment b of Section 66 of the Restatement Third of Trusts, the Reporter notes that there may be a duty to seek deviation when there would be substantial distributions to beneficiaries who are legally competent to manage funds but practically at serious risk of squandering those distributions due, for example, to substance addiction or gambling. Although the Uniform Trust Decanting Act does not impose a duty to decant, an exercise of the decanting power would usually be an appropriate exercise of the authorized fiduciary's discretion in such circumstances. See also Restatement Third of Trusts § 87.

Where the trustee has a duty to seek a deviation and the appropriate deviation could be achieved by an exercise of the decanting power, the trustee could fulfill such duty by an exercise of the decanting power rather than seeking a judicial deviation.

NORTH CAROLINA COMMENT

Subsection (a) is generally consistent with North Carolina law in imposing under this Chapter fiduciary duties upon trustees in exercising discretion, including a trustee exercising the decanting power under former G.S. 36C-8-816.1. The subsection clarifies that the authorized fiduciary is subject to the same fiduciary duties in exercising the decanting power as in exercising any other discretionary power.

Under this Chapter these duties include the duty to administer the trust in good faith, in accordance with its terms and purposes and in the interests of beneficiaries imposed by G.S. 36C-8-801 and G.S. 36C-8-814(a), the duty of loyalty imposed by G.S. 36C-8-802, the duty to treat the beneficiaries impartially imposed by G.S. 36C-8-803, and the duty to administer the trust as a prudent person imposed by G.S. 36C-8-804.

Subsection (b) is consistent with former G.S. 36C-8-816.1(g), which provided that nothing in that section creates or implies a duty to exercise the decanting power, but broadens it in providing that this Article does not imply a duty to inform beneficiaries about the applicability of the Article.

Subsection (c), as noted by the National Conference of Commissioners on Uniform State Laws, makes it clear that the duty imposed by G.S. 36C-8-801 to administer the trust "in accordance with its terms" includes the decanting power, and the duty imposed by G.S. 36C-8-802(a) to administer the trust "solely in the interests of the beneficiaries" takes into account the decanting power.

OFFICIAL COMMENT

Because the authorized fiduciary by decanting is exercising a power over the first trust, the requirements in Section 5 apply to the first trust. It is irrelevant whether the second trust is governed by the law of the state or administered in the state.

The laws of different states may govern a trust for purposes of determining its validity, for purposes of construing the trust and for purposes of administration of the trust. The determination of the state law that governs for these purposes is also dependent upon whether the trust property consists of movables or land and whether the trust was created by a will or by an inter vivos instrument. See Restatement Second of Conflict of Laws §§ 267-279; Uniform Trust Code § 107; see also Uniform Probate Code § 2-703.

To provide greater certainty about whether the act applies to a trust, Section 5(2) provides that the act applies to a trust that by its terms provides that it is governed by the law of the enacting state, without further inquiry as to whether the law of the enacting state actually applies. The act also applies where the law of the enacting state in fact governs administration of the trust, construction of the terms of the trust, or determination of the meaning or effect of terms of the trust, whether or not the trust instrument expressly so states.

Decanting is considered an administrative power because it deals with the powers of the trustee. See Comment a to the Restatement Second Conflict of Laws § 271 (testamentary trusts) and Comment a to § 272 (inter vivos trusts). Decanting, however, can alter the beneficial interests of a trust. In order to avoid having different rules for the application of the act depending upon whether the exercise of the decanting power changes administrative provision or beneficial interests, and the difficulty of drawing a distinct line between modifications that are administrative in nature and modifications that change beneficial interests, the act is intended to have broad application.

This act applies if the law of the state governs for purposes of any one or more of administration, meaning or effect. "Meaning and effect" are the terms used in the Uniform Trust Code (see Section 107). "Construction" is the term used in the Restatement Second of Conflicts.

This act also applies if the trust instrument states that the law of the state governs for purposes of any one or more of administration, meaning or effect without the necessity of establishing that the law of the state in fact governs for such purpose.

Alternatively, it is sufficient if the trust has its principal place of administration in the state. See Section 108 of the Uniform Trust Code with respect to the principal place of administration of a trust. While a change of principal place of administration will usually change the law governing the administration of the trust, that is not the result under all circumstances. To avoid the difficulties of determining whether the law governing administration has changed when the principal place of administration has changed, the act applies to any trust with a principal place of administration in the state, regardless of what state law governs its administration and meaning and effect.

NORTH CAROLINA COMMENT

This section has no counterpart in prior North Carolina decanting law. See G.S. 36C-1-107 for the governing law determining the meaning and effect of the terms of a trust generally and G.S. 36C-1-108 with respect to the principal place of administration of a trust.

OFFICIAL COMMENT

A trustee should be able to administer a trust with some dispatch and without concern that reliance on a prior decanting is misplaced. This section allows a trustee, other fiduciary or other person to reasonably rely on the validity of a prior decanting, whether that decanting was performed under the act or under other law of the state or another jurisdiction. Thus this section relieves a trustee or other fiduciary from any duty it might otherwise have to determine definitively the validity of a prior decanting.

The person's reliance on the validity of a prior decanting must be reasonable. Thus a fiduciary must still review the facts of the prior decanting, whether it appears to be in compliance with the statute or other law under which the decanting was performed, and whether the law under which the decanting was performed appears to be applicable to the trust. If the second trust contains provisions that clearly are prohibited by the applicable decanting law, or fails to contain provisions that are clearly required by the applicable decanting law, reliance would not be reasonable.

When trusts have changed jurisdictions, it may be difficult to determine what law governs the administration of the trust. When trusts have multiple trustees, or a trustee conducts different trust functions in different places, it may be difficult to determine where the trust is administered. Thus it may be difficult in some cases to confirm with certainty which state decanting law applied to a prior attempted decanting. In some instances more than one state's decanting law may appear to apply, creating further uncertainty if the prior attempted decanting did not comply with all of the potentially applicable statutes. Section 6 protects a trustee or other person who makes a reasonable determination about which state decanting law applied to a prior decanting.

Ordinarily, a trustee or other person relying on a prior decanting need not independently verify compliance with every procedural rule of the decanting law. For example, ordinarily, the person relying on the prior decanting need not verify that every person required by the statute to receive notice in fact received notice. If such person knew, however, that the decanting law required notice and that no notice was given, reliance would not be reasonable.

This section does not validate any or all attempted decantings. Even if a trustee or other person may reasonably rely on a prior decanting, an interested person may still have the ability to challenge the decanting as invalid.

There may be times when the trustee or other person has sufficient questions about a prior attempted decanting that additional action is required to determine whether the prior attempted decanting was valid, in whole or in part, and to clarify the operating terms of the trust. In some cases the authorized fiduciary might use a new, properly implemented decanting to clarify the terms of the trust prospectively. In other cases a nonjudicial settlement agreement between the trustee and interested parties might be used to conform the effective terms of the trust. In some cases the trustee or other person might petition the court to determine the effective terms of the trust.

NORTH CAROLINA COMMENT

The provisions of this section are new to North Carolina decanting law.

OFFICIAL COMMENT

Generally a trustee is not required to provide notice to beneficiaries prior to exercising a discretionary power. This section is not intended to change the law in this regard except with respect to exercises of the decanting power. Because qualified beneficiaries are entitled to know the terms of the trust, they should receive notice of any change in the terms of the trust. Requiring prior notice seems reasonable, in light of the significant trust modifications that can be made by decanting, and practical, in that it helps determine if any settlor, fiduciary or beneficiary has an objection to or may challenge the decanting. Any person entitled to notice under subsection 7(c) may petition the court under Section 9 for a determination of whether the proposed or attempted exercise of the decanting power is an abuse of discretion or does not otherwise comply with the act.

If a qualified beneficiary is a minor, incapacitated, or unknown, or a beneficiary whose identity or location is not reasonably ascertainable, the representation principles of applicable state law may be employed. Under state law, an emancipated minor presumably may represent himself or herself.

Notice must be given to (a) each settlor of the first trust (see Section 2(25)); (b) all qualified beneficiaries (see Section 2(20)); (c) each holder of a presently exercisable power of appointment, whether or not such holder is a qualified beneficiary; (d) any person who may remove or replace the authorized fiduciary; (e) all other fiduciaries of the first trust; (f) all fiduciaries of the second trust or trusts; and (g) the Attorney General (or other official with enforcement authority over charitable interests) if there is a determinable charitable interest (see Section 14(a)(1)). If the authorized fiduciary is comprised of more than one fiduciary, notice should be given to any person who may remove or replace any of such fiduciaries. The term "replace" refers to the power to both remove and designate a successor for the authorized fiduciary, and does not refer to the power merely to designate a successor when a vacancy occurs.

Other notice provisions under state law may also apply to a decanting. Under Section 813(a) of the Uniform Trust Code, a trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. An exercise of the decanting power is a material fact. If the second trust is newly created for purposes of decanting, state law may require notice of the creation of the trust to certain beneficiaries. For example, Section 813 of the Uniform Trust Code requires a trustee, within 60 days after accepting a trusteeship, to notify the qualified beneficiaries of the acceptance and of the trustee's name, address, and telephone number. In addition, if the exercise of the decanting power results in a distribution of property, the distribution would be considered a disbursement that should be reported on the accounting of the first trust. If the exercise of the decanting power results in the termination of the first trust, state law or the trust instrument may require a final accounting.

Subsection (c)(7) entitles the Attorney General to notice of an exercise of the decanting power with respect to a trust containing a determinable charitable interest. See Section 14(a)(1).

Subsection (d) provides that notice need not be given to a person who is not known to the fiduciary or who is known to the fiduciary but cannot be located by the fiduciary after reasonable diligence. An analogous term, "reasonable care," is used in Section 1007 of the Uniform Trust Code. Section 1007 provides that a trustee who has exercised reasonable care to ascertain the happening of an event that affects the administration of a trust is not liable for a loss resulting from the trustee's lack of knowledge.

Although the act does not limit the amount of time that may pass between the giving of notice and the exercise of the decanting power, if the exercise of the power does not occur within a reasonable period of time from the proposed effective date set forth in the notice, a new notice should be given with a new notice period. Further, the authorized fiduciary's duties to keep beneficiaries and interested persons informed about the trust may require the authorized fiduciary to inform such persons if the decanting is not completed as proposed or when the decanting has been completed.

If after notice is given and before the decanting power is exercised, relevant facts change in a manner that entitles an additional person to receive notice, unless such additional person can be represented by another person who has already received notice, notice should be provided to such additional person. A new notice period should begin to run, unless such additional person waives the notice period.

Subsection (e) describes the items that must be included in the notice. Subparagraph (1) requires that the notice specify the manner in which the authorized fiduciary intends to exercise the decanting power. Depending upon the circumstances, the authorized fiduciary might describe the modifications being made, provide a comparison of the first trust and the second trust or, where the second trust is extensively different than the first trust, refer the notice recipient to the trust instruments. As a best practice, it is desirable to tell each notice recipient in which capacity he or she is receiving the notice. For example, a notice might state: "You are receiving this notice because you are the settlor of Trust XYZ" or "You are receiving this notice because you are a qualified beneficiary of Trust XYZ." In the case of notice to an Attorney General, it is a best practice to indicate where in the instruments the determinable charitable interest may be found and whether the second trust will be administered under the law of a different state (see Section 14(e)).

Although under Section 7(h) an exercise of the decanting power will not be ineffective because of the failure to provide the required notice to one or more persons, provided that the authorized fiduciary acted with reasonable care, the act does not override the court's ability to address breaches of fiduciary duty and to fashion appropriate remedies.

NORTH CAROLINA COMMENT

This section carries forward the notice requirements of former G.S. 36C-8-816.1(f)(2), which required the trustee to give at least 60 days written notice of the intention to exercise the decanting power to all qualified beneficiaries of the original trust, but differs from former G.S. 36C-8-816.1(f)(2) in requiring notice to persons who were not required to receive notice under former G.S. 36C-8-816.1(f)(2).

The drafters omitted subsection (a) of the Uniform Trust Decanting Act which provided that, in this section, a notice period begins on the date notice is given under subsection (c) of the Uniform Trust Decanting Act and ends 59 days after the day notice is given because this Article is subject to the notice provisions of G.S. 36C-1-109.

Subsection (a) incorporates the provisions of subsection (b) of the Uniform Trust Decanting Act and is consistent with former G.S. 36C-8-816.1(f)(2), described above.

Subsection (b) incorporates the provisions of subsection (c) of the Uniform Trust Decanting Act, modified as follows:

(i) In the introductory language of subsection (b), the drafters substituted the words "written notice" for the words "notice in a record."

(ii) In subdivision (b)(1), the drafters omitted the requirement set forth in subsection (c)(1) of the Uniform Trust Decanting Act that notice be given to each settlor of the first trust living or then in existence and provided instead that notice must be given to each settlor as to whom the second trust would be a grantor trust. The requirement set forth in subdivision (b)(1) is new to North Carolina decanting law.

Subdivision (b)(2) incorporates the provisions of subsection (c)(2) of the Uniform Trust Decanting Act and is consistent with former G.S. 36C-8-816.1(f)(2), described above.

Subdivisions (b)(3) and (b)(4) incorporate respectively the provisions of subsections (c)(4) and (c)(5) of the Uniform Trust Decanting Act and are both new to North Carolina decanting law.

The drafters chose to omit the following sections of the Uniform Trust Decanting Act for the reasons indicated below:

(i) Subsection (c)(3) requiring notice to be given to each holder of a presently exercisable power of appointment over any part or all of the first trust, which the drafters viewed as inconsistent with the concept of qualified beneficiaries required to receive notice under other provisions of this Chapter. See Official Comment to G.S. 36C-1-103.

(ii) Subsection (c)(6) requiring notice to be given to each fiduciary of the second trust, which the drafters viewed as an unnecessary complication.

(iii) Subsection (c)(7) requiring notice to be given to the Attorney General if Section (14)(b) of the Uniform Trust Decanting Act is applicable because the drafters did not adopt Section 14 of the Uniform Trust Decanting Act. Under G.S. 36C-8B-7(b)(2), a charitable organization that is a qualified beneficiary would be entitled to receive written notice of an intended exercise of a decanting power.

The drafters omitted that part of subsection (d) of the Uniform Trust Decanting Act providing that an authorized fiduciary is not required to give notice under subsection (c) of the Uniform Trust Decanting Act to a qualified beneficiary who is a minor and has no representative or to a person that is not known to the fiduciary or is known to the fiduciary but cannot be located by the fiduciary after reasonable diligence. This was omitted because this Article is subject to the notice provisions of G.S. 36C-1-109 and the provisions regarding representation under Article 3 of this Chapter.

Subsection (c) incorporates the provisions of subsection (e) of the Uniform Trust Decanting Act and is similar to former G.S. 36C-8-816.1(f)(2) providing that notice of a proposed decanting include a copy of the decanting instrument described in former G.S. 36C-8-816.1(f)(1), which in turn was required to set forth the manner of the exercise of the power, including the terms of the second trust, and the effective date of the exercise of the power. The requirement in subsection (c) that the notice include a copy of the first trust is new to North Carolina decanting law.

Subsection (d) incorporates the provisions of subsection (f) of the Uniform Trust Decanting Act and is consistent with former G.S. 36C-8-816.1(f)(3) providing that if all qualified beneficiaries waive the notice period by a signed written instrument delivered to the trustee, the trustee's power to appoint principal or income shall be exercisable after notice is waived by all qualified beneficiaries, notwithstanding the effective date of the exercise of the power.

Subsection (e) incorporates the provisions of subsection (g) of the Uniform Trust Decanting Act and is similar to former G.S. 36C-8-816.1(f)(4) providing that the trustee's notice under that subsection shall not limit the right of any beneficiary to object to the exercise of the trustee's power to appoint and bring an action for breach of trust seeking appropriate relief as provided by G.S. 36C-10-1001. Subdivision (e)(2) is new to North Carolina decanting law.

Subsection (f) incorporates the provisions of subsection (h) of the Uniform Trust Decanting Act and is new to North Carolina decanting law.

References in the Official Comment to "subsection 7(c)," "subsection (e)," and "Section 7(h)" should be understood respectively to refer to subsections (b), (c), and (f) of this section. The reference in the Official Comment to "subsection (c)(7)" should be disregarded.

OFFICIAL COMMENT

Once the authorized fiduciary has provided the requisite notice of a proposed decanting under Section 7 and the notice period has either passed or been waived as provided in Section 7(f), then on or about the proposed effective date for the exercise of the decanting power the authorized fiduciary may effectuate the decanting by a signed record. The notice (a) includes copies of the first-trust instrument and the second-trust instrument, (b) specifies the manner in which the decanting power would be exercised, including which property of the first trust is being distributed to each of the second trusts and which property, if any, remains in the first trust, and (c) specifies the proposed effective date for the decanting. In the case of an exercise of the decanting power that is structured as a modification of the first trust, the signed record required by Section 10 may be the same instrument setting forth the terms of the modified trust. Where the decanting is structured as a distribution to a separate second trust, generally the signed record required by Section 10 will be a separate instrument from the second-trust instrument.

The decanting power can be exercised by either an actual distribution of property to one or more second trusts or by modifying the terms of the first trust to create the second trust with or without an actual distribution of property. If the decanting power is exercised by modifying the terms of the first trust, the trustee could either treat the second trust created by such modification as a new trust, in which case the property of the first trust would need to be transferred to the second trust, or alternatively treat the second trust as a continuation of the first trust, in which case the property of the first trust would not need to be retitled.

Other actions may be required to formally complete the transfer of property from the first trust to the second trust, such as retitling accounts, executing deeds, and signing assignments.

NORTH CAROLINA COMMENT

The provisions of this section are somewhat similar to those in former G.S. 36C-8-816.1(f)(1), which required the exercise of the power to be in writing, signed and acknowledged by the trustee, setting forth the manner of the exercise, including the terms of the second trust, but this section differs from former G.S. 36C-8-816.1(f)(1) in the following respects which are new to North Carolina decanting law:

(i) The signed written instrument setting forth the exercise of the decanting power is no longer required to be acknowledged.

(ii) This section expressly requires identification of the first trust and a statement of the property of the first trust being distributed to each second trust and the property, if any, that remains in the first trust.

(iii) This section permits the required information to be identified by reference to the notice required by G.S. 36C-8B-7.

OFFICIAL COMMENT

Noncontingent Right . The term "noncontingent right" describes interests that are certain to occur. A right is not noncontingent if it is subject to the occurrence of a specified event that is not certain to occur. For example, if A's children who survive A are to receive trust assets upon A's death, the rights of A's children are not noncontingent, because each must survive A to take and they may not survive A. The rights of A's children are not noncontingent regardless of whether the requirement of survival is expressed as a condition precedent or a condition subsequent. Thus the result is the same if the gift upon A's death is to A's children in equal shares, but if any child predeceases A such child's share shall be distributed to such child's descendants in shares per stirpes.

A right also is not a noncontingent right if it is subject to the exercise of discretion. Thus if a trustee has discretion to make distributions to A and A's descendants for their support and health care, the interests of A and A's descendants are not noncontingent. The result is the same even if the trust directs the trustee to make distributions to A and A's descendants for their support and health care because the timing and amount of the distributions are subject to the trustee's discretion.

A right also is not noncontingent if a person has discretion to distribute the property subject to the interest to any person other than the beneficiary or the beneficiary's estate. Thus if a trust provides that all income shall be distributed annually to A, but gives the trustee discretion to distribute principal to B for B's support and medical care, A's right is not noncontingent.

A current mandatory right to receive income, an annuity or a unitrust payment where the trustee has no discretion to make distributions to others is a noncontingent right.

Presumptive Remainder Beneficiary . "Presumptive remainder beneficiary" means a qualified beneficiary (see Section 2(20)) other than a current beneficiary (see Section 2(9)). The presumptive remainder beneficiaries might be termed the first-line remainder beneficiaries. These are the beneficiaries who would become eligible to receive distributions were the event triggering the termination of a current beneficiary's interest or of the trust itself to occur on the date in question. Such a terminating event will often be the death or deaths of the current beneficiaries. A person who would have a presently exercisable general power of appointment if the trust terminated on that date or if the interests of the current beneficiaries terminated on that date without causing the trust to terminate is a presumptive remainder beneficiary.

Presumptive remainder beneficiaries can include takers in default of the exercise of a power of appointment. The term may sometimes include the persons entitled to receive the trust property pursuant to the irrevocable exercise of an inter vivos power of appointment. Because the exercise of a testamentary power of appointment is not effective until the testator's death, the qualified beneficiaries do not include appointees under the will of a living person. Nor would the term include the objects of an unexercised inter vivos power.

Successor Beneficiary . The term "successor beneficiary" means a beneficiary who has a future beneficial interest in a trust, vested or contingent, including a person who may become a beneficiary in the future by reason of inclusion in a class, other than a beneficiary who is a qualified beneficiary. Thus it includes beneficiaries who might be termed "second line" or more remote remainder beneficiaries. It also includes unborn or unascertained beneficiaries who are beneficiaries by reason of being members of a class. It does not include, however, a person who is merely a holder of a power of appointment but not otherwise a beneficiary.

Vested Interest . "Vested interest" includes a right to a mandatory distribution that is a noncontingent right as of the date of the exercise of the decanting power. Section 11(a)(4)(A). For example, if the trustee is required to distribute the trust principal to A when A attains age 30 if A is then living, and A has attained age 30 but the trustee has not yet made the distribution, A's right to receive the trust principal is a right to a mandatory distribution that is a noncontingent right. If A is age 29, however, A's right is not a noncontingent right because A must survive to age 30.

The right to a mandatory distribution does not include a right to a distribution pursuant to a standard or a right to a distribution in the discretion of a fiduciary. Thus a right to receive distributions for "support and health care," or for "best interests" would not be a mandatory distribution right for purposes of Section 11.

"Vested interest" also includes a current and noncontingent right, annually or more frequently, to a mandatory distribution of income, a specified dollar amount or a percentage of value of some or all of the trust properties. Section 11(a)(4)(B). Thus if A is currently entitled to all trust income payable annually, and the trustee has no discretion to not pay the income to A and no discretion to distribute principal to anyone other than A, A's right to income is a vested interest. A's right to income is a vested interest even if the trustee has discretion to distribute principal to A. The result is the same if instead of an income right, A has the right to receive a specified dollar amount or a percentage of value of trust assets. A's right is a vested interest even if the right will cease upon some future event, such as A's death or a particular date, so long as the future event is not an exercise of fiduciary discretion. A specified dollar amount includes a dollar amount that is dependent upon factors other than fiduciary discretion or specific events not certain to occur, such as the inflation rate. A "vested interest" includes a current right to a unitrust distribution based on the value of certain or all trust assets.

A fiduciary's power to make equitable adjustments to income or principal, whether granted under the trust instrument or state law, does not make an income interest not mandatory or not noncontingent. A fiduciary's power to exclude certain assets in determining a unitrust distribution to attain an equitable result, whether granted under the trust instrument or state law, does not make a unitrust interest not mandatory or not noncontingent. For example, a beneficiary's current right to receive an annual distribution equal to 4% of the value of the trust principal is a vested interest even if the fiduciary has a right to exclude from the value of trust principal non-income producing assets.

Even if all conditions to such right have been met, the decanting may eliminate current mandatory rights to income, annuity or unitrust distributions that have come into effect with respect to a beneficiary if the authorized fiduciary has discretion to make principal distributions to another beneficiary. For example, if the first trust provides for mandatory income distributions to A, but permits the authorized fiduciary to make discretionary principal distributions to A, B or C for their best interests, the decanting may eliminate A's mandatory income interest. In such case the first trust indirectly gave the authorized fiduciary the ability to reduce or eliminate A's income interest by making discretionary principal distributions to B or C.

A right to receive mandatory payments less frequently than annually is not a vested interest. For example, a right to receive 5% of the trust value every fifth year is not a vested interest, except with respect to any amounts currently payable. As another example, a right to receive distributions of one-third of the trust principal at ages 30, 35 and 40 is not a vested interest if the beneficiary has not attained age 30. If the beneficiary is age 30 but the trustee has not yet distributed the one-third payable at age 30, the beneficiary's right to that one-third is a vested interest, but the beneficiary's right to receive distributions at ages 35 and 40 is not a vested interest.

"Vested interest" also includes a current and noncontingent right, annually or more frequently, to withdraw income, a specified dollar amount, or a percentage of value of some or all of the trust property. Section 11(a)(4)(C). Thus, for example, it makes no difference whether the trustee is required to distribute income annually or whether the beneficiary may withdraw income annually. As another example, if B has a current right to withdraw annually the greater of $5,000 or 5% of the trust value each year, B's right is a vested interest. If B's right to withdraw did not begin until B attained age 25 and B has not attained age 25, B's right would not be a vested interest.

"Vested interest" also includes a presently exercisable general power of appointment. 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.

A power to withdraw from a trust is a power of appointment. See Restatement Third of Trusts § 56 comment b. Thus if a beneficiary has already attained an age at which the beneficiary can withdraw all or a portion of the trust, the second trust may not modify or eliminate that right of withdrawal. If a Crummey withdrawal power is still in effect with respect to a prior contribution to the trust, the second trust cannot modify or eliminate the Crummey withdrawal right.

For example, if the trustee may make discretionary distributions to C and C's descendants, C has a right to withdraw one-half of trust principal after attaining age 28, and C has attained age 28, C's right is a vested interest under Section 11(a)(4)(D) even if the trustee has power to distribute trust principal to anyone other than C.

"Vested interest" also includes a right to receive an ascertainable part of the trust property on the trust's termination which is not subject to the exercise of discretion or to the occurrence of a specified event that is not certain to occur. Thus if the trustee is to distribute income to F, and upon F's death is to distribute the principal to G or G's estate, G's interest is a vested interest. G would not have a vested interest if the trustee had discretion to distribute principal to F or if G was required to survive F to take the remainder interest. Thus the right of a person to receive the trust property upon the termination of such trust if such person is then living would not be a vested interest. Any interest with a condition is not a vested interest, regardless of whether the condition is a condition precedent or condition subsequent. For example, A does not have a vested interest if upon termination the trust property passes to A or A's estate, provided that A is then married or was married at the time of A's prior death.

Expanded Distributive Discretion Decanting . Under Section 11 an authorized fiduciary who has expanded distributive discretion to distribute all or part of the principal of a trust to one or more of the current beneficiaries may exercise the decanting power over the principal subject to such expanded distributive discretion.

"Expanded distributive discretion" is defined in Section 2(11). When a trustee is granted expanded distributive discretion, that is an indication that the settlor intended to rely on the trustee's judgment and discretion in making distributions. The settlor's faith in the trustee's judgment supports the assumption that the settlor would trust the trustee's judgment in making modifications to the trust instrument in light of changed circumstances including the beneficiary's circumstances and changes in tax and other laws.

The decanting power, like most discretionary distribution powers, can be exercised over all or part of the first trust. If it is exercised over only part of the first trust, the second trust would need to be a separate trust and could not be a continuation of the first trust. If the decanting power is exercised to distribute property of the first trust to more than one second trusts, then the second trusts (or at least all but one of the second trusts) would need to be separate trusts and could not be a continuation of the first trust.

If the authorized fiduciary has expanded discretion over only part of the first trust, the authorized fiduciary may exercise the decanting power under this section only over such part. See Section 11(f). With respect to the remainder of the trust, the authorized fiduciary may have the ability to decant under Section 12 or Section 13.

The second trust may contain any terms permissible for a trust subject only to the restrictions found in the act. Thus subject to subsections (c) and (f) of Section 11 and the other restrictions in Sections 14 through 20 and subject to the fiduciary duty in Section 4(a), the second trust may (1) eliminate (but not add) one or more current beneficiaries; (2) make a current beneficiary a presumptive remainder beneficiary or a successor beneficiary; (3) eliminate (but not add) one or more presumptive remainder and successor beneficiaries; (4) make a presumptive remainder beneficiary a successor beneficiary, or vice versa; (5) alter or eliminate rights that are not vested interests; (6) change the standard for distributions; (7) add or eliminate a spendthrift provision; (8) extend the duration of a trust (subject to Section 20); (9) change the jurisdiction of the trust and the law governing the administration of the trust (subject to Section 14(e)); (10) eliminate, modify or add powers of appointment; (11) change the trustee or trustee succession provisions; (12) change the powers of the trustee; (13) change administrative provisions of the trust; (14) add investment advisors, trust protectors or other fiduciaries; (15) divide a trust into more than one trust; and (16) consolidate trusts. The foregoing list merely provides examples and is not exhaustive.

The second trust, however, cannot make a remainder beneficiary a current beneficiary. This prohibition on accelerating a remainder interest is included to avoid any argument under Internal Revenue Code Section 674 that the mere existence of a power to make a remainder beneficiary a current beneficiary causes the trust to be a grantor trust, whether or not the decanting power is ever exercised in such manner.

Section 11(c)(3) prohibits the second trust from reducing or eliminating a vested interest. A vested interest is not reduced, however, just because other changes made as a result of a decanting may have incidental effects on the interest. For example, a modification of the fiduciary's investment powers or the manner of determining the fiduciary's compensation may have incidental effects on a beneficiary's interest, but such modifications do not reduce a vested interest.

The restrictions in Section 11(c)(3) do not apply to a decanting under Section 13. Section 13(c)(2).

Subsections (d) and (e) permit the second trust to retain or omit a power of appointment included in the first trust, or to create powers of appointment in one or more current beneficiaries of the first trust. For example, if the first trust permits the authorized fiduciary to make discretionary distributions of income or principal to the settlor's child A, and upon A's death the remainder is allocated for the settlor's descendants per stirpes, to be held in further trust for each such descendant, the second trust could grant A a lifetime and/r testamentary power, general or nongeneral. The second trust could grant A a lifetime power to appoint to A's descendants, spouse and charitable organizations and a testamentary power to appoint to A's estate or to the creditors of A's estate. The second trust also could provide that each descendant of the settlor for whom a trust is established at A's death will have an inter vivos or a testamentary, general or limited, power of appointment. The second trust could even give A's now living children, D and E, powers of appointment that they may exercise in their Wills, but that will only take effect upon A's death or, if later, their deaths.

Subsection (e) makes clear that persons who are not otherwise beneficiaries of the first trust may be permissible appointees of a power of appointment granted to a current beneficiary.

Sometimes state law may provide more than one method for making the same modification to a trust. For example, a combination of trusts or a division of a trust that would be permitted under Section 417 of the Uniform Trust Code may also be accomplished under this act through decanting. When a desired modification could be accomplished by decanting or by another method, the trustee may select either method.

NORTH CAROLINA COMMENT

Generally, in this section the drafters substantially modified Section 11 of the Uniform Trust Decanting Act by providing for an authorized fiduciary's power to decant pursuant to distributive discretion, whether or not limited to an ascertainable standard. This modification is generally consistent with former G.S. 36C-8-816.1(b). It differs, however, from the Uniform Trust Decanting Act, which makes a distinction between decanting pursuant to "expanded distribution discretion" as set forth in Section 11 of the Act and defined in part under Section 2 of the Act as a "discretionary power of distribution that is not limited to an ascertainable standard . . . ." and decanting pursuant to "a limited distributive discretion" as set forth in Section 12 of the Act and defined in that Section in part as a "discretionary power of distribution limited to an ascertainable standard . . . ."

In accordance with this modification, the drafters omitted the word "expanded" before "distributive discretion" wherever it appeared in this section. The references to "expanded distributive discretion" in the Official Comment should be understood to refer to distributive discretion, whether or not limited to an ascertainable standard. In addition, Section 12 of the Uniform Trust Decanting Act was omitted in its entirety. As previously noted in the North Carolina Comment to G.S. 36C-8B-2, the definition of "expanded distributive discretion" in Section 2 of the Act was also omitted.

Subsection (a) incorporates the provisions of subsection (a) of the Uniform Trust Decanting Act, modified as follows:

(i) The drafters omitted the definition of "presumptive remainder beneficiary" in Section 11(a)(2) of the Uniform Trust Decanting Act and the definition of "successor beneficiary" in Section 11(a)(3) of the Act because the drafters viewed the distinction between these types of beneficiaries as overly complicated and unnecessary. The discussions of these definitions in the Official Comment should be disregarded.

(ii) Sub-subdivisions (a)(2)a. through e. incorporate subsections (a)(4)(A) through (E) of the Uniform Trust Decanting Act, except that in sub-subdivision (a)(2)d. the term "power of withdrawal" was substituted for the term "a presently exercisable general power of appointment" in (a)(4)(d) of the Uniform Trust Decanting Act in view of the definition of "power of withdrawal" in G.S. 36C-1-103(13) generally defining a power of withdrawal as a presently exercisable power of appointment. The references in the Official Comment to "Section 11(a)(4)(A)", "Section 11(a)(4)(B)" and "Section 11(a)(4)(C)" should be understood to refer, respectively, to sub-subdivision (a)(2)a., sub-subdivision (a)(2)b. and sub-subdivision (a)(2)c. of this section.

The definitions of "noncontingent right" in subdivision (a)(1) and "vested interest" in subdivision (a)(2), together with the requirement that the second trust not reduce or eliminate any defined vested interest under subdivision (b)(3), are generally consistent with former G.S. 36C-8-816.1(c)(3), which provided that the second trust may not reduce certain fixed interests of the beneficiary, and resemble former G.S. 36C-8-816.1(c)(6)a., which provided that the second trust must provide a power of withdrawal identical to the power of withdrawal in the first trust.

Subdivisions (b)(1), (2) and (3) incorporate for the most part the provisions of Subsection (b) and (c)(1), (2) and (3) of the Uniform Trust Decanting Act, modified as follows:

(i) Subsection (b) of the Uniform Trust Decanting Act providing that an authorized fiduciary that has discretionary distribution over principal may exercise the decanting power over principal was modified to provide, consistent with the first sentence of former G.S. 36C-8-816.1(b), that, in addition, the authorized fiduciary may exercise a decanting power over income.

(ii) Subsection (c)(2) of the Uniform Trust Decanting Act referring to "presumptive remainder beneficiaries" or "successor beneficiaries" was omitted, and in its place the drafters brought forward in subdivision (b)(2) the provisions of former G.S. 36C-8-816.1(c)(1) that the beneficiaries of the second trust may include only beneficiaries of the original trust.

(iii) Subdivision (b)(4) was added to subsection (b) to bring forth the provisions of former G.S. 36C-8-816.1(c)(7) that when distributive discretion is subject to an ascertainable standard, the power to distribute income and principal to current beneficiaries in the second trust must be subject to the same ascertainable standard, but subdivision (b)(4) broadened the power to distribute to more than one second trust, so long as the power to distribute in the second trusts is subject to the same ascertainable standard and in the aggregate is exercisable in the favor of the same current beneficiaries. For example, assume a pot trust permits discretionary distributions of income and principal for the health, education, support and maintenance of A, B, and C. The Trustee exercises the decanting power to sever the pot trust into three separate, equal trusts with an identical distribution standard for each of A, B, and C. The severance would satisfy Section 11(b)(4) because distributions from each second trust would be subject to the same ascertainable standard and in the aggregate the power to distribute income and principal would be exercisable in favor of the same beneficiaries as the original pot trust.

References in the Official Comment to "subsection (c)" and "Section 11(c)(3)" should be understood to refer, respectively, to subsection (b) and subdivision (b)(3) of this section.

Subsection (c) incorporates the provisions of subsection (d) of the Uniform Trust Decanting Act which are broader in scope than former G.S. 36C-8-816.1(c)(8) which authorized the second trust to confer a power of appointment upon a beneficiary of the original trust. Subsection (d) of the Uniform Trust Decanting Act was modified to add the language "who is not an authorized fiduciary" after the words "current beneficiary" in subdivision (c)(3) of this section and after the words "remainder beneficiary" in subdivision (c)(4) of this section. This language was added to prevent an authorized fiduciary who is also a beneficiary from being able to grant a general power of appointment in the authorized fiduciary's own favor. The drafters were concerned that possessing the power to create a general power of appointment can be viewed as equivalent to possessing the general power of appointment itself. References in the Official Comment to "subsection (d)" should be understood as referring to subsection (c) of this section.

Subsection (d) incorporates the provisions of subsection (e) of the Uniform Trust Decanting Act and is generally consistent with the provisions of G.S. 36C-8-816.1(c)(8) that the permissible appointees of the power of appointment may include persons who are not beneficiaries of the original or second trust. References in the Official Comment to "subsection (e)" should be understood to refer to subsection (d) of this section.

Subsection (e) incorporates the provisions of subsection (f) of the Uniform Trust Decanting Act and is new to North Carolina decanting law in clarifying that if the authorized fiduciary has distributive discretion over a part but not all of the principal of the trust, a fiduciary may exercise the decanting power over that part of the principal over which the authorized fiduciary has distributive discretion. References in the Official Comment to "subsection (f)" should be understood to refer to subsection (e) of this section.

Subsection (f), which is not a part of the Uniform Trust Decanting Act, was added to this section to clarify that G.S. 36C-8-814(b)(1), which rewrites the terms of a trust that might otherwise result in adverse estate and gift tax consequences to a trustee who is a beneficiary, was applicable to the first trust pursuant to the terms of the first trust. The drafters were concerned that absent the language of 36C-8B-11(f), this Article (rather than the first trust itself) would be considered the source of the power to create a general power and G.S. 36C-8-814(b)(1) would therefore not apply.

OFFICIAL COMMENT

Section 13 permits an authorized fiduciary to exercise the decanting power over a trust that has a beneficiary with a disability to create a special-needs trust that governmental benefits programs may not consider a "resource" for purposes of the eligibility of the beneficiary with a disability for those benefits. Many governmental benefit programs restrict eligibility for those programs to only persons of limited resources. These resources may include any assets from which the beneficiary with a disability has the right to compel a distribution or a withdrawal. Special-needs trusts are drafted so as to limit the distribution rights of the beneficiary with a disability and thus better permit the beneficiary with a disability to qualify for governmental benefits. Under Section 13 the authorized fiduciary may modify the dispositive provisions for the beneficiary with a disability even if the authorized fiduciary has no discretion to make distributions or only discretion over income.

Beneficiary with a Disability . "Beneficiary with a disability" means a beneficiary who the special-needs fiduciary believes may qualify for governmental benefits based on disability. Section 13(a)(1). The beneficiary need not be adjudicated incompetent or totally incapacitated. The beneficiary need not be currently receiving governmental benefits based on disability. Nor need it be certain that the beneficiary would qualify for such benefits but for the terms of the first trust. The special-needs fiduciary need only have a reasonable belief that the decanting may permit the beneficiary to qualify for such benefits. The governmental benefits must be ones, however, that are based on disability and not merely on financial need. Thus a decanting intended to permit a beneficiary with no disability to qualify for a needs-based college scholarship is not permitted under Section 13.

Governmental Benefits . "Governmental benefits" means financial aid or services from a state, federal or other public agency. Section 13(a)(2). It does not include benefits from a private entity.

Special-Needs Fiduciary . Because the term "authorized fiduciary" is limited to a fiduciary who has the power to make discretionary distributions of principal and Section 13 is intended to permit a fiduciary to decant even if the fiduciary does not have discretion over principal, Section 13 uses the separate term "special-needs fiduciary" to identify the fiduciary who has the power to decant. If there is no fiduciary who has discretion over principal, the special-needs fiduciary is the fiduciary with discretion over income, or if none, the fiduciary who is directed to make distributions. Section 13(a)(3).

Special-Needs Trust . "Special-needs trust" means a trust the trustee believes would not be considered a resource for purposes of determining whether a beneficiary with a disability is eligible for governmental benefits based on disability. Section 13(a)(4).

Furtherance of Purposes of Trust . The exercise of the decanting power must be in furtherance of the purposes of the first trust. Section 13(b)(2). Thus the decanting must effectuate better the settlor's broader purposes. In most cases, if the first trust did not anticipate the beneficiary's disability and the settlor's broader purpose was to provide for the beneficiary's support, a decanting that would permit the beneficiary with a disability to qualify for governmental benefits while still being eligible to receive discretionary distributions from the trust would further the purposes of the trust.

For example, assume the first trust was created and funded by A, requires all income to be distributed to the beneficiary after age 21, permits the trustee to distribute principal to the beneficiary pursuant to an ascertainable standard for the beneficiary's support, permits the beneficiary to withdraw the trust principal at age 30, grants the beneficiary a testamentary general power of appointment, and upon the beneficiary's death distributes any unappointed property per stirpes to A's descendants then living. If the beneficiary is age 25 and is disabled, the authorized fiduciary may exercise the decanting power to distribute the principal of the first trust to a trust that provides only for distributions to the beneficiary in the trustee's absolute discretion and upon the beneficiary's death distributes the remaining trust assets per stirpes to A's descendants then living. The exercise of the decanting power may eliminate the beneficiary's right to income, the beneficiary's prospective right to withdraw the trust at age 30 and the beneficiary's power of appointment. The second trust may not, however, change the remainder beneficiaries. Section 13(c)(3).

The result is the same if the beneficiary is age 31 and thus has a right to withdraw the trust assets, because Section 13(c)(2) provides that Section 11(c)(3) does not apply to the interest of the beneficiary with a disability.

If in the above example the trustee had no discretion to distribute principal, but was either required to distribute income or had discretion to distribute income for A's support, the authorized fiduciary could still decant to a special-needs trust. The trustee would be considered the special-needs fiduciary under Section 13(a)(3).

The decanting, however, must further the purposes of the first trust. Section 13(b)(2). For example, if a trust was created solely for the purpose of funding college education for the settlor's grandchildren, the authorized fiduciary may not decant to pay for the support of a grandchild who is a beneficiary with a disability. Conceivably, however, a trust for the education at all levels of the settlor's grandchildren might be decanted to a trust that permits distributions to a grandchild who is a beneficiary with a disability for such grandchild's occupational therapy and vocational training.

Pooled or Payback Trust . The second trust may be a pooled trust or a payback trust. Section 13(c)(1). For example, assume a trust was funded by the beneficiary, directly or indirectly, and provides for distributions of income to the beneficiary until age 30 and then provides for the remainder of the trust to be distributed to the beneficiary. The beneficiary is age 28. The authorized fiduciary may exercise the decanting power, and the second trust may be a "pooled trust" or a payback trust. Section 13(c)(1). The act does not require that the second trust be a "pooled trust" or a payback trust, but other state law may impose such a requirement.

Other Beneficial Interests Must Be Substantially Similar . Subsection (c)(3) generally requires that any beneficial interests of beneficiaries other than the beneficiary with a disability be substantially similar to their interests in the first trust except to the extent they are affected by changes to the interest of the beneficiary with a disability. The beneficiary's disability justifies permitting a modification of the interest of the beneficiary with a disability even when the trustee has limited or no discretion, but does not justify otherwise changing the interests of other beneficiaries. The modifications to the interest of the beneficiary with a disability, however, might affect the amount or timing of the other beneficiaries' interests.

Thus if the first trust has more than one current beneficiary, one of whom is a beneficiary with a disability, the special-needs fiduciary may decant under Section 11 as if the special-needs fiduciary had expanded discretion to distribute principal to the beneficiary with a disability, but may not alter the interests of the other beneficiaries except to the extent they are affected by the changes to the interest of the beneficiary with a disability. For example, assume the first trust was created and funded by A, continues for the rule against perpetuities period, requires that income be distributed per stirpes to A's descendants, and permits discretionary distributions of principal to A's descendants pursuant to an ascertainable standard. The exercise of the decanting power might, for example, distribute part of the principal of the first trust to a special-needs trust solely for the benefit of the beneficiary with a disability (the "Special-Needs Trust") and distribute the remaining principal to a trust solely for the benefit of the nondisabled beneficiaries (the "Non-Special-Needs Trust"), the terms of which are otherwise identical to the terms of the first trust. The Special-Needs Trust might give the trustee absolute discretion to make distributions to the beneficiary with a disability. Upon the death of the beneficiary with a disability, however, the remaining assets of the Special-Needs Trust must be distributed to the Non-Special-Needs Trust, because the decanting cannot change the interests of the non-disabled beneficiaries, except to the extent they are affected by the changes to the interest of the beneficiary with a disability. The non-disabled beneficiaries' remainder interests may be affected, for example, because the trustee of the Special-Needs Trust may make distributions to the beneficiary with a disability in the trustee's absolute discretion and is not limited by an ascertainable standard. The Non-Special-Needs Trust must have the same terms as the first trust, except that it may modify or eliminate the interest of the beneficiary with a disability. So, for example, the Non-Special-Needs Trust might provide that no distributions would be made to the beneficiary with a disability unless the Special-Needs Trust was exhausted.

NORTH CAROLINA COMMENT

This section is generally consistent with former G.S. 36C-8-816.1(c)(10) permitting the trustee to exercise the decanting power to appoint the property of a trust that has a beneficiary with a disability to a second trust, referred to in that subsection as a "supplemental needs trust", that the governmental benefits program may not consider as a resource for purposes of the beneficiary's eligibility for those benefits.

This section modifies Section 13 of the Uniform Trust Decanting Act as follows:

(i) In subsection (a)(1) the definition of a "beneficiary with a disability" was modified to add the words "now or in the future" after the language "A beneficiary of the first trust who the special-needs fiduciary believes may qualify." These words were added so that a beneficiary of the first trust who does not presently qualify for governmental benefits, but who the special-needs fiduciary believes may qualify for the special-needs governmental benefits based on a disability in the future, will be a beneficiary with a disability for purposes of this Article.

(ii) Subsection (d), which is not a part of the Uniform Trust Decanting Act, was added to clarify that where the first trust contains a Medicaid payback provision, an exercise of the decanting power pursuant to this Article shall not be deemed a termination of the first trust that would trigger the payback provision so long as the second trust also contains a valid Medicaid payback provision that complies with 42 U.S.C. § 1396p(d)(4).

Effect of Amendments. - Session Laws 2020-69, s. 2, effective July 1, 2020, deleted "subject to expanded distributive discretion" following "with a disability" in the introductory language of subsection (b).

OFFICIAL COMMENT

A trust instrument may expressly preclude the exercise of a decanting power under the act or any similar state statute with respect to the entire trust or with respect to one or more provisions of the trust. See Section 15(a). The exercise of a decanting power, however, is not prohibited by a statement that the trust is irrevocable or unamendable, or by a spendthrift provision. See Section 15(c). In order to preclude the exercise of the decanting power, the first-trust instrument must expressly refer to the act or to a power granted by state law to the fiduciary to distribute part or all of the principal of the trust to another trust or to modify the trust. For example, assume a first-trust instrument states: "There shall always be a trustee who is an attorney or accountant." That sentence alone would not prohibit the exercise of the decanting power to eliminate that requirement. If the first-trust instrument, however, also stated that "this provision may not be modified by the exercise of any decanting power," then the exercise of the decanting power to modify that provision would be prohibited by Section 15(a).

Any restriction in the first-trust instrument that expressly applies to decanting is honored. Thus, for example, a restriction in the first-trust instrument that requires court approval of any decanting that accelerates the distribution of trust assets would be enforced. As another example, a restriction requiring approval of any decanting by a particular third party would also be enforced.

An irrevocable trust may provide in the trust instrument a mechanism for modifying the trust, for example, by granting a trust protector the power to modify the trust. The fact that a trust instrument provides such a mechanism for modification does not preclude the application of this act. Any requirements or restrictions contained in the trust instrument for such modification mechanism do not apply to an exercise of a decanting power under this act unless such requirements or restrictions expressly apply to an exercise of a decanting power under this act or a similar state statute.

If the first-trust instrument contains a restriction on decanting, the provision must be included in the second-trust instrument. Section 15(e). This provision is intended to prevent serial decanting in which the first decanting removes the restriction on changing a particular provision in the first-trust instrument, and the second decanting then changes such provision.

NORTH CAROLINA COMMENT

Subsections (a) and (b) expand on North Carolina statutory decanting law by permitting the terms of the first trust to prohibit or restrict the exercise of the decanting power by express reference, as this Article and former G.S. 36C-8-816.1 are primarily default statutes that could be prohibited or restricted by the terms of a trust. See G.S. 36C-1-105.

Subsection (b)(1) was modified to bring forward the requirement in subsection (e) of the Uniform Trust Decanting Act that any restriction on the decanting power contained in the first trust must be included in the second trust.

Subsection (c) is consistent with former G.S. 36C-8-816.1(e)(3) providing that the exercise of the decanting power is not prohibited by a spendthrift provision or by a provision in the original trust agreement that prohibits amendment or revocations of the trust.

Subsection (d) is new to North Carolina decanting law.

Subsection (e) of the Uniform Trust Decanting Act was omitted because, as noted above, its provisions were added to subsection (b)(1) of this section. The reference in the Official Comment to "Section 15(e)" should be understood to refer to subsection (b)(1) of this section.

OFFICIAL COMMENT

An exercise of the decanting power generally is an action taken by the authorized fiduciary that does not require beneficiary consent or court approval. The purpose of requiring beneficiary consent or court approval to a change in the compensation of the authorized fiduciary is to place a check on an authorized fiduciary increasing its own compensation by decanting. In this context it does not seem necessary to require the consent of all beneficiaries. Obtaining the consent of qualified beneficiaries, who would generally be immediately impacted by a change in compensation, should be sufficient.

If the first-trust instrument specifies the authorized fiduciary's compensation, the decanting may not increase the fiduciary's compensation without either the consent of all qualified beneficiaries of the second trust or court approval. Section 16(a). This subsection applies whether the increase in compensation would result from omitting the provision in the trust instrument specifying compensation, modifying such provision or replacing such provision with a different provision. If it is unclear whether a change in method of calculating compensation would result in an increase, either court approval or consent of all qualified beneficiaries should be obtained.

If the first-trust instrument does not specify the authorized fiduciary's compensation, the decanting may not increase the compensation above the compensation permitted in the trust code of the enacting state without either the consent of all qualified beneficiaries or court approval. Section 16(b).

Section 16 expressly does not prohibit an increase in compensation arising incidentally because of other changes made by the exercise of the decanting power. For example, any increase in the compensation of the authorized fiduciary because the second trust may last longer than the first trust is incidental. Also incidental are any increases in compensation that may arise because the second trust may have a greater value in the future than the first trust would have had, for example, because property is retained in the trust longer or smaller distributions are made. Other incidental increases in the compensation of the authorized fiduciary may occur because of changes in investments, changes in the law governing the administration of the trust, changes in the identity of the authorized fiduciary, or changes in the duties of the authorized fiduciary.

In many cases the consideration of a proposed decanting or the implementation of a decanting is fairly seen as an exercise of a discretionary fiduciary power that does not warrant any additional compensation for the authorized fiduciary. In some cases, however, the authorized fiduciary may be required to spend an extraordinary amount of time in evaluating a potential exercise of the decanting power, particularly when an exercise of the power is suggested by a beneficiary, or in exercising the decanting power. In such cases, and regardless of whether the authorized fiduciary ultimately exercises the decanting power, the authorized fiduciary may be entitled to additional compensation under the trust instrument or under state law. See Section 708 of the Uniform Trust Code. In the absence of explicit authority on the appropriate amount of any such compensation, such compensation should be reasonable considering the relevant factors, including the time devoted to the decanting and the degree of difficulty. See Restatement Third of Trusts Section 38 comment c. The authorized fiduciary may also be entitled to have reasonable expenses related to evaluating a potential exercise of the decanting power or in exercising the decanting power paid from the first trust. See Section 709 of the Uniform Trust Code.

NORTH CAROLINA COMMENT

Subsection (a) is new to North Carolina decanting law. This subsection does not prevent a trustee from seeking an increase in compensation under that trust pursuant to a non-judicial settlement agreement under G.S. 36C-1-111 or modification of the trust under G.S. 36C-4-411.

The drafters omitted subsection (b) of the Uniform Trust Decanting Act, which addresses decanting to a trust to effect a change in fiduciary compensation where the trust instrument does not specify the compensation of an authorized fiduciary, because a trustee's compensation in such cases is governed by Article 6 of Chapter 32 of the General Statutes. See G.S. 36C-7-708. The comments in the Official Comment regarding compensation if the first trust does not specify compensation and the reference to "Section 16(b)" should be disregarded.

Subsection (b) of this section incorporates the provisions of subsection (c) of the Uniform Trust Decanting Act, which is new to North Carolina decanting law.

OFFICIAL COMMENT

An authorized fiduciary should not be permitted to decant in order to insert in the second-trust instrument a provision directly exculpating the authorized fiduciary or indemnifying the authorized fiduciary except to the extent such provision was contained in the first-trust instrument or applicable law would have provided such exculpation or indemnification. Nonetheless, decanting may appropriately reduce the authorized fiduciary's liability indirectly. For example, if the second trust is subject to the law of a different state, the law governing the second trust may provide additional protection to the authorized fiduciary.

The terms of the second trust may reduce an authorized fiduciary's liability indirectly, for example, by modifying the rules for approving accounts or expressly permitting the retention of certain property. While such provisions may not violate Section 16, they could under certain circumstances violate the authorized fiduciary's general fiduciary duties. For example, while it may be appropriate in the second trust to expressly permit the retention of a residence used by a current beneficiary of the trust, it may not be appropriate to permit the retention of all of the current trust property without any liability.

Subsection (b) recognizes that the trustee of the first trust may be unwilling to distribute the assets of the first trust to the second trust unless the trustee is indemnified for any liability or claim that may become payable from the first trust after its assets are distributed. Subsection (b) is consistent with Section 27, which provides that decanting does not relieve the trust property from any liability that otherwise attaches to the trust property. The indemnification described in subsection (b) may be contained in the second-trust instrument or may be contained in the record exercising the decanting power.

An authorized fiduciary can decant to a trust that divides the trustee responsibilities (i.e., jobs) among various parties, but cannot eliminate the fiduciary duties that accompany those jobs. To the extent that the second trust assigns a fiduciary responsibility and the fiduciary duty that accompanies such responsibility to a particular fiduciary, the other fiduciaries may be relieved from liability for the actions of that particular fiduciary. For example, an investment advisor can be appointed and the authorized fiduciary can be relieved of fiduciary liability for the investment decisions to the extent permitted by the law of the enacting state so long as the investment advisor is acting in a fiduciary capacity and has fiduciary liability for the investment decisions. Section 17(c), (d).

NORTH CAROLINA COMMENT

Subsections (a) and (b) are new to North Carolina decanting law.

Subsection (c) incorporates, after the semicolon, the provisions of subsection (d) of the Uniform Trust Decanting Act and is also new to North Carolina decanting law. The reference in the Official Comment to "Section 17(d)" should be understood to refer to subsection (c) of this section following the semicolon.

OFFICIAL COMMENT

Section 18 authorizes a modification of a trustee removal provision only with either court approval or the consent of the person currently holding the right to remove or replace the trustee. The power to remove a fiduciary is a power to remove the fiduciary without the fiduciary's consent regardless of whether the remover has the power to designate the successor fiduciary. The power to replace a fiduciary is the power to remove the fiduciary and to designate the successor for the fiduciary without the consent of the fiduciary.

Unless the qualified beneficiaries also consent to such change, the person currently holding the right to remove the authorized fiduciary may only consent to the modification of the right with respect to himself or herself and cannot consent to the modification of such right with respect to any successor remover. Section 18(1). For example, if a trust provides that the authorized fiduciary may be removed by X (the "current remover"), so long as X is living and not incapacitated, and after X is deceased or incapacitated, by Y, X may consent to a modification that would permit the authorized fiduciary to be removed only by the joint agreement of X and Z and only with 90 days' prior notice, but such modification would not affect Y's power of removal after X is deceased or incapacitated unless Y also consents to the modification or unless the qualified beneficiaries consent to such change.

Alternatively, the removal power may be modified by the current remover and the qualified beneficiaries if the modification grants a substantially similar removal right to another person. Section 18(2). In the previous example, X (the current remover) and the qualified beneficiaries could consent to a modification that would permit the authorized fiduciary to be removed by Z, or if Z were not willing and able to act, by W. Y, the successor remover named in the first-trust instrument, would not need to consent to such modification if X and the qualified beneficiaries consent to it.

Alternatively, the power to remove or replace the authorized fiduciary may be modified if the court approves the modification and the modification grants a substantially similar power to another person. Section 18(3).

In the case of a modification with the consent of the qualified beneficiaries or with court approval, the modification must grant a substantially similar power to another person. A power to remove a fiduciary only for cause would not be substantially similar to a power to remove a fiduciary for any reason. A power to remove a fiduciary only after the fiduciary has attained age 75 or served for ten years is not substantially similar to a power to remove the fiduciary at any time. A power to replace a fiduciary is not substantially similar unless it contains substantially the same restrictions on who may serve as the replacement fiduciary. For example, a power to remove a fiduciary and replace the fiduciary with any person would not be substantially similar to a power to remove the fiduciary and replace the fiduciary with a person who is not related or subordinate to the settlor.

In exercising the decanting power to designate a different person to remove and replace the trustee, the authorized trustee should be alert to the tax consequences if the person so designated is not independent for tax purposes.

NORTH CAROLINA COMMENT

This section has no counterpart in prior North Carolina decanting law.

OFFICIAL COMMENT

Certain tax benefits granted under the Internal Revenue Code (the "Code") or state law are dependent upon a trust containing specific provisions. For example, a qualified terminable interest property ("QTIP") marital trust or general power of appointment marital trust requires that the surviving spouse be entitled for life to all income, and a general power of appointment marital trust also requires that the surviving spouse have a general power of appointment exercisable alone and in all events. If a trustee had the power to decant the trust in a manner that deprived the surviving spouse of the requisite income interest, or in the case of a general power of appointment marital trust, the requisite general power of appointment, then arguably the trust would not qualify for the marital deduction from the inception of the trust. Similarly, it is important to ensure that charitable lead trusts and charitable remainder trusts cannot be modified in a way that arguably would prevent them from qualifying for the charitable deduction or that would reduce the amount of that deduction at their inception.

Grantor Trust . For purposes of this section, a grantor trust means a trust as to which a settlor of the first trust is considered the owner for income tax purposes under the Internal Revenue Code. Section 19(a)(1). The term does not include a trust over which someone other than the settlor (e.g., a beneficiary) is treated as the owner under Code section 678. A "nongrantor trust" is a trust that is not a grantor trust. Section 19(a)(3).

Marital Deduction . Subsection (b)(1) protects the marital deduction. For example, for property to qualify as qualified terminable interest property, the surviving spouse must have a qualifying income interest for life and a QTIP election must be made. Code § 2056(b)(7)(B)(i). The surviving spouse has a qualifying income interest for life if the surviving spouse is entitled to all the income from the property payable annually or at more frequent intervals and no person has a power to appoint any part of the property to any person other than the surviving spouse. Code § 2056(b)(7)(B)(ii). If the first trust is a trust with respect to which a QTIP election was made, subsection (b)(1) prohibits decanting the property to a trust that does not give the surviving spouse a qualifying income interest for life. For example, if the trustee had expanded discretion to distribute principal to the surviving spouse, the trustee could not decant to give the surviving spouse a lifetime power of appointment in favor of descendants. In addition, both Section 11(c)(3) and Section 19(b)(1) would prohibit the trustee from decanting in a manner that would alter the surviving spouse's income interest.

As another example, assume the first trust qualified for the marital deduction under Code Section 2056(b)(5) because the surviving spouse is entitled for life to all the income, the surviving spouse has a testamentary power of appointment in favor of her estate, and no person has any power to appoint other than to the surviving spouse, and the trustee also has a power to make discretionary distributions to the surviving spouse subject to expanded discretion. Subsection (b)(1) prohibits decanting to a second trust that does not give the surviving spouse a right to all income or that gives any person a power to appoint to anyone other than the surviving spouse. Subsection (b)(1) also requires that the second trust qualify for the marital deduction under the same section of the Code, Section 2056(b)(5). It is not sufficient that the second trust qualify for the marital deduction under another section of the Code. Although Code Section 2056(b)(5) requires that the trust give the surviving spouse a power to appoint to either herself or her estate, the second trust could give the surviving spouse a lifetime power to appoint to herself instead of a testamentary power in favor of her estate, or could expand her testamentary power to include persons other than her estate as potential appointees, because the second trust would still qualify for the marital deduction under Code Section 2056(b)(5). If the first trust, however, gave the surviving spouse a lifetime general power of appointment, the authorized fiduciary could not decant in a manner that eliminated such power of appointment. Section 11(c)(3).

Charitable Deduction . Section 19(b)(2) protects the charitable deduction. The act does not apply to wholly charitable trusts. Section 3(b). While a split interest trust such as a charitable remainder trust or charitable lead trust would not be a wholly charitable trust, in almost all cases the trustee of such a trust would not have discretion to distribute principal to a current beneficiary and therefore there would not be an authorized fiduciary (see Section 2(3)) who would have authority to exercise the decanting power under Section 11 or Section 12. In the rare case in which a split interest charitable trust could be decanted, Section 19(b)(2) requires that the second trust qualify for the charitable deduction under the same provision of the Internal Revenue Code or state law.

Subject to the provisions of Section 14, Section 19(b)(2) does not prohibit the modification or omission of a future gift to a charitable organization even if such gift, if made, would result in a future charitable deduction.

Gift Tax Annual Exclusion . Code Section 2503(b) grants a gift tax annual exclusion for gifts of a "present interest." Present interests are often created in trusts by granting the beneficiary a Crummey right of withdrawal over contributions to the trust. If a trustee could decant in a manner that prematurely terminated a beneficiary's existing Crummey right of withdrawal over a prior contribution to the trust, then arguably the contribution would not qualify for the gift tax annual exclusion. The restriction in Section 11(c)(3) prohibiting the modification or elimination of a presently exercisable power of appointment also protects the annual exclusion for a prior gift to a Crummey trust.

Code Section 2503(c) provides another method for qualifying gifts to a trust for the gift tax annual exclusion. Code Section 2503(c) permits a gift tax annual exclusion for a gift to a trust for an individual under age 21 provided that the property and its income may be expended for the benefit of the donee before attaining age 21, to the extent not so expended passes to the donee upon attaining age 21, and, in the event of the donee's death, is payable to the estate of the donee or pursuant to a general power of appointment.

Assume, for example that the first trust permitted distributions of income and principal subject to expanded discretion to A, provided that the trust property should be distributed to A at age 21 and directed that the trust be distributed to A's estate if A died prior to age 21. A is age 19. The authorized fiduciary could decant to a second trust that, instead of distributing the property to A at age 21, provided A a right to withdraw the trust property for 60 days and that, instead of distributing the property to A's estate, gave A a general testamentary power of appointment. Such a decanting is permitted because the second trust would still qualify under Code Section 2503(c). The authorized fiduciary could not decant to a trust that did not permit A to withdraw the assets until age 30 or that neither gave A a testamentary general power of appointment nor directed distribution of the property to A's estate.

S Corporation Stock . Under Code Section 1361, only certain types of trusts are permitted to own S corporation stock. If the first trust owns S corporation stock, the second trust must also qualify to own S corporation stock under Code Section 1361(c)(2). If the first trust qualifies because it is an electing small business trust (an "ESBT"), the second trust may either be an ESBT or qualify to hold S corporation stock because it is a grantor trust or a qualified subchapter S trust (a "QSST"). Similarly, if the first trust owns S corporation stock and is a grantor trust, the second trust may qualify to hold S corporation stock by being a grantor trust, an ESBT or a QSST.

Subsection (b)(4) imposes a more stringent rule if the first trust is a QSST. In order for a trust to qualify as a QSST, (a) the terms of the trust must require that during the life of the current income beneficiary there shall be only one income beneficiary and (b) all of the income must be distributed to such beneficiary. Code § 1361(d)(3). Thus it may be important that a trust intended to qualify as a QSST not be permitted to be decanted into a trust that would not qualify as a QSST. If the first trust owns S corporation stock and qualifies as an S corporation shareholder because it is a QSST, subsection (b)(4) requires that the second trust also be a QSST. If the first trust is a QSST, it is not sufficient that the second trust qualify to hold S corporation stock under another provision of the Code. If the authorized fiduciary had the power to modify a trust intended to qualify as a QSST to a trust that did not so qualify, the trust would not be a QSST from its inception.

GST "Annual Exclusion" Gifts . Code Section 2642(c) grants a zero inclusion ratio, essentially a "GST annual exclusion," to gifts that qualify for the gift tax annual exclusion but imposes two additional requirements for gifts to trusts. First, the trust must be only for a single individual and second, if the individual dies before the termination of the trust, the property of the trust must be included in the gross estate of such individual. Thus while gifts to trusts for multiple beneficiaries could qualify for the gift tax annual exclusion through the use of Crummey withdrawal rights, such gifts generally would not qualify for the GST annual exclusion. The Code Section 2642(c) restriction requiring a trust be for a single individual for such individual's life could be violated through decanting if the decanting permitted a remainder beneficiary to receive distributions prior to the individual's death. Section 19(b)(5) prohibits such a modification. The requirement that the trust be included in the gross estate of the individual could perhaps be violated by decanting to a trust that was not includible in the beneficiary's gross estate. Section 19(b)(5) prohibits such a decanting.

Qualified Benefits . Complicated rules determine when the life expectancy of a trust beneficiary can be considered in determining the required minimum distribution rules when a trust is the beneficiary of a qualified retirement plan or IRA. These rules are found in Code Section 401(a)(9) and the corresponding regulations, and in other Code sections that refer to Section 401(a)(9). For example, with IRAs, Code Section 408(a)(6) states: "Under regulations prescribed by the Secretary, rules similar to the rules of section 401(a)(9) and the incidental death benefit requirements of section 401(a) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained."

Under the rules in Code Section 401(a)(9), only trusts with certain provisions and restrictions permit the life expectancy of the beneficiary to be used to determine required minimum distributions. If a trustee could decant to a trust that would not meet these requirements, then arguably the old trust would not qualify from the inception to use the life expectancy of the beneficiary.

Subsection (b)(6) applies not only to any trust that is currently the beneficiary of an individual retirement account ("IRA") or qualified benefit, but also to any successor trust. The need to apply subsection (b)(6) to successor trusts is demonstrated by the following example. Assume Trust A is the beneficiary of Parent's $100,000 IRA. Child is the current beneficiary of Trust A and upon Child's death the assets of Trust A will be distributed to Trusts X and Y for Child's children. Trust A is not a "conduit trust," but qualified to take IRA distributions over Child's life expectancy because Trust A, and Trusts X and Y, have only individuals as beneficiaries and all future beneficiaries must be younger than Child. If Trusts X and Y permitted the exercise of a decanting power in any way that could result in the addition of charities or individuals older than Child as beneficiaries or permissible appointees, Trust A would not have qualified to take IRA distributions over Child C's life expectancy. Therefore, the restrictions on decanting must apply to Trusts X and Y, as well as to Trust A. Trusts X and Y are indirect beneficiaries of the qualified benefit property.

If an attempted decanting violates subsection (b)(6), the qualified benefit property is deemed to be held as a separate share as of the date of the exercise of the decanting power. Holding the qualified benefit property as a separate share permits the remedial rules of Section 22 to apply only with respect to the qualified benefit property and its proceeds.

Foreign Grantor Trusts . Generally, the grantor trust rules apply only to a "grantor" who is a citizen or resident of the United States or a domestic corporation. An exception to this rule applies if (a) the foreign grantor has the power to revest title to the trust property in the grantor and such power is exercisable (1) solely by the grantor without the approval or consent of any other person or (2) with the consent of a related or subordinate party who is subservient to the grantor, or (b) distributions may be made only to the grantor and the grantor's spouse during the life of the grantor. If a foreign trust qualifies as a grantor trust because of Code Section 672(f)(2)(A), subsection (b)(7) provides that the decanting power cannot be exercised to a second trust that does not meet the requirements of Code Section 672(f)(2)(A).

Catch-all . Subsection (b)(8) is a catch-all provision intended to preserve any tax benefits not specifically listed in Section 19 for which the first trust qualified if the first-trust instrument expressly indicates an intent to qualify for the tax benefit or is clearly designed to qualify for the tax benefit. Note that subsection (b)(8) does not address any tax benefits for which the trust may qualify in the future. For example, assume that the first trust was a credit shelter trust that was not subject to federal estate tax at the death of the first to die of a married couple because of the decedent's federal exclusion. Assume that an independent person may make discretionary distributions to the surviving spouse and descendants pursuant to expanded discretion. Also assume that the credit shelter trust was designed so that it would not be included in the surviving spouse's estate. The authorized fiduciary could decant and the second trust could grant the surviving spouse a general power of appointment that would cause inclusion in the surviving spouse's estate. Although the credit shelter trust was designed to be excluded from the surviving spouse's estate, such tax benefit is one that would occur, if at all, in the future at the surviving spouse's death; it is not a tax benefit claimed in the past. Therefore subsection (b)(8) does not prohibit such a modification. If the settlor's purposes include saving taxes, and causing inclusion in the spouse's estate may save more taxes by causing a basis adjustment at the surviving spouse's death even though the trust assets would then be included in the surviving spouse's estate, then such a decanting may be appropriate and is not prohibited by subsection (b)(8).

Grantor Trusts . Subsection (b)(9) expressly permits an exercise of the decanting power to change the income tax status of the trust from a grantor trust to a nongrantor trust or vice versa. Although, absent subsection (b)(9), grantor trust status generally might be viewed as a tax benefit of the first trust, grantor trust status is treated differently under the act because the grantor does not necessarily intend that the grantor trust status be maintained until the grantor's death and because other desirable modifications of the trust may result in a loss of grantor trust status.

An exercise of the decanting power may cause a nongrantor trust to become a grantor trust either as a primary purpose of the exercise of the decanting power or as an incidental consequence of other changes made by the decanting. Subsection (b)(9)(B). It would be fundamentally unfair, however, to permit a decanting to impose on the settlor liability for the second trust's income taxes if the settlor objected to such liability. Therefore subsection (b)(10)(B) permits the settlor to block the decanting by objection during the notice period unless the settlor has the power to cause the second trust to cease to be a grantor trust. The settlor receives prior notice of the exercise of the decanting power under Section 7(c)(1).

Where the first trust is a grantor trust, often the settlor or another person has the power to cause the trust to cease to be a grantor trust. This power permits the settlor or someone acting on the settlor's behalf to relieve the settlor of the income tax liability for the trust. If the second trust is a grantor trust and does not contain the same provisions permitting the grantor trust treatment to be "turned off," the settlor may block the proposed decanting by objecting during the notice period. Subsection (b)(10)(A).

If a portion of a trust is a grantor trust and the remaining portion is a nongrantor trust, subsection (b)(10) applies to the portion that is a grantor trust.

NORTH CAROLINA COMMENT

In subdivision (b)(1), to avoid duplication of provisions, the drafters combined the provisions of subsection (b)(1) of the Uniform Trust Decanting Act protecting the marital deduction and subsection (b)(2) of the Uniform Trust Decanting Act protecting the charitable deductions. Subdivision (b)(1) is generally consistent with former G.S. 36C-8-816.1(c)(4) preserving the marital and charitable deductions but is more specific in requiring that the deduction qualify in the second trust under the same sections of the Internal Revenue Code as in the first trust. The reference in the Official Comment to "subsection (b)(1)" regarding the marital deduction and "Section 19(b)(2)" regarding the charitable deduction should be understood to refer to subdivision (b)(1) of this section.

In subdivision (b)(2), also to avoid duplication of provisions, the drafters combined the first sentence of subsection (b)(3) of the Uniform Trust Decanting Act preserving the qualification of the gift tax annual exclusion under section 2503(b) of the Internal Revenue Code with the second sentence of subsection (b)(3) preserving the qualification of the gift tax annual exclusion for transfers to minors under section 2503(b) by application of section 2503(c). Subdivision (b)(2) is generally consistent with former G.S. 36C-8-816.1(c)(5) preserving the gift tax exclusion under section 2503(b) by application of section 2503(c), but is broader in encompassing other present interest gifts under section 2503(b) such as a Crummey right of withdrawal.

Subdivision (b)(3), which preserves the qualification of trusts permitted to hold S Corporation stock, incorporates in sub-subdivision (b)(3)a. the first sentence of subsection (b)(4) of the Uniform Trust Decanting Act and in sub-subdivision (b)(3)b. the second sentence of subsection (b)(4). Sub-subdivision (b)(3)a. is generally consistent with former G.S. 36C-8-816.1(c)(9) providing that if the first trust owns S Corporation stock, the second trust shall not contain any provisions jeopardizing the subchapter S election. Sub-subdivision (b)(3)b. is new to North Carolina law in providing that if the first trust is a qualified subchapter S trust ("QSST"), the second trust must also be a QSST. The reference in the Official Comment to "subsection (b)(4)" should be understood to refer to sub-subdivision (b)(3)b. of this section.

Subdivision (b)(4) incorporates the provisions of subsection (b)(5) of the Uniform Trust Decanting Act protecting the generation-skipping transfer gift tax annual exclusion. It is generally consistent with former G.S. 36C-8-816.1(c)(9) providing that the second trust may not jeopardize the qualification of a transfer as a direct skip under section 2642(c) of the Internal Revenue Code. The reference in the Official Comment to "Section 19(b)(5)" should be understood to refer to subdivision (b)(4) of this section.

Subdivision (b)(5) incorporates the provisions of subsection (b)(6) of the Uniform Trust Decanting Act regarding the rules permitting the life expectancy of a beneficiary of a trust to be used in determining the minimum distribution rule under section 401(a)(9) of the Internal Revenue Code when qualified benefits are payable to the trust. The first sentence of subdivision (b)(5) is generally consistent with former G.S. 36C-8-816.1(c)(9) providing that if the first trust owns qualified benefits subject to the minimum distribution rules, the second trust may not shorten the available distribution period for purposes of these rules. The second sentence of subdivision (b)(5) is new to North Carolina law in providing that qualified benefits are deemed to be set aside in a separate trust if the attempted exercise of the decanting power violates the provisions of the first sentence of subdivision (b)(5). The reference in the Official Comment to "subsection (b)(6)" should be understood to refer to subdivision (b)(5) of this section.

Subdivision (b)(6) combines in that subdivision the provisions of the Uniform Trust Decanting Act regarding grantor trusts. Sub-subdivision (b)(6)a. incorporates the provisions of subsection (b)(7) of the Uniform Trust Decanting Act protecting the qualification of a foreign trust as a grantor trust and is new to North Carolina law. Sub-subdivision (b)(6)b. incorporates the provisions of subsection (b)(9) of the Uniform Trust Decanting Act regarding whether the second trust may or may not be a grantor trust and is generally consistent with the provisions of former G.S. 36C-8-816.1(c)(9) regarding this matter. Sub-subdivision (b)(6)c. incorporates the provisions of subdivision (b)(10) of the Uniform Trust Decanting Act that the decanting power may not be executed if the settlor objects subject to the provisions of sub-subdivisions (b)(10)(A) and (B) of the Uniform Trust Decanting Act. The reference in the Official Comment to "subsection (b)(7)", and "subsection (b)(9)" should be understood to refer respectively to sub-subdivision (b)(6)a. and sub-subdivision (b)(6)b. of this section. The reference in the Official Comment to "subsection (b)(10)(A)" and "subsection (b)(10)(B)" should be understood to refer respectively to clause (i) and clause (ii) of sub-subdivision (b)(6)c. of this section.

Subdivision (b)(7) incorporates the provisions of subsection (b)(8) of the Uniform Trust Decanting Act regarding the preservation of tax benefits not specifically listed in this section for which the first trust is qualified. It is generally consistent with former G.S. 36C-8-816.1(c)(9) providing that the terms of the second trust may not jeopardize any other specific tax benefits for which a contribution qualified for tax purposes, but contains more specific provisions requiring the first trust to expressly indicate an attempt to qualify for the benefit or be designed to enable the first trust to qualify for the benefit. The reference in the Official Comment to "subsection (b)(8)" should be understood to refer to subdivision (b)(7) of this section.

OFFICIAL COMMENT

To implement the public policy of the state law applicable to the first trust, subsection (b) requires that any maximum perpetuity, accumulation, or suspension-of-the-power-of-alienation period (collectively referred to as a "perpetuities rule") applicable to the first trust apply to the second trust to the extent its assets are attributed to the first trust. This rule is also supported by pragmatic considerations. An exercise of a decanting power could inadvertently violate a perpetuities rule applicable to the first trust if the second trust does not comply with the same perpetuities rule. Even in states that have abolished the maximum perpetuity rule, the state may still impose another perpetuities rule (e.g., a suspension-of-the-power-of-alienation rule), the first trust may still be subject to a rule against perpetuities under prior law or the first trust may be subject to a rule against perpetuities under the law of a different state. Further, if a trust is grandfathered from generation-skipping transfer ("GST") tax or has an inclusion ratio less than one, decanting to a trust that does not comply with the same rule against perpetuities period (or a federal rule against perpetuities period) may have adverse GST consequences.

Thus if the first trust was created in a state with a traditional rule against perpetuities, the authorized fiduciary may not exercise the decanting power to change the governing law to a state with no rule against perpetuities and to eliminate the rule against perpetuities applicable to the first trust.

Where the maximum term of the first trust is measured by reference to lives in being on the date the first trust became irrevocable, Section 20 does not preclude the second trust from using an expanded class of measuring lives so long as the expanded class were in being on the date the first trust became irrevocable. For example, assume the first trust is subject to State A's trust duration rule, which is a traditional rule against perpetuities that requires that an interest in a trust vest within twenty-one years of the last to die of lives in being when the trust became irrevocable. The first trust contains a perpetuities savings clause that requires the trust to terminate twenty-one years after the death of the survivor of the settlor's descendants living when the first trust was created. The second trust may replace the perpetuities savings clause with a provision that requires the trust to terminate twenty-one years after the death of the survivor of the descendants of any grandparent of the settlor who were living when the first trust was created.

As another example, assume the first trust is subject to State A's trust duration rule, which is a traditional rule against perpetuities, but which permits a trust to opt out of the rule against perpetuities. The first trust does not opt out of the rule against perpetuities. The second trust may opt out of the rule against perpetuities if the first trust could have done so.

If the first trust and the state law applicable to the first trust permitted the springing of the "Delaware Tax Trap" of Code Section 2041(a)(3), the second trust may also permit the springing of the Delaware Tax Trap.

The second trust may terminate earlier than the trust duration rule applicable to the first trust would require. Assume Trust A and Trust B are both subject to State Z's trust duration rule, which is a traditional rule against perpetuities. Both trusts were created by the same settlor and contain a perpetuities savings clause that requires the termination of the trust twenty-one years after the death of the survivor of the settlor's descendants living on the date the trust was created. Trust A was created on June 6, 1966. Trust B was created May 5, 1955. Trust A may be decanted into Trust B because Trust B will terminate prior to the rule against perpetuities applicable to Trust A. Trust B may be decanted into Trust A if Trust A is modified to provide, or the decanting instrument provides, that the portion of Trust A attributable to the addition of the assets of Trust B must vest within the rule against perpetuities period applicable to Trust B. The trustee could segregate the assets Trust A receives from the decanting of Trust B. Alternatively, the trustee could determine the fractional share of the total assets attributable to Trust B, based upon values at the time of decanting, and such fractional share of Trust A will be subject to the rule against perpetuities period applicable to Trust B.

If the authorized fiduciary attempts to decant Trust B into Trust A without providing either in Trust A or the decanting instrument that the portion of the trust attributable to Trust B must vest within the rule against perpetuities period applicable to Trust B, the decanting may still be valid. First, the statutes of State Z may contain a rule against perpetuities savings clause that will cause the trust to vest or terminate within the applicable rule against perpetuities period. Second, if there is no statutory savings clause, Section 22 of this act may apply to read into Trust A an appropriate savings clause with respect to the portion of the trust attributable to Trust B.

Section 20 does not address whether, if the decanting changes the place of administration for the trust or the law governing the trust, and the new jurisdiction has a more restrictive trust duration rule, the new jurisdiction may impose its maximum perpetuity, accumulation or suspension-of-the-power-of-alienation period on the second trust. The new jurisdiction may do so if the rule of the first jurisdiction is contrary to a strong public policy of the new jurisdiction. Thus if the first jurisdiction has no rule against perpetuities, and the second jurisdiction has a traditional rule against perpetuities, the second jurisdiction may but need not determine that its rule expresses a strong public policy against perpetual trusts.

Subsection (a) provides that, except as provided by subsection (b), the second trust may have a term that is the same as or different from the term of the first trust. Thus the term of the second trust may be longer than or shorter than the term of the first trust.

NORTH CAROLINA COMMENT

Subsection (a) is substantially similar to the last sentence of former G.S. 36C-8-816.1(b) providing that the second trust may have a duration that is longer than the first trust.

Subsection (b) is consistent with former G.S. 36C-8-816.1(e)(2), which provided that the exercise of the power to decant is subject to G.S. 41-23 specifying the permissible period allowed for the suspension of the power of alienation of the original trust and the time from which that permissible period is computed, and thus generally allowed extension of the term of an original trust for property governed by that section. Subsection (b) is broader than former G.S. 36C-8-816.1(e)(2) in that it expressly extends the rule to require that property decanted to a second trust be subject to any perpetuities laws that apply to the first trust.

OFFICIAL COMMENT

Although the decanting power under Sections 11 and 12 is premised on the authorized fiduciary's power to distribute principal of the first trust to one or more current beneficiaries, the authorized fiduciary may exercise the decanting power even if the authorized fiduciary would not have made a distribution of principal to a current beneficiary under the distribution standard of the first trust. For example, assume a trust permits the trustee to distribute income and principal to S for S's support and health care, considering S's other resources, and that given S's other resources the trustee would not currently make a distribution to S. The trustee may still exercise the decanting power under Section 12.

Section 21, however, does not authorize an exercise of the decanting power under Sections 11 and 12 if the authorized fiduciary does not currently have a power to distribute principal. For example, if a trust permits income to be distributed to A, but does not permit principal distributions until A is age 25 or has a child, and A is age 21 and has no child, the trustee may not decant the trust under Section 11 or Section 12.

NORTH CAROLINA COMMENT

This section is substantially similar to the second sentence of former G.S. 36C-8-816.1(b) providing that the trustee may exercise the decanting power whether or not there is a current need to distribute under any standard provided in the first trust.

OFFICIAL COMMENT

In order to provide as much certainty as possible to the trustee and the beneficiaries with respect to the operative terms of a trust, an exercise of a decanting power should not be wholly invalid because the second-trust instrument in part violates this act. Section 22(a) modifies the second-trust instrument to delete impermissible provisions in the second-trust instrument and to insert required provisions in the second-trust instrument. For example, if the second trust sets forth an impermissible rule against perpetuities period (see Section 20), the other modifications made by the decanting should be effective.

The remedial rules of Section 22 apply only to the least extent required to comply with this act. Thus if a provision in the second-trust instrument would be permissible with respect to some of the trust property but is impermissible with respect to other trust property, such provision will be void only as to the trust property with respect to which it is impermissible. Further, any modification to a provision of the second-trust instrument that is required by Section 22 should be the modification that implements the intended modifications to the greatest extent permitted under the act. Thus the authorized fiduciary's intent is relevant in determining how to apply the provisions of Section 22.

For example, assume a trust holds $500,000 of marketable assets and is the beneficiary of Grantor's $100,000 IRA. Grantor's Child is the sole current beneficiary of the trust. The trust is qualified to use Child's life expectancy in determining the distribution period for the IRA because the trust restricts all future beneficiaries, including appointees under any power of appointment and takers in default, to individuals younger than Child. The authorized fiduciary attempts to decant the trust to permit Child to appoint to her spouse. This is in violation of Section 19(b)(6) because if Child could appoint the IRA to a spouse who is older than Child, Trust would not have qualified to take IRA distributions over Child's life expectancy. Section 19(b)(6) causes the qualified benefit property and any reinvested distributions of the qualified benefit property to be treated as a separate share. Section 22 will void the power to appoint to a spouse only with respect to the qualified benefit property and any reinvested distributions of the qualified benefit property, and only if the spouse is (or could be) older than Child, because that is the least intrusive remediation required to comply with Section 19(b)(6).

As another example, assume the authorized fiduciary attempts to decant a trust to permit Child to appoint to her sibling. If Child's sibling is older than Child, this is in violation of Section 19(b)(6) because if Child could appoint the IRA to her older sibling, the trust would not have qualified to take IRA distributions over Child's life expectancy. Section 19(b)(6) causes the qualified benefit property and any reinvested distributions of the qualified benefit property to be treated as a separate share. Section 22 will void the power to appoint to a sibling only with respect to the qualified benefit property and any reinvested distributions of the qualified benefit property, which are treated as a separate share, and only if the sibling is older than Child, because that is the least intrusive remediation required to comply with Section 19(b)(6).

As yet another example, assume the authorized fiduciary attempts to decant Trust to change (1) the successor fiduciaries, (2) the manner in which the first trust instrument directed that the authorized fiduciary be compensated, which will increase the authorized fiduciary's compensation, and (3) the identity of the person who can remove the authorized fiduciary (the "Remover"). The authorized fiduciary obtains the written consent of the qualified beneficiaries of the second trust, but does not obtain consent of the Remover or approval by the court. The changes to the successor fiduciaries will be effective. The change to the authorized fiduciary's compensation will also be effective because the requirement in Section 16(a) or Section 16(b) was met. The change to the identity of the Remover will not be effective because the Remover named in the first trust instrument did not consent. See Section 18.

Section 22(b) provides that if the savings provision in Section 22(a) applies, the trustee or other fiduciary shall take corrective action consistent with the fiduciary's duties. When Section 22(a) applies, the copy of the second-trust instrument provided to qualified beneficiaries and other parties under Section 7 would not accurately state the terms of the second trust. A trustee or other fiduciary may have a duty to notify certain persons of the accurate terms of the second trust. See, for example, Section 813(a) of the Uniform Trust Code imposing a duty on the trustee to keep the qualified beneficiaries reasonably informed about the administration of the trust and the material facts necessary for them to protect their interests.

Additional corrective action may be required, especially if distributions were made or not made in reliance on the assumed terms of the second-trust instrument and such terms are altered by Section 22(a).

Where a fiduciary is uncertain about whether corrective action should be taken, the fiduciary may apply to the court for instructions under Section 9.

NORTH CAROLINA COMMENT

This section has no counterpart in prior North Carolina decanting law.

OFFICIAL COMMENT

"Settlor" is defined in Section 2(25) as the person who creates or contributes property of the trust, except as provided in Section 25. The comments to Section 102 and Section 103 of the Uniform Trust Code generally consider the person who funded a trust as the settlor and would not treat as the settlor a nominal grantor, meaning a person who signs the trust instrument to create the trust but who does not contribute the property to the trust (except perhaps for nominal funding).

When a new trust instrument is created for purposes of serving as the second trust for a decanting, the second-trust instrument may be signed by the trustee of the first trust, a beneficiary, the settlor of the first trust, an attorney for the settlor, the trustee or a beneficiary of the first trust, or some other person. Under these circumstances, the creator of the second trust generally will not be the settlor of the second trust unless such person funded the first trust or is the authorized fiduciary exercising the decanting power.

For most purposes, when a trust is decanted the settlor of the first trust should be considered the settlor of the second trust to the extent of the decanting. If the second trust is a pre-existing trust funded by a different settlor, then the original settlor of the second trust would continue to be considered the settlor over the portion of the trust property attributable to that person's contribution and the original settlor of the first trust would be considered the settlor of the portion of the second trust property attributable to the decanting. This general rule of Section 25(a) would apply, for example, for purposes of determining who holds the rights granted to the settlor or who must consent when the settlor's consent is required for an action and for tax purposes. For example, under the Uniform Trust Code this rule would apply for purposes of Section 113 (Insurable Interest), Section 301(d) (limiting the ability of a settlor to represent a beneficiary), Section 405(a) (enforcement of a charitable trust), Section 411 (modification of a trust with the settlor's intent), Section 505 (Creditor's Claims), Section 706(a) (request to remove a trustee), and Section 814 (limiting certain discretionary powers).

For purposes of determining the settlor's intent or purpose in creating a trust, or whether the settlor did not anticipate certain circumstances, it may sometimes be appropriate to consider the intent of the original settlor of the second trust. For example, if a decanting distribution is made to a pre-existing trust with property of its own, the intent of the original settlor of the second trust may be more relevant in construing, modifying or reforming the second-trust instrument after the decanting distribution. In such a case, the decanting distribution adopts the language of the second-trust instrument, which is most appropriately construed with respect to the intent of the creator of such trust. When a decanting distribution is made to a second trust created by the authorized fiduciary for the purposes of decanting, or when the decanting is a modification of the first trust, the intent of the authorized fiduciary may be most relevant in later construing the terms of the second trust, or at least the terms modified by the decanting. The intent of the settlor of the first trust may still be relevant, however, because the decanting would have been made to better carry out the purposes of the first trust. Further, to the extent the second trust does not modify the terms of the first trust, the intent of the settlor of the first trust would be relevant in construing such terms.

Section 25(b) would apply, under the Uniform Trust Code, with respect to Section 412 (Modification or Termination Because of Unanticipated Circumstances), Section 415 (Reformation to Correct Mistakes) and Section 416 (Modification to Achieve Settlor's Tax Objectives). For example, under Section 412 of the Uniform Trust Code, a court may make certain trust modifications if because of "circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust." The modification, to the extent practicable, is to be made in "accordance with the settlor's probable intention." Thus where the authorized fiduciary of the first trust, or some other person, has created the second trust, the intent of the maker of the second trust may be relevant in determining, with respect to the second trust, what circumstances were not anticipated by the settlor and what would be the settlor's probable intent.

Section 25(b) may also apply in other contexts for determining the purposes and material purposes of the trust. The material purposes of the trust may, for example, be relevant in determining whether a nonjudicial settlement agreement is valid. Settlor intent is relevant in determining a trust's purposes and material purposes.

NORTH CAROLINA COMMENT

This section is new to North Carolina decanting law.

The reference in the Official Comment to "Section 2(25)" of the Uniform Trust Decanting Act defining the "Settlor" should be understood to refer to G.S. 36C-1-103(17). As noted in the North Carolina Comment to G.S. 36C-8B-2, the drafters omitted Section 2(25) because it was for the most part similar to the definition of "Settlor" in G.S. 36C-1-103(17). To conform to Section 2(25), the definition of "Settlor" in G.S. 36C-1-103(17) was amended effective with the enactment of this Article to add that the definition applies "[e]xcept as otherwise provided in G.S. 36C-8B-25".

OFFICIAL COMMENT

If the decanting power is exercised by modifying the terms of the first trust, the trustee could either treat the second trust created by such modification as a new trust, in which case the property of the first trust would need to be transferred to the second trust, or alternatively treat the second trust as a continuation of the first trust, in which case the property of the first trust would not need to be retitled. When the second trust is a continuation of the first trust, any property owned by the first trust is still owned by the trust after the decanting, even if the authorized fiduciary is not aware of such property at the time of the decanting.

When the decanting power is exercised by distributing property of the first trust to a separate second trust, regardless of whether the terms of such second trust are set forth in an entirely separate trust instrument or a modification of the first-trust instrument, the property of the first trust needs to be transferred to the second trust(s). Inevitably, there will be cases where the trustee fails to transfer all of the property to the second trust. The trustee can protect against this possibility by, in the exercise of the decanting power, making a global assignment of all trust property to the second trust. When the property of the first trust is being divided among more than one second trusts or not all of the property of the first trust is being decanted, it is more complicated, but still possible, to specify in the exercise of the decanting power how later-discovered property should be allocated.

Section 26(c) explicitly permits an authorized fiduciary to provide, in an exercise of the decanting power or by the terms of a second trust, for disposition of later-discovered property belonging to the first trust or property paid to or acquired by the first trust after exercise of the decanting power. For example, if an authorized fiduciary exercises the decanting power over a trust to create a special-needs trust for the settlor's child J and to create a separate trust for the settlor's other children, the exercise of the decanting power might state that the trust for J will be funded with marketable securities and cash with a value of $1,000,000 and that all other property, including later-discovered property, will be distributed to and owned by the trust for the other children. Assume the trust for J is then funded with $1,000,000 of marketable securities and all other property then known to the trustee is assigned to the trust for the other children. If subsequently other trust assets are discovered, it would be clear that they belong to the trust for the other children and not the trust for J.

The trustee in transferring title to the first trust's property pursuant to a decanting may also take the precaution of executing a global assignment of all property not otherwise expressly transferred to the appropriate second trusts.

Section 26(a) and (b) specify default rules when later-discovered property and property paid to or acquired by the first trust after the exercise of the decanting power is not expressly allocated to a particular trust by the exercise, by the second-trust instrument or by an assignment.

Subsection (a) provides that if the decanting intended to distribute all of the principal of the first trust to one or more second trusts, then the property is part of the second trust or trusts. When there is more than one second trusts, the exercise of the decanting power might specify their respective interests in the property of the first trust or if it does not, the second trusts may need to reach agreement about their respective ownership interests.

Subsection (b) provides that if the decanting was not intended to distribute all of the principal of the first trust to one or more second trusts, such property remains part of the first trust.

NORTH CAROLINA COMMENT

The provisions of this section have no counterpart in prior North Carolina law.

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).

NORTH CAROLINA COMMENT

This section recodifies with minor modifications the provisions of former G.S. 36A-161 except for former G.S. 36A-161(b)(3) which excluded from the operation of the North Carolina Uniform Prudent Investor Act certain trusts that are excluded from the operation of this Chapter by G.S. 36C-1-102.

Effective Date and Applicability. - Session Laws 2005-192, which enacted Chapter 36C, in s. 7(a) provides: "Section 2 of this act becomes effective January 1, 2006, and except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, applies to (i) all trusts created before, on, or after that date; (ii) all judicial proceedings concerning trusts commenced on or after that date; and (iii) judicial proceedings concerning trusts commenced before that date unless the court finds that application of a particular provision of Chapter 36C of the General Statutes would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of Chapter 36C of the General Statutes does not apply and the superseded law applies.

"Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, any rule of construction or presumption provided in Chapter 36C of the General Statutes applies to trust instruments executed before the effective date of Section 2 of this act unless there is a clear indication of a contrary intent in the terms of the trust or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary. Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, an act done before the effective date of Section 2 of this act is not affected by Chapter 36C of the General Statutes. If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before the effective date of Section 2 of this act, that statute continues to apply to the right even if it has been repealed or superseded."

Official Comment on Effective Date and Applicability. - The Uniform Trust Code is intended to have the widest possible effect within constitutional limitations. Specifically, the Code applies to all trusts whenever created, to judicial proceedings concerning trusts commenced on or after its effective date, and unless the court otherwise orders, to judicial proceedings in progress on the effective date. In addition, any rules of construction or presumption provided in the Code apply to preexisting trusts unless there is a clear indication of a contrary intent in the trust's terms. By applying the Code to preexisting trusts, the need to know two bodies of law will quickly lessen.

This Code cannot be fully retroactive, however. Constitutional limitations preclude retroactive application of rules of construction to alter property rights under trusts that became irrevocable prior to the effective date. Also, rights already barred by a statute of limitation or rule under former law are not revived by a possibly longer statute or more liberal rule under this Code. Nor is an act done before the effective date of the Code affected by the Code's enactment.

The Uniform Trust Code contains an additional effective date provision. Pursuant to Section 602(a), prior law will determine whether a trust executed prior to the effective date of the Code is presumed to be revocable or irrevocable.

For a comparable uniform law effective date provision, see Uniform Probate Code Section 8 101.

North Carolina Comment on Effective Date and Applicability. - The drafters modified the provisions of the Uniform Trust Code relating to its application to trust instruments executed before its effective date by adding the phrase "or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary" to the end of the first sentence of the second paragraph. Although this Chapter is intended to have broad application, the drafters concluded that a rule of construction or presumption provided in this Chapter should not be applied to a trust instrument executed before the effective date of this Chapter if the application of such rule or presumption would impair the substantial rights of a beneficiary of a trust established under such a trust instrument.

Editor's Note. - Session Laws 2005-192, which enacted Chapter 36C, in s. 6, provides: "The Revisor of Statutes shall cause to be printed along with this act all relevant portions of the Official Commentary to the Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Official Comments, copyright 2005, are reprinted in this Chapter with the permission of the National Conference of Commissioners on Uniform State Laws. It is believed that the Official Comments will prove of value to the practitioner in understanding and applying the text of this Chapter.

The Official Comments appearing under individual sections in this Chapter have been printed by the publisher as received, without editorial change, and relate to the Chapter as originally enacted. However, not all sections in this Chapter may carry Official Comments. Furthermore, Official Comments may or may not have been received or updated in conjunction with subsequent amendments to this Chapter and, therefore, may not reflect all changes to the sections under which they appear.

Where they appear in this Chapter, "Amended Comment" usually means that an error in the original comment has been corrected by a subsequent amendment, and "Supplemental Comment" pertains to a later development, such as an amendment to the statute text. North Carolina Comments explain where the General Assembly has enacted variations to the text of the Uniform Act.

CASE NOTES

Cited in Belk v. Belk, 221 N.C. App. 1, 728 S.E.2d 356 (2012).

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). ...

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 risketurn 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 § 515(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.

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).

NORTH CAROLINA COMMENTS

This section recodifies the provisions of former G.S. 36A-162 except for former G.S. 36A-162(f) concerning the duty of a trustee with special skills which under G.S. 36C-8-806 is applicable to all matters of trust administration, including the investment and management of trust property.

CASE NOTES

Removal of Fiduciary Upheld. - Reversing an assistant clerk's order removing a guardian of an estate and trustee under a special needs trust for breach of fiduciary duty was error where the appropriate standard of review was whether the assistant clerk committed an error of law, the unchallenged findings of fact showed that the guardian and trustee had spent more than 90 percent of the monies that had been deposited in the trust for purposes for which he received some, if not all, of the benefit, and thus, he was removed based on waste and mismanagement of the assets committed to his care. In re Estate of Skinner, 370 N.C. 126, 804 S.E.2d 449 (2017).

No Violation of Standard Shown. - Because a bank, which was the trustee of a trust, demonstrated reasonable care by taking precautionary steps to protect the retained funds and investing the funds in a liquid and risk-free money market account until the pending litigation was resolved, there was no breach of fiduciary duty under G.S. 32-2. Heinitsh v. Wachovia Bank, 192 N.C. App. 570, 665 S.E.2d 541 (2008), review denied, 363 N.C. 125, 673 S.E.2d 131 (2009).

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..."

NORTH CAROLINA COMMENT

This section recodifies the provisions of former G.S. 36A-163 of the North Carolina Uniform Prudent Investor Act.

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.

NORTH CAROLINA COMMENT

This section recodifies the provisions of former G.S. 36A 164 of the North Carolina Uniform Prudent Investor Act.

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.

NORTH CAROLINA COMMENT

This section recodifies the provisions of former G.S. 36A 168 of the North Carolina Uniform Prudent Investor Act.

OFFICIAL COMMENT

This section codifies the remedies available to rectify or to prevent a breach of trust for violation of a duty owed to a beneficiary. The duties that a trust might breach include those contained in Article 8 in addition to those specified elsewhere in the Code.

This section identifies the available remedies but does not attempt to cover the refinements and exceptions developed in case law. The availability of a remedy in a particular circumstance will be determined not only by this Code but also by the common law of trusts and principles of equity. See Section 106.

Beneficiaries and cotrustees have standing to bring a petition to remedy a breach of trust. Following a successor trustee's acceptance of office, a successor trustee has standing to sue a predecessor for breach of trust. See Restatement (Second) of Trusts § 200 (1959). A person who may represent a beneficiary's interest under Article 3 would have standing to bring a petition on behalf of the person represented. In the case of a charitable trust, those with standing include the state attorney general, a charitable organization designated entitled to receive distributions under the terms of the trust, and other persons with a special interest. See Section 110 & Restatement (Second) of Trusts § 391 (1959). A person appointed to enforce a trust for an animal or a trust for a noncharitable purpose would have standing to sue for a breach of trust. See Sections 110(b), 408, 409.

Traditionally, remedies for breach of trust at law were limited to suits to enforce unconditional obligations to pay money or deliver chattels. See Restatement (Second) of Trusts § 198 (1959). Otherwise, remedies for breach of trust were exclusively equitable, and as such, punitive damages were not available and findings of fact were made by the judge and not a jury. See Restatement (Second) of Trusts § 197 (1959). The Uniform Trust Code does not preclude the possibility that a particular enacting jurisdiction might not follow these norms.

The remedies identified in this section are derived from Restatement (Second) of Trusts § 199 (1959). The reference to payment of money in subsection (b)(3) includes liability that might be characterized as damages, restitution, or surcharge. For the measure of liability, see Section 1002. Subsection (b)(5) makes explicit the court's authority to appoint a special fiduciary, also sometimes referred to as a receiver. See Restatement (Second) of Trusts § 199(d) (1959). The authority of the court to appoint a special fiduciary is not limited to actions alleging breach of trust but is available whenever the court, exercising its equitable jurisdiction, concludes that an appointment would promote administration of the trust. See Section 704(d) (special fiduciary may be appointed whenever court considers such appointment necessary for administration).

Subsection (b)(8), which allows the court to reduce or deny compensation, is in accord with Restatement (Second) of Trusts § 243 (1959). For the factors to consider in setting a trustee's compensation absent breach of trust, see Section 708 and Comment. In deciding whether to reduce or deny a trustee compensation, the court may wish to consider (1) whether the trustee acted in good faith; (2) whether the breach of trust was intentional; (3) the nature of the breach and the extent of the loss; (4) whether the trustee has restored the loss; and (5) the value of the trustee's services to the trust. See Restatement (Second) of Trusts § 243 cmt. c (1959).

The authority under subsection (b)(9) to set aside wrongful acts of the trustee is a corollary of the power to enjoin a threatened breach as provided in subsection (b)(2). However, in setting aside the wrongful acts of the trustee the court may not impair the rights of bona fide purchasers protected under Section 1012. See Restatement (Second) of Trusts § 284 (1959).

NORTH CAROLINA COMMENT

Section 1001 includes the remedies provided in former G.S. 36A-81 and those allowed in Matter of Will of Jacobs, 91 N.C. App. 138, 370 S.E.2d 860, review denied, 323 N.C. 476, 373 S.E.2d 863 (1988).

Subsection (e) was added to the section to bring forward the substance of former G.S. 36A-80 which allowed a court to relieve a trustee from liability for violating the provisions of the former Article 5 of Chapter 36A, the Uniform Trusts Act, if the trustee acted honestly and in good faith. Subsection (e) authorizes such relief for any breach of trust.

Effective Date and Applicability. - Session Laws 2005-192, which enacted Chapter 36C, in s. 7(a) provides: "Section 2 of this act becomes effective January 1, 2006, and except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, applies to (i) all trusts created before, on, or after that date; (ii) all judicial proceedings concerning trusts commenced on or after that date; and (iii) judicial proceedings concerning trusts commenced before that date unless the court finds that application of a particular provision of Chapter 36C of the General Statutes would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of Chapter 36C of the General Statutes does not apply and the superseded law applies.

"Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, any rule of construction or presumption provided in Chapter 36C of the General Statutes applies to trust instruments executed before the effective date of Section 2 of this act unless there is a clear indication of a contrary intent in the terms of the trust or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary. Except as otherwise provided in Chapter 36C of the General Statutes, as enacted by Section 2 of this act, an act done before the effective date of Section 2 of this act is not affected by Chapter 36C of the General Statutes. If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before the effective date of Section 2 of this act, that statute continues to apply to the right even if it has been repealed or superseded."

Official Comment on Effective Date and Applicability. - The Uniform Trust Code is intended to have the widest possible effect within constitutional limitations. Specifically, the Code applies to all trusts whenever created, to judicial proceedings concerning trusts commenced on or after its effective date, and unless the court otherwise orders, to judicial proceedings in progress on the effective date. In addition, any rules of construction or presumption provided in the Code apply to preexisting trusts unless there is a clear indication of a contrary intent in the trust's terms. By applying the Code to preexisting trusts, the need to know two bodies of law will quickly lessen.

This Code cannot be fully retroactive, however. Constitutional limitations preclude retroactive application of rules of construction to alter property rights under trusts that became irrevocable prior to the effective date. Also, rights already barred by a statute of limitation or rule under former law are not revived by a possibly longer statute or more liberal rule under this Code. Nor is an act done before the effective date of the Code affected by the Code's enactment.

The Uniform Trust Code contains an additional effective date provision. Pursuant to Section 602(a), prior law will determine whether a trust executed prior to the effective date of the Code is presumed to be revocable or irrevocable.

For a comparable uniform law effective date provision, see Uniform Probate Code Section 8 101.

North Carolina Comment on Effective Date and Applicability. - The drafters modified the provisions of the Uniform Trust Code relating to its application to trust instruments executed before its effective date by adding the phrase "or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary" to the end of the first sentence of the second paragraph. Although this Chapter is intended to have broad application, the drafters concluded that a rule of construction or presumption provided in this Chapter should not be applied to a trust instrument executed before the effective date of this Chapter if the application of such rule or presumption would impair the substantial rights of a beneficiary of a trust established under such a trust instrument.

Editor's Note. - Session Laws 2005-192, which enacted Chapter 36C, in s. 6, provides: "The Revisor of Statutes shall cause to be printed along with this act all relevant portions of the Official Commentary to the Uniform Trust Code and all explanatory comments of the drafters of this act as the Revisor may deem appropriate."

Official Comments, copyright 2005, are reprinted in this Chapter with the permission of the National Conference of Commissioners on Uniform State Laws. It is believed that the Official Comments will prove of value to the practitioner in understanding and applying the text of this Chapter.

The Official Comments appearing under individual sections in this Chapter have been printed by the publisher as received, without editorial change, and relate to the Chapter as originally enacted. However, not all sections in this Chapter may carry Official Comments. Furthermore, Official Comments may or may not have been received or updated in conjunction with subsequent amendments to this Chapter and, therefore, may not reflect all changes to the sections under which they appear.

Where they appear in this Chapter, "Amended Comment" usually means that an error in the original comment has been corrected by a subsequent amendment, and "Supplemental Comment" pertains to a later development, such as an amendment to the statute text. North Carolina Comments explain where the General Assembly has enacted variations to the text of the Uniform Act.

CASE NOTES

Editor's Note. - One of the cases below was decided under prior law.

Standing To Enforce Trust. - Trustees had standing to appeal an order granting co-trustees partial summary judgment in because the essence of the complaint was that the co-trustees breached their duties and violated the trust agreement; thus, the trustees would have standing to sue their fellow trustees to enforce the trust. Yost v. Yost, 213 N.C. App. 516, 713 S.E.2d 758, review denied 718 S.E.2d 375, 2011 N.C. LEXIS 1122 (N.C. 2011).

Court May Relieve Trustee of Restriction on Purchasing Trust Property. - This section, by allowing a court of competent jurisdiction to relieve the trustee of "any or all of the duties and restrictions" placed upon him by this Article, gives statutory authority to the court to relieve the trustee of the restriction that he cannot purchase property from the trust. Wachovia Bank & Trust Co. v. Johnston, 269 N.C. 701, 153 S.E.2d 449 (1967), decided under prior law.

Voidable Transfer. - When a trustee transferred trust property to the trustee to satisfy the trust's debt to the trustee, the trustee's subsequent transfers of the property were voidable because the trustee's transfer to the trustee was void, due to the trustee's breach of the trustee's duty of loyalty, so the trustee had no title to transfer to subsequent transferees. THZ Holdings, LLC v. McCrea, 231 N.C. App. 482, 753 S.E.2d 344 (2013).

OFFICIAL COMMENT

Subsection (a) is based on Restatement (Third) of Trusts: Prudent Investor Rule § 205 (1992). If a trustee commits a breach of trust, the beneficiaries may either affirm the transaction or, if a loss has occurred, hold the trustee liable for the amount necessary to compensate fully for the consequences of the breach. This may include recovery of lost income, capital gain, or appreciation that would have resulted from proper administration. Even if a loss has not occurred, the trustee may not benefit from the improper action and is accountable for any profit the trustee made by reason of the breach.

For extensive commentary on the determination of damages, traditionally known as trustee surcharge, with numerous specific applications, see Restatement (Third) of Trusts: Prudent Investor Rule §§ 205-213 (1992). For the use of benchmark portfolios to determine damages, see Restatement (Third) of Trusts: Prudent Investor Rule Reporter's Notes to §§ 205 and 208-211 (1992). On the authority of a court of equity to reduce or excuse damages for breach of trust, see Restatement (Second) of Trusts § 205 cmt. g (1959).

For purposes of this section and Section 1003, "profit" does not include the trustee's compensation. A trustee who has committed a breach of trust is entitled to reasonable compensation for administering the trust unless the court reduces or denies the trustee compensation pursuant to Section 1001(b)(8).

Subsection (b) is based on Restatement (Second) of Trusts § 258 (1959). Cotrustees are jointly and severally liable for a breach of trust if there was joint participation in the breach. Joint and several liability also is imposed on a nonparticipating cotrustee who, as provided in Section 703(g), failed to exercise reasonable care (1) to prevent a cotrustee from committing a serious breach of trust, or (2) to compel a cotrustee to redress a serious breach of trust. Joint and several liability normally carries with it a right in any trustee to seek contribution from a cotrustee to the extent the trustee has paid more than the trustee's proportionate share of the liability. Subsection (b), consistent with Restatement (Second) of Trusts § 258 (1959), creates an exception. A trustee who was substantially more at fault or committed the breach of trust in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries is not entitled to contribution from the other trustees.

Determining degrees of comparative fault is a question of fact. The fact that one trustee was more culpable or more active than another does not necessarily establish that this trustee was substantially more at fault. Nor is a trustee substantially less at fault because the trustee did not actively participate in the breach. See Restatement (Second) of Trusts § 258 cmt. e (195). Among the factors to consider: (1) Did the trustee fraudulently induce the other trustee to join in the breach? (2) Did the trustee commit the breach intentionally while the other trustee was at most negligent? (3) Did the trustee, because of greater experience or expertise, control the actions of the other trustee? (4) Did the trustee alone commit the breach with liability imposed on the other trustee only because of an improper delegation or failure to properly monitor the actions of the cotrustee? See Restatement (Second) of Trusts § 258 cmt. d (1959).

NORTH CAROLINA COMMENT

Subsection (a) is generally consistent with North Carolina case law. See Freeman v. Cook, 41 N.C. 373 (1849).

Subsection (b) establishes an equitable rule of contribution among cotrustees. General North Carolina contribution provisions do not apply to breaches of trust or fiduciary obligations. G.S. 1B-1(g).

CASE NOTES

Applied in Belk v. Belk, 221 N.C. App. 1, 728 S.E.2d 356 (2012).

OFFICIAL COMMENT

The principle on which a trustee's duty of loyalty is premised is that a trustee should not be allowed to use the trust as a means for personal profit other than for routine compensation earned. While most instances of personal profit involve situations where the trustee has breached the duty of loyalty, not all cases of personal profit involve a breach of trust. Subsection (a), which holds a trustee accountable for any profit made, even absent a breach of trust, is based on Restatement (Second) of Trusts § 203 (1959). A typical example of a profit is receipt by the trustee of a commission or bonus from a third party for actions relating to the trust's administration. See Restatement (Second) of Trusts § 203 cmt. a (1959).

A trustee is not an insurer. Similar to Restatement (Second) of Trusts § 204 (1959), subsection (b) provides that absent a breach of trust a trustee is not liable for a loss or depreciation in the value of the trust property or for failure to make a profit.

NORTH CAROLINA COMMENT

The title to Section 1003 of the Uniform Trust Code was changed from "Damages in Absence of Breach" to "Liability in Absence of Breach" because there are generally no damages in the absence of a breach.

Subsection (a) of the Uniform Trust Code was modified to add the second sentence to clarify that allowable compensation of the trustee would not be considered "profits" for which a trustee is accountable.

Subsection (b) is consistent with North Carolina case law. See, e.g., Lichtenfels v. North Carolina National Bank, 268 N.C. 467, 151 S.E.2d 78 (1966); Cheshire v. First Presbyterian Church, 225 N.C. 165, 33 S.E.2d 866 (1945).

OFFICIAL COMMENT

This section, which is based on Massachusetts General Laws chapter 215, § 45, codifies the court's historic authority to award costs and fees, including reasonable attorney's fees, in judicial proceedings grounded in equity. The court may award a party its own fees and costs from the trust. The court may also charge a party's costs and fees against another party to the litigation. Generally, litigation expenses were at common law chargeable against another party only in the case of egregious conduct such as bad faith or fraud. With respect to a party's own fees, Section 709 authorizes a trustee to recover expenditures properly incurred in the administration of the trust. The court may award a beneficiary litigation costs if the litigation is deemed beneficial to the trust. Sometimes, litigation brought by a beneficiary involves an allegation that the trustee has committed a breach of trust. On other occasions, the suit by the beneficiary is brought because of the trustee's failure to take action against a third party, such as to recover property properly belonging to the trust. For the authority of a beneficiary to bring an action when the trustee fails to take action against a third party, see Restatement (Second) of Trusts §§ 281-282 (1959). For the case law on the award of attorney's fees and other litigation costs, see 3 Austin W. Scott & William F. Fratcher, The Law of Trusts §§ 188.4 (4th ed. 1988).

NORTH CAROLINA COMMENT

This section of the Uniform Trust Code was modified to refer to existing North Carolina law with respect to awarding costs and expenses, including attorney's fees, in place of the provisions of the Uniform Trust Code which allowed the court "as justice and equity may require" to award such costs "to any party, to be paid by another party or from the trust that is the subject of the controversy." G.S. 6-21(2) provides substantially the same result as the Uniform Trust Code with respect to proceedings for the construction of a trust or to fix the rights and duties of the parties.

CASE NOTES

Award of Attorneys' Fees Affirmed. - It was no error to affirm a clerk's award of attorneys' fees against a former co-trustee because (1) G.S. 36C-10-1004 and G.S. 6-21(2) did not limit a court's discretion to award fees to cases of egregious conduct, and, (2) if egregious conduct were required, there was sufficient evidence of such conduct when the former co-trustee jeopardized the health of the trust by refusing to cooperate with efforts to sell or lease the trust property, which was deteriorating while remaining vacant. Bullard v. Hoffman (In re Mayette E. Hoffman Living Trust U/A Dated August 4, 1997), 258 N.C. App. 255, 812 S.E.2d 401 (2018).

Cited in Belk v. Belk, 221 N.C. App. 1, 728 S.E.2d 356 (2012).

§ 36C-10-1004. Attorneys' fees and costs.

In a judicial proceeding involving the administration of a trust, the court may award costs and expenses, including reasonable attorneys' fees, as provided in the General Statutes, except that, in the case of a proceeding to establish the validity of a trust under Article 4C of this Chapter, the court shall allow for attorneys' fees for the attorneys of a party contesting the proceeding only if the court finds the party had reasonable grounds for contesting the proceeding.

History

(2005-192, s. 2; 2021-53, s. 1.3.)

OFFICIAL COMMENT

This section, which is based on Massachusetts General Laws chapter 215, § 45, codifies the court's historic authority to award costs and fees, including reasonable attorney's fees, in judicial proceedings grounded in equity. The court may award a party its own fees and costs from the trust. The court may also charge a party's costs and fees against another party to the litigation. Generally, litigation expenses were at common law chargeable against another party only in the case of egregious conduct such as bad faith or fraud. With respect to a party's own fees, Section 709 authorizes a trustee to recover expenditures properly incurred in the administration of the trust. The court may award a beneficiary litigation costs if the litigation is deemed beneficial to the trust. Sometimes, litigation brought by a beneficiary involves an allegation that the trustee has committed a breach of trust. On other occasions, the suit by the beneficiary is brought because of the trustee's failure to take action against a third party, such as to recover property properly belonging to the trust. For the authority of a beneficiary to bring an action when the trustee fails to take action against a third party, see Restatement (Second) of Trusts §§ 281-282 (1959). For the case law on the award of attorney's fees and other litigation costs, see 3 Austin W. Scott & William F. Fratcher, The Law of Trusts §§ 188.4 (4th ed. 1988).

NORTH CAROLINA COMMENT

This section of the Uniform Trust Code was modified to refer to existing North Carolina law with respect to awarding costs and expenses, including attorney's fees, in place of the provisions of the Uniform Trust Code which allowed the court "as justice and equity may require" to award such costs "to any party, to be paid by another party or from the trust that is the subject of the controversy." G.S. 6-21(2) provides substantially the same result as the Uniform Trust Code with respect to proceedings for the construction of a trust or to fix the rights and duties of the parties.

Editor's Note. - Session Laws 2021-53, s. 1.5, made the exception in the second half of this section, as added by Session Laws 2021-53, s. 1.3, effective October 1, 2021, and applicable to proceedings initiated on or after that date.

Session Laws 2021-53, s. 5.1, contains a severability clause.

Effect of Amendments. - Session Laws 2021-53, s. 1.3, added the exception in the second half of the section. For effective date and applicability, see editor's note.

CASE NOTES

Award of Attorneys' Fees Affirmed. - It was no error to affirm a clerk's award of attorneys' fees against a former co-trustee because (1) G.S. 36C-10-1004 and G.S. 6-21(2) did not limit a court's discretion to award fees to cases of egregious conduct, and, (2) if egregious conduct were required, there was sufficient evidence of such conduct when the former co-trustee jeopardized the health of the trust by refusing to cooperate with efforts to sell or lease the trust property, which was deteriorating while remaining vacant. Bullard v. Hoffman (In re Mayette E. Hoffman Living Trust U/A Dated August 4, 1997), 258 N.C. App. 255, 812 S.E.2d 401 (2018).

Cited in Belk v. Belk, 221 N.C. App. 1, 728 S.E.2d 356 (2012).

OFFICIAL COMMENT

The one-year and five-year limitations periods under this section are not the only means for barring an action by a beneficiary. A beneficiary may be foreclosed by consent, release, or ratification as provided in Section 1009. Claims may also be barred by principles such as estoppel and laches arising in equity under the common law of trusts. See Section 106.

The representative referred to in subsection (a) is the person who may represent and bind a beneficiary as provided in Article 3. During the time that a trust is revocable and the settlor has capacity, the person holding the power to revoke is the one who must receive the report. See Section 603(a) (rights of settlor of revocable trust).

This section addresses only the issue of when the clock will start to run for purposes of the statute of limitations. If the trustee wishes to foreclose possible claims immediately, a consent to the report or other information may be obtained pursuant to Section 1009. For the provisions relating to the duty to report to beneficiaries, see Section 813.

Subsection (a) applies only if the trustee has furnished a report. The one-year statute of limitations does not begin to run against a beneficiary who has waived the furnishing of a report as provided in Section 813(d).

Subsection (c) is intended to provide some ultimate repose for actions against a trustee. It applies to cases in which the trustee has failed to report to the beneficiaries or the report did not meet the disclosure requirements of subsection (b). It also applies to beneficiaries who did not receive notice of the report, whether personally or through representation. While the five-year limitations period will normally begin to run on termination of the trust, it can also begin earlier. If a trustee leaves office prior to the termination of the trust, the limitations period for actions against that particular trustee begins to run on the date the trustee leaves office. If a beneficiary receives a final distribution prior to the date the trust terminates, the limitations period for actions by that particular beneficiary begins to run on the date of final distribution.

If a trusteeship terminates by reason of death, a claim against the trustee's estate for breach of fiduciary duty would, like other claims against the trustee's estate, be barred by a probate creditor's claim statute even though the statutory period prescribed by this section has not yet expired.

This section does not specifically provide that the statutes of limitations under this section are tolled for fraud or other misdeeds, the drafters preferring to leave the resolution of this question to other law of the State.

NORTH CAROLINA COMMENT

The drafters omitted subsections (a) and (b) of the Uniform Trust Code which provided for a one year limitation of action for breach of trust after the beneficiary was sent a report adequately disclosing the existence of a potential claim for breach of trust and informing the beneficiary of the time allowed for commencing a proceeding. The drafters were concerned that these provisions would have greatly expanded residual liability of trustees.

This section modified subsection (c) of the Uniform Trust Code to refer to existing North Carolina law in Chapter 1 of the General Statutes regarding limitation of actions involving trusts. Under existing North Carolina law the statute of limitations applicable to an action for breach of fiduciary duty by a trustee is the same as an action for breach of contract, i.e., three years. See Pittman v. Barker, 117 N.C. App. 580, 452 S.E.2d 326 (1995), review denied, 340 N.C. 261, 456 S.E.2d 833 (1995). The statute of limitations begins to run when the claimant knew or, by due diligence, should have known of the facts constituting the basis for the claim. Id.

However, this section changes North Carolina law by retaining the Uniform Trust Code provision that in no event may an action be commenced for breach of trust more than five years after the first to occur of the trustee ceasing to act as trustee, the termination of the beneficiary's interest, or the termination of the trust.

SUPPLEMENTAL NORTH CAROLINA COMMENT (2015)

Effective October 1, 2015 a second sentence is added to subsection (b) to clarify that, notwithstanding the provisions of G.S. 1-17 tolling the statute of limitations for commencement of an action by a person who is under a disability, including but not limited to a minor, the statute of limitations for commencing the action begins to run when the person with authority to represent and bind the disabled person under Article 3 of this Chapter (whether or not the person consented to the representation of the disabled person) knew, or by due diligence, should have known of the facts constituting the basis for the claim. The statute of limitations begins to run at that time both as to the disabled person and the person with authority to represent and bind the disabled person.

During its term, which may be perpetual, a trust may have from time to time a minor beneficiary against whom under G.S. 1-17 the statute of limitations will not begin to run until after the minor reaches age eighteen. The amendment to subsection (b) is intended to allow a trustee to avoid such a prolonged period of exposure by giving adequate notice of the facts constituting the basis for the claim to the person with authority to represent and bind the minor so that the statute of limitations will not be tolled and will begin to run at the time of such adequate notice.

Editor's Note. - Session Laws 2015-205, s. 11(a), as amended by Session Laws 2015-264, s. 31(b), provides: "The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Commentary to the Uniform Powers of Appointment Act and of the Official Commentary to the Uniform Trust Code and all explanatory comments of the drafters of Part III and Parts VI through X-A of this act, as the Revisor may deem appropriate."

Effect of Amendments. - Session Laws 2015-205, s. 6, effective October 1, 2015, rewrote subsection (b), which formerly read: "Except as provided in subsection (a) of this section, Chapter 1 of the General Statutes governs the limitations of actions on judicial proceedings involving trusts." For applicability and effective date, see editor's note.

CASE NOTES

Continuing Wrong Doctrine Does Not Extend Limitations Period for Actions Against Trustees. - Continuing wrong doctrine does not apply to extend the time to begin the running of the limitations period for actions against trustees; an individual's acts as trustee end upon his resignation, and at that point the statute of limitations begins to run. Robert K. Ward Living Trust v. Peck, 229 N.C. App. 550, 748 S.E.2d 606 (2013).

Illustrative Cases. - Plaintiff trust's claims that defendant took wrongful actions as trustee were properly dismissed as barred by the limitations period for actions against trustees, as the complaint was not filed until over five years after defendant resigned as trustee. Robert K. Ward Living Trust v. Peck, 229 N.C. App. 550, 748 S.E.2d 606 (2013).

Cited in THZ Holdings, LLC v. McCrea, 231 N.C. App. 482, 753 S.E.2d 344 (2013).

OFFICIAL COMMENT

It sometimes happens that the intended terms of the trust differ from the apparent meaning of the trust instrument. This can occur because the court, in determining the terms of the trust, is allowed to consider evidence extrinsic to the trust instrument. See Section 103(18) (definition of "terms of a trust"). Furthermore, if a trust is reformed on account of mistake of fact or law, as authorized by Section 415, provisions of a trust instrument can be deleted or contradicted and provisions not in the trust instrument may be added. The concept of the "terms of a trust," both as defined in this Code and as used in the doctrine of reformation, is intended to effectuate the principle that a trust should be administered and distributed in accordance with the settlor's intent. However, a trustee should also be able to administer a trust with some dispatch and without concern that a reasonable reliance on the terms of the trust instrument is misplaced. This section protects a trustee who so relies on a trust instrument but only to the extent the breach of trust resulted from such reliance. This section is similar to Section 1(b) of the Uniform Prudent Investor Act, which protects a trustee from liability to the extent that the trustee acted in reasonable reliance on the provisions of the trust.

This section protects a trustee only if the trustee's reliance is reasonable. For example, a trustee's reliance on the trust instrument would not be justified if the trustee is aware of a prior court decree or binding nonjudicial settlement agreement clarifying or changing the terms of the trust.

NORTH CAROLINA COMMENT

This section is consistent with G.S. 36C-9-901(b) of the North Carolina Uniform Prudent Investor Act formerly codified at G.S. 36A-161(b). This section also is consistent with North Carolina case law. See, e.g., Lichtenfels v. North Carolina National Bank, 268 N.C. 467, 151 S.E.2d 78 (1966).

OFFICIAL COMMENT

This section, which is based on Washington Revised Code § 11.98.100, is designed to encourage trustees to administer trusts expeditiously and without undue concern about liability for failure to ascertain external facts, often of a personal nature, that might affect administration or distribution of the trust. The common law, contrary to this section, imposed absolute liability against a trustee for misdelivery regardless of the trustee's level of care. See Restatement (Second) of Trusts § 226 (1959). The events listed in this section are not exclusive. A trustee who has exercised reasonable care to ascertain the occurrence of other events, such as the attainment by a beneficiary of a certain age, is also protected from liability.

NORTH CAROLINA COMMENT

This section appears to have no counterpart in prior North Carolina law.

OFFICIAL COMMENT

Even if the terms of the trust attempt to completely exculpate a trustee for the trustee's acts, the trustee must always comply with a certain minimum standard. As provided in subsection (a), a trustee must always act in good faith with regard to the purposes of the trust and the interests of the beneficiaries. Subsection (a) is consistent with the standards expressed in Sections 105 and 814(a), which, similar to this section, place limits on the power of a settlor to negate trustee duties. This section is also similar to Section 222 of the Restatement (Second) of Trusts (1959), except that this Code, unlike the Restatement, allows a settlor to exculpate a trustee for a profit that the trustee made from the trust.

Subsection (b) disapproves of cases such as Marsman v. Nasca, 573 N.E.2d 1025 (Mass. App. Ct. 1991), which held that an exculpatory clause in a trust instrument drafted by the trustee was valid because the beneficiary could not prove that the clause was inserted as a result of an abuse of a fiduciary relationship. For a later case where sufficient proof of abuse was present, see Rutanan v. Ballard, 678 N.E.2d 133 (Mass. 1997). Subsection (b) responds to the danger that the insertion of such a clause by the fiduciary or its agent may have been undisclosed or inadequately understood by the settlor. To overcome the presumption of abuse in subsection (b), the trustee must establish that the clause was fair and that its existence and contents were adequately communicated to the settlor. In determining whether the clause was fair, the court may wish to examine: (1) the extent of the prior relationship between the settlor and trustee; (2) whether the settlor received independent advice; (3) the sophistication of the settlor with respect to business and fiduciary matters; (4) the trustee's reasons for inserting the clause; and (5) the scope of the particular provision inserted. See Restatement (Second) of Trusts § 222 cmt. d (1959).

The requirements of subsection (b) are satisfied if the settlor was represented by independent counsel. If the settlor was represented by independent counsel, the settlor's attorney is considered the drafter of the instrument even if the attorney used the trustee's form. Because the settlor's attorney is an agent of the settlor, disclosure of an exculpatory term to the settlor's attorney is disclosure to the settlor.

NORTH CAROLINA COMMENT

This section changes prior North Carolina law with respect to the limitations on the enforceability of exculpatory provisions in the trust. Former G.S. 36A-78 authorized a settlor to relieve a trustee from liability otherwise imposed by former Article 5 of Chapter 36A, the Uniform Trusts Act, except the prohibition against making loans to the trustee, holding funds uninvested for an unreasonable length of time, and buying from and selling to the trustee. These specific limitations on the validity of trust terms relieving a trustee from liability are no longer necessary in light of the more comprehensive provisions of this section. See also G.S. 36C-8-802 providing that the terms of a trust may authorize any transaction involving a conflict of interest.

The drafters omitted subdivision (a)(2) of the Uniform Trust Code which provides that an exculpatory provision was invalid if inserted as a result of the abuse by the trustee of a fiduciary or confidential relationship to the settlor. The drafters also omitted subsection (b) of the Uniform Trust Code which provides that an exculpatory term of a trust drafted by the trustee is invalid unless the trustee proves the exculpatory term is fair and that its existence and content was adequately communicated to the settlor. The drafters were concerned that these provisions would unnecessarily complicate the use of legitimate limitations of liability in trust documents that trustees customarily rely on.

OFFICIAL COMMENT

This section is based on Sections 216 through 218 of the Restatement (Second) of Trusts (1959). A consent, release, or affirmance under this section may occur either before or after the approved conduct. This section requires an affirmative act by the beneficiary. A failure to object is not sufficient. See Restatement (Second) of Trusts § 216 cmt. a (1959). A consent is binding on a consenting beneficiary although other beneficiaries have not consented. See Restatement (Second) of Trusts § 216 cmt. g (1959). To constitute a valid consent, the beneficiary must know of the beneficiary's rights and of the material facts relating to the breach. See Restatement (Second) of Trusts § 216 cmt. k (1959). If the beneficiary's approval involves a self-dealing transaction, the approval is binding only if the transaction was fair and reasonable. See Restatement (Second) of Trusts §§ 170(2), 216(3) and cmt. n (1959).

An approval by the settlor of a revocable trust or by the holder of a presently exercisable power of withdrawal binds all the beneficiaries. See Section 603. A beneficiary is also bound to the extent an approval is given by a person authorized to represent the beneficiary as provided in Article 3.

2001 Amendment. By a 2001 amendment, the limitation of this section to beneficiaries "having capacity" was deleted. This limitation was included by mistake. As indicated in the second paragraph of the comment, the drafting committee did not intend to prohibit the use of the representation provisions of Article 3, several of which address representation of and the giving of a binding consent on behalf of an incapacitated beneficiary.

NORTH CAROLINA COMMENT

Subsection (a) changes North Carolina law by providing that a beneficiary may relieve a trustee from liability for any breach of trust subject to the provisions of subdivisions (a)(1) and (2). Former G.S. 36A-79 permitted a beneficiary to release a trustee from liability otherwise imposed by former Article 5 of Chapter 36A, the Uniform Trusts Act, except the prohibition against making loans to the trustee, holding funds invested for an unreasonable length of time, and buying from and selling to the trustee. These specific limitations on the beneficiary's ability to relieve a trustee from liability are no longer necessary in light of the more comprehensive provisions of this section. See also G.S. 36C-8-802(b) which allows a beneficiary to relieve a trustee from liability for breach of trust involving any conflict of interest.

Subsection (b) was added to this section to clarify that no consideration is required for the validity of a consent, release or ratification.

CASE NOTES

Cited in THZ Holdings, LLC v. McCrea, 231 N.C. App. 482, 753 S.E.2d 344 (2013).

OFFICIAL COMMENT

This section is based on Section 7-306 of the Uniform Probate Code. However, unlike the Uniform Probate Code, which requires that the contract both disclose the representative capacity and identify the trust, subsection (a) protects a trustee who reveals the fiduciary relationship either by indicating a signature as trustee or by simply referring to the trust. The protection afforded the trustee by this section applies only to contracts that are properly entered into in the trustee's fiduciary capacity, meaning that the trustee is exercising an available power and is not violating a duty. This section does not excuse any liability the trustee may have for breach of trust.

Subsection (b) addresses trustee liability arising from ownership or control of trust property and for torts occurring incident to the administration of the trust. Liability in such situations is imposed on the trustee personally only if the trustee was personally at fault, either intentionally or negligently. This is contrary to Restatement (Second) of Trusts § 264 (1959), which imposes liability on a trustee regardless of fault, including liability for acts of agents under respondeat superior. Responding to a particular concern of trustees, subsection (b) specifically protects a trustee from personal liability for violations of environmental law such as CERCLA (42 U.S.C. § 9607) or its state law counterparts, unless the trustee was personally at fault. See also Sections 701(c)(2) (nominated trustee may investigate trust property to determine potential violation of environmental law without having accepted trusteeship) and 816(13) (trustee powers with respect to possible liability for violation of environmental law).

Subsection (c) alters the common law rule that a trustee could not be sued in a representative capacity if the trust estate was not liable.

NORTH CAROLINA COMMENT

Subsection (a) is generally consistent with former G.S. 36A-74(c) and North Carolina case law. See Church v. First Union National Bank, 63 N.C. App. 359, 304 S.E.2d 633, review denied and appeal dismissed, 309 N.C. 460, 307 S.E.2d 363 (1983); see also Scott v. United Carolina Bank, 130 N.C. App. 426, 503 S.E.2d 149, review denied, 350 N.C. 99, 528 S.E.2d 584 (1999). Subsection (a) of the Uniform Trust Code was modified by adding the second sentence bringing forward the provisions of former G.S. 36A-74(c) regarding prima facie evidence of disclosure of fiduciary capacity on written contracts.

Subsection (b) is broader, simpler and more effective than former G.S. 36A-76(a) which provided for tort liability of trusts.

Subsection (c) is generally consistent with former G.S. 36A-74(a) with respect to judicial proceedings against a trustee in the trustee's fiduciary capacity based on contract, but changes prior law in former G.S 36A-76(a) by allowing the trustee to be sued on a tort in a representative capacity, whether or not personally at fault. Former G.S. 36A-76(a) allowed the personal representative to be sued in a representative capacity on a tort only if the court found certain alternative conditions were met, one of which was that the trustee was not personally at fault. The second sentence of subsection (c) was added to bring forward the substance of the provisions of former G.S. 36A-74(a) and former G.S. 36A-76(b).

Subsection (c) changes prior law in not bringing forward provisions in former G.S. 36A-74(b) and former G.S. 36A-76(b) requiring notice to beneficiaries of suits against the personal representative based on a contract or on a tort. The drafters concluded that these provisions may be a "trap for the unwary"and were unnecessary because the trustee is charged with the duty to defend actions and beneficiaries could sue the trustee for breach of trust if the trustee failed to properly defend a claim.

The provisions in former G.S. 36A-75(c) and former G.S. 36A-77(e) that those sections did not change existing law as to liability of trustees of charitable trusts were not brought forward because the drafters concluded that no different standard for liability of charitable trustees appeared to be in effect in North Carolina.

Subsection (d) was added to the section to bring forward the provisions of former G.S. 36A-75(a) and (b) regarding exoneration or reimbursement for torts but applies such provisions to any claim other than a breach of trust.

Subsection (e) was added to the section to bring forward the substance of provisions in G.S. 32-27(8a)g. which would not otherwise be applicable unless incorporated by reference.

CASE NOTES

Editor's Note. - The cases below were decided under prior law.

Protection of Beneficiaries of Charitable Trusts. - The State as parens patriae, through its Attorney General, has the common-law right and power to protect the beneficiaries of charitable trusts and the property to which they are or may be entitled. Sigmund Sternberger Found. v. Tannenbaum, 273 N.C. 658, 161 S.E.2d 116 (1968), decided under prior law.

Enforcement of Gift or Trust. - Because of the public interest necessarily involved in a charitable trust or gift to charity and essential to its legal classification as a charity, it is generally recognized that the Attorney General, in his capacity as representative of the State and of the public, is the, or at least a, proper party to institute and maintain proceedings for the enforcement of such a gift or trust. Sigmund Sternberger Found. v. Tannenbaum, 273 N.C. 658, 161 S.E.2d 116 (1968), decided under prior law.

Court May Relieve Trustee of Restriction on Purchasing Trust Property. - This section, by allowing a court of competent jurisdiction to relieve the trustee of "any or all of the duties and restrictions" placed upon him by this Article, gives statutory authority to the court to relieve the trustee of the restriction that he cannot purchase property from the trust. Wachovia Bank & Trust Co. v. Johnston, 269 N.C. 701, 153 S.E.2d 449 (1967), decided under prior law.

OFFICIAL COMMENT

Section 1010 protects a trustee from personal liability on contracts that the trustee enters into on behalf of the trust. Section 1010 also absolves a trustee from liability for torts committed in administering the trust unless the trustee was personally at fault. It does not protect a trustee from personal liability for contracts entered into or torts committed by a general or limited partnership of which the trustee was a general partner. That is the purpose of this section, which is modeled after Ohio Revised Code § 1339.65. Subsection (a) protects the trustee from personal liability for such partnership obligations whether the trustee signed the contract or it was signed by another general partner. Subsection (b) protects a trustee from personal liability for torts committed by the partnership unless the trustee was personally at fault. Protection from the partnership's contractual obligations is available under subsection (a) only if the other party is on notice of the fiduciary relationship, either in the contract itself or in the partnership certificate on file.

Special protection is not needed for other business interests that the trustee may own, such as an interest as a limited partner, a membership interest in an LLC, or an interest as a corporate shareholder. In these cases the nature of the entity or the interest owned by the trustee carries with it its own limitation on liability.

Certain exceptions apply. The section is not intended to be used as a device for individuals or their families to shield assets from creditor claims. Consequently, subsection (c) excludes from the protections provided by this section trustees who own an interest in the partnership in another capacity or if an interest is owned by the trustee's spouse or the trustee's descendants, siblings, parents, or the spouse of any of them.

Nor can a revocable trust be used as a device for avoiding claims against the partnership. Subsection (d) imposes personal liability on the settlor for partnership contracts and other obligations of the partnership the same as if the settlor were a general partner.

This section has been placed in brackets to alert enacting jurisdictions to consider modifying the section to conform it to the State's specific laws on partnerships and other forms of unincorporated businesses.

NORTH CAROLINA COMMENT

The drafters found no prior North Carolina law specifically addressing liability of a trust that is a general partner.

Subsection (a) of the Uniform Trust Code was modified to provide that the trustee must hold an interest in a general partnership "in a fiduciary capacity" to be immune from personal liability on a contract entered into by the parties. The drafters further modified subsection (a) by adding the last sentence bringing forward the second sentence of the provisions of former G.S. 36A-74(c) regarding prima facie evidence of fiduciary capacity on contracts but applying it to partnership documents.

Subsection (b) of the Uniform Trust Code was modified to provide that the trustee must hold the interest as a general partner "in a fiduciary capacity" to be immune from personal liability for torts committed by the partnership and that the section does not apply to additional interests in the partnership held by the trustee in a nonfiduciary capacity.

Subsection (c) of the Uniform Trust Code was omitted. It provided that the immunity from personal liability on contracts entered into by the partnership or for torts committed by the partnership did not apply if any member of the trustee's family holds an interest in the partnership.

Subsection (c) modifies subsection (d) of the Uniform Trust Code to provide that the settlor of a revocable trust is liable as a general partner for contracts and other obligations only when the settlor transfers an existing partnership interest to the trust, whereas subsection (d) of the Uniform Trust Code holds a settlor liable as a general partner whenever the trustee holds a partnership interest. The drafters concluded that there is little potential for abuse if the trust itself acquires a general partnership interest because other partners must agree to admit the revocable trust and any person dealing with the partnership can inquire about the general partner.

OFFICIAL COMMENT

This section is derived from Section 7 of the Uniform Trustee Powers Act.

Subsection (a) protects two different classes; persons other than beneficiaries who assist a trustee with a transaction, and persons other than beneficiaries who deal with the trustee for value. As long as the assistance was provided or the transaction was entered into in good faith and without knowledge, third persons in either category are protected in the transaction even if the trustee was exceeding or improperly exercising the power. For the definition of "know," see Section 104. This Code does not define "good faith" for purposes of this and the next section. Defining good faith with reference to the definition used in the State's commercial statutes would be consistent with the purpose of this section, which is to treat commercial transactions with trustees similar to other commercial transactions.

Subsection (b) confirms that a third party who is acting in good faith is not charged with a duty to inquire into the extent of a trustee's powers or the propriety of their exercise. The third party may assume that the trustee has the necessary power. Consequently, there is no need to request or examine a copy of the trust instrument. A third party who wishes assurance that the trustee has the necessary authority instead should request a certification of trust as provided in Section 1013. Subsection (b), and the comparable provisions enacted in numerous States, are intended to negate the rule, followed by some courts, that a third party is charged with constructive notice of the trust instrument and its contents. The cases are collected in George G. Bogert & George T. Bogert, The Law of Trusts and Trustees § 897 (Rev. 2d ed. 1995); and 4 Austin W. Scott & William F. Fratcher, The Law of Trusts § 297 (4th ed. 1989).

Subsection (c) protects any person, including a beneficiary, who in good faith delivers property to a trustee. The standard of protection in the Restatement is phrased differently although the result is similar. Under Restatement (Second) of Trusts § 321 (1959), the person delivering property to a trustee is liable if at the time of the delivery the person had notice that the trustee was misapplying or intending to misapply the property.

Subsection (d) extends the protections afforded by the section to assistance provided to or dealings for value with a former trustee. The third party is protected the same as if the former trustee still held the office.

Subsection (e) clarifies that a statute relating to commercial transactions controls whenever both it and this section could apply to a transaction. Consequently, the protections provided by this section are superseded by comparable protective provisions of these other laws. The principal statutes in question are the various articles of the Uniform Commercial Code, including Article 8 on the transfer of securities, as well as the Uniform Simplification of Fiduciary Securities Transfer Act.

NORTH CAROLINA COMMENT

Subsection (a) is consistent with the rule in North Carolina that a third party who assists a trustee with knowledge of the trustee's misconduct is directly accountable to the person injured. See, e.g., Abbitt v. Gregory, 201 N.C. 577, 596 99, 160 S.E.2d 896, 906 7 (1931); FNB Southeast v. Lane, 160 N.C. App. 535, 586 S.E.2d 530 (2003), review denied, 358 N.C. 152, 592 S.E.2d 588 (2004).

Subsection (b), however, changes the common law rule recognized in North Carolina to the effect that a person who deals with another is charged with knowledge of facts which a reasonable investigation would disclose and must examine the trust instrument and other sources of information in order to be satisfied that the trustee has authority to enter into the transaction. See Kaplan v. First Union Nat'l. Bank, 99 N.C. App. 570, 573, 393 S.E.2d 344, 346 (1990). The Official Comments state that third party may assume the trustee has the necessary power and does not have to request or examine a copy of the instrument.

Subsection (f) was added to this section to clarify that a certification under G.S. 36C-10-1013 is not a requirement for protection of third persons afforded by this section.

CASE NOTES

Cited in THZ Holdings, LLC v. McCrea, 231 N.C. App. 482, 753 S.E.2d 344 (2013).

OFFICIAL COMMENT

This section, derived from California Probate Code § 18100.5, is designed to protect the privacy of a trust instrument by discouraging requests from persons other than beneficiaries for complete copies of the instrument in order to verify a trustee's authority. Even absent this section, such requests are usually unnecessary. Pursuant to Section 1012(b), a third person proceeding in good faith is not required to inquire into the extent of the trustee's powers or the propriety of their exercise. This section adds another layer of protection.

Third persons frequently insist on receiving a copy of the complete trust instrument solely to verify a specific and narrow authority of the trustee to engage in a particular transaction. While a testamentary trust, because it is created under a will, is a matter of public record, an inter vivos trust instrument is private. Such privacy is compromised, however, if the trust instrument must be distributed to third persons. A certification of trust is a document signed by a currently acting trustee that may include excerpts from the trust instrument necessary to facilitate the particular transaction. A certification provides the third party with an assurance of authority without having to disclose the trust's dispositive provisions. Nor is there a need for third persons who may already have a copy of the instrument to pry into its provisions. Persons acting in reliance on a certification may assume the truth of the certification even if they have a complete copy of the trust instrument in their possession.

Subsections (a) through (c) specify the required contents of a certification. Subsection (d) clarifies that the certification need not include the trust's dispositive terms. A certification, however, normally will contain the administrative terms of the trust relevant to the transaction. Subsection (e) provides that the third party may make this a condition of acceptance. Subsections (f) and (g) protect a third party who relies on the certification. The third party may assume that the certification is true, and is not charged with constructive knowledge of the terms of the trust instrument even if the third party has a copy.

To encourage compliance with this section, a person demanding a trust instrument after already being offered a certification may be liable under subsection (h) for damages if the refusal to accept the certification is determined not to have been in good faith. A person acting in good faith would include a person required to examine a complete copy of the trust instrument pursuant to due diligence standards or as required by other law. Examples of such due diligence and legal requirements include (1) in connection with transactions to be executed in the capital markets where documentary standards have been established in connection with underwriting concerns; (2) to satisfy documentary requirements established by state or local government or regulatory agency; (3) to satisfy documentary requirements established by a state or local government or regulatory agency; and (4) where the insurance rates or premiums or other expenses of the party would be higher absent the availability of the documentation.

The Uniform Trust Code leaves to other law the issue of how damages for a bad faith refusal are to be computed and whether attorney's fees might be recoverable. For a discussion of the meaning of "good faith," see Section 1012 Comment.

NORTH CAROLINA COMMENT

This section has no counterpart in prior North Carolina law.

Subsection (a)(2) of the Uniform Trust Code was modified to allow the withholding of the settlor's identity pursuant to a provision in the trust instrument.

Subsection (f) was added to the section to (i) require that the certification be executed and acknowledged with the formalities of deeds because it is important that the public record identify the trustee and the trustee's authority to act with respect to real property, and (ii) to prevent the settlor's social security number from being placed on the public record.

OFFICIAL COMMENT

This section, which is being inserted in all Uniform Acts approved in 2000 or later, preempts the federal Electronic Signatures in Global and National Commerce Act. Section 102(a)(2)(B) of that Act provides that the federal law can be preempted by a later statute of the State that specifically refers to the federal law. The effect of this section, when enacted as part of this Code, is to leave to state law the procedures for obtaining and validating an electronic signature. The Uniform Trust Code does not require that any document be in paper form, allowing all documents under this Code to be transmitted in electronic form. A properly directed electronic message is a valid method of notice under the Code as long as it is reasonably suitable under the circumstances and likely to result in receipt of the notice or document. See Section 109(a).

COMMENT

For the reasons why the above Uniform Acts should be repealed upon enactment of the Uniform Trust Code, see the Prefatory Note. Enacting jurisdictions that have not enacted one or more of the specified Uniform Acts should repeal their comparable legislation. Because of the comprehensive scope of the Uniform Trust Code, many States will have trust provisions not based on any Uniform Act that will need to be repealed upon enactment of this Code. This section does not attempt to list the types of conforming amendments, whether in the enacting State's probate code or elsewhere, that need to be made upon enactment of this Code.