NOTES TO DECISIONS

1. Relation to Other Statutes.

Limitations on liability contained in T.C.A. § 35-2-111(c) applied to a bank, as defined by T.C.A. § 35-2-102(a)(1) to include any association “carrying on the business of banking.” McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

2. Bad Faith.

Considering the definition of good faith in T.C.A. § 35-2-102(b), the obvious implication is that a bad-faith act is done dishonestly. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

NOTES TO DECISIONS

1. Fiduciaries.

T.C.A. § 35-2-107 governs withdrawals by a fiduciary from a bank account containing fiduciary funds. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

Provisions of T.C.A. §§ 35-2-107 and 35-2-109 are bolstered by T.C.A. § 35-2-111(c)(1)-(2), which clarifies that a bank does not acquire any duty simply because it knows that a depositor is a fiduciary. Furthermore, a bank generally has no duty to limit a fiduciary's transactions. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

After finding that Tennessee's Uniform Fiduciaries Act (UFA) displaced plaintiffs'  negligence claims and shielded the bank from liability arising from the actions of a fiduciary depositor, only plaintiffs'  allegations of “knowing” or “bad faith” conduct survived and those claims were preempted by the Employee Retirement Income Security Act (ERISA), as the bank merely held the funds on deposit and custody of plan assets alone could not establish control sufficient to confer fiduciary status; thus the bank was not subject to liability as an ERISA fiduciary. McLemore v. Regions Bank, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

2. Relation to Other Laws.

Exemption in the Tennessee Consumer Protection Act, T.C.A. § 47-18-101 et seq., for acts or transactions specifically authorized under the laws of Tennessee, as set forth in T.C.A. § 47-18-111(a)(1), applied to a bank's actions because the Uniform Fiduciaries Act, T.C.A. § 35-2-101 et seq., specifically authorized the bank to effectuate a fiduciary depositor's transfers, without being liable to the principal, as long as the bank was acting in good faith and without actual knowledge of the fiduciary's breach of duty, pursuant to T.C.A. §§ 35-2-107, and 35-2-109. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

3. Liability.

Nothing in T.C.A. § 35-2-111(c)(1) forecloses liability if a bank has actual knowledge that a fiduciary is breaching his or her duty. Because the statute does not speak to situations where a bank has acted in bad faith or with knowledge of a fiduciary's wrongdoing, T.C.A. § 35-2-111 can be reconciled with T.C.A. §§ 35-2-107 and 35-2-109. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

Pursuant to T.C.A. §§ 35-2-107 and 35-2-109, a bank is liable to a principal for a fiduciary's illegal withdrawal or transfer of funds if, and only if, the bank had actual knowledge that the fiduciary was breaching his or her fiduciary duty or had knowledge of such facts that its action amounts to bad faith. Anything less is insufficient to support liability. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

To show that defendant bank had knowledge of such facts that its action amounted to bad faith, pursuant to T.C.A. §§ 35-2-107 and 35-2-109, plaintiffs were required to show that the circumstances surrounding a fiduciary's transactions so clearly suggested a breach of fiduciary duty that the bank's failure to investigate was a conscious effort to avoid knowledge of wrongdoing. Plaintiffs could not merely show that the bank was negligent in not discovering a third party's fraud or not undertaking reasonable efforts to monitor its depositors. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

Collateral References.

Revocation of tentative “Totten” trusts of savings bank account by inter vivos declaration or will. 46 A.L.R.3d 487.

NOTES TO DECISIONS

1. Fiduciaries.

T.C.A. § 35-2-109 explains the contours of a bank's liability to a fiduciary's principals when the fiduciary transfers funds to his or her own personal account. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

Provisions of T.C.A. §§ 35-2-107 and 35-2-109 are bolstered by T.C.A. § 35-2-111(c)(1)-(2), which clarifies that a bank does not acquire any duty simply because it knows that a depositor is a fiduciary. Furthermore, a bank generally has no duty to limit a fiduciary's transactions. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

2. Relation to Other Laws.

Exemption in the Tennessee Consumer Protection Act, T.C.A. § 47-18-101 et seq., for acts or transactions specifically authorized under the laws of Tennessee, as set forth in T.C.A. § 47-18-111(a)(1), applied to a bank's actions because the Uniform Fiduciaries Act, T.C.A. 35-2-101 et seq., specifically authorized the bank to effectuate a fiduciary depositor's transfers, without being liable to the principal, as long as the bank was acting in good faith and without actual knowledge of the fiduciary's breach of duty, pursuant to T.C.A. §§ 35-2-107, and 35-2-109. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

Bank was not entitled to immunity from liability under T.C.A. § 45-2-707(d) for transactions by a fiduciary who endorsed checks payable to his principal and deposited them in his own accounts, despite the existence of a power of attorney, because under T.C.A. §§ 47-3-307 and 47-3-420, the bank was deemed to have notice that the fiduciary was breaching his fiduciary obligations. Section 45-2-707 was limited to its terms, that is, to transactions that involved a payment made or property withdrawn in connection with an attorney-in-fact's operation of the account. West v. Regions Bank, — S.W.3d —, 2011 Tenn. App. LEXIS 403 (Tenn. Ct. App. July 26, 2011).

3. Liability.

Nothing in T.C.A. § 35-2-111(c)(1) forecloses liability if a bank has actual knowledge that a fiduciary is breaching his or her duty. Because the statute does not speak to situations where a bank has acted in bad faith or with knowledge of a fiduciary's wrongdoing, T.C.A. § 35-2-111 can be reconciled with T.C.A. §§ 35-2-107 and 35-2-109. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

Pursuant to T.C.A. §§ 35-2-107 and 35-2-109, a bank is liable to a principal for a fiduciary's illegal withdrawal or transfer of funds if, and only if, the bank had actual knowledge that the fiduciary was breaching his or her fiduciary duty or had knowledge of such facts that its action amounts to bad faith. Anything less is insufficient to support liability. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

To show that defendant bank had knowledge of such facts that its action amounted to bad faith, pursuant to T.C.A. §§ 35-2-107 and 35-2-109, plaintiffs were required to show that the circumstances surrounding a fiduciary's transactions so clearly suggested a breach of fiduciary duty that the bank's failure to investigate was a conscious effort to avoid knowledge of wrongdoing. Plaintiffs could not merely show that the bank was negligent in not discovering a third party's fraud or not undertaking reasonable efforts to monitor its depositors. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

NOTES TO DECISIONS

1. Fiduciaries.

Provisions of T.C.A. §§ 35-2-107 and 35-2-109 are bolstered by T.C.A. § 35-2-111(c)(1)-(2), which clarifies that a bank does not acquire any duty simply because it knows that a depositor is a fiduciary. Furthermore, a bank generally has no duty to limit a fiduciary's transactions. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

2. Banks.

Limitations on liability contained in T.C.A. § 35-2-111(c) applied to a bank, as defined by T.C.A. § 35-2-102(a)(1) to include any association “carrying on the business of banking.” McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

3. Liability.

Nothing in T.C.A. § 35-2-111(c)(1) forecloses liability if a bank has actual knowledge that a fiduciary is breaching his or her duty. Because the statute does not speak to situations where a bank has acted in bad faith or with knowledge of a fiduciary's wrongdoing, T.C.A. § 35-2-111 can be reconciled with T.C.A. §§ 35-2-107 and 35-2-109. McLemore v. Regions Bank, — F. Supp. 2d —, 2010 U.S. Dist. LEXIS 25785 (M.D. Tenn. Mar. 18, 2010), aff'd, 2012 U.S. App. LEXIS 11600, 2012 FED App. 172P (6th Cir.), 2012 FED App. 0172P (6th Cir.).

NOTES TO DECISIONS

1. Construction and Interpretation.

The phrase “hereby authorized” as used in Shannon's Code § 5433, meant that authority or power to do the thing contemplated was conferred rather than that it must be done; thus this section was not mandatory. Steinberg v. Cox, 24 Tenn. App. 340, 144 S.W.2d 12, 1939 Tenn. App. LEXIS 16 (Tenn. Ct. App. 1939).

2. Administration of Estates.

To exercise the power conferred by this section, in administration of estates, it must be before the time for the payment of debts or distribution expires. After that time, §§ 5-8-401 — 5-8-403 are applicable. Head v. Barry, 69 Tenn. 753, 1878 Tenn. LEXIS 174 (1878).

3. Investment of Funds by Trustee.

4. —Diversion of Funds.

Where a trustee diverts the proceeds of trust property to the purchase of land, taking title in his own name, the cestuis que trustent may pursue their remedy against him and the land unaffected by the statute of limitation. Kaphan v. Toney, 58 S.W. 909, 1899 Tenn. Ch. App. LEXIS 184 (1899).

5. —Purchase of Corporate Stock.

A testamentary trustee's estate cannot be held liable for loss to the trust funds by the purchase of certain corporate stock with a portion of the trust funds, in view of the provisions of the will creating the trust fund, empowering the trustee to make reinvestments of trust property as he may see fit, “looking always to the safety of the investment rather than to a high rate of interest.” Falls v. Carruthers, 20 Tenn. App. 681, 103 S.W.2d 605, 1936 Tenn. App. LEXIS 59 (Tenn. Ct. App. 1936).

Collateral References.

Authorization by trust instrument of investment of trust funds in nonlegal investments. 78 A.L.R.2d 7.

Authorization or approval by court of investments by trustees which are “nonlegal” or contrary to terms of the trust instrument. 170 A.L.R. 1219.

Beneficiary's consent to, acquiescence in, or ratification of, improper investments or loans (including failure to invest) trustee, effect of. 128 A.L.R. 4.

Care required of trustee with respect to retaining securities coming into his hands as assets of the estate. 77 A.L.R. 505, 112 A.L.R. 355.

Conflict of laws as to investment of fund of testamentary trust. 115 A.L.R. 805.

Corporate trustee's right to invest in or retain its own stock. 134 A.L.R. 1324, 157 A.L.R. 1429.

Corporation of which trustee is an officer or stockholder, purchase from, as voidable or as ground for surcharging his account. 105 A.L.R. 449.

Diversification investments, duty and liability of trustee as to. 24 A.L.R.3d 730.

Duty of trustee to diversify investments, and liability of failure to do so. 24 A.L.R.3d 730.

Investment of trust funds in share or part of single security or group or pool of securities. 103 A.L.R. 1192, 110 A.L.R. 1166, 125 A.L.R. 669.

Measure of trustee's liability for breach of trust in selling investment property, or changing investments, in good faith. 58 A.L.R.2d 674.

Nonlegal investments, when will may be deemed to authorize investment of trust fund in. 78 A.L.R.2d 7.

Private corporation, right of trustee to invest trust funds in stock of. 12 A.L.R. 574, 122 A.L.R. 657, 78 A.L.R.2d 7.

Protection of investment in stocks by submitting to voluntary assessment, power and duty of trustee as to. 104 A.L.R. 979.

Retaining unauthorized securities held by testator or creator of trust. 37 A.L.R. 559, 122 A.L.R. 801, 135 A.L.R. 1528.

NOTES TO DECISIONS

1. Construction and Interpretation.

2. —Provisions Directory.

This chapter is not mandatory, but intended to authorize by specific reference thereto the investment of the trust funds in certain property or securities listed or named, and is therefore permissive. Falls v. Carruthers, 20 Tenn. App. 681, 103 S.W.2d 605, 1936 Tenn. App. LEXIS 59 (Tenn. Ct. App. 1936).

3. Construction with Other Acts.

4. —Uniform Veterans' Guardianship Act.

This statute includes most securities which are safest and most desirable for investment of trust funds and the Uniform Veterans' Guardianship Act, prior to amendment of 1935, did not confer authority on guardian to invest ward's funds in other securities, without first obtaining the approval of court. McCuiston v. Haggard, 21 Tenn. App. 277, 109 S.W.2d 413, 1937 Tenn. App. LEXIS 32 (Tenn. Ct. App. 1937).

5. Investment of Trust Funds.

6. —Duty to Invest.

Where trust money cannot be applied either immediately or within a short time to the purposes of the trust, it is the duty of the trustee to make the fund productive to the cestuis que trust by investment of it in some proper security. Linder v. Officer, 175 Tenn. 402, 135 S.W.2d 445, 1940 Tenn. LEXIS 74 (1940).

7. —Legalizing Unauthorized Investments.

The rule that a trustee is not liable for loss on investment unauthorized at the time which it was made but which by subsequent events becomes a legal investment is only applicable where the depreciation occurs after the investment becomes legal. Humphries v. Manhattan Sav. Bank & Trust Co., 174 Tenn. 17, 122 S.W.2d 446, 1938 Tenn. LEXIS 58 (1938).

8. —Mortgage.

Notwithstanding effect of statute conferring upon guardians authority to invest in existing real estate bonds and notes, the purchase of an existing mortgage constituted waste and was sufficient in itself to authorize removal of minor's guardian. Monteverde v. Christie, 23 Tenn. App. 514, 134 S.W.2d 905, 1939 Tenn. App. LEXIS 59 (Tenn. Ct. App. 1939).

9. —Loan by Guardian from Trust.

If it could be conceded that this chapter may be given a curative effect, insofar as the illegality grounded on the investment of the ward's funds in an existing and outstanding mortgage loan is concerned, it can hardly be reasonably contended that anything in the chapter covers or cures the fundamental illegality of an investment of a ward's funds in a loan owned by the guardian — a purchase from itself. Meloy v. Nashville Trust Co., 177 Tenn. 340, 149 S.W.2d 73, 1940 Tenn. LEXIS 42 (1941).

10. —Will Provisions — Effect.

A testamentary trustee's estate cannot be held liable for loss to the trust funds by the purchase of certain corporate stock with a portion of the trust funds, in view of provisions of the will creating the trust fund, empowering the trustee to make reinvestments of trust property “as he may see fit, looking always to the safety of the investment rather than to a high rate of interest.” Falls v. Carruthers, 20 Tenn. App. 681, 103 S.W.2d 605, 1936 Tenn. App. LEXIS 59 (Tenn. Ct. App. 1936).

11. —Rule of Prudence.

Losses suffered by the trust corpus due to bad investments cannot be recovered from the trustee personally if he acted in good faith and as a prudent businessman would in the conduct of his own affairs even though the investments are other than permitted by statute since the statutory authorizations are permissive only. Falls v. Carruthers, 20 Tenn. App. 681, 103 S.W.2d 605, 1936 Tenn. App. LEXIS 59 (Tenn. Ct. App. 1936).

NOTES TO DECISIONS

1. Application of Section.

This section by its own terms does not apply to the clerk and master of the chancery court. Steinberg v. Cox, 24 Tenn. App. 340, 144 S.W.2d 12, 1939 Tenn. App. LEXIS 16 (Tenn. Ct. App. 1939).

2. Provisions not Mandatory.

This section is not mandatory, but is intended to authorize by specific reference thereto the investment of the trust funds in certain property or securities listed or named, and is therefore permissive. Falls v. Carruthers, 20 Tenn. App. 681, 103 S.W.2d 605, 1936 Tenn. App. LEXIS 59 (Tenn. Ct. App. 1936).

3. Rule of Prudent Investment.

Losses suffered by the trust corpus due to bad investments cannot be recovered from the trustee personally if he acted in good faith and as a prudent businessman would in the conduct of his own affairs even though the investments are other than permitted by statute since the statutory authorizations are permissive only. Falls v. Carruthers, 20 Tenn. App. 681, 103 S.W.2d 605, 1936 Tenn. App. LEXIS 59 (Tenn. Ct. App. 1936).

NOTES TO DECISIONS

1. Construction and Interpretation.

2. —Conduct of Sale.

This section does not apply where trustee sells land without following defendant's plan, since section does not apply to conduct of sale, but only as to statutory method of advertising sale. Doty v. Federal Land Bank, 169 Tenn. 496, 89 S.W.2d 337, 1935 Tenn. LEXIS 75 (1936), rehearing denied, 169 Tenn. 496, 90 S.W.2d 527 (1936).

3. Sufficiency of Publication.

Three successive weekly publications of the advertisement of the sale of land is a compliance with the statute, though there may be more publications. Allen v. Kerr, 81 Tenn. 256, 1884 Tenn. LEXIS 34 (1884).

4. —Provisions of Trust Deed — Effect.

Under provision of a trust deed for public sale after “advertising three weeks,” publication of the sale for three weeks is sufficient. Potts v. Coffman, 146 Tenn. 282, 240 S.W. 783, 1922 Tenn. LEXIS 2 (1922).

Assignee was entitled to summary judgment granting it possession of property because under T.C.A. § 24-5-101, the recitations in the deed of trust provided prima facie evidence that the sale was properly advertised in the newspaper as required by T.C.A. § 35-5-101; thus, the assignee shifted the burden to the borrower to come forward with evidence that the sale was not properly advertised, but the borrower did not. CitiMortgage, Inc. v. Drake, 410 S.W.3d 797, 2013 Tenn. App. LEXIS 116 (Tenn. Ct. App. Feb. 21, 2013), appeal denied, — S.W.3d —, 2013 Tenn. LEXIS 663 (Tenn. Aug. 14, 2013).

5. —Statutory Provisions — Effect.

The foreclosure of a trust deed was properly set aside where the trust deed did not contain any provisions relative to advertisement in foreclosure proceedings and the statutory provisions of this section were not followed. Clack v. Standefer, 24 Tenn. App. 556, 147 S.W.2d 764, 1940 Tenn. App. LEXIS 63 (Tenn. Ct. App. 1940).

Because a newspaper was a paper of general circulation, the circulation of that newspaper in the county where a foreclosure was held bearing a notice of the foreclosure complied with the requirement in T.C.A. § 35-5-101(a) that the notice of the sale be made known in that county by publication. Thacker v. Shapiro & Kirsch, LLP, 354 S.W.3d 733, 2011 Tenn. App. LEXIS 326 (Tenn. Ct. App. June 20, 2011), appeal denied, Thacker v. Shapiro & Kirsch, LLP, — S.W.3d —, 2011 Tenn. LEXIS 1038 (Tenn. Oct. 18, 2011).

Pre-petition, a Chapter 13 debtor received 30-days notice as required by the Fair Debt Collection Practices Act, advising her that she had 30 days from date of letter to dispute debt. Notice of foreclosure was sufficient under Tennessee law, as she was notified by letter and told when and where advertisement of trustee's sale pertaining to her residence would appear, and publication was made in county where property was located. In re Comer, — B.R. —, 2014 Bankr. LEXIS 907 (Bankr. E.D. Tenn. Mar. 7, 2014).

6. Delegation of Trustee's Authority.

Authority may not be delegated to a constable to select the time and place of sale and make the sale without the supervision of the mortgagee or trustee. Such ignores protection of interests of the mortgagor. This does not mean that a trustee may not appoint an agent to make sale. Green v. Stevenson, 54 S.W. 1011, 1899 Tenn. Ch. App. LEXIS 138 (1899).

7. Foreclosure.

Because 15 U.S.C. § 1692f(6)(A) prohibited taking or threatening to take any nonjudicial action to effect dispossession or disablement of property, and foreclosure in some states was carried out in through “nonjudicial action,” the result of which was to “effect dispossession” of the secured property—including pursuant to Mich. Comp. Laws Serv. § 600.3204 and T.C.A. § 35-5-101—the example's presence within a provision that prohibited unfair means to “collect or attempt to collect any debt” suggested that mortgage foreclosure was a “means” to collect a debt. Glazer v. Chase Home Fin. LLC, 704 F.3d 453, 2013 FED App. 0016P, 2013 U.S. App. LEXIS 845 (6th Cir. Jan. 14, 2013).

Trial court correctly determined that a borrower's counterclaim, which challenged the constitutionality of the private foreclosure process, did not state a prima facie constitutional violation because the borrower was free to assert wrongful foreclosure as a defense to the unlawful detainer action and raise her constitutional issues in circuit court. CitiMortgage, Inc. v. Drake, 410 S.W.3d 797, 2013 Tenn. App. LEXIS 116 (Tenn. Ct. App. Feb. 21, 2013), appeal denied, — S.W.3d —, 2013 Tenn. LEXIS 663 (Tenn. Aug. 14, 2013).

8. —Sales under Mortgage.

Foreclosure sale under mortgage, decreed by chancery, will be directed to be advertised as sales under executions. Humes v. Heirs of Shelly, 1 Tenn. 79, 1804 Tenn. LEXIS 27 (1804); Hord v. James, 1 Tenn. 201, 1805 Tenn. LEXIS 37 (1805).

It is assumed that the rule in Tennessee is that a strict foreclosure is valid only if fully supported by every specified condition, when there is no provision for personal service and no redemption is permitted. Higbee v. Chadwick, 220 F. 873, 1915 U.S. App. LEXIS 2538 (6th Cir. Tenn. 1915).

Homeowner did not state a claim for failure to receive notice of the foreclosure sale because there was no requirement under the deed of trust that she receive notice of the foreclosure; there is no statutory requirement that the notice be received by the debtor. Davis v. Wells Fargo Home Mortg., — S.W.3d —, 2018 Tenn. App. LEXIS 163 (Tenn. Ct. App. Mar. 29, 2018).

9. —Contingent Remainder Interest.

A contingent remainder interest is not subject to execution and sale by a judgment creditor. Harris v. Bittikofer, 562 S.W.2d 815, 1978 Tenn. LEXIS 593 (Tenn. 1978).

10. —Several Creditors — Demand by One or More.

Generally speaking, any one of two or more creditors secured can demand foreclosure of the lien of a trust deed which secures several separate obligations. Foster v. Harle, 166 Tenn. 576, 64 S.W.2d 21, 1933 Tenn. LEXIS 120 (1933).

11. —Foreclosure on Trustee's Own Motion.

A trustee, under a trust deed providing that on default he shall proceed to sell, may do so on his own motion, in the absence of a stipulation for creditor's demand. Foster v. Harle, 166 Tenn. 576, 64 S.W.2d 21, 1933 Tenn. LEXIS 120 (1933).

12. —Place of Sale.

Where through mistake combination deed and trust deed provided for sale in county other than where the land lay and foreclosure sale in front of locked doors of courthouse in such county resulted in $60,000 worth of land being sold for $32,000, evidence supported action of chancellor in setting aside sale as unfair and inequitable. Pugh v. Richmond, 58 Tenn. App. 62, 425 S.W.2d 789, 1967 Tenn. App. LEXIS 210 (Tenn. Ct. App. 1967).

Foreclosure sale under trust deed would not be illegal because it was conducted in county other than where the land lay if the parties so contracted. Pugh v. Richmond, 58 Tenn. App. 62, 425 S.W.2d 789, 1967 Tenn. App. LEXIS 210 (Tenn. Ct. App. 1967).

Collateral References.

Propriety of accepting check or promissory note in satisfaction of bid at execution or judicial sale had for cash. 86 A.L.R.2d 292.

NOTES TO DECISIONS

1. Advertising Sufficiency.

2. —Several Executions for Same Party on Same Land.

Where there is more than one execution in favor of the same party levied on the same land, or where there is more than one order of sale of the same land, and all in favor of the same party, one advertisement is sufficient to authorize a sale at the same time under all of the executions, or orders of sale, and the printer's fees, over and above the proper amount for one such advertisement, on motion to retax costs, will be struck out and disallowed the sheriff. Arnold v. Dinsmore, 43 Tenn. 235, 1866 Tenn. LEXIS 44 (1866).

3. —Advertisement under Writ, and Sale under Alias.

Where the day designated in the required advertisement for the sale of land is subsequent to the return day of the venditioni exponas, the writ may be returned, and another (an alias writ) issued, which will authorize the sale without a new advertisement. Luther v. McMichael, 25 Tenn. 298, 1845 Tenn. LEXIS 87 (1845).

4. —Presumptions from Recital in Sheriff's Return or Deed.

The recital in the sheriff's deed that, “having legally advertised and made known” the time and place of sale, according to law, he made the sale is prima facie evidence of the fact of advertising as required by law, and otherwise making known the sale by notice to the judgment debtor in actual possession as required by § 26-5-103. Rogers v. Jennings' Lessee, 11 Tenn. 307, 11 Tenn. 308, 1832 Tenn. LEXIS 48 (1832); Downing v. Stephens, 60 Tenn. 454, 1872 Tenn. LEXIS 532 (1873).

A sheriff's return stating that he had given “due notice by written advertisement, as required by law,” does not imply the notice to the owner in actual possession required by § 26-5-103. Downing v. Stephens, 60 Tenn. 454, 1872 Tenn. LEXIS 532 (1873).

5. —Insufficient Advertising.

Although sale of land not advertised according to statute is not invalid, appellate court can consider fact of insufficient advertisement in connection with other facts of case in determining why land did not bring adequate price. Napier v. Stone, 21 Tenn. App. 626, 114 S.W.2d 57, 1937 Tenn. App. LEXIS 64 (Tenn. Ct. App. 1937).

Sale of land, for which mortgagor had paid $450, was set aside where sale was unadvertised and consideration was only $117. Napier v. Stone, 21 Tenn. App. 626, 114 S.W.2d 57, 1937 Tenn. App. LEXIS 64 (Tenn. Ct. App. 1937).

6. —Provisions of Instrument — Effect.

Where deed of trust did not recite number of posters that should have been put in public places to advertise sale, same should have been advertised as required by statute. Napier v. Stone, 21 Tenn. App. 626, 114 S.W.2d 57, 1937 Tenn. App. LEXIS 64 (Tenn. Ct. App. 1937).

Where time, place and terms of sale are set out in mortgage or deed of trust, such instrument controls and full compliance therewith is necessary to render sale valid, but if time, place and terms of sale are not set out, same are governed by statute. Napier v. Stone, 21 Tenn. App. 626, 114 S.W.2d 57, 1937 Tenn. App. LEXIS 64 (Tenn. Ct. App. 1937).

7. Objections to Written Notice.

8. —Mode of Making.

Where there is objection to written notice, the proper practice is to file a petition upon which an issue may be made and proof can be taken to sustain the grounds alleged; but treating the exceptions as an informal proceeding equivalent to a petition, making an issue, it must be determined upon the proof taken; and the burden of proof rests upon the party filing exceptions. Childress v. Harrison, 60 Tenn. 410, 1872 Tenn. LEXIS 523 (1873); Goddard v. Cox, 69 Tenn. 112, 1878 Tenn. LEXIS 55 (1878); Myers v. James, 72 Tenn. 370, 1880 Tenn. LEXIS 29 (1880).

Objection to the report of the sale by the clerk, because the sale was advertised by written notices instead of the publication in a newspaper, cannot be taken by a speaking exception not sustained by anything in the record, where the advertisement conforms to the provisions of the statute, it not appearing in the record that a newspaper was published in the county at the time, or that the printer would make the publication for the price fixed by law, and there being no negativing of “any other reason” which induced the clerk to adopt the mode of advertising by written and posted notices, especially where the advertisement is not in conflict with the decree under which the sale was made. Goddard v. Cox, 69 Tenn. 112, 1878 Tenn. LEXIS 55 (1878).

9. —When Newspaper Published in City.

Upon proper exception to a master's report, the record should disclose that during the time involved a newspaper was published in the county. Goddard v. Cox, 69 Tenn. 112, 1878 Tenn. LEXIS 55 (1878).

NOTES TO DECISIONS

1. Applicability.

Because bankruptcy debtor did not argue that the United States or Tennessee had or asserted liens in debtor's residence, the validity of the successor trustee deed was not subject to the requirements of subsection (b). In re Williams, 247 B.R. 449, 2000 Bankr. LEXIS 410 (Bankr. E.D. Tenn. 2000).

2. Compliance with Statute — Sufficiency.

The statute prescribes all that is required to appear is the advertisement of the sale, though ordinarily, under our practice, the proceedings, under which the sale is ordered are briefly mentioned in the advertisement, which mention is proper enough, but not absolutely demanded. Arnold v. Dinsmore, 43 Tenn. 235, 1866 Tenn. LEXIS 44 (1866); State use of Herald Pub. Co. v. Whitworth, 98 Tenn. 263, 39 S.W. 10, 1896 Tenn. LEXIS 220 (1897).

3. Objections to Advertising.

In suit to recover land purchased at sheriff's sale by virtue of an execution the defendant is entitled to introduce evidence that advertisement was not according to law. Loyd v. Anglin's Lessee, 15 Tenn. 427, 15 Tenn. 428, 1835 Tenn. LEXIS 19 (1835).

4. Noncompliance.

Nominee failed to state a claim for setting aside the foreclosure sale because the mere failure of the trustee to give notice of the foreclosure sale in accordance with applicable law was not sufficient to set aside the sale. EverBank v. Henson, — S.W.3d —, 2015 Tenn. App. LEXIS 11 (Tenn. Ct. App. Jan. 9, 2015), appeal denied, Everbank v. Henson, — S.W.3d —, 2015 Tenn. LEXIS 1071 (Tenn. Dec. 15, 2015).

Trial court erred in summarily dismissing a nominee's claims against a trustee because the nominee qualified as an interested party since it had a recorded interest in a lien that would be extinguished or adversely affected by the sale; the nominee held legal title to the secured interest and was the beneficiary of record, and the trustee failed to comply with the notice requirements and was liable to the party injured by the noncompliance for all damages resulting from the failure. EverBank v. Henson, — S.W.3d —, 2015 Tenn. App. LEXIS 11 (Tenn. Ct. App. Jan. 9, 2015), appeal denied, Everbank v. Henson, — S.W.3d —, 2015 Tenn. LEXIS 1071 (Tenn. Dec. 15, 2015).

5. Standing.

Standing was not a ground upon which to dismiss any of a nominee's claims against a trustee because the nominee was a “party interested” pursuant to the statute; the nominee was the record holder of a lien that would be extinguished or adversely affected by the foreclosure sale, and for that reason the nominee had standing to pursue the claims asserted in the action. EverBank v. Henson, — S.W.3d —, 2015 Tenn. App. LEXIS 11 (Tenn. Ct. App. Jan. 9, 2015), appeal denied, Everbank v. Henson, — S.W.3d —, 2015 Tenn. LEXIS 1071 (Tenn. Dec. 15, 2015).

NOTES TO DECISIONS

1. Failure to Advertise — Effect on Validity of Sale.

The want of the prescribed advertisement does not render the sale void or voidable, for the provisions for the advertisement are merely directory, so far as the validity of the sale is concerned. Howell v. Donaldson, 54 Tenn. 206, 1872 Tenn. LEXIS 36 (1872); Childress v. Harrison, 60 Tenn. 410, 1872 Tenn. LEXIS 523 (1873); Downing v. Stephens, 60 Tenn. 454, 1872 Tenn. LEXIS 532 (1873); Goddard v. Cox, 69 Tenn. 112, 1878 Tenn. LEXIS 55 (1878).

Chancery court does not have jurisdiction to set aside sale by trustee under trust deed where trustee fails to sell pursuant to defendant's plan, since sale is neither void nor voidable, and defendant's only remedy is to sue trustee for damages. Doty v. Federal Land Bank, 169 Tenn. 496, 89 S.W.2d 337, 1935 Tenn. LEXIS 75 (1936), rehearing denied, 169 Tenn. 496, 90 S.W.2d 527 (1936).

A failure to comply with §§ 35-5-101 — 35-5-106 does not render a sale void. Williams v. Williams, 25 Tenn. App. 290, 156 S.W.2d 363, 1941 Tenn. App. LEXIS 108 (Tenn. Ct. App. 1941).

Nominee failed to state a claim for setting aside the foreclosure sale because the mere failure of the trustee to give notice of the foreclosure sale in accordance with applicable law was not sufficient to set aside the sale. EverBank v. Henson, — S.W.3d —, 2015 Tenn. App. LEXIS 11 (Tenn. Ct. App. Jan. 9, 2015), appeal denied, Everbank v. Henson, — S.W.3d —, 2015 Tenn. LEXIS 1071 (Tenn. Dec. 15, 2015).

2. Fiduciary Relation between Purchasers and Grantor.

It makes little difference whether trustee's deed is void, voidable or not on account of failure to advertise where the purchasers had assumed the grantor's note secured by the deed of trust under which they purchased, the assumption having been undertaken in consideration of other matters. Clack v. Standefer, 24 Tenn. App. 556, 147 S.W.2d 764, 1940 Tenn. App. LEXIS 63 (Tenn. Ct. App. 1940).

3. Failure to Provide Specific Time for Postponed Sale.

Trial court erred in granting a lender's motion for summary judgment because, while the deed of trust did not provide a specific time requirement on the issue of the foreclosure sale other than to reference the foreclosure statutes and the notice of sale, questions remained as to whether the postponed foreclosure sale was held at the time and under the terms designated in the notice, and the sale could not be deemed void or voidable even when it did not comply with the foreclosure statutes. Wells Fargo Bank, N.A. v. Lockett, — S.W.3d —, 2014 Tenn. App. LEXIS 231 (Tenn. Ct. App. Apr. 24, 2014).

NOTES TO DECISIONS

1. Failure to Advertise — Remedies.

Chancery court does not have jurisdiction to set aside sale by trustee under trust deed where trustee fails to sell pursuant to defendant's plan, since sale is neither void nor voidable, and defendant's only remedy is to sue trustee for damages. Doty v. Federal Land Bank, 169 Tenn. 496, 89 S.W.2d 337, 1935 Tenn. LEXIS 75 (1936), rehearing denied, 169 Tenn. 496, 90 S.W.2d 527 (1936).

Trial court erred in summarily dismissing a nominee's claims against a trustee because the nominee qualified as an interested party since it had a recorded interest in a lien that would be extinguished or adversely affected by the sale; the nominee held legal title to the secured interest and was the beneficiary of record, and the trustee failed to comply with the notice requirements and was liable to the party injured by the noncompliance for all damages resulting from the failure. EverBank v. Henson, — S.W.3d —, 2015 Tenn. App. LEXIS 11 (Tenn. Ct. App. Jan. 9, 2015), appeal denied, Everbank v. Henson, — S.W.3d —, 2015 Tenn. LEXIS 1071 (Tenn. Dec. 15, 2015).

2. Limitations.

A suit under the provision of this section authorizing damages for failure of an officer or other person to comply with § 35-5-108 in sale of lands at foreclosure is not an action to recover a statutory penalty so as to be governed by the one year statute of limitations set out in § 28-3-104 but falls within the ten year limitation of § 28-3-110. Doty v. Federal Land Bank, 173 Tenn. 140, 114 S.W.2d 953, 1937 Tenn. LEXIS 20 (1938).

3. Failure to Comply.

Trial court properly dismissed a nominee's claim against a trustee because the nominee failed to state a claim for setting aside the foreclosure sale; the mere fact that the sale was for a price that was grossly inadequate or unfair failed to state a claim to set aside the foreclosure sale, and there were no allegations of irregularity, misconduct, fraud, or unfairness on the part of the trustee. EverBank v. Henson, — S.W.3d —, 2015 Tenn. App. LEXIS 11 (Tenn. Ct. App. Jan. 9, 2015), appeal denied, Everbank v. Henson, — S.W.3d —, 2015 Tenn. LEXIS 1071 (Tenn. Dec. 15, 2015).

NOTES TO DECISIONS

1. Construction and Interpretation.

2. —Application to Sale Under Trust Deed.

This section providing for sale of defendant's property by plan applies to sale of land under trust deed as well as sales under execution. Doty v. Federal Land Bank, 169 Tenn. 496, 89 S.W.2d 337, 1935 Tenn. LEXIS 75 (1936), rehearing denied, 169 Tenn. 496, 90 S.W.2d 527 (1936).

3. —History of Section.

This section, though based on Acts 1779, ch. 14, § 3, is a literal reproduction of § 2154 of the Code of 1858. Doty v. Federal Land Bank, 169 Tenn. 496, 89 S.W.2d 337, 1935 Tenn. LEXIS 75 (1936), rehearing denied, 169 Tenn. 496, 90 S.W.2d 527 (1936).

4. Construction with Other Acts.

5. —Advertising for Sale.

Section 35-5-101 does not apply where trustee sells land without following defendant's plan, since it does not apply to conduct of sale but only as to statutory method of advertising sale. Doty v. Federal Land Bank, 169 Tenn. 496, 89 S.W.2d 337, 1935 Tenn. LEXIS 75 (1936), rehearing denied, 169 Tenn. 496, 90 S.W.2d 527 (1936).

6. Division of Land.

7. —Persons Entitled to Object.

Mere strangers, who had no claim whatever to be enforced against the land, will not be permitted to interpose the objection that the sale was void for sale of separate lots in gross, where the debtor whose land had been so sold himself acquiesced in it. Cooke, Settle & Co. v. Walters, 70 Tenn. 116, 1878 Tenn. LEXIS 193 (1878); Prigmore v. Shelton, 77 Tenn. 563, 1882 Tenn. LEXIS 102 (1882).

8. —Duty to Furnish Division Plan.

In a sale of land under execution, where it is levied on as one entire tract, it is not the duty of the sheriff, nor has he the right himself, to divide the land and sell it in parcels, though it be susceptible of division by well defined natural and artificial boundaries. This rule is not affected by the smallness of the debt as compared to the value of the land levied upon. Jones v. Townsend, 2 Shan. 167 (1876); Lucas v. Moore, 70 Tenn. 1, 1878 Tenn. LEXIS 175 (1878).

Where complainants' two tracts of land were sold as one in order to satisfy the debts of complainants but the complainants did not object or offer a plan as provided by this section, the sale was approved. Hawkins v. Spicer, 20 Tenn. App. 528, 101 S.W.2d 151, 1936 Tenn. App. LEXIS 43 (Tenn. Ct. App. 1936).

It is the duty of the defendants whose land is to be sold to furnish a plan of the division of the land, otherwise it will be sold without division. Williams v. Williams, 25 Tenn. App. 290, 156 S.W.2d 363, 1941 Tenn. App. LEXIS 108 (Tenn. Ct. App. 1941).

9. —Determination by Deed Description.

The title papers of the judgment debtor must determine the fact whether, for the purpose of execution sale, the realty therein described shall be treated as one or several lots, and if his deed describes it as one lot or piece of land, it will be so treated. Ament v. Brennan, 1 Cooper's Tenn. Ch. 431 (1873).

10. —Valid Sale Without Division.

Upon a resale of land ordered by the chancery court to enforce the lien reserved for the purchase-money, it is no ground of exception to the sale that the land was not divided and sold in lots, the decree not directing it and the owner of the land not offering any plan of division, or requesting a sale in lots. Lucas v. Moore, 70 Tenn. 1, 1878 Tenn. LEXIS 175 (1878).

11. —Contiguous Tracts.

Where several tracts of land once belonged to different owners, which, when levied on, belonged to the execution debtor, and lay contiguous to or adjoining each other, and constituted but one body of land, held and known as such, and was so levied on, a sale of the whole would not be a fraud on anybody. Cooke, Settle & Co. v. Walters, 70 Tenn. 116, 1878 Tenn. LEXIS 193 (1878); Stephens v. Taylor, 74 Tenn. 307, 1880 Tenn. LEXIS 253 (1880).

12. —Decree Authorizing Sale Separately or as Whole.

In the foreclosure sale of a mortgage trust deed on a three fourths undivided interest in land, where the purchasers of an undivided one fourth interest from the mortgagor assumed and paid a corresponding proportional part of the mortgage debt, and for that reason requested a separate sale in one fourths, and the holders of the secured notes objected upon the alleged ground that such sale would probably produce less than a sale of the three fourths undivided interest as an entirety, it was decreed to be proper to advertise and cry the sale on both bases, and to adopt the one which produced the larger result. Merrimon v. Parkey, 136 Tenn. 645, 191 S.W. 327, 1916 Tenn. LEXIS 169 (1916).

Where decree directing sale of land for satisfaction of judgment by foreclosure of mortgage provided that a sale of the land as a whole be made only in the event that prior sale of the land in smaller tracts should bring amount insufficient to satisfy judgment and costs, such provision obviated objection that in the interest of the debtors a sale should be made only of the small tracts separately for the reason that persons interested in purchasing small tracts would be deterred by a prospect of a sale as a whole. Northwestern Mut. Life Ins. Co. v. Jackson, 19 Tenn. App. 67, 83 S.W.2d 279, 1934 Tenn. App. LEXIS 4 (Tenn. Ct. App. 1934).

Decree directing sale of land for satisfaction of judgment by foreclosure of mortgage was not in error by virtue of direction that clerk and master shall first sell the land in tracts, and that a sale of it as a whole shall be made only in the event that the sale in tracts shall fail to bring the amount necessary to pay judgment and costs. Northwestern Mut. Life Ins. Co. v. Jackson, 19 Tenn. App. 67, 83 S.W.2d 279, 1934 Tenn. App. LEXIS 4 (Tenn. Ct. App. 1934).

13. —Relief in Chancery.

Chancery court does not have jurisdiction to set aside sale by trustee under trust deed where trustee fails to sell pursuant to defendant's plan, since sale is neither void or voidable, and defendant's only remedy is to sue trustee for damages. Doty v. Federal Land Bank, 169 Tenn. 496, 89 S.W.2d 337, 1935 Tenn. LEXIS 75 (1936), rehearing denied, 169 Tenn. 496, 90 S.W.2d 527 (1936).

14. —Remedy in Damages.

Where complainants, having executed deed of trust, proffered plan of subdivision of land to be sold as required by statute, refusal of trustee's agent to abide by plan did not invalidate or render sale voidable, but the remedy would be an action for damages. Miller v. Fidelity-Bankers Trust Co., 21 Tenn. App. 289, 109 S.W.2d 421, 1937 Tenn. App. LEXIS 34 (Tenn. Ct. App. 1937).

15. Conduct of Sale.

Mortgagee cannot delegate to constable the time and place, and conduct of sale, although he may employ agent to perform ministerial duties. Green v. Stevenson, 54 S.W. 1011, 1899 Tenn. Ch. App. LEXIS 138 (1899).

Crying of sale by sheriff for trustee proper when trustee was present and sheriff merely acted as auctioneer. Hawkins v. Spicer, 20 Tenn. App. 528, 101 S.W.2d 151, 1936 Tenn. App. LEXIS 43 (Tenn. Ct. App. 1936).

NOTES TO DECISIONS

1. Amount of Tender.

Where land of persons under disability are sold for reinvestment or division, the chancellor may set aside a sale publicly made, upon tender of a sum less than 10 percent of the amount for which the clerk and master had sold the land. Robertson v. Bush, 3 Tenn. Civ. App. (3 Higgins) 154 (1912).

2. Setting Aside Foreclosure Sales.

The conscience-shocking inadequacy-of-price test for setting aside foreclosure sales is impractical and should be abandoned. Holt v. Citizens Cent. Bank, 688 S.W.2d 414, 1984 Tenn. LEXIS 892 (Tenn. 1984).

If a foreclosure sale is legally held, conducted and consummated, there must be some evidence of irregularity, misconduct, fraud, or unfairness on the part of the trustee or the mortgagee that caused or contributed to an inadequate price, for a court of equity to set aside the sale. Holt v. Citizens Cent. Bank, 688 S.W.2d 414, 1984 Tenn. LEXIS 892 (Tenn. 1984).

NOTES TO DECISIONS

1. Payment of Fee from Common Fund.

Sale for partition benefitted all parties, including the lender, such that under such circumstances, it was appropriate to order auctioneer fees to be paid out of the common fund, so that they were paid on a pro rata basis, proportionately to the amount of benefit a party derived from the sale; therefore, the chancery court did not abuse its discretion when it ordered that the auctioneer's fee be paid out of the common fund. Fossett v. Gray, 173 S.W.3d 742, 2004 Tenn. App. LEXIS 602 (Tenn. Ct. App. 2004), appeal denied, — S.W.3d —, 2005 Tenn. LEXIS 273 (Tenn. Mar. 21, 2005).

NOTES TO DECISIONS

1. Successor Trustees.

Mortgagee, trustee, and assignor were entitled to judgment on the pleadings as to a mortgagor's claims that a successor trustee was improperly appointed because T.C.A. § 35-5-114(b)(1) and the deed of trust allowed the mortgagee to freely appoint successor trustees. Thornley v. U.S. Bank, N.A., — S.W.3d —, 2015 Tenn. App. LEXIS 521 (Tenn. Ct. App. June 30, 2015), appeal denied, — S.W.3d —, 2015 Tenn. LEXIS 962 (Tenn. Nov. 24, 2015).

NOTES TO DECISIONS

1. Rebuttable Presumption.

Mortgagee's summary judgment for a deficiency judgment after a foreclosure sale was proper as the mortgagor did not rebut the presumption that the price attained at the foreclosure sale was the fair market value of the property under T.C.A. § 35-5-118(b) where the mortgagor's attorney waived the issue; the claims raised in the mortgagor's affidavit and response to the summary judgment motion were immaterial as the mortgagor failed to pay the promissory notes, and there was no dispute as to the sale price attained at the foreclosure sale. Commercial Bank, Inc. v. Lacy, 371 S.W.3d 121, 2012 Tenn. App. LEXIS 165 (Tenn. Ct. App. Mar. 14, 2012), appeal denied, Commercial Bank v. Lacy, — S.W.3d —, 2012 Tenn. LEXIS 457 (Tenn. June 20, 2012).

Trial court properly held that a bank was entitled to summary judgment on its deficiency claim because debtors were unable to overcome the statutory presumption that the foreclosure price represented the property's fair market value at the time of the sale; the 15.8 percent difference between the appraised price and the foreclosure sale price, with nothing more, was insufficient to establish that the property was sold for an amount materially less than its fair market value. Capital Bank v. Brock, — S.W.3d —, 2014 Tenn. App. LEXIS 382 (Tenn. Ct. App. June 30, 2014).

Dismissal of borrowers'  claims against a bank which sought a deficiency judgment was appropriate because the borrowers failed to rebut the presumption that the foreclosure price was equal to the fair market value of the foreclosed properties at the time of each foreclosure sale. Furthermore, the bank was neither unjustly enriched, nor did it receive a windfall because the foreclosure sale prices were not materially less than fair market value at the time of foreclosure. Halliman v. Heritage Bank, — S.W.3d —, 2015 Tenn. App. LEXIS 288 (Tenn. Ct. App. Apr. 30, 2015).

2. Taxes Properly Included.

Mortgagee was properly awarded a summary judgment for the deficiency remaining after a foreclosure sale of the property under T.C.A. § 35-5-118(a) as under even though the trustee's deed provided that the property was conveyed subject to any unpaid property taxes, the loan documents provided that the mortgagee was entitled to be reimbursed for the unpaid taxes it paid to protect its collateral. Commercial Bank, Inc. v. Lacy, 371 S.W.3d 121, 2012 Tenn. App. LEXIS 165 (Tenn. Ct. App. Mar. 14, 2012), appeal denied, Commercial Bank v. Lacy, — S.W.3d —, 2012 Tenn. LEXIS 457 (Tenn. June 20, 2012).

3. Fair Market Value.

Lender was properly granted summary judgment on its claim for a deficiency judgment against the note guarantors where a lease purchase agreement between the guarantors and a lessee was inapplicable, and the guarantors' assertion that the property was complete and habitable was insufficient to show that the appraisal price, which was 20 percent higher than the foreclosure price, was equal to the fair market value. Firstbank v. Horizon Capital Partners, LLC, — S.W.3d —, 2014 Tenn. App. LEXIS 47 (Tenn. Ct. App. Feb. 3, 2014).

Bank that purchased real property that was owned by Chapter 13 debtors at a foreclosure sale was entitled to summary judgment on its claim that it had a claim in the amount of $47,081 against the debtors'  bankruptcy estate because the amount it paid for the property was less than the debtors owed on a note they signed; the debtors did not rebut the presumption established by T.C.A. § 35-5-118 that the sale price of the property was equal to the fair market value of the property by introducing a tax appraisal that valued the property at $502,900, and the bank's bid of $387,000 was not materially less than the fair market value of $425,000 established by an appraisal, given anticipated expenses of preparing the property for resale. In re Radewald, — B.R. —, 2015 Bankr. LEXIS 984 (Bankr. E.D. Tenn. Mar. 30, 2015).

Trial court erred as to the fair market value of a commercial property at the time of a foreclosure sale because the sellers, who bought the property at the sale, sold the property for a lesser value several weeks after the sale. The buyers, who defaulted upon a promissory note secured by a deed of trust on the property, thus proved by a preponderance of the evidence that the property sold for an amount materially less than the fair market value of the property at the time of the foreclosure sale. Cutshaw v. Hensley, — S.W.3d —, 2015 Tenn. App. LEXIS 609 (Tenn. Ct. App. July 29, 2015).

Debtor successfully rebutted the statutory presumption that the sale price of a foreclosed property was equal to the fair market value of the property at the time of the foreclosure sale, as the foreclosure sale price was materially less than fair market value; a company's offer, purportedly made two months prior to the foreclosure sale, most closely represented fair market value, and 2007 and 2009 appraisals were too far removed in time to be probative of fair market value. Eastman Credit Union v. Bennett, — S.W.3d —, 2016 Tenn. App. LEXIS 229 (Tenn. Ct. App. Mar. 31, 2016).

Borrowers claimed the trial court erred by considering the listed sale price two years after foreclosure as evidence of fair market value, but there was no merit to this contention because the only value evidence the trial court relied upon was the value opinions of two experts; consideration of the listed sale price aided the trial court in its assessment of the experts'  appraisals and the evidence did not preponderate against the trial court's finding that one expert's valuation of the property was credible. Commerce Union Bank v. Bush, 512 S.W.3d 217, 2016 Tenn. App. LEXIS 451 (Tenn. Ct. App. June 29, 2016), appeal denied, — S.W.3d —, 2016 Tenn. LEXIS 881 (Tenn. Nov. 16, 2016).

Trial court correctly determined that the foreclosure sale price was not materially less than the fair market value; the presumptive fair market value of the property was $ 1,050,000, and this value was corroborated by one expert's two appraisals of the same value, and what the borrowers probably could have gotten eventually was inconsequential, as the issue was the fair market value at the time of the foreclosure sale. Commerce Union Bank v. Bush, 512 S.W.3d 217, 2016 Tenn. App. LEXIS 451 (Tenn. Ct. App. June 29, 2016), appeal denied, — S.W.3d —, 2016 Tenn. LEXIS 881 (Tenn. Nov. 16, 2016).

4. Deficiency Judgment Amount.

Neither party disputed the amounts noted by the trial court in its judgment, and no error in the trial court's calculations was discerned, such that the deficiency judgment amount was proper. Eastman Credit Union v. Bennett, — S.W.3d —, 2016 Tenn. App. LEXIS 229 (Tenn. Ct. App. Mar. 31, 2016).

5. Fraud.

Bank followed proper procedures in selecting an appraiser and did not influence the value of the appraisal for which it relied upon in placing its bid at the foreclosure sale; the bank was not afforded an opportunity to evaluate one certain appraisal prior to the foreclosure sale because it never received a copy of the appraisal and thus the bank was justified in relying on the appraisal in its possession, and there was no fraud, collusion, misconduct, or irregularity in connection with the foreclosure process. Commerce Union Bank v. Bush, 512 S.W.3d 217, 2016 Tenn. App. LEXIS 451 (Tenn. Ct. App. June 29, 2016), appeal denied, — S.W.3d —, 2016 Tenn. LEXIS 881 (Tenn. Nov. 16, 2016).

35-6-101. Short title.

This chapter shall be known and may be cited as the “Uniform Principal and Income Act”.

Acts 2000, ch. 829, § 1.

Compiler's Notes. Former chapter 6, §§ 35-6-101 — 35-6-115 (Acts 1955, ch. 81, §§ 1-15; 1965, ch. 360, § 1; Acts 1986, ch. 591, §§ 1, 2; T.C.A., §§ 35-701 — 35-715), a former version of the Uniform Principal and Income Act, was repealed by Acts 2000, ch. 829, § 1, eff. July 1, 2000. For current provisions, see this chapter.

Textbooks. Pritchard on Wills and Administration of Estates (5th ed., Phillips and Robinson), §§ 443, 1018.

Law Reviews.

Selected Tennessee Legislation of 1986, 54 Tenn. L. Rev. 457 (1987).

Symposium: The Role of Federal Law in Private Wealth Transfer: A Fresh Look at State Asset Protection Trust Statutes, 67 Vand. L. Rev. 1741 (2014).

Symposium: The Role of Federal Law in Private Wealth Transfer: Unconstitutional Perpetual Trusts, 67 Vand. L. Rev. 1769 (2014).

Where There's a Will: “Total return trusts” come to Tennessee (Dan W. Holbrook), 37 No. 12 Tenn. B.J. 33 (2001).

35-6-102. Chapter definitions.

As used in this chapter, unless the context otherwise requires:

1. “Accounting period” means a calendar year unless another twelve-month period is selected by a fiduciary. The term includes a portion of a calendar year or other twelve-month period that begins when an income interest begins or ends when an income interest ends.
2. “Beneficiary” includes, in the case of a decedent's estate, an heir, legatee, and devisee and, in the case of a trust, an income beneficiary and a remainder beneficiary.
3. “Fiduciary” means a personal representative or a trustee. The term includes an executor, administrator, successor personal representative, special administrator, and a person performing substantially the same function.
4. “Income” means money or property that a fiduciary receives as current return from a principal asset. The term includes a portion of receipts from a sale, exchange, or liquidation of a principal asset, to the extent provided in part 4 of this chapter.
5. “Income beneficiary” means a person to whom net income of a trust is or may be payable.
6. “Income interest” means the right of an income beneficiary to receive all or part of net income, whether the terms of the trust require it to be distributed or authorize it to be distributed in the trustee's discretion.
7. “Mandatory income interest” means the right of an income beneficiary to receive net income that the terms of the trust require the fiduciary to distribute.
8. “Net income” means the total receipts allocated to income during an accounting period minus the disbursements made from income during the period, plus or minus transfers under this chapter to or from income during the period.
9. “Person” means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency or instrumentality, public corporation, or any other legal or commercial entity.
10. “Principal” means property held in trust for distribution to a remainder beneficiary when the trust terminates.
11. “Remainder beneficiary” means a person entitled to receive principal when an income interest ends.
12. “Terms of a trust” means the manifestation of the intent of a settlor or decedent with respect to the trust, expressed in a manner that admits of its proof in a judicial proceeding, whether by written or spoken words or by conduct.
13. “Trustee” includes an original, additional, or successor trustee, whether or not appointed or confirmed by a court.

Acts 2000, ch. 829, § 1.

35-6-103. Fiduciary duties — General principles.

1. In allocating receipts and disbursements to or between principal and income, and with respect to any matter within the scope of title 35, chapter 6, a fiduciary:
   1. Shall administer a trust or estate in accordance with the terms of the trust or the will, even if there is a different provision in this chapter;
   2. May administer a trust or estate by the exercise of a discretionary power of administration given to the fiduciary by the terms of the trust or the will, even if the exercise of the power produces a result different from a result required or permitted by this chapter;
   3. Shall administer a trust or estate in accordance with this chapter if the terms of the trust or the will do not contain a different provision or do not give the fiduciary a discretionary power of administration; and
   4. Shall add a receipt or charge a disbursement to principal to the extent that the terms of the trust and this chapter do not provide a rule for allocating the receipt or disbursement to or between principal and income.
2. In exercising the power to adjust under § 35-6-104(a) or a discretionary power of administration regarding a matter within the scope of this chapter, whether granted by the terms of a trust, or will or this chapter, a fiduciary shall administer a trust or estate impartially, based on what is fair and reasonable to all of the beneficiaries, considering any terms of the trust or the will manifesting the trustors' or testators' intention that the fiduciary shall or may favor one (1) or more of the beneficiaries. A determination in accordance with this chapter is presumed to be fair and reasonable to all of the beneficiaries.

Acts 2000, ch. 829, § 1.

Law Reviews.

The Unitrust in Estate Planning: A Partial Panacea, 21 Vand. L. Rev. 1023 (1968).

35-6-104. Trustee's power to adjust.

1. A trustee may adjust between principal and income to the extent the trustee considers necessary if:
   1. The trustee invests and manages trust assets as a prudent investor;
   2. The terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust's income; and
   3. The trustee determines, after applying the rules in § 35-6-103(a), that the trustee is unable to comply with § 35-6-103(b).
2. In deciding whether and to what extent to exercise the power to make adjustments under this section, the trustee may consider, but is not limited to, any of the following:
   1. The nature, purpose, and expected duration of the trust;
   2. The intent of the settlor;
   3. The identity and circumstances of the beneficiaries;
   4. The needs for liquidity, regularity of income, and preservation and appreciation of capital;
   5. The assets held in the trust; the extent to which they consist of financial assets, interests in closely held enterprises, tangible and intangible personal property, or real property; the extent to which an asset is used by a beneficiary; and whether an asset was purchased by the trustee or received from the settlor;
   6. The net amount allocated to income under the other sections of this chapter and the increase or decrease in the value of the principal assets, which the trustee may estimate as to assets for which market values are not readily available;
   7. Whether and to what extent the terms of the trust give the trustee the power to invade principal or accumulate income or prohibit the trustee from invading principal or accumulating income, and the extent to which the trustee has exercised a power from time to time to invade principal or accumulate income;
   8. The actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation; and
   9. The anticipated tax consequences of an adjustment.
3. A trustee may not make an adjustment:
   1. That disqualifies the trust for an estate tax or gift tax marital or charitable deduction that would be allowed, in whole or in part, if the trustee did not have the power to make the adjustment;
   2. That reduces the actuarial value of the income interest in a trust to which a person transfers property with the intent to qualify for a gift tax exclusion;
   3. That changes the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets;
   4. From any amount that is permanently set aside for charitable purposes under a will or the terms of a trust unless both income and principal are so set aside;
   5. If possessing or exercising the power to make an adjustment causes an individual to be treated as the owner of all or part of the trust for income tax purposes, and the individual would not be treated as the owner if the trustee did not possess the power to make an adjustment;
   6. If possessing or exercising the power to make an adjustment causes all or part of the trust assets to be included for estate tax purposes in the estate of an individual who has the power to remove a trustee or appoint a trustee, or both, and the assets would not be included in the estate of the individual if the trustee did not possess the power to make an adjustment;
   7. If the trustee is a beneficiary of the trust; or
   8. If the trustee is not a beneficiary, but the adjustment would benefit the trustee directly or indirectly.
4. If subdivision (c)(5), (6), (7), or (8) applies to a trustee and there is more than one (1) trustee, a cotrustee to whom the provision does not apply may make the adjustment unless the exercise of the power by the remaining trustee or trustees is not permitted by the terms of the trust.
5. A trustee may release the entire power conferred by subsection (a) or may release only the power to adjust from income to principal or the power to adjust from principal to income if the trustee is uncertain about whether possessing or exercising the power will cause a result described in subdivision (c)(1)-(6) or (c)(8), or if the trustee determines that possessing or exercising the power will or may deprive the trust of a tax benefit or impose a tax burden not described in subsection (c). The release may be permanent or for a specified period, including a period measured by the life of an individual.
6. Terms of a trust that limit the power of a trustee to make an adjustment between principal and income do not affect the application of this section unless it is clear from the terms of the trust that the terms are intended to deny the trustee the power of adjustment conferred by subsection (a).
7. Nothing in this section or in this chapter is intended to create or imply a duty to make an adjustment, and a trustee is not liable for not considering whether to make an adjustment or for choosing not to make an adjustment.

Acts 2000, ch. 829, § 1; 2004, ch. 866, § 7.

Law Reviews.

Where There's a Will: “Total return trusts” come to Tennessee (Dan W. Holbrook), 37 No. 12 Tenn. B.J. 33 (2001).

35-6-105. Optional notice.

1. A trustee may, but is not required to, give a notice of proposed action regarding a matter governed by this chapter as provided in this section. For the purpose of this section, a proposed action includes:
   1. An individual action;
   2. A course of action; or
   3. A decision not to take action.
2. If the trustee decides to give notice, the trustee shall mail notice of the proposed action to all adult beneficiaries who are receiving, or are entitled to receive, income under the trust or to receive a distribution of principal if the trust were terminated at the time the notice is given.
3. Notice of proposed action need not be given to any person who consents in writing to the proposed action. The consent may be executed at any time before or after the proposed action is taken.
4. The notice of proposed action shall state that it is given pursuant to this section and shall state all of the following:
   1. The name and mailing address of the trustee;
   2. The name and telephone number of a person who may be contacted for additional information;
   3. A description of the action proposed to be taken and an explanation of the reasons for the action;
   4. The time within which objections to the proposed action can be made, which shall be at least sixty (60) days from the mailing of the notice of proposed action; and
   5. The date on or after which the proposed action may be taken or is effective.
5. A beneficiary may object to the proposed action by mailing a written objection to the trustee at the address stated in the notice of proposed action within the time period specified in the notice of proposed action.
6. A trustee is not liable to a beneficiary for an action regarding a matter governed by this chapter if the trustee does not receive a written objection to the proposed action from the beneficiary within the applicable period and the other requirements of this section are satisfied. If no beneficiary entitled to notice objects under this section, the trustee is not liable to any current or future beneficiary with respect to the proposed action.
7. If the trustee receives a written objection within the applicable period, either the trustee or a beneficiary may petition the court to have the proposed action taken as proposed, taken with modifications, or denied. In the proceeding, a beneficiary objecting to the proposed action has the burden of proving that the trustee's proposed action should not be taken. A beneficiary who has not objected is not estopped from opposing the proposed action in the proceeding. If the trustee decides not to implement the proposed action, the trustee shall notify the beneficiaries of the decision not to take the action and the reasons for the decision, and the trustee's decision not to implement the proposed action does not itself give rise to liability to any current or future beneficiary. A beneficiary may petition the court to have the action taken, and has the burden of proving that it should be taken.

Acts 2000, ch. 829, § 1.

Collateral References.

Modern status of rules governing allocations of stock dividends or splits between principal and income. 81 A.L.R.3d 876.

35-6-106. Remedy.

With respect to a trustee's exercise or nonexercise of the power to make an adjustment under § 35-5-104, the sole remedy is to direct, deny, or revise an adjustment between principal and income.

Acts 2000, ch. 829, § 1.

Law Reviews.

Conversions of Nonprofit Hospitals to For-Profit Status: The Tennessee Experience, 28 U. Mem. L. Rev. 1077 (1998).

Stock Dividends and Trusts Created Prior to March 1, 1955: Should the Uniform Principal And Income Act Apply?, 39 Tenn. L. Rev. 688 (1971).

Collateral References.

Modern status of rules governing allocations of stock dividends or splits between principal and income. 81 A.L.R.3d 876.

35-6-107. Records.

A trustee who elects to exercise any power or not to exercise any power under this chapter shall maintain only such records that may be necessary or appropriate in the discretion of the trustee to support such determination at the time the determination is made and shall not be required to maintain records not necessary for the administration of the trust.

Acts 2000, ch. 829, § 1.

35-6-108. Total return unitrusts.

1. In this section:
   1. “Disinterested person” means a person who is not a “related or subordinate party,” as defined in 26 U.S.C. § 672(c), with respect to the person then acting as trustee of the trust and excludes the trustor of the trust and any interested trustee;
   2. “Income trust” means a trust, created by either an inter vivos or a testamentary instrument, which directs or permits the trustee to distribute the net income of the trust to one (1) or more persons, either in fixed proportions or in amounts or proportions determined by the trustee and regardless of whether the trust directs or permits the trustee to distribute the principal of the trust to one (1) or more such persons;
   3. “Interested distributee” means a person to whom distributions of income or principal can currently be made who has the power to remove the existing trustee and designate as successor a person who may be a “related or subordinate party,” as defined in 26 U.S.C. § 672(c), with respect to such distributee;
   4. “Interested trustee” means an individual trustee who is a qualified beneficiary or any trustee who may be removed and replaced by an interested distributee, or an individual trustee whose legal obligation to support a beneficiary may be satisfied by distributions of income and principal of the trust;
   5. “Internal Revenue Code” refers to the Internal Revenue Code of 1986, as amended from time to time, and any references to a section of such shall include any successor, substituted, or amended section of the Internal Revenue Code;
   6. “Total return unitrust” means an income trust that has been converted under this section or the laws of any other jurisdiction that permits an income trust to be converted to a trust in which a unitrust amount is treated as the net income of the trust;
   7. “Trustee” means all persons acting as trustee of the trust, except where expressly noted otherwise, whether acting in their discretion or on the direction of one (1) or more persons acting in a fiduciary capacity;
   8. “Trustor” means an individual who created an inter vivos or a testamentary trust;
   9. “Qualified beneficiaries” means those beneficiaries of a trust specified in § 35-15-103(24); and
   10. “Unitrust amount” means an amount computed as a percentage of the fair market value of the trust.
2. A trustee, other than an interested trustee, or where two (2) or more persons are acting as trustee, a majority of the trustees who are not an interested trustee, in either case hereafter “trustee”, may, in its sole discretion and without court approval:
   1. Convert an income trust to a total return unitrust;
   2. In the case of a total return unitrust converted under this section or the laws of any other jurisdiction, reconvert a total return unitrust to an income trust; or
   3. In the case of a total return unitrust converted under this section or the laws of any other jurisdiction, change the percentage used to calculate the unitrust amount or the method used to determine the fair market value of the trust if all of the following apply:
      1. The trustee adopts a written policy for the trust providing:
         1. In the case of a trust being administered as an income trust, that future distributions from the trust will be unitrust amounts rather than net income;
         2. In the case of a trust being administered as a total return unitrust, that future distributions from the trust will be net income rather than unitrust amounts; or
         3. That the percentage used to calculate the unitrust amount or the method used to determine the fair market value of the trust will be changed as stated in the policy;
      2. The trustee sends written notice of its intention to take such action, along with copies of such written policy and this section, to the trustor of the trust, if living, and to all qualified beneficiaries of the trust;
      3. At least one (1) person receiving notice under subdivision (b)(3)(B) is legally competent; and
      4. No person receiving such notice objects, by written instrument delivered to the trustee, to the proposed action of the trustee within thirty (30) days of receipt of such notice.
3. If there is no trustee of the trust other than an interested trustee, the interested trustee or, where two (2) or more persons are acting as trustee and are interested trustees, a majority of such interested trustees may, in its sole discretion and without court approval:
   1. Convert an income trust to a total return unitrust;
   2. Reconvert a total return unitrust to an income trust; or
   3. Change the percentage used to calculate the unitrust amount or the method used to determine the fair market value of the trust if all of the following apply:
      1. The trustee adopts a written policy for the trust providing:
         1. In the case of a trust being administered as an income trust, that future distributions from the trust will be unitrust amounts rather than net income;
         2. In the case of a trust being administered as a total return unitrust, that future distributions from the trust will be net income rather than unitrust amounts; or
         3. That the percentage used to calculate the unitrust amount or the method used to determine the fair market value of the trust will be changed as stated in the policy;
      2. The trustee appoints a disinterested person who, in its sole discretion but acting in a fiduciary capacity, determines for the trustee:
         1. The percentage to be used to calculate the unitrust amount;
         2. The method to be used in determining the fair market value of the trust; and
         3. Which assets, if any, are to be excluded in determining the unitrust amount;
      3. The trustee sends written notice of its intention to take such action, along with copies of such written policy and this section, and the determinations of the disinterested person to the trustor of the trust, if living, and to all qualified beneficiaries of the trust;
      4. At least one (1) person receiving notice under subdivision (c)(3)(C), of this section is legally competent; and
      5. No person receiving such notice objects, by written instrument delivered to the trustee, to the proposed action or the determinations of the disinterested person within thirty (30) days of receipt of such notice.
4. If any trustee desires to convert an income trust to a total return unitrust, reconvert a total return unitrust to an income trust, or change the percentage used to calculate the unitrust amount or the method used to determine the fair market value of the trust but does not have the ability to or elects not to do it under subsection (b) or (c), the trustee may petition the court for such order as the trustee deems appropriate. In the event, however, there is only one (1) trustee of such trust and such trustee is an interested trustee or in the event there are two (2) or more trustees of such trust and a majority of them are interested trustees, the court, in its own discretion or on the petition of such trustee or trustees or any person interested in the trust, may appoint a disinterested person who, acting in a fiduciary capacity, shall present such information to the court as shall be necessary to enable the court to make its determinations hereunder.
5. The fair market value of the trust shall be determined at least annually, using such valuation date or dates or averages of valuation dates as are deemed appropriate. Assets for which a fair market value cannot be readily ascertained shall be valued using such valuation methods as are deemed reasonable and appropriate. Assets used by a trust beneficiary, such as a residence property or tangible personal property, may be excluded from fair market value for computing the unitrust amount.
6. The percentage to be used in determining the unitrust amount shall be a reasonable current return from the trust, in any event not less than three percent (3%) nor more than five percent (5%), taking into account the intentions of the trustor of the trust as expressed in the governing instrument, the needs of the beneficiaries, general economic conditions, projected current earnings and appreciation for the trust, and projected inflation and its impact on the trust.
7. Following the conversion of an income trust to a total return unitrust, the trustee:
   1. Shall consider the unitrust amount as paid from net accounting income determined as if the trust were not a unitrust;
   2. Shall then consider the unitrust amount as paid from ordinary income not allocable to net accounting income;
   3. After calculating the trust's capital gain net income described in 26 U.S.C. § 1222(9), may consider the unitrust amount as paid from net short-term capital gain described in 26 U.S.C. § 1222(5) and then from net long-term capital gain described in 26 U.S.C. § 1222(7); and
   4. Shall then consider the unitrust amount as coming from the principal of the trust.
8. In administering a total return unitrust, the trustee may, in its sole discretion but subject to the governing instrument, determine:
   1. The effective date of the conversion;
   2. The timing of distributions, including, but not limited to, provisions for prorating a distribution for a short year in which a beneficiary's right to payments commences or ceases;
   3. Whether distributions are to be made in cash or in kind or partly in cash and partly in kind;
   4. If the trust is reconverted to an income trust, the effective date of such reconversion; and
   5. Such other administrative issues as may be necessary or appropriate to carry out the purposes of this section.
9. Conversion to a total return unitrust under this section shall not affect any other provision of the governing instrument, if any, regarding distributions of principal.
10. In the case of a trust for which a marital deduction has been taken for federal tax purposes under 26 U.S.C. § 2056 or § 2523, the spouse otherwise entitled to receive the net income of the trust shall have the right, by written instrument delivered to the trustee, to compel the reconversion during that spouse's lifetime of the trust from a total return unitrust to an income trust, notwithstanding anything in this section to the contrary.
11. 1. This section shall be construed as pertaining to the administration of a trust and shall be available to any trust including a trust initially converted to a total return unitrust under the laws of another jurisdiction that is administered in Tennessee under Tennessee law or to any trust, regardless of its place of administration, whose governing instrument provides that Tennessee law governs matters of construction or administration unless:
       1. The governing instrument reflects an intention that the current beneficiary or beneficiaries are to receive an amount other than a reasonable current return from the trust;
       2. The trust is a pooled income fund described in 26 U.S.C. § 642(c)(5) or a charitable-remainder trust described in 26 U.S.C. § 664(d); and
       3. The governing instrument expressly prohibits use of this section by specific reference to the section or expressly states the trustor's intent that net income not be calculated as a unitrust amount.
    2. Any of the following statements in the governing instrument, or words similar to such statements, shall be sufficient to preclude the use of this section:

       The provisions of § 35-6-109, as amended, or any corresponding provision of future law, shall not be used in the administration of this trust; or

       My trustee shall not determine the distributions to the income beneficiary as a unitrust amount.

12. Any trustee or disinterested person who in good faith takes or fails to take any action under this section shall not be liable to any person affected by such action or inaction, regardless of whether such person received written notice as provided in this section and regardless of whether such person was under a legal disability at the time of the delivery of such notice. Such person's exclusive remedy shall be to obtain an order of the court directing the trustee to convert an income trust to a total return unitrust, to reconvert from a total return unitrust to an income trust or to change the percentage used to calculate the unitrust amount.
13. This section shall be available to trusts in existence on July 1, 2010, or created thereafter.

Acts 2010, ch. 725, § 21; 2018, ch. 887, § 1; 2019, ch. 197, § 3.

Code Commission Notes.

Acts 2010, ch. 725, § 21 purported to enact §§ 35-17-101 and 35-17-102. In comments jointly proposed by the Estate and Probate Section of the Tennessee Bar Association, the Probate Study Committee of the Tennessee Bar Association, and the Trust Committee of the Tennessee Bankers Association, as authorized by 725, Acts of 2010, ch. 725, § 24, it was recommended that the enactments by Acts 2010, ch. 725, § 21 be enacted as §§ 35-6-108 and 35-6-109, respectively.

Compiler's Notes. The Internal Revenue Code, referred to in this section, is compiled in title 26 U.S.C.

Amendments. The 2018 amendment added “, or gives the trustee no discretion to distribute any trust principal to the income beneficiary under any circumstances” at the end of (k)(1)(A); deleted “; described in 26 U.S.C. § 664(d)” at the end of (k)(1)(B); and added “Except for testamenatry trusts established prior to July 1, 2010,” at the beginning of (k)(1)(C).

The 2019 amendment, in (k)(1), deleted “, or gives the trustee no discretion to distribute any trust principal to the income beneficiary under any circumstances” at the end of (A); inserted “described in 26 U.S.C. § 664(d)” at the end of (B); and deleted “Except for testamentary trusts established prior to July 1, 2010,” at the beginning of (C).

Effective Dates. Acts 2018, ch. 887, § 2. May 3, 2018.

Acts 2019, ch. 197, § 8.  April 25, 2019.

35-6-109. Express total return unitrusts.

1. This section shall apply to a trust that, by its governing instrument, requires or permits the distribution, at least annually, of a unitrust amount equal to a fixed percentage of not less than three percent (3%) nor more than five percent (5%) per year of the fair market value of the trust's assets, valued at least annually, such trust to be referred to in this section as an “express total return unitrust”.
2. The unitrust amount for an express total return unitrust may be determined by reference to the fair market value of the trust's assets in one (1) year or more than one (1) year.
3. Distribution of such a fixed percentage unitrust amount is considered a distribution of all of the income of the express total return unitrust.
4. An express total return unitrust may or may not provide a mechanism for changing the unitrust percentage similar to the mechanism provided under § 35-6-108, based upon the factors noted therein, and may or may not provide for a conversion from a unitrust to an income trust and/or a reconversion of an income trust to a unitrust similar to the mechanism under § 35-6-108.
5. If an express total return unitrust does not specifically or by reference to § 35-6-108 deny a power to change the unitrust percentage or to convert to an income trust, then the trustee shall have such power and the express total return unitrust shall be deemed to be a “total return unitrust” within the meaning of § 35-6-108 for purposes of applying § 35-6-108 to the trust.
6. The distribution of a fixed percentage of not less than three percent (3%) nor more than five percent (5%) reasonably apportions the total return of an express total return unitrust.
7. The trust instrument may grant discretion to the trustee to adopt a consistent practice of treating capital gains as part of the unitrust distribution, to the extent that the unitrust distribution exceeds the net accounting income, or it may specify the ordering of such classes of income.
8. Unless the terms of the trust specifically provide otherwise, a distribution of the unitrust amount from an express total return unitrust shall be considered to have been made from the following sources in order of priority:
   1. From net accounting income determined as if the trust were not a unitrust;
   2. From ordinary income not allocable to net accounting income;
   3. After calculating the trust's capital gain net income as described in 26 U.S.C. § 1222(9), from net realized short-term capital gain as described in 26 U.S.C. § 1222(5) and then from net realized long-term capital gain described in 26 U.S.C. § 1222(7); and
   4. From the principal of the trust.
9. The trust instrument may provide that assets:
   1. For which a fair market value cannot be readily ascertained shall be valued using such valuation methods as are deemed reasonable and appropriate; and
   2. Used by a trust beneficiary, such as a residence property or tangible personal property, may be excluded from the net fair market value for computing the unitrust amount.
10. In this section, “Internal Revenue Code” refers to the Internal Revenue Code of 1986 (U.S.C. title 26), and any references to a section thereof shall include any successor, substituted, or amended section of the Internal Revenue Code.

Acts 2010, ch. 725, § 21.

Code Commission Notes.

Acts 2010, ch. 725, § 21 purported to enact §§ 35-17-101 and 35-17-102. In comments jointly proposed by the Estate and Probate Section of the Tennessee Bar Association, the Probate Study Committee of the Tennessee Bar Association, and the Trust Committee of the Tennessee Bankers Association, as authorized by 725, Acts of 2010, ch. 725, § 24, it was recommended that the enactments by Acts 2010, ch. 725, § 21 be enacted as §§ 35-6-108 and 35-6-109, respectively.

Part 2
Decedent's Estate or Terminating Income Interest

35-10-101. [Repealed.]

Compiler's Notes. Former Part 1, §§ 35-10-101 — 35-10-109 (Acts 1973, ch. 177, §§ 1-8, 10; T.C.A., §§ 35-1101 — 35-1109), concerning the Uniform Management of Institutional Funds Act of 1973, was repealed by Acts 2007, ch. 186, §  11(a), effective July 1, 2007.

35-10-102. [Repealed.]

Compiler's Notes. Former Part 1, §§ 35-10-101 — 35-10-109 (Acts 1973, ch. 177, §§ 1-8, 10; T.C.A., §§ 35-1101 — 35-1109), concerning the Uniform Management of Institutional Funds Act of 1973, was repealed by Acts 2007, ch. 186, §  11(a), effective July 1, 2007.

35-10-103. [Repealed.]

Compiler's Notes. Former Part 1, §§ 35-10-101 — 35-10-109 (Acts 1973, ch. 177, §§ 1-8, 10; T.C.A., §§ 35-1101 — 35-1109), concerning the Uniform Management of Institutional Funds Act of 1973, was repealed by Acts 2007, ch. 186, §  11(a), effective July 1, 2007.

35-10-104. [Repealed.]

Compiler's Notes. Former Part 1, §§ 35-10-101 — 35-10-109 (Acts 1973, ch. 177, §§ 1-8, 10; T.C.A., §§ 35-1101 — 35-1109), concerning the Uniform Management of Institutional Funds Act of 1973, was repealed by Acts 2007, ch. 186, §  11(a), effective July 1, 2007.

35-10-105. [Repealed.]

Compiler's Notes. Former Part 1, §§ 35-10-101 — 35-10-109 (Acts 1973, ch. 177, §§ 1-8, 10; T.C.A., §§ 35-1101 — 35-1109), concerning the Uniform Management of Institutional Funds Act of 1973, was repealed by Acts 2007, ch. 186, §  11(a), effective July 1, 2007.

35-10-106. [Repealed.]

Compiler's Notes. Former Part 1, §§ 35-10-101 — 35-10-109 (Acts 1973, ch. 177, §§ 1-8, 10; T.C.A., §§ 35-1101 — 35-1109), concerning the Uniform Management of Institutional Funds Act of 1973, was repealed by Acts 2007, ch. 186, §  11(a), effective July 1, 2007.

35-10-107. [Repealed.]

Compiler's Notes. Former Part 1, §§ 35-10-101 — 35-10-109 (Acts 1973, ch. 177, §§ 1-8, 10; T.C.A., §§ 35-1101 — 35-1109), concerning the Uniform Management of Institutional Funds Act of 1973, was repealed by Acts 2007, ch. 186, §  11(a), effective July 1, 2007.

35-10-108. [Repealed.]

Compiler's Notes. Former Part 1, §§ 35-10-101 — 35-10-109 (Acts 1973, ch. 177, §§ 1-8, 10; T.C.A., §§ 35-1101 — 35-1109), concerning the Uniform Management of Institutional Funds Act of 1973, was repealed by Acts 2007, ch. 186, §  11(a), effective July 1, 2007.

35-10-109. [Repealed.]

Compiler's Notes. Former Part 1, §§ 35-10-101 — 35-10-109 (Acts 1973, ch. 177, §§ 1-8, 10; T.C.A., §§ 35-1101 — 35-1109), concerning the Uniform Management of Institutional Funds Act of 1973, was repealed by Acts 2007, ch. 186, §  11(a), effective July 1, 2007.

Part 2
Uniform Prudent Management of Institutional Funds Act

COMMENTS TO OFFICIAL TEXT

Prefatory Note

Reasons for Revision.

The Uniform Prudent Management of Institutional Funds Act (UPMIFA) replaces the Uniform Management of Institutional Funds Act (UMIFA).  The National Conference of Commissioners on Uniform State Laws approved UMIFA in 1972, and 47 jurisdictions have enacted the act.  UMIFA provided guidance and authority to charitable organizations within its scope concerning the management and investment of funds held by those organizations, UMIFA provided endowment spending rules that did not depend on trust accounting principles of income and principal, and UMIFA permitted the release of restrictions on the use or management of funds under certain circumstances.  The changes UMIFA made to the law permitted charitable organizations to use modern investment techniques such as total-return investing and to determine endowment fund spending based on spending rates rather than on determinations of “income” and “principal.”

UMIFA was drafted almost 35 years ago, and portions of it are now out of date.  The prudence standards in UMIFA have provided useful guidance, but prudence norms evolve over time.  The new Act provides modern articulations of the prudence standards for the management and investment of charitable funds and for endowment spending.  The Uniform Prudent Investor Act (UPIA), an Act promulgated in 1994 and already enacted in 43 jurisdictions, served as a model for many of the revisions.  UPIA updates rules on investment decision making for trusts, including charitable trusts, and imposes additional duties on trustees for the protection of beneficiaries.  UPMIFA applies these rules and duties to charities organized as nonprofit corporations.  UPMIFA does not apply to trusts managed by corporate and other fiduciaries that are not charities, because UPIA provides management and investment standards for those trusts.

In applying principles based on UPIA to charities organized as nonprofit corporations, UPMIFA combines the approaches taken by UPIA and by the Revised Model Nonprofit Corporation Act (RMNCA).  UPMIFA reflects the fact that standards for managing and investing institutional funds are and should be the same regardless of whether a charitable organization is organized as a trust, a nonprofit corporation, or some other entity.  See  Bevis Longstreth, Modern Investment Management and the Prudent Man Rule 7 (1986) (stating “[t]he modern paradigm of prudence applies to all fiduciaries who are subject to some version of the prudent man rule, whether under ERISA, the private foundation provisions of the Code, UMIFA, other state statutes, or the common law.”); Harvey P. Dale, Nonprofit Directors and Officers — Duties and Liabilities for Investment Decisions,  1994 N.Y.U. Conf. Tax Plan. 501(c)(3) Org’s. Ch. 4.

UPMIFA provides guidance and authority to charitable organizations concerning the management and investment of funds held by those organizations, and UPMIFA imposes additional duties on those who manage and invest charitable funds.  These duties provide additional protections for charities and also protect the interests of donors who want to see their contributions used wisely.

UPMIFA modernizes the rules governing expenditures from endowment funds, both to provide stricter guidelines on spending from endowment funds and to give institutions the ability to cope more easily with fluctuations in the value of the endowment.

Finally, UPMIFA updates the provisions governing the release and modification of restrictions on charitable funds to permit more efficient management of these funds. These provisions derive from the approach taken in the Uniform Trust Code (UTC) for modifying charitable trusts.  Like the UTC provisions, UPMIFA’s modification rules preserve the historic position of the attorneys general in most states as the overseers of charities.

As under UMIFA, the new Act applies to charities organized as charitable trusts, as nonprofit corporations, or in some other manner, but the rules do not apply to funds managed by trustees that are not charities.  Thus, the Act does not apply to trusts managed by corporate or individual trustees, but the Act does apply to trusts managed by charities.

Prudent Management and Investment.

UMIFA applied the 1972 prudence standard to investment decision making.  In contrast, UPMIFA will give charities updated and more useful guidance by incorporating language from UPIA, modified to fit the special needs of charities.  The revised Act spells out more of the factors a charity should consider in making investment decisions, thereby imposing a modern, well accepted, prudence standard based on UPIA.

Among the expressly enumerated prudence factors in UPMIFA is “the preservation of the endowment fund,” a standard not articulated in UMIFA.

In addition to identifying factors that a charity must consider in making management and investment decisions, UPMIFA requires a charity and those who manage and invest its funds to:

1. Give primary consideration to donor intent as expressed in a gift instrument,

2. Act in good faith, with the care an ordinarily prudent person would exercise,

3. Incur only reasonable costs in investing and managing charitable funds,

4. Make a reasonable effort to verify relevant facts,

5. Make decisions about each asset in the context of the portfolio of investments, as part of an overall investment strategy,

6. Diversify investments unless due to special circumstances, the purposes of the fund are better served without diversification,

7. Dispose of unsuitable assets, and

8. In general, develop an investment strategy appropriate for the fund and the charity.

UMIFA did not articulate these requirements.

Thus, UPMIFA strengthens the rules governing management and investment decision making by charities and provides more guidance for those who manage and invest the funds.

Donor Intent with Respect to Endowments.

UPMIFA improves the protection of donor intent with respect to expenditures from endowments.   When a donor expresses intent clearly in a written gift instrument, the Act requires that the charity follow the donor’s instructions.  When a donor’s intent is not so expressed, UPMIFA directs the charity to spend an amount that is prudent, consistent with the purposes of the fund, relevant economic factors, and the donor’s intent that the fund continue in perpetuity.  This approach allows the charity to give effect to donor intent, protect its endowment, assure generational equity, and use the endowment to support the purposes for which the endowment was created.

Retroactivity.

Like UMIFA, UPIA, the Uniform Principal and Income Act of 1961, and the Uniform Principal and Income Act of 1997, UPMIFA applies retroactively to institutional funds created before and prospectively to institutional funds created after enactment of the statute.  Regarding the considerations motivating this treatment of the issues, see the comment to Section 4 [§ 35-10-204].

Endowment Spending.

UPMIFA improves the endowment spending rule by eliminating the concept of historic dollar value and providing better guidance regarding the operation of the prudence standard.  Under UMIFA a charity can spend amounts above historic dollar value that the charity determines to be prudent.  The Act directs the charity to focus on the purposes and needs of the charity rather than on the purposes and perpetual nature of the fund.  Amounts below historic dollar value cannot be spent.  The Drafting Committee concluded that this endowment spending rule created numerous problems and that restructuring the rule would benefit charities, their donors, and the public.  The problems include:

1. Historic dollar value fixes valuation at a moment in time, and that moment is arbitrary.  If a donor provides for a gift in the donor’s will, the date of valuation for the gift will likely be the donor’s date of death.  (UMIFA left uncertain what the appropriate date for valuing a testamentary gift was.)  The determination of historic dollar value can vary significantly depending upon when in the market cycle the donor dies.  In addition, the fund may be below historic dollar value at the time the charity receives the gift if the value of the asset declines between the date of the donor’s death and the date the asset is actually distributed to the charity from the estate.

2. After a fund has been in existence for a number of years, historic dollar value may become meaningless.  Assuming reasonable long term investment success, the value of the typical fund will be well above historic dollar value, and historic dollar value will no longer represent the purchasing power of the original gift.  Without better guidance on spending the increase in value of the fund, historic dollar value does not provide adequate protection for the fund.  If a charity views the restriction on spending simply as a direction to preserve historic dollar value, the charity may spend more than it should.

3. The Act does not provide clear answers to questions a charity faces when the value of an endowment fund drops below historic dollar value.  A fund that is so encumbered is commonly called an “underwater” fund. Conflicting advice regarding whether an organization could spend from an underwater fund has led to difficulties for those managing charities.  If a charity concluded that it could continue to spend trust accounting income until a fund regained its historic dollar value, the charity might invest for income rather than on a total-return basis.  Thus, the historic dollar value rule can cause inappropriate distortions in investment policy and can ultimately lead to a decline in a fund’s real value.  If, instead, a charity with an underwater fund continues to invest for growth, the charity may be unable to spend anything from an underwater endowment fund for several years.  The inability of a charity to spend anything from an endowment is likely to be contrary to donor intent, which is to provide current benefits to the charity.

The Drafting Committee concluded that providing clearly articulated guidance on the prudence rule for spending from an endowment fund, with emphasis on the permanent nature of the fund, would provide the best protection of the purchasing power of endowment funds.

Presumption of Imprudence.

UPMIFA includes as an optional provision a presumption of imprudence if a charity spends more than seven percent of an endowment fund in any one year.  The presumption is meant to protect against spending an endowment too quickly.  Although the Drafting Committee believes that the prudence standard of UPMIFA provides appropriate and adequate protection for endowments, the Committee provided the option for states that want to include a mechanical guideline in the statute.  A major drawback to any statutory percentage is that it is unresponsive to changes in the rate of inflation or deflation.

Modification of Restrictions on Charitable Funds.

UPMIFA clarifies that the doctrines of cy pres and deviation apply to funds held by nonprofit corporations as well as to funds held by charitable trusts.  Courts have applied trust law rules to nonprofit corporations in the past, but the Drafting Committee believed that statutory authority for applying these principles to nonprofit corporations would be helpful.  UMIFA permitted release of restrictions but left the application of cy pres uncertain.  Under UPMIFA, as under trust law, the court will determine whether and how to apply cy pres or deviation and the attorney general will receive notice and have the opportunity to participate in the proceeding.  The one addition to existing law is that UPMIFA gives a charity the authority to modify a restriction on a fund that is both old and small.  For these funds, the expense of a trip to court will often be prohibitive.  By permitting a charity to make an appropriate modification, money is saved for the charitable purposes of the charity.  Even with respect to small, old funds, however, the charity must notify the attorney general of the charity’s intended action.  Of course, if the attorney general has concerns, he or she can seek the agreement of the charity to change or abandon the modification, and if that fails, can commence a court action to enjoin it.  Thus, in all types of modification the attorney general continues to be the protector both of the donor’s intent and of the public’s interest in charitable funds.

Other Organizational Law.

For matters not governed by UPMIFA, a charitable organization will continue to be governed by rules applicable to charitable trusts, if it is organized as a trust, or rules applicable to nonprofit corporations, if it is organized as a nonprofit corporation.

Relation to Trust Law.

Although UPMIFA applies a number of rules from trust law to institutions organized as nonprofit corporations, in two respects UPMIFA creates rules that do not exist under the common law applicable to trusts.  The endowment spending rule of Section 4 [§ 35-10-204] and the provision for modifying a small, old fund in subsection (d) of Section 6 [§ 35-10-206] have no counterparts in the common law or the UTC.  The Drafting Committee believes that these rules could be useful to charities organized as trusts, and the Committee recommends conforming amendments to the UTC and the Principal and Income Act to incorporate these changes into trust law.

NOTES TO DECISIONS

1. Conditional Gift.

Where conditional gift agreements between an organization and a college did not specify the duration of the conditions, as in the name of a dormitory, and the court concluded that the conditions were limited to the life of the building itself, because the college's predecessor to the agreements presented no legal basis for permitting it to keep the gift while refusing to honor the conditions attached to it, defendant must either return the present value of the gift to plaintiff or abide by the conditions originally placed on the gift. Tenn. Div. of the United Daughters of the Confederacy v. Vanderbilt Univ., 174 S.W.3d 98, 2005 Tenn. App. LEXIS 272 (Tenn. Ct. App. 2005).

NOTES TO DECISIONS

1. Conditional Gift.

Where conditional gift agreements between an organization and a college did not specify the duration of the conditions, as in the name of a dormitory, and the court concluded that the conditions were limited to the life of the building itself, because the college's predecessor to the agreements presented no legal basis for permitting it to keep the gift while refusing to honor the conditions attached to it, defendant must either return the present value of the gift to plaintiff or abide by the conditions originally placed on the gift. Tenn. Div. of the United Daughters of the Confederacy v. Vanderbilt Univ., 174 S.W.3d 98, 2005 Tenn. App. LEXIS 272 (Tenn. Ct. App. 2005).

NOTES TO DECISIONS

1. Right to Intervene.

Where charitable gifts of 101 pieces of art were given to a university subject to a restriction that the pieces could not be sold, the university filed an ex parte declaratory judgment action seeking permission to sell two valuable pieces of the collection. The Attorney General and Reporter of Tennessee sought to intervene to represent the interests of the charitable beneficiaries, the potential charitable beneficiaries, and the people of Tennessee pursuant to the Charitable Beneficiaries Act of 1997, T.C.A. § 35-13-110, and the Uniform Trust Code, T.C.A. § 35-15-110; the Attorney General's initial motion to intervene was denied. Georgia O'Keeffe Found. (Museum) v. Fisk Univ., 312 S.W.3d 1, 2009 Tenn. App. LEXIS 434 (Tenn. Ct. App. July 14, 2009), appeal denied, Ga. O'Keeffe Found. (Museum) v. Fisk Univ., — S.W.3d —, 2010 Tenn. LEXIS 204 (Tenn. Feb. 22, 2010).

COMMENTS TO OFFICIAL TEXT

Prefatory Note:  Over the quarter century from the late 1960's the investment practices of fiduciaries experienced significant change. The Uniform Prudent Investor Act (UPIA) undertakes to update trust investment law in recognition of the alterations that have occurred in investment practice. These changes have occurred under the influence of a large and broadly accepted body of empirical and theoretical knowledge about the behavior of capital markets, often described as “modern portfolio theory.”

This Act draws upon the revised standards for prudent trust investment promulgated by the American Law Institute in its Restatement (Third) of Trusts: Prudent Investor Rule (1992) [hereinafter Restatement of Trusts 3d: Prudent Investor Rule; also referred to as 1992 Restatement].

Objectives of the Act:  UPIA makes five fundamental alterations in the former criteria for prudent investing. All are to be found in the Restatement of Trusts 3d: Prudent Investor Rule.

1. The standard of prudence is applied to any investment as part of the total portfolio, rather than to individual investments. In the trust setting the term “portfolio” embraces all the trust's assets. UPIA § 2(b)[§ 35-14-104(b)].
2. The tradeoff in all investing between risk and return is identified as the fiduciary's central consideration. UPIA § 2(b)[§ 35-14-104(b)].
3. All categoric restrictions on types of investments have been abrogated; the trustee can invest in anything that plays an appropriate role in achieving the risk/return objectives of the trust and that meets the other requirements of prudent investing. UPIA § 2(e)[§ 35-14-104(e)].
4. The long familiar requirement that fiduciaries diversify their investments has been integrated into the definition of prudent investing. UPIA § 3 [§ 35-14-105].
5. The much criticized former rule of trust law forbidding the trustee to delegate investment and management functions has been reversed. Delegation is now permitted, subject to safeguards. UPIA § 9 [§ 35-14-111].

   Literature:  These changes in trust investment law have been presaged in an extensive body of practical and scholarly writing. See especially the discussion and reporter's notes by Edward C. Halbach, Jr., in Restatement of Trusts 3d: Prudent Investor Rule (1992); see also Edward C. Halbach, Jr., Trust Investment Law in the Third Restatement, 27 Real Property, Probate & Trust J. 407 (1992); Bevis Longstreth, Modern Investment Management and the Prudent Man Rule (1986); Jeffrey N. Gordon, The Puzzling Persistence of the Constrained Prudent Man Rule, 62 N.Y.U.L. Rev. 52 (1987); John H. Langbein & Richard A. Posner, The Revolution in Trust Investment Law, 62 A.B.A.J. 887 (1976); Note, The Regulation of Risky Investments, 83 Harvard L. Rev. 603 (1970). A succinct account of the main findings of modern portfolio theory, written for lawyers, is Jonathan R. Macey, An Introduction to Modern Financial Theory (1991) (American College of Trust & Estate Counsel Foundation). A leading introductory text on modern portfolio theory is R.A. Brealey, An Introduction to Risk and Return from Common Stocks (2d ed. 1983).

   Legislation:  Most states have legislation governing trust-investment law. This Act promotes uniformity of state law on the basis of the new consensus reflected in the Restatement of Trusts 3d: Prudent Investor Rule. Some states have already acted. California, Delaware, Georgia, Minnesota, Tennessee, and Washington revised their prudent investor legislation to emphasize the total-portfolio standard of care in advance of the 1992 Restatement. These statutes are extracted and discussed in Restatement of Trusts 3d: Prudent Investor Rule § 227, reporter's note, at 60-66 (1992).

   Drafters in Illinois in 1991 worked from the April 1990 “Proposed Final Draft” of the Restatement of Trusts 3d: Prudent Investor Rule and enacted legislation that is closely modeled on the new Restatement. 760 ILCS § 5/5 (prudent investing); and § 5/5.1 (delegation) (1992). As the Comments to this Uniform Prudent Investor Act reflect, the Act draws upon the Illinois statute in several sections. Virginia revised its prudent investor act in a similar vein in 1992. Virginia Code § 26-45.1 (prudent investing) (1992). Florida revised its statute in 1993. Florida Laws, ch. 93-257, amending Florida Statutes § 518.11 (prudent investing) and creating § 518.112 (delegation). New York legislation drawing on the new Restatement and on a preliminary version of this Uniform Prudent Investor Act was enacted in 1994. N.Y. Assembly Bill 11683-B, Ch. 609 (1994), adding Estates, Powers and Trusts Law § 11-2.3 (Prudent Investor Act).

   Remedies:  This Act does not undertake to address issues of remedy law or the computation of damages in trust matters. Remedies are the subject of a reasonably distinct body of doctrine. See generally Restatement (Second) of Trusts §§ 197-226A (1959) [hereinafter cited as Restatement of Trusts 2d; also referred to as 1959 Restatement].

   Implications for Charitable and Pension Trusts:  This Act is centrally concerned with the investment responsibilities arising under the private gratuitous trust, which is the common vehicle for conditioned wealth transfer within the family. Nevertheless, the prudent investor rule also bears on charitable and pension trusts, among others. “In making investments of trust funds the trustee of a charitable trust is under a duty similar to that of the trustee of a private trust.” Restatement of Trusts 2d § 389 (1959). The Employee Retirement Income Security Act (ERISA), the federal regulatory scheme for pension trusts enacted in 1974, absorbs trust-investment law through the prudence standard of ERISA § 404(a) (1)(B), 29 U.S.C. § 1104(a). The Supreme Court has said: “ERISA's legislative history confirms that the Act's fiduciary responsibility provisions ‘codif[y] and mak[e] applicable to [ERISA] fiduciaries certain principles developed in the evolution of the law of trusts.’” Firestone Tire & Rubber Co. v. Bruch

   Other Fiduciary Relationships:  The Uniform Prudent Investor Act regulates the investment responsibilities of trustees. Other fiduciaries — such as executors, conservators, and guardians of the property — sometimes have responsibilities over assets that are governed by the standards of prudent investment. It will often be appropriate for states to adapt the law governing investment by trustees under this Act to these other fiduciary regimes, taking account of such changed circumstances as the relatively short duration of most executorships and the intensity of court supervision of conservators and guardians in some jurisdictions. The present Act does not undertake to adjust trust-investment law to the special circumstances of the state schemes for administering decedents' estates or conducting the affairs of protected persons.

   Although the Uniform Prudent Investor Act by its terms applies to trusts and not to charitable corporations, the standards of the Act can be expected to inform the investment responsibilities of directors and officers of charitable corporations. As the 1992 Restatement observes, “the duties of the members of the governing board of a charitable corporation are generally similar to the duties of the trustee of a charitable trust.” Restatement of Trusts 3d: Prudent Investor Rule § 379, Comment b , at 190 (1992). See also id. § 389, Comment b , at 190-91 (absent contrary statute or other provision, prudent investor rule applies to investment of funds held for charitable corporations).

COMMENTS TO OFFICIAL TEXT

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 [§§ 35-14-104 — 35-14-111] 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).

NOTES TO DECISIONS

1. No Breach.

There was no breach of duty on the part of a trustee based on a lack of diversification because written documentation had been executed electing an in-kind distribution of the stocks in the estate and which acknowledged that the trustee would continue to hold “these securities” for a son's benefit; moreover, a family had owned these stocks for years, and they continued to pay large dividends to the trust during the administration period. Glass v. Suntrust Bank, 523 S.W.3d 61, 2016 Tenn. App. LEXIS 305 (Tenn. Ct. App. May 4, 2016), appeal denied, — S.W.3d —, 2016 Tenn. LEXIS 710 (Tenn. Sept. 26, 2016).

COMMENTS TO OFFICIAL TEXT

Section 2 [§ 35-14-104] is the heart of the Act. Subsections (a), (b), and (c) are patterned loosely on the language of the Restatement of Trusts 3d: Prudent Investor Rule § 227 (1992), and on the 1991 Illinois statute, 760 § ILCS 5/5a (1992). Subsection (f) is derived from Uniform Probate Code § 7-302 (1969).

Objective Standard:  Subsection (a) of this Act [§ 35-14-104(a)] carries forward the relational and objective standard made familiar in the Amory  case, in earlier prudent investor legislation, and in the Restatements. Early formulations of the prudent person rule were sometimes troubled by the effort to distinguish between the standard of a prudent person investing for another and investing on his or her own account. The language of subsection (a), by relating the trustee's duty to “the purposes, terms, distribution requirements, and other circumstances of the trust,” should put such questions to rest. The standard is the standard of the prudent investor similarly situated.

Portfolio Standard:  Subsection (b) emphasizes the consolidated portfolio standard for evaluating investment decisions. An investment that might be imprudent standing alone can become prudent if undertaken in sensible relation to other trust assets, or to other nontrust assets. In the trust setting the term “portfolio” embraces the entire trust estate.

Risk and Return:  Subsection (b) also sounds the main theme of modern investment practice, sensitivity to the risk/return curve. See generally the works cited in the Prefatory Note to this Act, under “Literature.” Returns correlate strongly with risk, but tolerance for risk varies greatly with the financial and other circumstances of the investor, or in the case of a trust, with the purposes of the trust and the relevant circumstances of the beneficiaries. A trust whose main purpose is to support an elderly widow of modest means will have a lower risk tolerance than a trust to accumulate for a young scion of great wealth.

Subsection (b) of this Act [§ 35-14-104(b)] 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 [26 U.S.C. § 1014] for low-basis assets, have traditionally been exceptionally important in estate planning for affluent persons. Under the present recognition rules of the federal income tax, taxable investors, including trust beneficiaries, are in general best served by an investment strategy that minimizes the taxation incident to portfolio turnover. See generally Robert H. Jeffrey & Robert D. Arnott, Is Your Alpha Big Enough to Cover Its Taxes?, Journal of Portfolio Management 15 (Spring 1993).

Another familiar example of how tax considerations bear upon trust investing: In a regime of pass-through taxation, it may be prudent for the trust to buy lower yielding tax-exempt securities for high-bracket taxpayers, whereas it would ordinarily be imprudent for the trustees of a charitable trust, whose income is tax exempt, to accept the lowered yields associated with tax-exempt securities.

When tax considerations affect beneficiaries differently, the trustee's duty of impartiality requires attention to the competing interests of each of them.

Subsection (c)(8), allowing the trustee to take into account any preferences of the beneficiaries respecting heirlooms or other prized assets, derives from the Illinois act, 760 ILCS § 5/5(a)(4) (1992).

Duty To Monitor:  Subsections (a) through (d) apply both to investing and managing trust assets. “Managing” embraces monitoring, that is, the trustee's continuing responsibility for oversight of the suitability of investments already made as well as the trustee's decisions respecting new investments.

Duty To Investigate:  Subsection (d) carries forward the traditional responsibility of the fiduciary investor to examine information likely to bear importantly on the value or the security of an investment — for example, audit reports or records of title. E.g., Estate of Collins, 72 Cal. App. 3d 663, 139 Cal. Rptr. 644 (1977) (trustees lent on a junior mortgage on unimproved real estate, failed to have land appraised, and accepted an unaudited financial statement; held liable for losses).

Abrogating Categoric Restrictions:  Subsection 2(e) [§ 35-14-104(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 [§ 35-14-104(e)] 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) [§ 35-14-104(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) [§ 35-14-104(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 [§ 35-14-107]. For example, were the trustee to invest in a second mortgage on a piece of real property owned by the trustee, the investment would be wrongful on account of the trustee's breach of the duty to abstain from self-dealing, even though the investment would no longer automatically offend the former categoric restriction against fiduciary investments in junior mortgages.

Professional Fiduciaries:  The distinction taken in subsection (f) between amateur and professional trustees is familiar law. The prudent investor standard applies to a range of fiduciaries, from the most sophisticated professional investment management firms and corporate fiduciaries, to family members of minimal experience. Because the standard of prudence is relational, it follows that the standard for professional trustees is the standard of prudent professionals; for amateurs, it is the standard of prudent amateurs. Restatement of Trusts 2d § 174 (1959) provides: “The trustee is under a duty to the beneficiary in administering the trust to exercise such care and skill as a man of ordinary prudence would exercise in dealing with his own property; and if the trustee has or procures his appointment as trustee by representing that he has greater skill than that of a man of ordinary prudence, he is under a duty to exercise such skill.” Case law strongly supports the concept of the higher standard of care for the trustee representing itself to be expert or professional. See Annot., Standard of Care Required of Trustee Representing Itself to Have Expert Knowledge or Skill, 91 A.L.R. 3d 904 (1979) & 1992 Supp. at 48-49.

The Drafting Committee declined the suggestion that the Act should create an exception to the prudent investor rule (or to the diversification requirement of Section 3 [§ 35-14-105]) 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 [§ 35-14-103(b)] 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).

NOTES TO DECISIONS

1. No Breach.

There was no breach of duty on the part of a trustee based on a lack of diversification because written documentation had been executed electing an in-kind distribution of the stocks in the estate and which acknowledged that the trustee would continue to hold “these securities” for a son's benefit; moreover, a family had owned these stocks for years, and they continued to pay large dividends to the trust during the administration period. Glass v. Suntrust Bank, 523 S.W.3d 61, 2016 Tenn. App. LEXIS 305 (Tenn. Ct. App. May 4, 2016), appeal denied, — S.W.3d —, 2016 Tenn. LEXIS 710 (Tenn. Sept. 26, 2016).

COMMENTS TO OFFICIAL TEXT

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 [§ 35-14-105], 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…”

NOTES TO DECISIONS

1. When Duty Arises.

Grant of summary judgment in favor of the bank in the decedent's daughter's action against it was appropriate because the bank's duty to assert control over the assets in question did not surface until a reasonable time after receiving trust assets. Wood v. Lowery, 238 S.W.3d 747, 2007 Tenn. App. LEXIS 119 (Tenn. Ct. App. Mar. 6, 2007), appeal denied, — S.W.3d —, 2007 Tenn. LEXIS 695 (Tenn. Aug. 13, 2007).

COMMENTS TO OFFICIAL TEXT

Section 4 [§ 35-14-106], 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 [§ 35-14-104] 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.

COMMENTS TO OFFICIAL TEXT

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 [§ 35-14-106] derives from Restatement of Trusts 3d: Prudent Investor Rule § 170 (1992), which makes minute changes in Restatement of Trusts 2d § 170 (1959).

The concept that the duty of prudence in trust administration, especially in investing and managing trust assets, entails adherence to the duty of loyalty is familiar. ERISA § 404(a)(1)(B), 29 U.S.C. § 1104(a)(1)(B), extracted in the Comment to Section 1 of this Act [§ 35-14-103], effectively merges the requirements of prudence and loyalty. A fiduciary cannot be prudent in the conduct of investment functions if the fiduciary is sacrificing the interests of the beneficiaries.

The duty of loyalty is not limited to settings entailing self-dealing or conflict of interest in which the trustee would benefit personally from the trust. “The trustee is under a duty to the beneficiary in administering the trust not to be guided by the interest of any third person. Thus, it is improper for the trustee to sell trust property to a third person for the purpose of benefitting the third person rather than the trust.” Restatement of Trusts 2d § 170, comment q , at 371 (1959).

No form of so-called “social investing” is consistent with the duty of loyalty if the investment activity entails sacrificing the interests of trust beneficiaries — for example, by accepting below-market returns — in favor of the interests of the persons supposedly benefitted by pursuing the particular social cause. See, e.g., John H. Langbein & Richard Posner, Social Investing and the Law of Trusts, 79 Michigan L. Rev. 72, 96-97 (1980) (collecting authority). For pension trust assets, see generally Ian D. Lanoff, The Social Investment of Private Pension Plan Assets: May it Be Done Lawfully under ERISA?, 31 Labor L.J. 387 (1980). Commentators supporting social investing tend to concede the overriding force of the duty of loyalty. They argue instead that particular schemes of social investing may not result in below-market returns. See, e.g., Marcia O'Brien Hylton, “Socially Responsible” Investing: Doing Good Versus Doing Well in an Inefficient Market, 42 American U.L. Rev. 1 (1992). In 1994 the Department of Labor issued an Interpretive Bulletin reviewing its prior analysis of social investing questions and reiterating that pension trust fiduciaries may invest only in conformity with the prudence and loyalty standards of ERISA §§ 403-404. Interpretive Bulletin 94-1, 59 Fed. Regis. 32606 (Jun. 22, 1994), to be codified as 29 CFR § 2509.94-1. The Bulletin reminds fiduciary investors that they are prohibited from “subordinat[ing] the interests of participants and beneficiaries in their retirement income to unrelated objectives.”

COMMENTS TO OFFICIAL TEXT

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 [§ 35-14-108] derives from Restatement of Trusts 2d § 183 (1959); see also id., § 232. Multiple beneficiaries may be beneficiaries in succession (such as life and remainder interests) or beneficiaries with simultaneous interests (as when the income interest in a trust is being divided among several beneficiaries).

The trustee's duty of impartiality commonly affects the conduct of investment and management functions in the sphere of principal and income allocations. This Act prescribes no regime for allocating receipts and expenses. The details of such allocations are commonly handled under specialized legislation, such as the Revised Uniform Principal and Income Act (1962) (which is presently under study by the Uniform Law Commission with a view toward further revision).

COMMENTS TO OFFICIAL TEXT

Wasting beneficiaries' money is imprudent. In devising and implementing strategies for the investment and management of trust assets, trustees are obliged to minimize costs.

The language of Section 7 [§ 35-14-109] 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).

COMMENTS TO OFFICIAL TEXT

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.

COMMENTS TO OFFICIAL TEXT

This section of the Act reverses the much-criticized rule that forbad trustees to delegate investment and management functions. The language of this section is derived from Restatement of Trusts 3d: Prudent Investor Rule § 171 (1992), discussed infra, and from the 1991 Illinois act, 760 ILCS § 5/5.1(b), (c) (1992).

Former Law:  The former nondelegation rule survived into the 1959 Restatement: “The trustee is under a duty to the beneficiary not to delegate to others the doing of acts which the trustee can reasonably be required personally to perform.” The rule put a premium on the frequently arbitrary task of distinguishing discretionary functions that were thought to be nondelegable from supposedly ministerial functions that the trustee was allowed to delegate. Restatement of Trusts 2d § 171 (1959).

The Restatement of Trusts 2d admitted in a comment that “There is not a clear-cut line dividing the acts which a trustee can properly delegate from those which he cannot properly delegate.” Instead, the comment directed attention to a list of factors that “may be of importance: (1) the amount of discretion involved; (2) the value and character of the property involved; (3) whether the property is principal or income; (4) the proximity or remoteness of the subject matter of the trust; (5) the character of the act as one involving professional skill or facilities possessed or not possessed by the trustee himself.” Restatement of Trusts 2d § 171, comment d  (1959). The 1959 Restatement further said: “A trustee cannot properly delegate to another power to select investments.” Restatement of Trusts 2d § 171, comment h  (1959).

For discussion and criticism of the former rule see William L. Cary & Craig B. Bright, The Delegation of Investment Responsibility for Endowment Funds, 74 Columbia L. Rev. 207 (1974); John H. Langbein & Richard A. Posner, Market Funds and Trust-Investment Law, 1976 American Bar Foundation Research J. 1, 18-24.

The Modern Trend To Favor Delegation:  The trend of subsequent legislation, culminating in the Restatement of Trusts 3d: Prudent Investor Rule, has been strongly hostile to the nondelegation rule. See John H. Langbein, Reversing the Nondelegation Rule of Trust-Investment Law, 59 Missouri L. Rev. 105 (1994).

The Delegation Rule of the Uniform Trustee Powers Act:  The Uniform Trustee Powers Act (1964) effectively abrogates the nondelegation rule. It authorizes trustees “to employ persons, including attorneys, auditors, investment advisors, or agents, even if they are associated with the trustee, to advise or assist the trustee in the performance of his administrative duties; to act without independent investigation upon their recommendations; and instead of acting personally, to employ one or more agents to perform any act of administration, whether or not discretionary…” Uniform Trustee Powers Act § 3(24), 7B Uniform Laws Ann. 743 (1985). The Act has been enacted in 16 states, see “Record of Passage of Uniform and Model Acts as of September 30, 1993,” 1993-94 Reference Book of Uniform Law Commissioners (unpaginated, following page 111) (1993).

UMIFA's Delegation Rule:  The Uniform Management of Institutional Funds Act (1972) (UMIFA), authorizes the governing boards of eleemosynary institutions, who are trustee-like fiduciaries, to delegate investment matters either to a committee of the board or to outside investment advisors, investment counsel, managers, banks, or trust companies. UMIFA § 5, 7A Uniform Laws Ann. 705 (1985). UMIFA has been enacted in 38 states, see “Record of Passage of Uniform and Model Acts as of September 30, 1993,” 1993-94 Reference Book of Uniform Law Commissioners (unpaginated, following page 111) (1993).

ERISA's Delegation Rule:  The Employee Retirement Income Security Act of 1974, the federal statute that prescribes fiduciary standards for investing the assets of pension and employee benefit plans, allows a pension or employee benefit plan to provide that “authority to manage, acquire or dispose of assets of the plan is delegated to one or more investment managers.…” ERISA § 403(a)(2), 29 U.S.C. § 1103(a)(2). Commentators have explained the rationale for ERISA's encouragement of delegation:

ERISA … Invites the dissolution of unitary trusteeship … ERISA's fractionation of traditional trusteeship reflects the complexity of the modern pension trust. Because millions, even billions of dollars can be involved, great care is required in investing and safekeeping plan assets. Administering such plans-computing and honoring benefit entitlements across decades of employment and retirement-is also a complex business … Since, however, neither the sponsor nor any other single entity has a comparative advantage in performing all these functions, the tendency has been for pension plans to use a variety of specialized providers. A consulting actuary, a plan administration firm, or an insurance company may oversee the design of a plan and arrange for processing benefit claims. Investment industry professionals manage the portfolio (the largest plans spread their pension investments among dozens of money management firms).John H. Langbein & Bruce A. Wolk, Pension and Employee Benefit Law 496 (1990).

The Delegation Rule of the 1992 Restatement:  The Restatement of Trusts 3d: Prudent Investor Rule (1992) repeals the nondelegation rule of Restatement of Trusts 2d § 171 (1959), extracted supra, and replaces it with substitute text that reads:

§ 171. Duty with Respect to Delegation. A trustee has a duty personally to perform the responsibilities of trusteeship except as a prudent person might delegate those responsibilities to others. In deciding whether, to whom, and in what manner to delegate fiduciary authority in the administration of a trust, and thereafter in supervising agents, the trustee is under a duty to the beneficiaries to exercise fiduciary discretion and to act as a prudent person would act in similar circumstances.

Restatement of Trusts 3d: Prudent Investor Rule § 171 (1992). The 1992 Restatement integrates this delegation standard into the prudent investor rule of section 227, providing that “the trustee must … 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 [§ 35-14-111] is designed to strike the appropriate balance between the advantages and the hazards of delegation. Section 9 [§ 35-14-111] authorizes delegation under the limitations of subsections (a) and (b). Section 9(a) [§ 35-14-111(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 [§ 35-4-111(c)] exonerates the trustee from personal responsibility for the agent's conduct when the delegation satisfies the standards of subsection 9(a) [§ 35-14-111(a)], subsection 9(b) [§ 35-14-111(a)] 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 [§ 35-14-109] 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.

COMMENTS TO OFFICIAL TEXT

This provision is taken from the Illinois act, 760 ILCS § 5/5(d) (1992), and is meant to facilitate incorporation of the Act by means of the formulaic language commonly used in trust instruments.

35-15-101. Short title.

This chapter shall be known and may be cited as the “Tennessee Uniform Trust Code.”

Acts 2004, ch. 537, § 2.

Compiler's Notes. Acts 2004, ch. 537, § 95 provided that the Tennessee Code Commission is requested to publish in the Tennessee Code Annotated the revised official comments that are filed with the executive secretary of the Tennessee Code Commission within 30 days of July 1, 2004.

The 2013 Restated Comments to Official Text reflect the input of various groups as well as the comments provided by the Uniform Law Commission.

Law Reviews.

Can't Trust a Trust? Decant (Dan W. Holbrook), 40 No. 8 Tenn. B.J. 20 (2004).

Exploring the Tennessee Uniform Trust Code (C. Shawn O'Donnell), 38 U. Mem. L. Rev. 489 (2008).

Symposium: The Role of Federal Law in Private Wealth Transfer: A Fresh Look at State Asset Protection Trust Statutes, 67 Vand. L. Rev. 1741 (2014).

Symposium: The Role of Federal Law in Private Wealth Transfer: Comment, Federalizing Principles of Donative Intent and Unanticipated Circumstances, 67 Vand. L. Rev. 1931 (2014).

Symposium: The Role of Federal Law in Private Wealth Transfer: Comment, Pro and Con (Law): Considering the Irrevocable Nongrantor Trust Technique, 67 Vand. L. Rev. 1999 (2014).

Symposium: The Role of Federal Law in Private Wealth Transfer: Strange Bedfellows: The Federal Constitution, Out-of-State Nongrantor Accumulation Trusts, and the Complete Avoidance of State Income Taxation, 67 Vand. L. Rev. 1945 (2014).

Symposium: The Role of Federal Law in Private Wealth Transfer: Unconstitutional Perpetual Trusts, 67 Vand. L. Rev. 1769 (2014).

Tennessee Uniform Trust Code: New Formulation for a Trusty Tool (Marshall H. Peterson), 41 No. 1 Tenn. B.J. 24 (2005).

Where There's a Will: The Report of My Practice's Death Was an Exaggeration: The Healthy Prognosis for Estate Planning in Tennessee (Eddy R. Smith), 48 Tenn. B.J. 32 (2012).

35-15-102. Scope.

This chapter applies to express trusts, charitable or noncharitable, and trusts created pursuant to a statute, judgment, or decree that requires the trust to be administered in the manner of an express trust.

Acts 2004, ch. 537, § 3.

35-15-103. Chapter definitions.

As used in this chapter, unless the context otherwise requires:

1. “Action” with respect to an act of a trustee, includes a failure to act;
2. “Another state” or “other state” means any state other than this state;
3. “Ascertainable standard” means a standard relating to an individual’s health, education, support or maintenance within the meaning of § 2041(b)(1)(A) or § 2514(c)(1) of the Internal Revenue Code of 1986 (U.S.C. §   2041(b)(1)(A) and § 2514(c)(1)), as in effect on July 1, 2004, or as later amended;
4. “Beneficial interest” means a distribution interest or a remainder interest; provided, however, that a beneficial interest specifically excludes a power of appointment or a power reserved by a settlor;
5. “Beneficiary” means a person that has a present or future beneficial interest in a trust, vested or contingent;
6. “Charitable trust” means a trust, or portion of a trust, created for a charitable purpose described in § 35-15-405(a);
7. “Conservator” has the same meaning as in § 34-1-101;
8. “Directed trust” means a trust where either through the terms of the trust, an  agreement of the qualified beneficiaries or a court order, one or more persons are given the  authority to direct or consent to a fiduciary's actual or proposed investment decision,  distribution decision, or any other decision of the fiduciary;
9. “Distribution beneficiary” means a beneficiary who is an eligible distributee or permissible distributee of the income or principal of a trust;
10. “Distribution interest” means:
    1. An interest, other than a remainder interest, held by a distribution beneficiary under a trust and may be a current distribution interest or a future distribution interest;
    2. Relative to a distribution interest:
       1. Neither the existence of a distribution interest or the provision of services by a spouse in that spouse’s capacity as a fiduciary of the trust creating the distribution interest is relevant in the equitable division of marital property;
       2. None of the factors in subdivision (10)(B)(i) or the exercise or non-exercise of any power or discretion by a spouse in that spouse’s capacity as a fiduciary of the trust creating the distribution interest (even if that spouse is also a beneficiary of the trust creating the distribution interest) are relevant to, indicative of or effect the transmutation or other conversion of separate property to community property;
       3. The expending of any community funds by a spouse in that spouse’s capacity as a fiduciary of the trust creating the distribution interest relative to the operation or maintenance of property related to a distribution interest is not relevant to or indicative of, and does not effect a transmutation or other conversion of separate property to community property;
       4. Any funds expended pursuant to subdivision (10)(B)(iii) shall be valid debts of the trust and shall be repaid to the community with appropriate interest;
    3. A distribution interest is classified as either a mandatory interest, a support interest or a discretionary interest; and although not the exclusive means to create each such respective distribution interest, absent clear and convincing evidence to the contrary, use of the example language accompanying the following definitions of each such respective distribution interest results in the indicated classification of distribution interest:
       1. A mandatory interest means a distribution interest in which the timing of any distribution must occur within one (1) year from the date the right to the distribution arises and the trustee has no discretion in determining whether a distribution shall be made or the amount of such distribution; example distribution language indicating a mandatory interest includes, but is not limited to:

1. All income shall be distributed to a named beneficiary; or
2. One hundred thousand dollars ($100,000) a year shall be distributed to a named beneficiary;
3. The trustee may make distributions for health, education, maintenance, and support;
4. The trustee shall make distributions for health, education, maintenance, and support; provided, however, that the trustee may exclude any of the beneficiaries or may make unequal distributions among them; or
5. The trustee may make distributions for health, education, maintenance, support, comfort, and general welfare;
6. A discretionary interest may also be evidenced by:
   1. Permissive distribution language such as “may make distributions”;
   2. Mandatory distribution language that is negated by the discretionary distribution language contained in the trust such as “the trustee shall make distributions in the trustee’s sole and absolute discretion”;
7. An interest that includes mandatory distribution language such as “shall” but is subsequently qualified by discretionary distribution language shall be classified as a discretionary interest and not as a support or a mandatory interest;

   are predeceased or are otherwise not in existence at the time all or any part of the trust terminates;

A support interest means a distribution interest that is not a mandatory interest but still contains mandatory language such as “shall make distributions” and is coupled with a standard capable of judicial interpretation; example distribution language indicating a support interest includes, but is not limited to:

The trustee shall make distributions for health, education, maintenance, and support;

Notwithstanding the distribution language used, if a trust instrument containing such distribution language specifically provides that the trustee exercise discretion in a reasonable manner with regard to a discretionary interest, then notwithstanding any other provision of this subdivision (10) defining distribution interests, the distribution interest shall be classified as a support interest;

A discretionary interest means any interest that is not a mandatory or a support interest and is any distribution interest where a trustee has any discretion to make or withhold a distribution; example distribution language indicating a discretionary interest includes, but is not limited to:

The trustee may, in the trustee's sole and absolute discretion, make distributions for health, education, maintenance, and support;

The trustee, in the trustee’s sole and absolute discretion, shall make distributions for health, education, maintenance, and support;

(i)  To the extent a trust contains distribution language indicating the existence of any combination of a mandatory, support and discretionary interest, that combined interest of the trust shall be divided and treated separately as follows:

The trust shall be a mandatory interest only to the extent of the mandatory distribution language;

The trust shall be a support interest only to the extent of such support distribution language; and

The remaining trust property shall be held as a discretionary interest;

For purposes of this subdivision (10)(D), a support interest that includes mandatory distribution language such as “shall” but is subsequently qualified by discretionary distribution language, shall be classified as a discretionary interest and not as a support interest;

“Environmental law” means a federal, state, or local law, rule, regulation, or ordinance relating to protection of the environment;

“Excluded fiduciary” means any trustee, trust advisor, or trust protector to the extent that, under the terms of a trust, an agreement of the qualified beneficiaries, or court order:

The trustee, trust advisor, or trust protector is excluded from exercising a power, or is relieved of a duty; and

The power or duty is granted or reserved to another person;

“Fiduciary” means:

A trustee, conservator, guardian, agent under any agency agreement or other instrument, an executor, personal representative or administrator of a decedent’s estate, or any other party, including a trust advisor or a trust protector, who is acting in a fiduciary capacity for any person, trust, or estate;

Fiduciary also means a trustee as defined in § 35-14-102;

For purposes of subdivision (13)(A), an agency agreement includes but is not limited to, any agreement under which any delegation is made, either pursuant to § 35-15-807 or by anyone holding a power or duty pursuant to part 12;

For purposes of the definition of fiduciary in this subdivision (13), fiduciary does not mean any person who is an excluded fiduciary as such is defined in this section;

“Foreign” or “foreign country” means any jurisdiction, subdivision, territory or possession thereof, other than that of the United States of America or of a state;

“Foreign jurisdiction” means any jurisdiction, subdivision, territory or possession thereof, other than this state;

“Guardian” has the same meaning as in § 34-1-101. The term does not include a guardian ad litem;

“Interests of the beneficiaries” means the beneficial interests provided in the terms of the trust;

“Internal Revenue Code” means the Internal Revenue Code of 1986 (26 U.S.C.), as in effect on July 1, 2004, or as later amended;

“Jurisdiction” with respect to a geographic area, includes a state or country;

“Person” means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, public corporation, or any other legal or commercial entity;

“Power of appointment” means:

An inter vivos or testamentary power to direct the disposition of trust property, other than a distribution decision made by a trustee or other fiduciary to a beneficiary;

Powers of appointment are held by the person to whom such power has been given, and not by a settlor in that person’s capacity as settlor;

“Power of withdrawal” means a presently exercisable general power of appointment other than a power:

Exercisable by a trustee and limited by an ascertainable standard; or

Exercisable by another person only upon consent of the trustee or a person holding an adverse interest;

“Property” means anything that may be the subject of ownership, whether real or personal, legal or equitable, or any interest therein;

“Qualified beneficiary” means a beneficiary who, assuming the nonexercise of all powers of appointment and the nonoccurrence of any event not reasonably expected to occur, on the date the beneficiary’s qualification is determined:

Is a distributee or permissible distributee of trust income or principal;

Would be a distributee or permissible distributee of trust income or principal if the interests of the distributees described in subdivision (24)(A) terminated on that date; or

Would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date;

Notwithstanding any other provisions of this subdivision (24), no ultimate beneficiary or potential ultimate beneficiary shall be a qualified beneficiary;

In determining who is or may be an ultimate beneficiary, all of the following shall be taken into consideration:

The terms of the trust naming any ultimate beneficiary or potential ultimate beneficiary and the intention of the settlor relative to any such beneficiary as expressed in such terms; and

Any terms or provisions related to the exercise of any power by any person naming any ultimate beneficiary or potential ultimate beneficiary and the intention of the person exercising such power relative to any such beneficiary as expressed in such terms or provisions;

Determined as provided in subdivision (24)(D)(i), an ultimate beneficiary or potential ultimate beneficiary is any beneficiary who the settlor or power holder did not reasonably anticipate would take any interest upon termination of all or any part of a trust absent all other beneficiaries or members of classes of beneficiaries named in the trust instrument or in the exercise of the power, respectively, predeceasing or otherwise not being in existence at the time at which such trust or part thereof terminates;

By way of example and not in limitation of this subdivision (24)(D), an ultimate beneficiary is a person or persons often included in a trust instrument or under the exercise of a power to take an interest in a trust at the time all or any part of such trust terminates only in a case where all other named beneficiaries or classes of beneficiaries that have or had an affinity through either familial connection or friendship with any of:

The settlor;

The person holding any power; or

Any prior beneficiary or potential beneficiary of the trust;

“Reach” means, with respect to a distribution interest or any power held by anyone relative to a trust, to subject such distribution interest or such power to a judgment, decree, garnishment, attachment, execution, levy, creditor’s bill or other legal, equitable, or administrative process, relief, or control of any court, tribunal, agency, or other entity that, by power of law, is provided with powers or jurisdiction similar to those described in this subdivision (25);

“Remainder interest” means an interest under which a trust beneficiary will receive property held by a trust outright at some time during the future; relative to a remainder interest:

Neither the existence of a remainder interest or the provision of services by a spouse in that spouse’s capacity as a fiduciary of the trust creating the remainder interest is relevant in the equitable division of marital property;

None of the factors in subdivision (26)(A) or the exercise or non-exercise of any power or discretion by a spouse in that spouse’s capacity as a fiduciary of the trust creating the remainder interest (even if that spouse is also a beneficiary of the trust creating the remainder interest) are relevant to, indicative of or effect the transmutation or other conversion of separate property to community property;

The expending of any community funds by a spouse in that spouse’s capacity as a fiduciary of the trust creating the remainder interest relative to the operation or maintenance of property related to a remainder interest is not relevant to or indicative of, and does not effect a transmutation or other conversion of separate property to community property;

Any funds expended pursuant to subdivision (26)(C) shall be valid debts of the trust and shall be repaid to the community with appropriate interest;

“Reserved power” means a power held by a settlor;

“Revocable” as applied to a trust, means revocable by the settlor without the consent of the trustee or a person holding an adverse interest;

“Settlor” means a person, including a testator, who creates, or contributes property to, a trust. If more than one (1) person creates or contributes property to a trust, each person is a settlor of the portion of the trust property attributable to that person’s contribution except to the extent another person has the power to revoke or withdraw that portion;

“Spendthrift provision” means a term of a trust which restrains both voluntary and involuntary transfer of a beneficiary's interest;

“State” means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States. The term includes an Indian tribe or band recognized by federal law or formally acknowledged by a state;

“Successors in interest” means 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 at law;

“Terms of a trust” means the manifestation of the settlor’s intent regarding a trust’s provisions as expressed in the trust instrument or as may be established by other evidence that would be admissible in a judicial proceeding;

“This state” means the state of Tennessee;

“Trust advisor” means any person described in § 35-15-1201(a);

“Trust instrument” means an instrument executed by the settlor that contains terms of the trust, including any amendments thereto;

“Trust protector” means any person described in § 35-15-1201(a); and

“Trustee” includes an original, additional, and successor trustee, and a cotrustee.

Acts 2004, ch. 537, § 4; 2007, ch. 24, §§ 1-3; 2007, ch. 477, § 1; 2013, ch. 390, §§ 3, 49; 2014, ch. 829, § 5.

Compiler's Notes. Acts 2013, ch. 390, § 55 provided that: (b) Except as otherwise provided in the act, on July 1, 2013:

1. The act applies to all trusts created before, on, or after July 1, 2013;
2. The act applies to all judicial proceedings concerning trusts commenced on or after July 1, 2013;
3. The act applies to judicial proceedings concerning trusts commenced before July 1, 2013, unless the court finds that application of a particular provision of the act would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of the act does not apply and the superseded law applies;
4. Any rule of construction or presumption provided in the act applies to trust instruments executed before July 1, 2013, unless there is a clear and express indication of a contrary intent in the terms of the trust; and
5. An act done before July 1, 2013, is not affected by the act.

   1. Interest of Beneficiaries.

   Trustee did not breach a duty under this statute by failing to convey personal assets to a trust in order to avoid probate administration and expenses; it was not shown that the trustee administered the trust in a manner that was inconsistent with the beneficial interest of the beneficiaries. Glass v. Suntrust Bank, 523 S.W.3d 61, 2016 Tenn. App. LEXIS 305 (Tenn. Ct. App. May 4, 2016), appeal denied, — S.W.3d —, 2016 Tenn. LEXIS 710 (Tenn. Sept. 26, 2016).

   Section Comment.

   “Action.” A definition of “action” is included for drafting convenience, to avoid having to clarify in the numerous places in the Tennessee Uniform Trust Code where reference is made to an “action” by the trustee that the term includes a failure to act.

   “Another state or “other state” The Tennessee Uniform Trust Code has always had a definition of “state.” A definition of “another state” or “other state,” along with definitions of “foreign” or “foreign country, “foreign jurisdiction” and “this state” were added by the 2013 amendments to the Tennessee Uniform Trust Code. Throughout the Tennessee trust statutes and comments thereto, all of such terms have the meaning ascribed to them respectively in T.C.A. § 35-15-103. Statutory definitions of these terms are included for multiple reasons, including but not limited to:

   Having such statutorily defined terms provides drafting convenience and avoids having to clarify in a document any subject covered by such terms.

   The Tennessee Uniform Trust Code contains detailed provisions regarding governing law. Under such provisions, neither the laws of any foreign country nor any judgment or similar holding of any foreign country’s tribunals are recognized or enforceable by this state. Therefore, such foreign law and holdings have no force or effect over a trust (or distribution therefrom) when that trust is governed by Tennessee law.

   The Tennessee Uniform Trust Code also has detailed provisions governing place of administration of a trust and the nexus required to determine such principal place of administration. These provisions regarding nexus also impact the ability for one to make a state jurisdiction provision in a trust. Including the above statutorily defined terms facilitates all such above provisions, as well as other provisions throughout the Tennessee Uniform Trust Code.

   From time to time the parties to or that have an interest in a trust, the transactions and other matters pertaining to a trust, as well as the provisions of the Tennessee Uniform Trust Code in general, touch more than one domestic jurisdiction or both domestic and foreign jurisdictions. In such cases, having such statutorily defined terms facilitates determination of whether Tennessee law alone applies, or due to constitutional limitations the law of another state or of the United States must be considered. Such statutorily defined terms also facilitate a clear demarcation between limitations or requirements of the U.S. constitution and the chimera and nonbinding nature of comity relative to the laws and holdings of a foreign country.

   Finally, the comments under “foreign” or “foreign country,” under “foreign jurisdiction,” as well as under “this state,” are incorporated herein by reference. Added by the 2013 amendments to Tennessee Uniform Trust Code

   “Ascertainable standard.” The 2007 amendments to the Tennessee Uniform Trust Code added a definition of “ascertainable standard,” thereby making it apply generally throughout the Code.

   “Beneficial interest.” Under the Tennessee Uniform Trust Code, a beneficial interest must either be a distribution interest or a remainder interest as such are defined in T.C.A. § 35-15-103. The Tennessee trust statutes do not provide for any other form or type of beneficial interest. See below for comments regarding distribution interests and remainder interests.

   A beneficial interest does not include either: a power of appointment or a reserved power as such are defined in T.C.A. § 35-15-103. See below for comments regarding powers of appointment and reserved powers. For this reason, under the Tennessee Uniform Trust Code, the holder of a power of appointment is not a beneficiary, such being a divergence from the Uniform Trust Code. Added by the 2013 amendments to Tennessee Uniform Trust Code.

   “Beneficiary.” This term refers only to a beneficiary of a trust as such is defined in the Tennessee Uniform Trust Code. In addition to living and ascertained individuals, beneficiaries may be unborn or unascertained. Pursuant to T.C.A. § 35-15-402 a trust must have a beneficiary unless the trust is: a charitable trust; for the care of an animal; or for a noncharitable purpose. Moreover, under T.C.A. § 35-15-402, a trust that requires a beneficiary 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 § 48 cmt. c (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts § 126  cmt. c (1959).

   Tennessee law is consistent with the common law of trusts that the holder of a power of appointment is not considered a trust beneficiary. Contrastingly, ULC - NCCUSL’s position in the Uniform Trust Code, which provides that the holder of a power of appointment is classified as a beneficiary, is in conflict with both Tennessee law and common law in general.

   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) [T.C.A. § 35-15-405(a) ]), persons receiving distributions from a charitable trust are not beneficiaries as that term is de-fined in the Tennessee Uniform Trust Code. Notwithstanding the above, a charitable organization expressly designated to receive distributions under the terms of a charitable trust are granted the rights of a qualified beneficiary under the Tennessee Uniform Trust Code, but only if such charitable organization otherwise holds beneficial interests sufficient to satisfy the requirements set forth in T.C.A. § 35-15-110.

   For reasons similar to those applying to charitable trusts, neither any animal under a trust for the care of an animal as provided by T.C.A. § 35-15-408, nor anyone (person, entity or otherwise) benefiting from or having an interest in the purpose for which a trust is established under T.C.A. § 35-15-409 are beneficiaries as that term is defined in the Tennessee Uniform Trust Code. Moreover, relative to trusts controlled by T.C.A. §§ 35-15-408 and 35-15-409, there are no qualified beneficiaries. Nevertheless, both such Tennessee statutes provide mechanisms under which one or more persons, or a court, can enforce such types of trusts.

   The Tennessee 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 § 43 (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts §§ 116 -119 (1959). Under the Tennessee Uniform Trust Code, the extent of a beneficiary's interest is determined solely by the settlor's intent to the greatest extent constitutionally allowable. Unlike in the Uniform Trust Code and the Restatement (Third) of Trusts, the Tennessee Uniform Trust Code does not require that such intent be limited by public policy. See  Restatement (Third) of Trusts § 49 (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts §§ 127 -128 (1959); but to the extent either of such restatements are in conflict with Tennessee law, the latter controls. 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 § 55(1) (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts §§ 140 , 142 (1959).

   “Charitable trust.” Under the Tennessee Uniform Trust Code, when a trust has both charitable and noncharitable beneficiaries only the charitable portion qualifies as a “charitable trust.” The great majority of the Tennessee Uniform Trust 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 [T.C.A. §§ 35-15-405  and 35-15-413 ], 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 [T.C.A. § 35-15-411 ] 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.

   “Conservator.” See the comments below under “guardian,” which include comments relative to a conservator.

   “Directed trust.” This term refers to true directed trusts as provided for in T.C.A. § 35-15-808 as opposed to a delegation of a fiduciary’s duties as provided for in T.C.A. §  35-15-807. Under a true directed trust, certain powers and duties that were historically and traditionally bundled in a single trustee, or in cotrustees, are removed from such and directed to other fiduciaries. Alternatively, certain other trust advisors or trust protectors are given various powers and duties relative to other fiduciaries (including trustees and cotrustees). To the extent a power or duty is removed from one fiduciary and given to another, the fiduciary from which the power or duty was removed is called an excluded fiduciary. An excluded fiduciary generally has no liability for the powers or duties so removed.

   Other names for directed trusts include “multi-participant trusts” and “reserved power trusts.” Tennessee has had statutes fully providing for true directed trusts since the late 1980s, such provisions being contained in T.C.A. §§ 35-3-122 and 35-3-123. However, such statutes were initially only addressed in the other Tennessee trust statutes by reference. As used here, the term directed trust includes trusts controlled by T.C.A. §§ 35-3-122 and 35-3-123 to the extent provided by T.C.A. § 35-15-808, as well as to other trusts as provided in T.C.A. § 35-15-808, including those subject to part 12. Added by the 2013 amendments to Tennessee Uniform Trust Code.

   “Distribution beneficiary.” One who holds a distribution interest under a trust. A distribution beneficiary is a beneficiary who is an eligible or permissible distributee of income or principal under such distribution interest. A distribution beneficiary, in their capacity as a distribution beneficiary, does not hold a remainder interest. This is true regardless of whether such beneficiary holds a remainder interest in some capacity other than as a distribution beneficiary. Added by the 2013 amendments to Tennessee Uniform Trust Code.

   “Distribution interest.” Before discussing the term distribution interest in detail, it is beneficial to consider why the concept of distribution interest; together with the related concepts expressed by the terms beneficial interest, distribution beneficiary, reach, remainder interest, and to a lesser extent power of appointment and reserved power; are crucial to understanding Tennessee law as it relates to trusts.

   All of the above terms are in T.C.A. § 35-15-103 and are discussed in these comments. Such terms are essential elements of the Tennessee Uniform Trust Code. Together with other provisions in the Tennessee trust statutes, the concepts behind these terms are designed to assure traditional Tennessee law concepts are preserved regarding spend-thrift, mandatory, support and discretionary trusts, together with their concomitant rights, benefits, creditor and other protections. They are also essential elements of the Tennessee Uniform Trust Code’s emphasis on settlor’s intent, freedom of disposition and certainty of construction and interpretation. Finally, these concepts determine whether an inter-est under a trust does or does not rise to the status of a property interest. Of course, that issue, in itself, has a significant bearing on implementing settlor’s intent and freedom of disposition, as well as on creditor and other protections.

   Established and traditional common law made clear distinctions among the treatment of spendthrift, mandatory, discretionary and support trusts. Tennessee courts have traditionally followed that traditional, established common law, which is reflected in the Restatement (Second) of Trusts. Some of the effects of these distinctions are noted in the comments to T.C.A. § 35-15-101, near the end of the section entitled, “Existing Uniform Laws on Trust Law Subjects.” Therein it discusses the effect of T.C.A. § 35-15-106, which rejects the Restatement (Third) of Trusts §§ 50, 56, 58, 59 or 60, and such sections’ comments. Other effects of these distinctions, including when a distribution interest does or does not rise to the status of a property interest and the effect of same, are noted in the comments to T.C.A. § 35-15-101 in the last paragraph under the heading, “Part 5. Creditor's Claims; Spendthrift and Discretionary Trusts.”

   The Uniform Trust Code and the Restatement (Third) of Trusts do not make these clear distinctions, leaving settlors without certainty as to the meaning and effect of language used relative to spendthrift, mandatory, support and discretionary trust provisions. Moreover, language in the Restatement (Third) of Trusts indicates that even if the terms of a trust specifically give a trustee “absolute, sole and unfettered” discretion, such Restatement infers a “reasonableness” standard relative to the exercise (or non-exercise) of that discretion. Uniform Trust Code section 814(a), and the comments thereunder (but not T.C.A. § 35-15-814), refer one to section 50 of the Restatement (Third) of Trusts. The comments under that section include the “reasonableness” standard mentioned above, thereby infusing the Uniform Trust Code with the Restatement’s “reasonableness” standard. A number of legal authors believe such provisions of the Restatement (Third) of Trusts and the Uniform Trust Code virtually always give any beneficiary an enforceable right to a distribution, thereby eviscerating the meaning of the word “discretionary.” Regardless of how clear and obvious a drafter is regarding a settlor’s intent to create a purely and absolutely discretionary trust, these authors believe such provisions of the Restatement (Third) of Trusts and the Uniform Trust Code result in nothing other than a vague “continuum” of rights and discretion that only lead to uncertainty and needless litigation. Moreover, it would not be illegitimate for one to be concerned that this “continuum” puts one on a slippery slope that could lead to a creditor of a beneficiary being able to reach that beneficiary’s now (under the Restatement (Third) of Trusts) and Uniform Trust Code, potentially enforceable right to a distribution. Of course this significantly reduces the creditor protection traditionally afforded to beneficiaries of third-party discretionary trusts.

   These are just a few of the reasons that Tennessee law relative to trusts rejects certain portions of the Restatement (Third) of Trusts and the Uniform Trust Code, and in the Tennessee Uniform Trust Code codifies the prior, established and traditional common law.

   In its broadest terms, a distribution interest is a beneficial interest, other than a remainder interest, held by a distribution beneficiary under a trust. Distribution interests may be current distribution interests or future distribution interests. The fact that a beneficial interest is a distribution interest controls many things relative to that interest.

   Distribution interests are separate as opposed to marital property for the purposes of an equitable division of marital property and therefore, are not relevant to such division. The fact that a spouse provides services in that spouse’s capacity as a fiduciary of the trust that created the distribution interest (or to such distribution interest) does not change the above and the provision of such services or the results from or effects of such provision do not give rise to marital property. Therefore, neither the provision of such services, nor the results from or effects of such provision of services, are relevant to such division.

   For the purposes of determining separate versus community property in a jurisdiction recognizing community property as the applicable marital property regime in that jurisdiction:

   Distribution interests are likewise separate property. Similarly, the fact that a spouse provides services in that spouse’s capacity as a fiduciary of the trust that created the distribution interest (or to such distribution interest) does not change the above and the provision of such services or the results from or effects of such provision do not give rise to marital or community property, nor is any of the above relevant to, indicative of, or does such effect, the transmutation or other conversion of separate property to community property . Moreover, in cases where a spouse is serving in such capacity as trustee of such trust, neither the exercise or non-exercise of any power or discretion by such spouse in such capacity as trustee give rise to marital or community property, nor is such relevant to, indicative of, or does such effect, the transmutation or other conversion of separate property to community property. This remains true even if the spouse is also a beneficiary of the trust that created the distribution interest (or of the distribution interest).

   Finally, the expending of any community funds by a spouse in such spouse’s capacity as a fiduciary of such trust that created the distribution interest, relative to the operation or maintenance of property related to such distribution interest, is not relevant to or indicative of, and does not effect, a transmutation or other conversion of separate property to community property. Instead any such expending of funds simultaneously creates a correspondingly equal and valid debt of the trust to the community and such debt shall be repaid to the community with appropriate interest from the assets of the trust.

   Distribution interests can be classified in one of three ways.

   The first classification is a mandatory interest. At least as to principal, it is also the least likely type of interest one normally encounters under the Tennessee trust statutes. In order to be a mandatory interest, a distribution interest must require distribution within one year of the date the right to the distribution arises and the trustee must have no discretion, whatsoever, relative to the making of or the amount of this distribution. The most common form of mandatory interest occurs when a trust directs that all the income or a specified dollar amount be distributed every year. Even where such mandatory interests exist under a trust, all non-mandatory distribution interests under such trust are either support or discretionary interests.

   The second classification is a support interest. In order to be a support interest, a distribution interest, though not a mandatory interest, must either contain: mandatory language such as “shall make,” (and as stated below, such mandatory language is not otherwise negated) and be coupled with a standard capable of judicial determination; or must contain specific language that a trustee’s discretion be exercised in a “reasonable” manner. While more common, these are likely not that prevalent either, especially as such relate to principal.

   The third classification is a discretionary interest. All distribution interests that are not either a mandatory or support distributions, and under which a trustee has any discretion to make or withhold a distribution, are discretionary interests. The fact that a standard, even one referring to “support,” is included in the distribution language will not convert a discretionary interest to a support interest unless the standard is coupled with mandatory language such as “shall make.” Moreover, even where such mandatory language is used, if such is negated (e.g., “shall make in the trustee’s discretion”) or subsequently qualified by discretionary language, the distribution interest is a discretionary interest and not a support or mandatory interest.

   Finally, should distribution language indicate any combination of a mandatory, support and discretionary interest, the combined interest is to be divided, with each distribution interest treated as the relevant type of distribution interest only to the extent of the respective different distribution language used.

   For all these reasons, the Tennessee Uniform Trust Code gravitates toward creation of discretionary interests versus support or mandatory interests.

   Under the definition of distribution interest in T.C.A. § 35-15-103 there are a number of examples of distribution language, which while not exclusive, indicates one of the three types of distribution interests. Added by the 2013 amendments to Tennessee Uniform Trust Code.

   “Environmental law.” To encourage trustees to accept and administer trusts containing real property, the Tennessee Uniform Trust Code contains several provisions designed to limit exposure to possible liability for violation of environmental law. Section 701(c)(2) [T.C.A. § 35-15-701(c)(2) ] authorizes a nominated trustee to investigate trust property to determine potential liability for violation of environmental law or other law without accepting the trusteeship. Section 816(13) [T.C.A. § 35-15-816(b)(13) ] grants a trustee comprehensive and detailed powers to deal with property involving environmental risks. Finally, unlike Uniform Trust Code section 1010(b), T.C.A. § 35-15-1010 immunizes a trustee from personal liability for violation of environmental law arising from the ownership and control of trust property.

   “Excluded fiduciary.” This term is included to define any person who would otherwise meet the definition of fiduciary, but who is relieved in one of the prescribed manners from any power or duty normally held by such relevant fiduciary and that power or duty is granted or reserved to another person.

   Although T.C.A. § 35-15-103 only specifically includes any “trustee,” “trust advisor” or “trust protector” as being potential excluded fiduciaries, such section of the Tennessee Code should be read to include anyone who would otherwise meet the definition of fiduciary contained in T.C.A. §  35-15-103, but who is relieved in one of the prescribed manners from any power or duty normally held by such relevant fiduciary and that power or duty is granted or reserved to another person. Added by the 2013 amendments to Tennessee Uniform Trust Code.

   “Fiduciary.” This term is included for several reasons, including but not limited to:

   To facilitate drafting by providing an all-inclusive word meaning any person having fiduciary powers and duties under the Tennessee trust statutes.

   To cover trust advisors and trust protectors under part 12, or otherwise, if any of such are serving in a fiduciary capacity as provided in T.C.A. § 35-15-1202 or elsewhere under the Tennessee trust statutes.

   To assure that any person, regardless of the nomenclature by which that person is called, when holding powers and carrying out duties that are normally fiduciary in nature is a fiduciary, unless that person is an excluded fiduciary. Added by the 2013 amendments to Tennessee Uniform Trust Code.

   “Foreign” or “foreign country.” The comments under “another state” or “other state” are incorporated herein by reference.

   The distinctive statutory definition of the word “foreign,” either by itself or followed by the word “country” is included to demarcate the different meaning of those words, particularly “foreign,” in the Tennessee trust statutes from the meaning generally ascribed to the term foreign in state statutes (including the Tennessee Code in places other than under the Tennessee trust statutes) and in state court holdings and similar rulings. Outside the Tennessee trust statutes, the word “foreign” is often used simply to denote another state of the United States. However, the appropriate term for such under the Tennessee trust statutes is “another state” or “other state,” while “foreign” either by itself or followed by “country” means a jurisdiction other than the United States or a state (as such is defined in T.C.A. §  35-15-103). Added by the 2013 amendments to Tennessee Uniform Trust Code.

   “Foreign jurisdiction.” The comments under “another state” or “other state,” under “foreign” or “foreign country,” as well as under “this state,” are incorporated herein by reference.

   By combining the word “foreign” with “jurisdiction,” the latter word being the generalized term for an area or matter under some domestic or foreign governmental control or authority, this statutory definition includes any jurisdiction (governmental authority) other than that of this state, the state of Tennessee.

   It is included for similar reasons as those set forth under “foreign” or “foreign country,” above. It is also included for drafting convenience. By simply stating “foreign jurisdiction” a drafter can mean any other jurisdiction than that of this state, Tennessee. Added by the 2013 amendments to Tennessee Uniform Trust Code.

   “Guardian.” Under the Tennessee Uniform Trust Code, both the term “guardian” and the term “conservator” have the same meaning as they respectfully do in T.C.A. § 34-1-101. Under such section; guardian means a person or persons appointed by the court to provide partial or full supervision, protection and assistance of the person or property, or both, of a minor; while conservator means a person or persons appointed by the court to provide partial or full supervision, protection and assistance of the person or property, or both, of a disabled person.

   “Interests of the beneficiaries.” The phrase “interests of the beneficiaries” (subdivision (8)) [T.C.A. § 35-15-103(17) ] is used with some frequency in the Tennessee 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 [T.C.A. § 35-15-108 ] 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) [T.C.A. § 35-15-706(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 [T.C.A. § 35-15-801 ] requires the trustee to administer the trust in the interests of the beneficiaries, and section 802 [T.C.A. § 35-15-802 ] makes clear that a trustee may not place its own interests above those of the beneficiaries. Section 808(d) [T.C.A. § 35-15-808(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. T.C.A. § 35-15-1202 provides likewise. Section 1002(b) [T.C.A. §  35-15-1002(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 [T.C.A. § 35-15-1008 ] 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.

   “Internal Revenue Code.” The definition of “internal revenue code” was added to T.C.A. § 35-15-103 with the 2013 amendments to the Tennessee Uniform Trust Code. The term as now defined in T.C.A. § 35-15-103 appeared in certain sections throughout the Tennessee Uniform Trust Code, while in certain other places in the Tennessee Uniform Trust Code and its comments it was referred to generically as “Internal Revenue Code,” or by similar words or abbreviations therefor. The 2013 amendments included the term’s definition in T.C.A. § 35-15-103 to make it consistently applicable throughout the Tennessee Uniform Trust Code. Nevertheless, it is still appropriate to refer to the Internal Revenue Code by its initials “I.R.C.” or through a full citation to title 26 of the United States Code or an abbreviation thereof. Moreover, a citation to “Treas. Reg. §” is an appropriate way to cite to the regulations under the Internal Revenue Code, as is a full citation to title 26 of the Code of Federal Regulations or an abbreviation thereof.

   “Jurisdiction.” (subdivision (9) [T.C.A. 35-5-103(19) ], 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 [T.C.A. §§ 35-15-107  and 35-15-403 ] to refer to the place whose law will govern the trust. The term is used in section 108 [T.C.A. § 35-15-108 ] to refer to the trust’s principal place of administration. The term is used in section 816 [T.C.A. § 35-15-816 ] 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.

   “Person.” The definition in T.C.A. § 35-15-103 is self sufficiently clear and needs no further explanation.

   “Power of appointment.” A power of appointment as defined in the Tennessee Uniform Trust Code is a matter of 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 § 11.1  (1986). A power is either general or nongeneral (such sometimes being called “special”) 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 § 11.4  (1986). All other powers are nongeneral (such sometimes being called “special powers of appointment”). 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 § 11.5  (1986). Powers of appointment may be held in either a fiduciary or nonfiduciary capacity.

   The Tennessee Uniform Trust Code makes distinctions among types of powers. Under T.C.A. § 35-15-302 the holder of any type of power of appointment may represent and bind persons whose interests are subject to the power. A “power of withdrawal” 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 person only upon consent of the trustee or a person holding an adverse interest.

   Finally, the Tennessee Uniform Trust Code makes two things crystal clear: A power of appointment, even when held by a trustee or other fiduciary, is different and distinct from any trustee’s or other fiduciary’s power to make decisions regarding distributions. Moreover, powers of appointment are held by the person to whom such power has been given in the distinct and singular capacity of a power holder. Therefore, if a settlor is given a power of appointment, such settlor holds that power of appointment as a power holder and not in that person’s capacity as settlor. Portions of the above (appropriately amended) were moved from the comment pertaining to beneficiary, while other portion of the above were added, both such types of changes were done to conform with the 2013 amendments to Tennessee Uniform Trust Code, which added a separate definition for “power of appointment.”

   “Power of withdrawal.” The definition of “power of withdrawal,” was amended in 2007 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. This was done to clarify that if a beneficiary is serving as trustee or co-trustee and has discretion to make a distribution to himself or for his own benefit pursuant to an ascertainable standard, then the creditor cannot reach or compel a distribution except to the extent the interest would be subject to a creditor's claim if the beneficiary were not acting as trustee or co-trustee.

   “Property.” The definition of “property” (subdivision (12)) [T.C.A. § 35-15-103(23) ] 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 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 Section Comment [T.C.A. § 35-15-401 ].

   “Qualified beneficiary.” 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 Tennessee Uniform Trust Code uses the concept of “qualified beneficiary” (subdivision (12) [§ T.C.A. 35-15-103(24) ]) 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 [T.C.A. § 35-15-705 ] to define the class to whom notice must be given of a trustee resignation. The term is used in section 813 [T.C.A. § 35-15-813 ] to define the class that generally has the right to request from a trustee information regarding the trust’s administration. Section 417 [T.C.A. § 35-15-417 ] 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 [T.C.A. § 35-15-704 ], as well as the appointment of successor trust advisors and trust protectors. Prior to transferring a trust’s principal place of administration, T.C.A. § 35-15-108 requires that the trustee give at least 60 days notice to the qualified beneficiaries.

   According to ULC - NCCUSL, 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 part 3 [T.C.A. §§ 35-15-301 – 35-15-305 ] may be employed, including the possible appointment by the court of a representative to represent the beneficiary’s interest.

   According to ULC - NCCUSL, 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.

   The Tennessee Uniform Trust Code generally follows ULC - NCCUSL’s position as expressed in the prior two paragraphs. However, the group of persons who potentially qualify as qualified beneficiaries under Tennessee law is meaningfully smaller. Under the Tennessee Uniform Trust Code, as of any (and as of each) point in time at which it is necessary to determine which beneficiaries are qualified beneficiaries you do so assuming the following two things (neither of which are required by the Uniform Trust Code): any and all then existing powers of appointment will not be exercised; and any event then not reasonably expected to occur will not occur.

   Moreover, under its definition of “qualified beneficiary” the Tennessee Uniform Trust Code provides that no ultimate beneficiary or potential ultimate beneficiary can ever be a qualified beneficiary or have the rights thereof. Additionally, no ultimate beneficiary or potential ultimate beneficiary has the standing to petition to remedy a breach of trust or to enforce a trust; the interests of such beneficiary being too remote. Notwithstanding the preceding portion of this paragraph, if and when the interests of any ultimate, or potential ultimate, beneficiary have ripened to the point that such beneficiary is eligible to receive, or have paid for their benefit, current distributions of income or principal, at such time they will no longer be an “ultimate beneficiary” or “potential ultimate beneficiary.” At such time such beneficiary has all the rights of any other current beneficiary of the same type, charitable or non-charitable. Similarly if a trust for animals or a trust for a noncharitable purpose (individually and collectively, “purpose trust”) is an ultimate, or potential ultimate, beneficiary, the rights of any person provided in [either] T.C.A. § 35-15-408 or § 35-15-409 to enforce the trust under which such purpose trust is an ultimate, or potential ultimate beneficiary will not ripen until such purpose trust is eligible to receive from the trust under which it was previously an ultimate, or potential ultimate, beneficiary, current distributions of income or principal.

If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before July 1, 2013, that statute continues to apply to the right even if it has been repealed or superseded.

35-15-104. Knowledge.

1. Subject to subsection (b), a person has knowledge of a fact if the person:
   1. Has actual knowledge of it;
   2. Has received a notice or notification of it; or
   3. From all the facts and circumstances known to the person at the time in question, has reason to know it.
2. An organization that conducts activities through employees has notice or knowledge of a fact involving a trust only from the time the information was received by an employee having responsibility to act for the trust, or would have been brought to the employee's attention if the organization had exercised reasonable diligence. An organization exercises reasonable diligence if it maintains reasonable routines for communicating significant information to the employee having responsibility to act for the trust and there is reasonable compliance with the routines. Reasonable diligence does not require an employee of the organization to communicate information unless the communication is part of the individual's regular duties or the individual knows a matter involving the trust would be materially affected by the information.

Acts 2004, ch. 537, § 5.

35-15-105. Default and mandatory rules.

1. Except as otherwise provided in the terms of the trust, this chapter governs the duties and powers of a trustee or any other fiduciary under this chapter, relations among trustees and such other fiduciaries, and the rights and interests of a beneficiary. The terms of a trust may expand, restrict, eliminate, or otherwise vary the duties and powers of a trustee, any such other fiduciary, relations among any of them, and the rights and interests of a beneficiary; provided, however, that nothing contained in this subsection (a) shall be construed to override or nullify the provisions of subsection (b). The rule of statutory construction that states that statutes in derogation of the common law are to be strictly construed shall have no application to this section. Except as restricted by subsection (b), pursuant to this section, courts shall give maximum effect to the principle of freedom of disposition and to the enforceability of trust instruments.
2. The terms of a trust prevail over any provision of this chapter except:
   1. The requirements for creating a trust;
   2. The duty of a trustee to act in accordance with the terms and purposes of the trust and the interests of the beneficiaries;
   3. The requirement that a trust and its terms be for the benefit of its beneficiaries as the interests of such beneficiaries are defined under the terms of the trust, and that the trust has a purpose that is lawful and possible to achieve;
   4. The power to modify or terminate a trust under §§ 35-15-410 — 35-15-416;
   5. The effect of a spendthrift provision and the rights of certain creditors and assignees to reach a trust as provided in part 5 of this chapter;
   6. The power of the court under § 35-15-702 to require, dispense with, or modify or terminate a bond;
   7. The power of the court under § 35-15-708(b) to adjust a trustee's compensation specified in the terms of the trust which is unreasonably low or high;
   8. The effect of an exculpatory term under § 35-15-1008;
   9. The rights under §§ 35-15-1010 — 35-15-1013 of a person other than a trustee or beneficiary;
   10. Periods of limitation for commencing a judicial proceeding;
   11. The power of the court to take such action and exercise such jurisdiction as may be necessary in the interests of justice; and
   12. The subject matter jurisdiction of the court and venue for commencing a proceeding as provided in §§ 35-15-203 and 35-15-204.
3. Any purpose enunciated as a material purpose of a trust in that trust's trust instrument shall be treated as a material purpose of that trust for all purposes of this chapter and chapter 16.

Acts 2004, ch. 537, § 6; 2007, ch. 24, §§ 4, 5; 2013, ch. 390, §§ 4-6.

Compiler's Notes. Acts 2013, ch. 390, § 55 provided that: (b) Except as otherwise provided in the act, on July 1, 2013:

1. The act applies to all trusts created before, on, or after July 1, 2013;
2. The act applies to all judicial proceedings concerning trusts commenced on or after July 1, 2013;
3. The act applies to judicial proceedings concerning trusts commenced before July 1, 2013, unless the court finds that application of a particular provision of the act would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of the act does not apply and the superseded law applies;
4. Any rule of construction or presumption provided in the act applies to trust instruments executed before July 1, 2013, unless there is a clear and express indication of a contrary intent in the terms of the trust; and
5. An act done before July 1, 2013, is not affected by the act.

   Law Reviews.

   Agents in Secrecy: The Use of Information Surrogates in Trust Administration (Lauren Z. Curry), 64 Vand. L. Rev. 925 (2011).

   1. Bad Faith Or Reckless Indifference. 2. Mandatory Obligation.

   Grant of summary judgment in favor of the bank in the decedent's daughter's action against it was appropriate pursuant to T.C.A. § 35-15-105(b)(8) and T.C.A. § 35-15-1008(a)(1) because nothing in the record indicated that the bank acted in bad faith or with reckless indifference; therefore, the terms of the will exonerating the bank, as trustee, prevailed in the case and the trial court was correct in so holding. Wood v. Lowery, 238 S.W.3d 747, 2007 Tenn. App. LEXIS 119 (Tenn. Ct. App. Mar. 6, 2007), appeal denied, — S.W.3d —, 2007 Tenn. LEXIS 695 (Tenn. Aug. 13, 2007).

   Trustees were under a mandatory obligation to distribute the remaining principal of such child's separate trust to such child, when the terminating event or events occurred, and because the trust did not provide otherwise, the trustees were to perform this task expeditiously, which they failed to do; because the trustees failed to take the appropriate actions for two years following the termination of the trust, the trial court was justified in ordering the clerk to prepare a deed to transfer the real estate to the beneficiaries. In re Farmer Family Trust, — S.W.3d —, 2018 Tenn. App. LEXIS 598 (Tenn. Ct. App. Oct. 11, 2018).

   Section Comment.

   Unless provided otherwise hereinafter, any reference to “section,” “subsection” or “subdivision” means all, or such portion of, T.C.A. § 35-15-105.

   The provisions of this section in some ways diverge significantly from the Uniform Trust Code and the restatements. To the extent this section is in conflict with the Uniform Trust Code, any restatement or any other foreign law, such foreign law is not precedential or controlling and is rejected by the Tennessee Uniform Trust Code.

   It is the policy of the state of Tennessee, as well as the overriding objective of the Tennessee trust statutes: that a settlor’s intent be the lodestar by which a trust is interpreted; that such intent be carried out; and that settlors have the freedom to dispose of their assets to whom and in the manner they wish; all to the greatest extent constitutionally allowable.

   Significantly more strongly than does the Uniform Trust Code, T.C.A. § 35-15-105(a) emphasizes that the Tennessee Uniform Trust Code is primarily a default statute. While the Tennessee Uniform Trust 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. Subject to only the limited exceptions contained in T.C.A. § 35-15-105(b) (which are fewer in number and in certain cases, less restrictive, than in section 105 of the Uniform Trust Code), 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. Moreover, in certain cases there need be no specific reference to the intent to override such default rules. One example of the myriad ways in which a settlor can override the default rules contained in the Tennessee Uniform Trust Code is that a settlor may override an otherwise applicable duty of loyalty in the terms of the trust. Sometimes such override is implied. For example, 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. Another way a settlor can override the default rules is such settlor can relieve a fiduciary from acting in good faith (such not being included in T.C.A. § 35-15-(b)(2).

   In order to do its utmost to assure all of the above, the Tennessee Uniform Trust Code rejects the rule of statutory construction that statutes in derogation of the common law are to be strictly construed.

   The subdivisions contained in T.C.A. § 35-15-105(b) (referred to hereafter in the comment to this section as “subdivision”) list the items not subject to override in the terms of the trust:

   Subdivision (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 T.C.A. §§ 35-15-401 – 35-15-409. Nevertheless, unlike the Uniform Trust Code, the Tennessee Uniform Trust Code contains no references to any impact of public policy on the purposes of a trust as such relates to the requirements for creating a trust under subdivisions (b)(1) or (b)(3).

   Subdivision (b)(2) provides that the terms may not eliminate a trustee’s duty to act in accordance with the terms and purposes of the trust and the interests of the beneficiaries. Unlike the Uniform Trust Code, the Tennessee Uniform Trust Code contains no reference to good faith in subdivision (b)(2). Therefore, a settlor may provide a standard other than good faith, (e.g., the Trustee's sole and absolute discretion, which standard under the Tennessee Uniform Trust Code contains no implied good faith or reasonableness standard) to govern the Trustee's actions. See T.C.A. § 35-15-814 for the standard by which a trustee’s exercise of discretion relative to a discretionary interest may be judicially reviewed or a distribution judicially forced.

   Moreover, absent some other restriction, a settlor is always free to specify the trust’s terms and the interests of the beneficiaries, to both of which the trustee must comply. Subdivision (b)(3) emphasizes that the “interests of the beneficiaries” are to be judged by such terms “as the interests of such beneficiaries are defined under the terms of the trust.” The Uniform Trust Code does not contain language similar to that contained in the last set of quotation marks above. Such language was added to the Tennessee Uniform Trust Code due to its overriding emphasis on settlor’s intent and freedom of disposition. Therefore, throughout the Tennessee Uniform Trust Code, whenever one encounters the phrase “that a trust and its terms be for the benefit of its beneficiaries” (or a similar phrase), one should automatically add to such phrase the remaining portion subdivision (b)(3), “as the interests of such beneficiaries are defined under the terms of the trust.”

   Under subdivision (b)(4), the power of the court to modify or terminate a trust under T.C.A. §§ 35-15-410 – 35-15-416 is not subject to variation in the terms of the trust. However, T.C.A. §§ 35-15-410 – 35-15-416 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.

   Subdivision (b)(5) clarifies that a settlor may not restrict the rights of a beneficiary’s creditors to a greater ex-tent than is allowed as provided in part 5.

   In conformity with traditional doctrine, the Tennessee Uniform Trust Code limits the ability of a settlor to exculpate a trustee from liability for breach of trust. The limits are specified in T.C.A. § 35-15-1008. Subdivision (b)(8) provides a cross-reference. Similarly, subdivision (b)(7) provides a cross-reference to section T.C.A. § 35-15-708(b), which limits the binding effect of a provision specifying a trustee’s, as well as a trust advisor’s or trust protector’s compensation.

   Subdivision (b)(9) clarifies that a settlor is not free to limit the rights of third persons, such as purchasers of trust property.

   Subdivision (b)(10) makes clear that the settlor may not reduce any otherwise applicable period of limitations for commencing a judicial proceeding. See  T.C.A. § 35-15-604 (period of limitations for contesting validity of revocable trust), and T.C.A. § 35-15-1005 (period of limitation on action for breach of trust), as well as similar provisions regarding limitations periods applicable to trust advisors, trust protectors and other fiduciaries. Similarly, a settlor may not so negate the responsibilities of a trustee that the trustee would no longer be acting in a fiduciary capacity. Notwithstanding the preceding sentence, in a directed trust one or more fiduciary powers and duties can be removed from a trustee and given to another fiduciary, in which case relative to the powers and duties so removed, that trustee will be an excluded fiduciary.

   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, which are acknowledged by subdivisions (b)(11) and (b)(6), respectively. Additionally, subdivision (b)(12) similarly provides that provisions on subject matter jurisdiction and venue cannot be altered in the terms of the trust.

   Finally, Tennessee allows “quiet” trusts, under which information regarding a trust and its operations may, if certain requirements are met, be withheld from beneficiaries and holders of powers of appointment. Because of this, the Tennessee Uniform Trust Code has no provision corresponding with Uniform Trust Code subsections (b)(8) and (b)(9).

   To assure the overriding objectives of the Tennessee Uniform Trust Code as stated in the third paragraph of these section comments to this section, T.C.A. § 35-15-105(c) makes it clear that the materiality of any purpose of the trust can be controlled simply by stating such in a trust instrument. While the language of such subsection (c) is written in the positive, (i.e., “Any purpose enunciated as a material purpose… shall be treated as a material purpose…”), such necessarily implies that a settlor also has the power to so enumerate that a purpose of a trust is not a material purpose of a trust for all purposes of this chapter and chapter 16.

If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before July 1, 2013, that statute continues to apply to the right even if it has been repealed or superseded.

35-15-106. Law supplemental to chapter — Applicability of certain sections of Restatement of Trusts.

1. The common law of trusts and principles of equity supplement this chapter, except to the extent modified by this chapter or another statute of this state.
2. Notwithstanding subsection (a):
   1. No provision in a trust directing or authorizing accumulation of trust income shall be invalid; and
   2. The traditional common law distinction between a discretionary trust and a support trust and the dual judicial review standards related to this distinction shall be maintained. Unless specifically provided otherwise in this chapter, courts shall not consult, rely on or give any persuasive value to the Restatement (Third) of Trusts §§ 50, 56, 58, 59 or 60, nor any of the comments under such sections or related thereto, none of which have any force or effect relative to trusts governed by the laws of this state.

Acts 2004, ch. 537, § 7; 2013, ch. 390, § 7.

Compiler's Notes. Acts 2013, ch. 390, § 55 provided that: (b) Except as otherwise provided in the act, on July 1, 2013:

1. The act applies to all trusts created before, on, or after July 1, 2013;
2. The act applies to all judicial proceedings concerning trusts commenced on or after July 1, 2013;
3. The act applies to judicial proceedings concerning trusts commenced before July 1, 2013, unless the court finds that application of a particular provision of the act would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of the act does not apply and the superseded law applies;
4. Any rule of construction or presumption provided in the act applies to trust instruments executed before July 1, 2013, unless there is a clear and express indication of a contrary intent in the terms of the trust; and
5. An act done before July 1, 2013, is not affected by the act.

   Section Comment.

   According to ULC – NCCUSL, the Uniform Trust Code codifies those portions of the law of express trusts that are most amenable to codification.

   While the Tennessee Uniform Trust Code would agree that no code can cover all portions of the law of express trusts, the Tennessee Uniform Trust Code codifies meaningfully more of such portions than does the Uniform Trust Code. The additional codification of the law of express trusts in the Tennessee Uniform Trust Code is intentional and is designed to provide significantly more certainty than does the Uniform Trust Code over the law that will control a trust and its administration. This is in accordance with Tennessee’s emphasis on settlor’s intent and freedom of disposition.

   Nevertheless, because it is impossible to codify all portions of the law of express trust, to the extent such are not codified in the Tennessee Uniform Trust Code, such code is supplemented by the common law of trusts, including principles of equity. To determine the common law and principles of equity, a court or other body adjudicating or mediating a matter is instructed to look first to other portions of the Tennessee trust statutes, then to prior and contemporaneous Tennessee law. If a court or other body adjudicating or mediating a matter cannot resolve the matter using Tennessee law, it may then look to other law (excluding the law of any foreign country), including the various applicable restatements. Regardless, to the extent any other law is in conflict with Tennessee law, Tennessee law controls. The common law of trusts also includes the traditional and broad equitable jurisdiction of the court, which the Tennessee Uniform Trust Code in no way restricts.

   Notwithstanding the preceding paragraph, when considering law other than Tennessee law, courts and other bodies adjudicating or mediating a matter are instructed to be mindful of the following:

   Numerous provisions of title 35, chapters 6, 14 and 15 were modified and diverge, in some cases significantly, from their respective uniform codes and the Restatements of Trust, as well as from restatements covering fields of law that are related to, or impact upon, trusts. Moreover, there are no uniform code provisions addressing the subjects covered by title 35, chapters 16 and 17. Such resulting divergence was undertaken deliberately and after significant consideration. Taken as a whole, the Tennessee trust statutes are a distinct and integrated set of trust laws.

   It is for this reason that the provisions of T.C.A. § 35-15-1101 reverse those of section 1101 of the Uniform Trust Code and expressly state that in applying and construing title 35 no consideration shall be given to any need to promote uniformity with respect to its subject matter among states, including relative to the laws of any foreign jurisdiction that has enacted versions of the various uniform codes, laws or acts. Moreover, T.C.A. § 35-15-1101 provides that unless specifically provided otherwise in title 35, chapters 6, 14, 15, 16 and 17, courts shall not consult or give any persuasive value to any such uniform acts or any foreign jurisdiction’s acts based on or similar to them; or to the comments of any of them; none of which have any force or effect relative to trusts governed by the laws of Tennessee.

   The statutory text of the Tennessee 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).

If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before July 1, 2013, that statute continues to apply to the right even if it has been repealed or superseded.

35-15-108. Place of administration — Sufficient nexus for a state jurisdiction provision — Transfer of place of administration.

1. Without limiting or precluding other means for establishing a sufficient connection with a jurisdiction, the terms of a trust designating that jurisdiction's laws in a state jurisdiction provision are valid and controlling if:
   1. A trustee's principal place of business is located in or a trustee is a resident of the designated jurisdiction; or
   2. All or part of the administration occurs in the designated jurisdiction; which such administration, includes but is not limited to:
      1. Maintenance of some trust records physically in the designated jurisdiction; and
      2. Wholly or partly preparing or arranging for the preparation, either on an exclusive or a nonexclusive basis, in the designated jurisdiction of an income tax return that must be filed by the trust; or
   3. Some or all of the trust assets are deposited in the designated jurisdiction or physical evidence of such assets is held in the designated jurisdiction and the trust is being administered by a person defined in subdivision (a)(1). For purposes of this subdivision (a)(3), “deposited in the designated jurisdiction,” includes assets being held in any of a checking account, time deposit, certificate of deposit, brokerage account, trust company fiduciary account, or other similar account or deposit that is located in the designated jurisdiction.
2. Except as otherwise expressly provided by the terms of a governing instrument specifically addressing the governing law for trust administration or by court order, the laws of this state shall govern the administration of a trust while the trust is administered in this state. Without precluding other means for establishing that a trust is administered in this state, if any of the activities described in subsection (a) occur in this state, the trust is administered in this state.
3. 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.
4. Without precluding the right of the court to order, approve, or disapprove a transfer, the trustee, in furtherance of the duty prescribed by subsection (c), may transfer the trust's principal place of administration to another state or to a jurisdiction outside of the United States.
5. The trustee shall notify the qualified beneficiaries of a proposed transfer of a trust's principal place of administration not less than sixty (60) days before initiating the transfer. The notice of proposed transfer must include:
   1. The name of the jurisdiction to which the principal place of administration is to be transferred;
   2. The address and telephone number at the new location at which the trustee can be contacted;
   3. An explanation of the reasons for the proposed transfer;
   4. The date on which the proposed transfer is anticipated to occur; and
   5. The date, not less than sixty (60) days after the giving of the notice, by which the qualified beneficiary must notify the trustee of an objection to the proposed transfer.
6. The authority of a trustee under this section to transfer a trust's principal place of administration terminates if a majority of those qualified beneficiaries described in § 35-15-103 notify the trustee of an objection to the proposed transfer on or before the date specified in the notice.
7. In connection with a transfer of the trust's principal place of administration, the trustee may transfer some or all of the trust property to a successor trustee designated in the terms of the trust or appointed pursuant to § 35-15-704.

Acts 2004, ch. 537, § 9; 2013, ch. 390, §§ 9, 10.

Compiler's Notes. Acts 2013, ch. 390, § 55 provided that: (b) Except as otherwise provided in the act, on July 1, 2013:

1. The act applies to all trusts created before, on, or after July 1, 2013;
2. The act applies to all judicial proceedings concerning trusts commenced on or after July 1, 2013;
3. The act applies to judicial proceedings concerning trusts commenced before July 1, 2013, unless the court finds that application of a particular provision of the act would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of the act does not apply and the superseded law applies;
4. Any rule of construction or presumption provided in the act applies to trust instruments executed before July 1, 2013, unless there is a clear and express indication of a contrary intent in the terms of the trust; and
5. An act done before July 1, 2013, is not affected by the act.

   Section Comment.

   The 2013 amendments to the Tennessee Uniform Trust Code substantially rewrote the previous subsection (a) of this section, leaving the former version inoperative as provided in the enacting and transitional language of Section 55, Pub. Act. 2013, Pub. Ch. 390, 108th Gen. Assemb., Reg. Sess. (Tenn., 2013). Such amendment also made section 107(a) of the Uniform Trust Code, as well as the comments thereunder, irrelevant to the current T.C.A. § 35-15-108.

   The Tennessee Uniform Trust Code allows any person having the requisite nexus with a jurisdiction to choose that jurisdiction’s law as controlling over a trust. Such requisite nexus is provided in T.C.A. § 35-15-108(a) and is defined in the broadest and most flexible terms.

   Relative to a state jurisdiction provision, designating the principal place of administration should be distinguished from designating the law to determine the meaning and effect of the trust's terms. A settlor is free in a state jurisdiction provision to designate one jurisdiction as the principal place of administration and another to govern the meaning and effect of the trust's provisions.

   Moreover, to the extent not otherwise provided in a state jurisdiction provision and to the greatest extent possible, T.C.A. § 35-15-108(b) provides that the principal place of administration of a trust is Tennessee if all or part of such administration takes place in Tennessee.

   Locating a trust’s principal place of administration may also be important for other matters, such as payment of state income tax. The fixing of a trust's principal place of administration will also determine where the trustee and beneficiaries have consented to suit under T.C.A. §§ 35-15-107 and 35-15-202, as well as the rules for locating venue under T.C.A. § 35-15-204.

   Notwithstanding the above, the remainder of T.C.A. § 35-15-108 provides that a trustee has a continuing duty to administer the trust in a jurisdiction that is appropriate. Moreover, such section provides a relatively simple procedure by which the trustee (or appropriate fiduciary) of a trust may transfer its principal place of administration to another jurisdiction within or without the United States. Use of this procedure is more readily available under the Tennessee Uniform Trust Code than under the Uniform Trust Code. Under the latter, the power to so transfer can be blocked by the objection of a single qualified beneficiary. On the contrary, the Tennessee Uniform Trust Code requires that a majority of the qualified beneficiaries object to such transfer or it will proceed.

   Unless provided otherwise hereinafter, any reference to “subsection” or “subdivision” means such portion of T.C.A. § 35-15-108.

   Subsection (a) provides a non-exclusive list of factors containing the requisite nexus with a jurisdiction to choose that jurisdiction’s law as controlling over a trust. Having chosen such jurisdiction, a settlor can then designate that juris-diction law control law by including a state jurisdiction provision in a trust per T.C.A. § 35-15-107.

   Subsection (b) provides that unless expressly specified otherwise in a trust instrument or by court order, Tennessee law governs the administration of a trust while such trust is administered in this state. Without precluding other means to establish that a trust is being administered in this state, the occurrence in Tennessee of any of the factors listed in subsection (a) causes the trust to be administered in Tennessee.

   Subsection (c) 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 T.C.A. § 35-15-103, 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 (d)-(g) 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 for any number of reasons, the following of which is a non-exhaustive list: to secure a lower state income tax rate; to obtain more favorable creditor protection; to extend any applicable rule against perpetuities; to avoid any prohibition on trust accumulations; to obtain or maintain the traditional common law distinction among mandatory, support and discretionary interests and trusts; to avoid any laws granting rights to some person relative to property in the trust; such rights being based on a personal relationship to a settlor of, a party to, or beneficiary of, the trust (e.g., forced heirship); 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 T.C.A. § 35-15-105. To facilitate transfer in the typical case, where there is general concurrence that a transfer is either desirable or is at least not harmful, a transfer can be accomplished without court approval unless a majority of qualified beneficiary objects. To allow the qualified beneficiaries described in T.C.A. § 35-15-103 sufficient time to review a proposed transfer, the trustee must give such qualified beneficiaries at least 60 days prior notice of the transfer. Notice must be given not only to qualified beneficiaries as defined in T.C.A. § 35-15-103 but also to those granted the rights of qualified beneficiaries under T.C.A. § 35-15-110. To assure that those receiving notice have sufficient information upon which to make a decision, minimum contents of the notice are specified. If a majority of the qualified beneficiary described in T.C.A. § 35-15-103 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 this state. The appointment of a new trustee may also be essential if the current trustee is ineligible to administer the trust in the new jurisdiction. Subsection (g) 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 T.C.A. § 35-15-704. Absent an order of succession in the terms of the trust, T.C.A. § 35-15-704 contains separate procedures for appointment of a successor trustee of a noncharitable trust and 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 § 615 (4th ed. 1989) as well as 7 A. W. Scott, W. F. Fratcher & M. L. Ascher, Scott and Ascher on Trusts  § 45.5.3.2 (5th ed. 2010).

If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before July 1, 2013, that statute continues to apply to the right even if it has been repealed or superseded.

35-15-110. Others treated as qualified beneficiaries.

1. A charitable organization expressly designated to receive distributions under the terms of a charitable trust has the rights of a qualified beneficiary under this chapter, if the charitable organization, on the date the charitable organization's qualification is being determined, would be a qualified beneficiary under this chapter if such charitable organization were an individual beneficiary.
2. The attorney general and reporter has the rights of a qualified beneficiary with respect to a charitable trust having its principal place of administration in this state if all of the interests in the trust that are for a charitable purpose, in the aggregate, on the date the attorney general and reporter's qualification is being determined, would cause an individual beneficiary to be a qualified beneficiary under this chapter if all of such interests were for the benefit of an individual beneficiary instead of for charitable purposes.

Acts 2004, ch. 537, § 11; 2007, ch. 24, § 6; 2019, ch. 340, § 8.

Amendments. The 2019 amendment rewrote the section which read: “(a)  A charitable organization expressly designated to receive distributions under the terms of a charitable trust has the rights of a qualified beneficiary under this chapter, if the charitable organization, on the date the charitable organization's qualification is being determined:“(1)  Is a distributee or a permissible distributee of trust income or principal;“(2)  Would be a distributee or a permissible distributee of trust income or principal if the interests of other distributees or permissible distributees then receiving or eligible to receive distributions terminated on that date without causing the trust to terminate; or“(3)  Would be a distributee or a permissible distributee of trust income or principal if the trust terminated on that date.“(b)  The attorney general and reporter of this state has the rights of a qualified beneficiary with respect to a charitable trust having its principal place of administration in this state.”

Effective Dates. Acts 2019, ch. 340, § 20. May 10, 2019.

35-15-111. Nonjudicial settlement agreements.

1. Except as otherwise provided in subsection (b), the trustee and the qualified beneficiaries may enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust.
2. A nonjudicial settlement agreement is valid only to the extent it does not violate a material purpose of the trust and includes terms and conditions that could be properly approved by the court under this chapter or other applicable law.
3. Matters that may be resolved by a nonjudicial settlement agreement include, but are not limited to:
   1. The interpretation or construction of the terms of the trust;
   2. The approval of a trustee's report or accounting;
   3. Direction to a trustee to refrain from performing a particular act or the grant to a trustee of any necessary or desirable power;
   4. The resignation or appointment of a trustee and the determination of a trustee's compensation;
   5. Transfer of a trust's principal place of administration;
   6. Liability of a trustee for an action relating to the trust;
   7. The extent or waiver of bond of a trustee;
   8. The governing law of the trust; and
   9. The criteria for distribution to a beneficiary where the trustee is given discretion.
4. Any qualified beneficiary or trustee may request the court to approve a nonjudicial settlement agreement, to determine whether the representation as provided in part 3 of this chapter was adequate, and to determine whether the agreement contains terms and conditions the court could have properly approved.

Acts 2004, ch. 537, § 12; 2007, ch. 24, §§ 7-9.

Law Reviews.

Where There's a Will: The Report of My Practice's Death Was an Exaggeration: The Healthy Prognosis for Estate Planning in Tennessee (Eddy R. Smith), 48 Tenn. B.J. 32 (2012).

35-15-112. Rules of construction.

The rules of construction that apply in this state to the interpretation of and disposition of property by will also apply as appropriate to the interpretation of the terms of a trust and the disposition of the trust property.

Acts 2004, ch. 537, § 13.

Law Reviews.

Symposium: The Role of Federal Law in Private Wealth Transfer: Comment, Federalizing Principles of Donative Intent and Unanticipated Circumstances, 67 Vand. L. Rev. 1931 (2014).

Tennessee Uniform Trust Code: New Formulation for a Trusty Tool (Marshall H. Peterson), 41 No. 1 Tenn. B.J. 24 (2005).

The Revocation-Upon-Divorce Doctrine: Tennessee's Need to Adopt the Broader Uniform Probate Code Approach (Hailey H. David), 39 U. Mem. L. Rev. 383 (2009).

Part 2
Judicial Proceedings