Chapter 1
Appointment and Removal of Trustees

35-1-101. [Repealed.]

Compiler's Notes. Former chapter 1, §§ 35-1-10135-1-120 (Code 1858, §§ 3648-3664 (deriv. Acts, 1831, ch. 107, §§ 1, 2; 1845-1846, ch. 194, § 2; 1853-1854, ch. 74, § 1; 1855-1856, ch. 113, §§ 11, 15); Acts 1859-1860, ch. 34, § 1; Act Jan. 14, 1868, §§ 1, 2 (published in Acts 1868-1869, p. 80); Acts 1917, ch. 137, §§ 1-3; Shan., §§ 3530a1-3530a3, 5414-5432; Code 1932, §§ 9573-9595; modified; Code Supp. 1950, § 9593; T.C.A. (orig. ed.), §§ 35-101 — 35-122), concerning appointment and removal of trustees, was repealed by Acts 1986, ch. 566, § 1.

35-1-102. [Repealed.]

Compiler's Notes. Former § 35-1-102 (Acts 1986, ch. 566, § 1; 1995, ch. 351, § 1), concerning the venue, was repealed by Acts 2004, ch. 537, § 97, effective July 1, 2004.

35-1-103. [Repealed.]

Compiler's Notes. Former § 35-1-103 (Acts 1986, ch. 566, § 1), concerning trustees and successor trustees, appointment by court, accounting, bonds, was repealed by Acts 2004, ch. 537, § 97, effective July 1, 2004.

35-1-104. [Repealed.]

Compiler's Notes. Former § 35-1-104 (Acts 1986, ch. 566, § 1), concerning the successor trustees, their appointment by petition and multiple trustees, was repealed by Acts 2004, ch. 537, § 97, effective July 1, 2004.

35-1-105. [Repealed.]

Compiler's Notes. Former § 35-1-105 (Acts 1986, ch. 566, § 1), concerning the resignation of trustees, was repealed by Acts 2004, ch. 537, § 97, effective July 1, 2004.

35-1-106. [Repealed.]

Compiler's Notes. Former § 35-1-106 (Acts 1986, ch. 566, § 1; 2002, ch. 735, §§ 10-12), concerning the removal of trustees, was repealed by Acts 2004, ch. 537, § 97, effective July 1, 2004.

35-1-107. [Repealed.]

Compiler's Notes. Former § 35-1-107 (Acts 1986, ch. 566, § 1), concerning the examination of accounts and deficiencies, was repealed by Acts 2004, ch. 537, § 97, effective July 1, 2004.

35-1-108. [Repealed.]

Compiler's Notes. Former § 35-1-108 (Acts 1986, ch. 566, § 1), concerning the acceptance and finality of resignation or removal and divesting and vesting of title, was repealed by Acts 2004, ch. 537, § 97, effective July 1, 2004.

35-1-109. [Repealed.]

Compiler's Notes. Former § 35-1-109 (Acts 1986, ch. 566, § 1), concerning bond instead of removal, was repealed by Acts 2004, ch. 537, § 97, effective July 1, 2004.

35-1-110. [Repealed.]

Compiler's Notes. Former § 35-1-110 (Acts 1986, ch. 566, § 1), concerning the liability of new trustee, was repealed by Acts 2004, ch. 537, § 97, effective July 1, 2004.

35-1-111. Real property — Documents to be recorded — Trust property.

  1. When real estate is held as a part of the trust property, the court order accepting the resignation or ordering the removal of a trustee and appointing a successor, or an acknowledged memorandum of the order, shall be recorded in the county where any real estate is located, identifying each parcel of real estate held by the trust.
    1. When real estate is held as part of the trust property and a trustee has resigned or been removed without order of a court, the resigning or removed trustee shall execute and record an instrument that:
      1. Recites the resignation or removal of the trustee;
      2. Gives the name and address of the successor trustee, if any; and
      3. Identifies each parcel of real estate held by the trust.
    2. A successor trustee, or a remaining trustee if there is no successor, shall execute and record the instrument described in subdivision (b)(1) if the resigning or removed trustee fails to record the required instrument within thirty (30) days after resigning or being removed.

Acts 1986, ch. 566, § 1; 1992, ch. 951, § 11.

Compiler's Notes. Former chapter 1, §§ 35-1-10135-1-120 (Code 1858, §§ 3648-3664 (deriv. Acts, 1831, ch. 107, §§ 1, 2; 1845-1846, ch. 194, § 2; 1853-1854, ch. 74, § 1; 1855-1856, ch. 113, §§ 11, 15); Acts 1859-1860, ch. 34, § 1; Act Jan. 14, 1868, §§ 1, 2 (published in Acts 1868-1869, p. 80); Acts 1917, ch. 137, §§ 1-3; Shan., §§ 3530a1-3530a3, 5414-5432; Code 1932, §§ 9573-9595; modified; Code Supp. 1950, § 9593; T.C.A. (orig. ed.), §§ 35-101 — 35-122), concerning appointment and removal of trustees, was repealed by Acts 1986, ch. 566, § 1.

Textbooks. Tennessee Jurisprudence, 24 Tenn. Juris., Trusts and Trustees, §§ 43, 45.

35-1-112. [Repealed.]

Compiler's Notes. Former §§ 35-1-10135-1-110 and 35-1-11235-1-114 (Acts 1986, ch. 566, § 1; 1988, ch. 854, § 12; 1995, ch. 351, § 1; 1995, ch. 352, § 1; 2002, ch. 735, §§ 10-12), concerning the appointment and removal of trustees, was repealed by Acts 2004, ch. 537, § 97, effective July 1, 2004

35-1-113. [Repealed.]

Compiler's Notes. Former §§ 35-1-10135-1-110 and 35-1-11235-1-114 (Acts 1986, ch. 566, § 1; 1988, ch. 854, § 12; 1995, ch. 351, § 1; 1995, ch. 352, § 1; 2002, ch. 735, §§ 10-12), concerning the appointment and removal of trustees, was repealed by Acts 2004, ch. 537, § 97, effective July 1, 2004

Acts 2004, ch. 866, § 6, purported to amend § 35-1-113; however, that section was repealed by Acts 2004, ch. 537.

35-1-114. [Repealed.]

Compiler's Notes. Former §§ 35-1-10135-1-110 and 35-1-11235-1-114 (Acts 1986, ch. 566, § 1; 1988, ch. 854, § 12; 1995, ch. 351, § 1; 1995, ch. 352, § 1; 2002, ch. 735, §§ 10-12), concerning the appointment and removal of trustees, was repealed by Acts 2004, ch. 537, § 97, effective July 1, 2004

35-1-115 — 35-1-120. [Repealed.]

Compiler's Notes. Former chapter 1, §§ 35-1-10135-1-120 (Code 1858, §§ 3648-3664 (deriv. Acts, 1831, ch. 107, §§ 1, 2; 1845-1846, ch. 194, § 2; 1853-1854, ch. 74, § 1; 1855-1856, ch. 113, §§ 11, 15); Acts 1859-1860, ch. 34, § 1; Act Jan. 14, 1868, §§ 1, 2 (published in Acts 1868-1869, p. 80); Acts 1917, ch. 137, §§ 1-3; Shan., §§ 3530a1-3530a3, 5414-5432; Code 1932, §§ 9573-9595; modified; Code Supp. 1950, § 9593; T.C.A. (orig. ed.), §§ 35-101 — 35-122), concerning appointment and removal of trustees, was repealed by Acts 1986, ch. 566, § 1.

35-1-121. Appointment of public trustee.

In addition to the other provisions for the appointment of trustees in this chapter, a public trustee may be appointed by the court pursuant to title 30, chapter 1, part 4.

Acts 1987, ch. 322, § 19.

35-1-122. [Repealed.]

Compiler's Notes. Former § 35-1-122 (Acts 1997, ch. 354, § 1), concerning the change of situs of trust and venues, was repealed by Acts 2004, ch. 537, § 97, effective July 1, 2004.

Chapter 2
Uniform Fiduciaries Act

35-2-101. Short title.

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

Acts 1953, ch. 82, § 14 (Williams, § 9596.31); T.C.A. (orig. ed.), § 35-201.

Cross-References. Bonds of fiduciaries, §§ 8-19-307, 35-50-111.

Textbooks. Pritchard on Wills and Administration of Estates (5th ed., Phillips and Robinson), §§ 737, 740.

Law Reviews.

Some Aspects of Estate Planning in Tennessee (Alec Brock Stevenson), 2 Vand. L. Rev. 265 (1949).

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, Is Federalization of Charity Law All Bad? What States Can Learn from the Internal Revenue Code, 67 Vand. L. Rev. 1621 (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: Comment, The Stored Communications Act and Digital Assets, 67 Vand. L. Rev. 1729 (2014).

Symposium: The Role of Federal Law in Private Wealth Transfer: Destructive Federal Preemption of State Wealth Transfer Law in Beneficiary Designation Cases: Hillman Doubles Down on Egelhoff, 67 Vand. L. Rev. 1665 (2014).

Symposium: The Role of Federal Law in Private Wealth Transfer: Disclaimers and Federalism, 67 Vand. L. Rev. 1871 (2014).

Symposium: The Role of Federal Law in Private Wealth Transfer: Federal Visions of Private Family Support, 67 Vand. L. Rev. 1835 (2014).

Symposium: The Role of Federal Law in Private Wealth Transfer: In Search of the Probate Exception, 67 Vand. L. Rev. 1533 (2014).

Symposium: The Role of Federal Law in Private Wealth Transfer:  Introduction, 67 Vand. L. Rev. 1531 (2014).

Symposium: The Role of Federal Law in Private Wealth Transfer: Probate Law Meets the Digital Age, 67 Vand. L. Rev. 1697 (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: The Creeping Federalization of Wealth-Transfer Law, 67 Vand. L. Rev. 1635  (2014).

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

Collateral References.

Enforceability of contractual right, in which fiduciary has interest, to purchase property of estate or trust. 6 A.L.R.4th 786.

Payment or distribution under invalid instruction as breach of trustee's duty. 6 A.L.R.4th 1196.

Uniform Fiduciaries Act, construction and application of provisions of, affecting rights and obligations arising from payment of personal obligations with trust funds. 114 A.L.R. 1088.

35-2-102. Chapter definitions.

  1. In this chapter, unless the context otherwise requires:
    1. “Bank” includes any person or association of persons, whether incorporated or not, carrying on the business of banking;
    2. “Fiduciary” includes a trustee under any trust, expressed, implied, resulting or constructive, executor, administrator, personal representative, guardian, conservator, curator, receiver, trustee in bankruptcy, assignee for the benefit of creditors, partner, agent, officer of a corporation, public or private, public officer, or any other person acting in a fiduciary capacity for any person, trust or estate;
    3. “Person” includes a corporation, partnership, or other association, or two (2) or more persons having a joint or common interest;
    4. “Principal” includes any person to whom a fiduciary as such owes an obligation; and
    5. “Savings institution” includes a federal or state savings and loan association or savings bank.
  2. A thing is done “in good faith,” within the meaning of this chapter, when it is in fact done honestly, whether it is done negligently or not.

Acts 1953, ch. 82, § 1 (Williams, § 9596.18); T.C.A. (orig. ed.), § 35-202; Acts 1985, ch. 167, § 1; 1988, ch. 854, § 13.

Law Reviews.

Ethics — Petty v. Privette: Exclusion of Attorney Liability in the Area of Estate Administration, 23 Mem. St. U.L. Rev. 687 (1993).

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.).

35-2-103. Application of payments made to fiduciaries — Validity of right or title acquired.

A person who in good faith pays or transfers to a fiduciary any money or other property, which the fiduciary as such is authorized to receive, is not responsible for the proper application thereof by the fiduciary, and any right or title acquired from the fiduciary in consideration of such payment or transfer is not invalid in consequence of a misapplication by the fiduciary.

Acts 1953, ch. 82, § 2 (Williams, § 9596.19); T.C.A. (orig. ed.), § 35-203.

35-2-104. Transfer of negotiable instrument by fiduciary.

If any negotiable instrument payable or endorsed to a fiduciary as such is endorsed by the fiduciary, or if any negotiable instrument payable or endorsed to the principal is endorsed by a fiduciary empowered to endorse such instrument on behalf of the principal, the endorsee is not bound to inquire whether the fiduciary is committing a breach of the fiduciary's obligation as fiduciary in endorsing or delivering the instrument, and is not chargeable with notice that the fiduciary is committing a breach of the obligation as fiduciary unless the endorsee takes the instrument with actual knowledge of such breach or with knowledge of such facts that the action in taking the instrument amounts to bad faith. If, however, such instrument is transferred by the fiduciary in payment of or as security for a personal debt of the fiduciary to the actual knowledge of the creditor, or is transferred in any transaction known by the transferee to be for the personal benefit of the fiduciary, the creditor or other transferee is liable to the principal if the fiduciary in fact commits a breach of the obligation as fiduciary in transferring the instrument.

Acts 1953, ch. 82, § 4 (Williams, § 9596.21); T.C.A. (orig. ed.), § 35-205.

35-2-105. Check drawn by fiduciary payable to third person.

If a check or other bill of exchange is drawn by a fiduciary as such, or in the name of the principal by a fiduciary empowered to draw such instrument in the name of the principal, the payee is not bound to inquire whether the fiduciary is committing a breach of the fiduciary's obligation as fiduciary in drawing or delivering the instrument, and is not chargeable with notice that the fiduciary is committing a breach of the obligation as fiduciary unless the payee takes the instrument with actual knowledge of such breach or with knowledge of such facts that the action in taking the instrument amounts to bad faith. If, however, such instrument is payable to a personal creditor of the fiduciary and delivered to the creditor in payment of or as security for a personal debt of the fiduciary to the actual knowledge of the creditor, or is drawn and delivered in any transaction known by the payee to be for the personal benefit of the fiduciary, the creditor or other payee is liable to the principal if the fiduciary in fact commits a breach of the obligation as fiduciary in drawing or delivering the instrument.

Acts 1953, ch. 82, § 5 (Williams, § 9596.22); T.C.A. (orig. ed.), § 35-206.

35-2-106. Check drawn by and payable to fiduciary — Uniform Veterans' Guardianship Act unaffected.

  1. If a check or other bill of exchange is drawn by a fiduciary as such or in the name of the principal by a fiduciary empowered to draw such instrument in the name of the principal, payable to the fiduciary personally, or payable to a third person and by the third person transferred to the fiduciary, and is thereafter transferred by the fiduciary, whether in payment of a personal debt of the fiduciary or otherwise, the transferee is not bound to inquire whether the fiduciary is committing a breach of the fiduciary's obligation as fiduciary in transferring the instrument, and is not chargeable with notice that the fiduciary is committing a breach of the obligation as fiduciary unless the transferee takes the instrument with actual knowledge of such breach or with knowledge of such facts that the action in taking the instrument amounts to bad faith, except and provided that title 34, chapter 5, being the Uniform Veterans' Guardianship Act, is not by this chapter amended.
  2. This chapter shall not apply in any situation governed by the Uniform Veterans' Guardianship Act.

Acts 1953, ch. 82, § 6 (Williams, § 9596.23); T.C.A. (orig. ed.), § 35-207.

35-2-107. Deposit in name of fiduciary as such — Drawing check.

If a deposit is made in a bank or savings institution to the credit of a fiduciary as such, the bank or savings institution is authorized to pay the amount of the deposit or any part thereof upon the check of the fiduciary, signed with the name in which such deposit is entered, without being liable to the principal, unless the bank or savings institution pays the check with actual knowledge that the fiduciary is committing a breach of the fiduciary's obligation as fiduciary in drawing the check or with knowledge of such facts that its action in paying the check amounts to bad faith. If, however, such a check is payable to the drawee bank or savings institution and is delivered to it in payment of or as security for a personal debt of the fiduciary to it, the bank or savings institution is liable to the principal if the fiduciary in fact commits a breach of the obligation as fiduciary in drawing or delivering the check except as provided in § 35-2-106.

Acts 1953, ch. 82, § 7 (Williams, § 9596.24); T.C.A. (orig. ed.), § 35-208; Acts 1985, ch. 167, § 2.

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.

35-2-108. Deposit in name of principal — Drawing checks.

If a check is drawn upon the account of the principal in a bank or savings institution by a fiduciary who is empowered to draw checks upon the principal's account, the bank or savings institution is authorized to pay such check without being liable to the principal, unless the bank or savings institution pays the check with actual knowledge that the fiduciary is committing a breach of the fiduciary's obligation as fiduciary in drawing such check, or with knowledge of such facts that its action in paying the check amounts to bad faith. If, however, such a check is payable to the drawee bank or savings institution and is delivered to it in payment of or as security for a personal debt of the fiduciary to it, the bank or savings institution is liable to the principal if the fiduciary in fact commits a breach of the obligation as fiduciary in drawing or delivering the check.

Acts 1953, ch. 82, § 8 (Williams, § 9596.25); T.C.A. (orig. ed.), § 35-209; Acts 1985, ch. 167, § 2.

35-2-109. Deposit in fiduciary's personal account — Drawing checks.

If a fiduciary makes a deposit in a bank or savings institution to the fiduciary's personal credit of checks drawn by the fiduciary upon an account in the fiduciary's own name as fiduciary, or of checks payable to the fiduciary as fiduciary, or of checks drawn by the fiduciary upon an account in the name of the principal if the fiduciary is empowered to draw checks thereon, or of checks payable to the principal and endorsed by the fiduciary, if the fiduciary is empowered to endorse such checks, or if the fiduciary otherwise makes a deposit of funds held by the fiduciary as fiduciary, the bank or savings institution receiving such deposit is not bound to inquire whether the fiduciary is committing thereby a breach of the obligation as fiduciary. The bank or savings institution is authorized to pay the amount of the deposit or any part thereof upon the personal check of the fiduciary without being liable to the principal unless the bank or savings institution receives the deposit or pays the check with actual knowledge that the fiduciary is committing a breach of the obligation as fiduciary in making such deposit or in drawing such check or with knowledge of such facts that its action in receiving the deposit or paying the check amounts to bad faith.

Acts 1953, ch. 82, § 9 (Williams, § 9596.26); T.C.A. (orig. ed.), § 35-210; Acts 1985, ch. 167, § 2.

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.).

35-2-110. Deposit in names of two or more trustees — Drawing checks.

When a deposit is made in a bank or savings institution in the name of two (2) or more persons as fiduciaries and a check is drawn upon the fiduciary account by any fiduciary or fiduciaries authorized by the other fiduciary or fiduciaries to draw checks upon the fiduciary account, neither the payee nor other holder nor the bank or savings institution is bound to inquire whether it is a breach of trust to authorize such fiduciary or fiduciaries to draw checks upon the fiduciary account, and is not liable unless the circumstances be such that the action of the payee or other holder or the bank or savings institution amounts to bad faith.

Acts 1953, ch. 82, § 10 (Williams, § 9596.27); T.C.A. (orig. ed.), § 35-211; Acts 1985, ch. 167, § 2; 1988, ch. 854, § 14.

35-2-111. Applicability of chapter — Cases not provided for.

  1. This chapter is applicable to state and federal savings and loan associations and savings banks. In the event of a conflict between this chapter and a law on the same subject relating specifically to state or federal savings and loan associations or savings banks, the specific law shall be controlling.
  2. In any case not provided for in this chapter, the rules of law and equity, including the law merchant and those rules of law and equity relating to trusts, agency, negotiable instruments and banking, shall continue to apply.
    1. Knowledge on the part of the bank or savings institution of the existence of a fiduciary relationship or the terms of the relationship shall not impose any duty or liability on the bank or savings institution for any action of the fiduciary.
    2. A bank or savings institution has no duty to establish an account for a fiduciary or to limit transactions in an account so established unless, in its discretion, it contracts in writing with the fiduciary to establish or limit transactions with respect to such an account; provided, that this shall not preclude a court from temporarily enjoining or restraining the removal of funds from an existing account by a bank or savings institution over which the court exercises personal jurisdiction.

Acts 1953, ch. 82, § 12 (Williams, § 9596.29); T.C.A. (orig. ed.), § 35-213; Acts 1985, ch. 168, § 1; 1993, ch. 175, § 1.

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.).

35-2-112. Uniformity of interpretation.

This chapter shall be so interpreted and construed as to effectuate its general purpose to make uniform the law of those states which enact it.

Acts 1953, ch. 82, § 13 (Williams, § 9596.30); T.C.A. (orig. ed.), § 35-214.

Chapter 3
Investment of Trust Funds

35-3-101. Authority of court.

The court is authorized to have the money and funds in the hands of clerks and receivers, or trustees, in litigation or under the control of the court, invested under such rules and orders in each case as may be legal and just.

Acts 1865, ch. 19, § 1; Shan., § 5433; mod. Code 1932, § 9592; T.C.A. (orig. ed.), § 35-301.

Cross-References. Investment of funds of minors and incompetents, § 18-5-105.

Textbooks. Pritchard on Wills and Administration of Estates (5th ed., Phillips and Robinson), § 737.

Tennessee Jurisprudence, 12 Tenn. Juris., Executors and Administrators, § 21; 14 Tenn. Juris., Guardian and Ward, §§ 8, 9; 24 Tenn. Juris., Trusts and Trustees, § 58.

Law Reviews.

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).

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, §§ 5-8-4015-8-403 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.

35-3-102. Authorized investments.

All trustees, guardians and other fiduciaries in this state, unless prohibited, or another mode of investment is prescribed by the will or deed of the testator or other person establishing the trust, may invest all funds in their hands in securities specified in §§ 35-3-10335-3-111, and may also invest funds in income-producing commercial or residential property.

Acts 1931, ch. 100, § 1; C. Supp. 1950, § 9596.1; modified; T.C.A. (orig. ed.), § 35-302; Acts 2016, ch. 640, § 3.

Amendments. The 2016 amendment added “, and may also invest funds in income-producing commercial or residential property.” at the end.

Effective Dates. Acts 2016, ch. 640, § 4. March 23, 2016.

Law Reviews.

Non-Tax Aspects of Estate Planning (Ronald Lee Gilman), 2 Mem. St. U.L. Rev. 41 (1972).

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).

35-3-103. Federal and state securities.

  1. Investments may be made in bonds, notes and stock of the United States and any state and territory of the United States.
  2. In the absence of an express provision to the contrary, if an indenture or other governing instrument directs, requires, authorizes or permits investment in United States government obligations, a bank, trust company, trust department or other fiduciary may invest in the obligations, either directly or in the form of securities or other interests in any open end or closed end management type investment company or investment trust registered under the federal Investment Company Act of 1940 (15 U.S.C. § 80a-1 et seq.), if the portfolio of the investment company or investment trust is limited to United States government obligations and to repurchase agreements fully collateralized by the obligations and if the investment company or investment trust actually takes delivery of the collateral, either directly or through an authorized custodian.

Acts 1931, ch. 100, § 1(a); C. Supp. 1950, § 9596.1(A); modified; T.C.A. (orig. ed.), § 35-303; Acts 1987, ch. 89, § 1; 2008, ch. 672, § 1.

Cross-References. See notes to § 35-3-102.

35-3-104. Securities of foreign governments.

Investments may be made in bonds, notes and stock issued or guaranteed by any foreign government with which the United States is at the time of sale or offer of sale of the bonds, notes or stock maintaining diplomatic relations and which foreign government has not, for at least thirty (30) years prior to the making of the investment, defaulted for more than thirty (30) days in the payment of any part either of principal or interest of any bond, note, stock or other evidence of indebtedness issued by it; provided, that if the foreign government has not been in existence for as much as thirty (30) years, but has been in existence for not less than ten (10) years, then the investment may be made in securities issued or guaranteed by it, if it has not defaulted in the payment of any part either of principal or interest of any bond, note, stock or other evidence of indebtedness issued by it since it has been in existence.

Acts 1931, ch. 100, § 1(b); C. Supp. 1950, § 9596.1(B); modified; T.C.A. (orig. ed.), § 35-304.

Cross-References. See notes to § 35-3-102.

35-3-105. Bonds of counties.

  1. Investments may be made in bonds of any county in the state and bonds of any city or town in the state having a population of not less than two thousand (2,000) by the last federal census preceding the investment, regardless of whether the bonds are payable from taxes levied on property in the county, city or town, or are payable solely from revenues of the waterworks system, electric distribution system or both owned and operated by the issuing county, city or town, or are payable from both taxes and revenues; provided, that the county, city or town has not defaulted within fifteen (15) years preceding the investment, for more than ninety (90) days, in the payment of any part of either principal or interest on any bond, note or other evidence of valid indebtedness.
  2. Before any funds may be invested in bonds payable solely from waterworks, electric revenue or both, there shall be furnished with the bonds a certified copy of an operating statement issued by the official in charge of the operations of the waterworks or electric distribution systems, showing that the net revenue from the system or systems pledged to and available for the principal of and interest on all outstanding bonds payable from that revenue, covering a period of twelve (12) consecutive months out of the fifteen (15) months preceding the investment, have been at least one and one-third (11/3) times the highest combined principal and interest requirements for any one (1) year on all bonds then outstanding that are payable from the pledged revenues of the system or systems.
  3. “Net revenue” means total revenue less operating expenses incurred in connection with the operation of the system or systems.

Acts 1931, ch. 100, § 1(c); 1939, ch. 143, § 1; 1949, ch. 275, § 1; C. Supp. 1950, § 9596.1(C); modified; T.C.A. (orig. ed.), § 35-305.

Compiler's Notes. For table of population of Tennessee municipalities, and for U.S. decennial populations of Tennessee counties, see Volume 13 and its supplement.

Cross-References. See notes to § 35-3-102.

35-3-106. Municipal bonds.

Investments may be made in bonds and notes of any county, city or town in any state or territory of the United States that has a population, as shown by the last federal census next preceding the investment, of not less than forty-five thousand (45,000) and has not defaulted within twenty-five (25) years next preceding the investment, for more than thirty (30) days, in the payment of any part of either principal or interest of any bond, note or other evidence of indebtedness.

Acts 1931, ch. 100, § 1(e); C. Supp. 1950, § 9596.1(D); modified; T.C.A. (orig. ed.), § 35-306.

Compiler's Notes. For table of population of Tennessee municipalities, and for U.S. decennial populations of Tennessee counties, see Volume 13 and its supplement.

Cross-References. See notes to § 35-3-102.

35-3-107. Real estate bonds and notes.

Investments may be made in bonds and notes secured by first mortgage or deed of trust on real estate located in this state; provided, that:

  1. The face or principal amount of the bonds or notes does not exceed one half (½) the actual value of the real estate as appraised by one (1) or more licensed real estate dealers acting for unincorporated trustees, guardians or other fiduciaries, and in case of incorporated trustees, guardians or other fiduciaries, the appraisal shall be made by an agent or committee composed of or selected by the board of directors or executive committee of the incorporated trustee, guardian or other fiduciary;
  2. The trustee, guardian or other fiduciary or any institution controlled by that entity or person has not received any commission from the borrower or issuer in the making of the mortgage or deed of trust or the underwriting of the securities secured by the mortgage or deed of trust, unless the commission charged the borrower or issuer does not exceed one percent (1%) per annum of the aggregate principal amount of the bonds or notes; and
  3. Any probate or chancery court of the county where the fiduciary is located, upon the application of any beneficiary of the trust or of any person connected with any beneficiary, by consanguinity or affinity, within the sixth degree as computed by the civil law, may, at any time, either restrain the making of any such proposed investment, if the investment is not consummated, or if consummated, require the fiduciary promptly to dispose of the bonds or notes at the best price then obtainable and otherwise reinvest the funds, and the court may exercise such power to restrain or compel disposal in all cases in which the court may find that action to be necessary to protect the interest of any beneficiary.

Acts 1931, ch. 100, § 1(f); C. Supp. 1950, § 9596.1(E); modified; T.C.A. (orig. ed.), § 35-307.

Cross-References. See notes to § 35-3-102.

Law Reviews.

Tennessee and the Installment Land Contract: A Viable Alternative to the Deed of Trust, 21 Mem. St. U.L. Rev. 551 (1991).

35-3-108. Railroad obligations.

  1. Investments may be made in the following railroad obligations:
    1. Obligations issued, assumed or guaranteed as to principal and interest by endorsement, or so guaranteed, which guaranty has been assumed;
    2. Obligations for the payment of the principal and interest of which a railroad corporation such as is described in this section is obligated under the terms of a lease made or assumed; or
    3. Equipment trust obligations in respect of which liability has been incurred by a railroad corporation incorporated under the laws of the United States, or any state of the United States, and owning and operating within the United States not less than five hundred (500) miles of standard-gauge railroad line, exclusive of sidings, or if the mileage so owned is less than five hundred (500) miles, the railroad operating revenues from the operation of all railroads operated by it, including the revenues from the operation of all railroads controlled through ownership of all, except directors' qualifying shares, of the voting stock of the owning corporation, was not less than ten million dollars ($10,000,000) each year for at least five (5) of the six (6) fiscal years next preceding the investment.
  2. Provided, that:
    1. In each year for at least five (5) of the six (6) fiscal years and in the last fiscal year next preceding the investment, the amount of income of such railroad corporation available for its fixed charges, as defined in subsection (c), was not less than one and one-half (1½) times its fixed charges, as defined in subsection (c);
    2. In each year for at least five (5) of the six (6) fiscal years next preceding the investment, the railroad corporation has paid dividends in cash upon its capital stock equivalent to at least one fourth (¼) of its fixed charges, or if the railroad corporation has not paid such dividends, that the amount of income available for its fixed charges was not less than one and one half (1½) times its fixed charges for at least nine (9) of the ten (10) fiscal years and in the last fiscal year next preceding the investment;
    3. At no time within the period of six (6) years has the railroad corporation failed regularly and punctually to pay the matured principal and interest of all its mortgage indebtedness; and
    4. The security, if any, for the obligations shall be property wholly or in part within the United States and the obligations shall be:
      1. Fixed interest-bearing bonds secured by direct mortgage on railroad owned or operated by the railroad corporation;
      2. Bonds secured by first mortgage upon terminal, depot or tunnel property, including lands, buildings and appurtenances, used in the service of transportation by one (1) or more railroad corporations; provided, that the bonds are the direct obligation of, or that payment of principal and interest of the bonds are guaranteed by, endorsement by or guaranteed by endorsement, which guaranty has been assumed by, one (1) or more railroad corporations;
      3. Equipment trust obligations, comprising bonds, notes and certificates, issued in connection with the purchase for use on railroads of new standard-gauge rolling stock through the medium of an equipment trust agreement, and which obligations, so long as any of them are outstanding and unpaid or unprovided for, shall be secured by an instrument:
        1. Vesting title to the equipment in a trustee free of encumbrance; or
        2. Creating a first lien on the equipment, or, pending the vesting of title, by the deposit of cash in trust to an amount equal to the face amount of the obligations issued in respect of the equipment, title to which is not yet so vested; provided, that the maximum amount of the obligations so issuable shall not exceed eighty percent (80%) of the cost of the equipment; and provided further, that the owner, purchaser or lessee, or the owners, purchasers or lessees, of the equipment shall be obligated by the terms of the obligations or of the instrument to:
          1. Maintain the equipment in proper repair;
          2. Replace any of the equipment that may be destroyed or released with other equipment of equal value, or, if released in connection with a sale of the equipment, to deposit the proceeds of the sale in trust for the benefit of the holders of the obligations pending replacement of the equipment;
          3. Pay any and all taxes or other governmental charges that may be required by law to be paid upon the equipment;
          4. Pay, in accordance with the provisions of the obligations or of the instrument, to holders, or to the trustee for the benefit of holders, of the obligations the amount of interest due on the obligations or of the dividends payable in respect of the obligations; and
          5. Pay the amount of the entire issue of the obligations in annual or semiannual installments each year throughout a period of not exceeding fifteen (15) years from the first date of issue of any of the obligations that the amount of the respective unmatured installments at any time outstanding shall be approximately equal; provided, that unless the owner, purchaser or lessee of the equipment, or one (1) or more of the owners, purchasers or lessees shall be a railroad corporation as is described in and meets the requirements of this section preceding subdivision (b)(4)(A), the obligations shall be guaranteed by endorsements as to principal and as to interest or dividends by the railroad corporation;
      4. Bonds of the railroad corporation secured by irrevocable pledge as collateral under a trust agreement of other railroad bonds that are legal investment for fiduciaries under this section, have a maturity not earlier than the bonds that they secure and of a total face amount not less than the total face amount of the bonds that they secure; or
      5. Fixed interest-bearing mortgage bonds other than those described in subdivisions (b)(4)(A) and (B), income mortgage bonds, collateral trust bonds or obligations other than those described in subdivision (b)(4)(D), or unsecured bonds or obligations, issued, assumed or guaranteed as to principal and interest by endorsement by, or so guaranteed, which guaranty has been assumed by, the railroad corporation; provided, that in each year for at least five (5) of the six (6) fiscal years and in the last fiscal year next preceding the investment:
        1. The amount of income of the railroad corporation available for its fixed charges, as defined in subsection (c), was not less than twice the sum of:
          1. Its fixed charges, as defined in subsection (c); and
          2. Full interest on the income mortgage bonds, if any;
        2. The net income of which after deductions was not less than ten thousand dollars ($10,000); and
        3. The railroad corporation has made the dividend and principal and interest payments required  by subdivisions (b)(4)(C)(ii)(d ) and (e ).
  3. The amount of income available for fixed charges shall be the amount obtained by deducting from gross income all items deductible in ascertaining net income other than contingent income interest and those constituting fixed charges. Fixed charges shall be rent for leased roads, miscellaneous rents, fixed interest on funded debt, interest on unfunded debt and amortization of discount on funded debt.
  4. Accounting terms used in this section shall be deemed to refer to those used in the accounting reports prescribed by the accounting regulations for common carriers subject to the Interstate Commerce Act (U.S.C. Title 49). If the interstate commerce commission prescribes accounting regulations in which are defined the terms “income available for fixed charges” and “fixed charges,” the definitions of those terms as so prescribed shall be taken and used in lieu of the definitions set forth in subsection (c) for all purposes.
  5. For purposes of this section, the revenues, earnings, income and fixed charges of, and dividends paid by, any railroad corporation, all or substantially all of the railroad lines of which have been acquired through merger, consolidations, conveyance or lease by another railroad corporation and remain in its possession, shall be deemed to be revenues, earnings, income and fixed charges of, and dividends paid by, the latter corporation.
  6. Not more than twenty-five percent (25%) of the assets of any trust shall be loaned or invested in the bonds, notes and certificates in this section defined, and not more than ten percent (10%) of the assets shall be invested in such bonds, notes and certificates for which any one (1) railroad corporation shall be obligated.

Acts 1931, ch. 100, § 1(g); C. Supp. 1950, § 9596.1(F); modified; T.C.A. (orig. ed.), § 35-308.

Cross-References. See notes to § 35-3-102.

35-3-109. Public utility bonds.

  1. Investments may be made in the bonds of any corporation that at the time of the investment is incorporated under the laws of the United States or any state of the United States, or the District of Columbia, and transacting the business of supplying electrical energy or artificial gas or both for light, heat, power and other purposes; provided, that at least seventy-five percent (75%) of the gross operating revenues of any such corporation are derived from that business, and not more than fifteen percent (15%) of the gross operating revenues, are derived from any one (1) kind of business other than supplying electricity and gas; and provided further, that corporation is subject to regulation by the Tennessee public utility commission or a public utility commission, or other similar regulatory body duly established by the laws of the United States or the states in which such corporation operates, subject to the following conditions:
    1. The corporation has all franchises necessary to operate in territory in which at least seventy-five percent (75%) of its gross income is earned, which franchises shall either be indeterminate permits or agreements with or subject to the jurisdiction of the Tennessee public utility commission, or other duly constituted regulatory body, or extend at least five (5) years beyond the maturity of the bonds;
    2. The outstanding full paid capital stock of the corporation is equal to at least two thirds (2/3) of the total debt secured by mortgage lien on any part or all of its property; provided, that in case of a corporation having nonpar value shares, the amount of capital that such shares represent is the capital as shown by the books of the corporation;
    3. The corporation has been in existence for a period of not less than eight (8) fiscal years and at no time within the period of eight (8) fiscal years next preceding the date of the investment has the corporation failed to pay promptly and regularly the matured principal and interest of all its indebtedness direct, assumed or guaranteed, but the period of life of the corporation, together with the period of life of any predecessor corporation or corporations from which a major portion of its property was acquired by consolidation, merger or purchase shall be considered together in determining the required period;
    4. For a period of five (5) fiscal years next preceding the investment the net earnings of the corporation have averaged per year not less than twice the average annual interest charges on its total funded debt applicable to that period, and for the last fiscal year preceding the investment its net earnings have been not less than twice the interest charges for a full year on its total funded debt outstanding at the time of the investment, and for that period the gross operating revenues of any such corporation have averaged per year not less than one million dollars ($1,000,000), and the corporation has for each year either earned an amount available for dividends or paid in dividends an amount equal to four percent (4%) upon a sum equivalent to two thirds (2/3) of its funded debt;
    5. The bonds must be part of an issue of not less than one million dollars ($1,000,000) and must be mortgage bonds secured by a first or refunding mortgage secured by property owned and operated by the corporation issuing or assuming them, or must be underlying mortgage bonds secured by property owned and operated by the corporations issuing or assuming them. The bonds are to be refunded by a junior mortgage providing for their retirement; provided, that the bonds under the junior mortgage comply with the requirements of this section and that the underlying mortgage is either a closed mortgage or remains open solely for the issue of additional bonds which are to be pledged under the junior mortgage. The aggregate principal amount of bonds secured by the first or refunding mortgage plus the principal amount of all the underlying outstanding bonds shall not exceed sixty percent (60%) of the value of the physical property owned as shown by the books of the corporation and subject to the lien of the mortgage or mortgages securing the total mortgage debt; and provided further, that, if a refunding mortgage, it must provide for the retirement on or before the date of their maturity of all bonds secured by prior liens on the property; and
    6. Not more than twenty-five percent (25%) of the assets of any trust shall be loaned on or invested in bonds of electric and gas corporations, and not more than ten percent (10%) of the assets of any trust shall be invested in the bonds of any one such corporation, as authorized by this section.
  2. In determining the qualifications of any bond under this section where a corporation has acquired its property or any substantial part thereof within five (5) years immediately preceding the date of the investment by consolidation or merger, or by the purchase of all or a substantial portion of the property of any other corporation or corporations, the gross operating revenues, net earnings and interest charges of the several predecessor or constituent corporations shall be consolidated and adjusted so as to ascertain whether there has been compliance with the requirements of subdivision (a)(4).
    1. The gross operating revenues and expenses of a corporation, for the purposes of this section, shall be, respectively, the total amount earned from the operation of, and the total expense of maintaining and operating all property owned and operated by or leased and operated by the corporation, as determined by the system of accounts prescribed by the Tennessee public utility commission, public utility commission or other similar regulatory body having jurisdiction in the matter. The gross operating revenues and expenses, as defined in this subdivision (c)(1), of subsidiary companies may be included; provided, that all the mortgage bonds and a controlling interest in stock or stocks of the subsidiary companies are pledged as part security for the mortgage debt of the principal company; and
    2. The net earnings of any corporation, for the purpose of this section, shall be the balance obtained by deducting from its gross operating revenues, its operating and maintenance expenses, taxes other than federal and state income taxes, rentals and provision for renewals and retirements of the physical assets of the corporation, and by adding to the balance its income from securities and miscellaneous sources, but not, however, to exceed fifteen percent (15%) of the balance;

Acts 1931, ch. 100, § 1(h); C. Supp. 1950, § 9596.1(G); modified; T.C.A. (orig. ed.), § 35-309; Acts 1995, ch. 305, § 100; 2017, ch. 94, § 34.

Amendments. The 2017 amendment substituted “Tennessee public utility commission” for “Tennessee regulatory authority” in (a), (a)(1), and (c)(1).

Effective Dates. Acts 2017, ch. 94, § 83. April 4, 2017.

Cross-References. See notes to § 35-3-102.

35-3-110. Telephone corporation bonds.

  1. Investments may be made in the bonds of any corporation that at the time of the investment is incorporated under the laws of the United States or any state of the United States, or the District of Columbia, and is authorized to engage and is engaging in the business of furnishing telephone service in the United States, and provided the corporation is subject to regulation by the interstate commerce commission or a regulatory authority, or public utility commission or other similar federal or state regulatory body duly established by the laws of the United States or the states in which the corporation operates, subject to the following conditions:
    1. The corporation has been in existence for a period of not less than eight (8) fiscal years and at no time within that period of eight (8) fiscal years next preceding the date of the investment has the corporation failed to pay promptly and regularly the matured principal and interest of all its indebtedness direct, assumed or guaranteed, but the period of life of the corporation, together with the period of life of any predecessor corporation or corporations from which a major portion of its property was acquired by consolidation, merger or purchase, shall be considered together in determining the required period;
    2. The outstanding full paid capital stock of the corporation is at the time of the investment equal to at least two thirds (2/3) of the total debt secured by all mortgage liens on any part or all of its property;
    3. For a period of five (5) fiscal years next preceding the investment, the net earnings of the corporation have averaged per year not less than twice the average annual interest charges on its total funded debt applicable to that period, and for the last fiscal year preceding the investment, the net earnings have been not less than twice the interest charges for a full year on its total funded debt outstanding at the time of the investment, and for that period, the gross operating revenues of the corporation have averaged per year not less than five million dollars ($5,000,000), and the corporation has for each of those years either earned an amount available for dividends or paid in dividends an amount equal to four percent (4%) upon all of its outstanding capital stock; and
    4. The bonds must be part of an issue of not less than five million dollars ($5,000,000) and must be secured by a first or refunding mortgage, and the aggregate principal amount of bonds secured by the first or refunding mortgage, plus the principal amount of all underlying outstanding bonds, shall not exceed sixty percent (60%) of the value of the property, real and personal, owned absolutely and subject to the lien of the mortgage; provided, that, if a refunding mortgage, it must provide for the retirement of all bonds secured by prior liens on the property. Not more than thirty-three and one third percent (331/3%) of the property constituting the specific security for the bonds may consist of stock or unsecured obligations of affiliated or other telephone companies, or both.
  2. In determining the qualification of any bond under this section, where a corporation has acquired its property or any substantial part of its property within five (5) years immediately preceding the date of the investment by consolidation or merger or by the purchase of all or a substantial portion of the property of any other corporation or corporations, the gross operating revenues, net earnings and interest charges of the several predecessor or constituent corporations shall be consolidated and adjusted so as to ascertain whether there has been compliance with the requirements of subdivision (a)(3).
  3. The gross operating revenues and expenses of a corporation, for the purpose of this section, shall be respectively the total amount earned from the operation of, and the total expense of maintaining and operating, all property owned and operated by or leased and operated by the corporation, as determined by the system of accounts prescribed by the interstate commerce commission or the Tennessee public utility commission, or public utility commission, or other similar federal or state regulatory body having jurisdiction in the matter.
  4. The net earnings of any corporation, for the purpose of this section, shall be the balance obtained by deducting from its gross operating revenues its operating and maintenance expenses, provision for depreciation of the physical assets of the corporation, taxes other than federal and state income taxes, rentals and miscellaneous charges, and by adding to the balance its income from securities and miscellaneous sources, but not, however, to exceed fifteen percent (15%) of the balance. “Funded debt” means all interest bearing debts maturing more than one (1) year from date of issue.
  5. Not more than twenty-five percent (25%) of the assets of any trust shall be loaned on or invested in bonds of telephone corporations, and not more than ten percent (10%) of the assets of any trust shall be invested in the bonds of any one (1) telephone corporation, as authorized by this section.

Acts 1931, ch. 100, § 1(i); C. Supp. 1950, § 9596.1(H); modified; T.C.A. (orig. ed.), § 35-310; Acts 1995, ch. 305, § 101; 2017, ch. 94, § 35.

Amendments. The 2017 amendment substituted “Tennessee public utility commission” for “Tennessee regulatory authority” in (c).

Effective Dates. Acts 2017, ch. 94, § 83. April 4, 2017.

Cross-References. See notes to § 35-3-102.

35-3-111. Obligations of certain federal agencies.

Trustees, guardians and other fiduciaries may also invest in or lend on the following obligations issued by the following authorized federal agencies:

  1. Bonds and/or debentures issued by a federal home loan bank organized under the “Federal Home Loan Bank Act” (47 Stat. 725, 12 U.S.C. § 1421 et seq.);
  2. Stock of federal savings and loan associations organized under the “Home Owner's Loan Act of 1933” (48 Stat. 128, 12 U.S.C. § 1461 et seq.), and amendments to that act, and/or building and loan associations, licensed to do business in Tennessee, where the stock of the associations is insured by the federal savings and loan insurance corporation;
  3. Notes, bonds, debentures or other obligations issued under title IV of the act of congress of the United States entitled “National Housing Act,” approved June 27, 1934 (48 Stat. 1246, 12 U.S.C. § 1701 et seq.), and any amendments thereto; and
  4. Mortgages guaranteed or insured under title III of the act of congress of the United States, entitled “Servicemen's Readjustment Act of 1944,” approved June 22, 1944 (58 Stat. 284, 38 U.S.C. § 1801 et seq. [repealed]), and any amendments thereto.

Acts 1935 (E.S.), ch. 36, § 1; 1939, ch. 73, § 1; 1949, ch. 175, § 1; C. Supp. 1950, § 9596.1(I); modified; T.C.A. (orig. ed.), § 35-311.

Compiler's Notes. Some of the provisions in (2) may be obsolete. The federal savings and loan insurance corporation no longer exists.

Title III of the Servicemen's Readjustment Act of 1944, referred to in subdivision (4), was repealed by Act Sept. 2, 1958, P.L. 85-857, § 14(87), 72 Stat. 1273. For present law, see 38 U.S.C. § 3701 et seq.

Cross-References. See notes to § 35-3-102.

35-3-112. State and federal bond issues — Reports.

Guardians, executors, administrators and trustees shall also be authorized and empowered to invest money and funds in their hands in the bonds of the state, of the United States, or obligations issued separately or collectively by or for federal land banks, federal intermediate credit banks and banks for cooperatives under the act of congress known as the Farm Credit Act of 1971 (85 Stat. 583, 12 U.S.C. § 2001 et seq.) and amendments to that act, or in obligations issued under the Home Owner's Loan Act of congress (12 U.S.C. § 1461 et seq.), or notes or bonds secured by mortgage or trust deed insured by the federal housing administrator, or bonds and/or debentures issued by national mortgage associations; also to lend on the security of any such bonds to the extent of eighty-five percent (85%) of their face value; and, in either case, make report thereof to the court where the guardian, executor, administrator or trustee is qualified, unless another mode of investment is required by will or deed of the testator or another person who has established the funds.

Acts 1865, ch. 19, § 2; Shan., § 4281; Acts 1925, ch. 9, § 1; Shan. Supp., § 4281a4; mod. Code 1932, § 8497; Acts 1935, ch. 136, § 1; 1935, ch. 187, § 1; 1937, ch. 75, § 1; C. Supp. 1950, § 8497; Acts 1976, ch. 585, § 2; T.C.A. (orig. ed.), § 35-312.

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).

35-3-113. Life, endowment or annuity contracts of life insurance companies.

  1. Executors, trustees and guardians are authorized, with the approval of a probate court or other court of competent jurisdiction, to invest out of income or principal of funds in their custody, in single or annual premium life, endowment or annuity contracts of legal reserve life insurance companies duly licensed and qualified to transact business within the state.
  2. Such contracts may be issued on the life or lives of any beneficiary, cestui que trust or ward, who may have a vested or contingent interest in the estate, or on the life or lives of any parent, trustor or other person in whom any beneficiary, cestui que trust or ward may have an insurable interest, and shall such be so drawn that the legal title of the policy or contract shall be in and the proceeds or avails of the proceeds payable to and in the control of the fiduciary making the investment, and may be retained and shall be subject to transfer, assignment and conveyance by the fiduciary as other personal property held in the account.

Acts 1939, ch. 133, §§ 1-3; 1945, ch. 150, § 1; mod. C. Supp. 1950, § 9596.2; T.C.A. (orig. ed.), § 35-313; Acts 2010, ch. 725, § 22.

Law Reviews.

Some Aspects of Estate Planning in Tennessee (Alec Brock Stevenson), 2 Vand. L. Rev. 265 (1949).

35-3-114. Certificates of deposit and savings accounts.

All trustees and guardians in this state, unless prohibited, or another mode of investment is prescribed, by the will or deed of the testator or other person establishing the trust, may invest trust funds in their hands, in addition to the investments heretofore authorized, in certificates of deposit of, and savings accounts in, any national or state bank in the United States, including itself if such trustee or guardian is a national or state bank in the United States otherwise qualified, whose deposits are insured by the federal deposit insurance corporation, at the prevailing rate of interest of such certificates or savings accounts. No trustee or guardian shall invest in such certificates of deposit of, or savings accounts in any one (1) bank, an amount from any one (1) fund in the trustee's or guardian's care in excess of such amount as is fully insured as a deposit in the bank by the federal deposit insurance corporation, unless the investment is first approved by a court of competent jurisdiction.

Acts 1939, ch. 170, § 1; C. Supp. 1950, § 9596.3 (Williams, § 9596.7); Acts 1975, ch. 331, § 1; T.C.A. (orig. ed.), § 35-314; Acts 1989, ch. 288, § 1.

35-3-115. Public housing authority obligations.

Notwithstanding any restrictions on investments contained in any laws of this state, the state and all public officers, municipal corporations, political subdivisions, and public bodies, all banks, bankers, trust companies, savings banks and institutions, building and loan associations, savings and loan associations, investment companies, and other persons carrying on a banking business, all insurance companies, insurance associations and other persons carrying on an insurance business, and all executors, administrators, guardians, trustees and other fiduciaries may legally invest any sinking funds, moneys or other funds belonging to them or within their control in any bonds or other obligations issued by a housing authority pursuant to the Housing Authorities Law, compiled in title 13, chapter 20, and any amendments to that law, or issued pursuant to the Memphis Housing Authority Law, chapter 615 of the Private Acts of 1935, as amended by chapter 900 of the Private Acts of 1937, and any amendments to that law, or issued by any public housing authority or agency in the United States, when the bonds or other obligations are secured by a pledge of annual contributions to be paid by the United States government or any agency of the United States government. The bonds and other obligations shall be authorized security for all public deposits, it being the purpose of this section to authorize any persons, firms, corporations, associations, political subdivisions, bodies and officers, public or private, to use any funds owned or controlled by them, including, but not limited to, sinking, insurance, investment, retirement, compensation, pension and trust funds, and funds held on deposit, for the purchase of any such bonds or other obligations; provided, that nothing contained in this section shall be construed as relieving any person, firm or corporation from any duty of exercising reasonable care in selecting securities.

Acts 1939, ch. 155, § 1; C. Supp. 1950, § 9596.4 (Williams, § 9596.8); T.C.A. (orig. ed.), § 35-315.

35-3-116. Courts empowered to authorize retention of original investments.

  1. Any guardian, personal representative, trustee or other fiduciary may make, in the county in which appointed, application to the chancery court, or to any other court therein having concurrent jurisdiction, for permission to retain and hold in unchanged form any security or investment originally forming a part of the estate, and the court shall have the authority and power to authorize the guardian, personal representative, trustee or other fiduciary, to retain and hold in unchanged form any security or investment originally forming a part of the estate, upon it being made to appear to the court that retention of the security or investment is to the manifest interest of the estate. The authority to retain securities or investments, when granted to the fiduciary by the instrument under which the fiduciary is acting, is not affected by the foregoing provisions.
  2. The application in every such case shall be made by bill or petition, and the beneficiaries be made the defendants and served with process, and the cause shall be conducted and heard in the same manner as other suits in chancery.
  3. A guardian ad litem shall be appointed for all defendants under disability, and the decree of the court authorizing the retention of the securities or investments shall set out fully the reasons and object moving the court in granting to the fiduciary the authority so to do.
  4. It is not intended to impose upon a fiduciary any duty or obligation in addition to those arising under previously existing law, nor is it intended to change, modify or alter any investment statute of the state, except insofar as variations from those statutes may be made through proceedings authorized by this section.

Acts 1945, ch. 53, §§ 1-4; mod. C. Supp. 1950, §§ 9596.5-9596.7 (Williams, §§ 9596.9-9596.11); T.C.A. (orig. ed.), §§ 35-316 — 35-318.

Textbooks. Pritchard on Wills and Administration of Estates (5th ed., Phillips and Robinson), § 740.

Law Reviews.

Wills and Fiduciary Powers (Robert L. McMurray), 31 Tenn. L. Rev. 191 (1964).

Collateral References.

Absences of market therefor as justifying trustee's retention of unauthorized or nonlegal securities received from creator of trust. 88 A.L.R.3d 894.

35-3-117. Investment in securities of management investment company or investment trust by bank or trust company — Fiduciary liability — Abuse of fiduciary discretion.

  1. Notwithstanding any other law, a bank or trust company, to the extent it acts at the direction of another person authorized to direct investment of funds held by the bank or trust company, or to the extent that it exercises investment discretion as a fiduciary, custodian, managing agent, or otherwise with respect to the investment and reinvestment of assets that it maintains in its trust department, may invest and reinvest the assets, subject to the standard contained in this section, in the securities of any open-end or closed-end management investment company or investment trust registered under the Investment Company Act of 1940 (15 U.S.C. §§ 80a-1 — 80a-64). The fact that the bank or trust company, or any affiliate of the bank or trust company, is providing services to the investment company or trust as investment advisor, sponsor, distributor, custodian, transfer agent, registrar or otherwise, and receiving reasonable remuneration for the services, does not preclude the bank or trust company from investing in the securities of the investment company or trust.
  2. In the absence of express provisions to the contrary in the governing instrument, a fiduciary will not be liable to the beneficiaries or to the trust with respect to a decision regarding the allocation and nature of investments of trust assets unless the court determines that the decision was an abuse of the fiduciary's discretion. A court shall not determine that a fiduciary abused its discretion merely because the court would not have exercised the discretion in the same manner.
  3. If a court determines that a fiduciary has abused its discretion regarding the allocation and nature of investments of trust assets, the remedy is to restore the income and remainder beneficiaries to the positions they would have occupied if the fiduciary had not abused its discretion, according to the following rules:
    1. To the extent that the abuse of discretion has resulted in no distribution to a beneficiary or a distribution that is too small, the court shall require a distribution from the trust to the beneficiary in an amount that the court determines will restore the beneficiary, in whole or in part, to the beneficiary's appropriate position, taking into account all prior distributions to the beneficiary.
    2. To the extent that the abuse of discretion has resulted in a distribution to a beneficiary that is too large, the court shall restore the beneficiaries, the trust, or both, in whole or in part, to their appropriate positions, taking into account all prior distributions, by requiring the fiduciary to withhold an amount from one (1) or more future distributions to the beneficiary who received the distribution that was too large or requiring that beneficiary to return some or all of the distribution to the trust.
    3. To the extent that the court is unable, after applying subdivisions (c)(1) and (c)(2), to restore the beneficiaries, the trust, or both, to the position they would have occupied if the fiduciary had not abused its discretion, the court may require the fiduciary to pay an appropriate amount from its own funds to one (1) or more of the beneficiaries or the trust or both.
  4. Upon a petition by the fiduciary, the court having jurisdiction over the trust or agency account shall determine whether a proposed plan of investment by the fiduciary will result in an abuse of the fiduciary's discretion. If the position describes the proposed plan of investment and contains sufficient information to inform the beneficiaries of the reasons for the proposal, the facts upon which the fiduciary relies, and an explanation of how the income and remainder beneficiaries will be affected by the proposed plan of investment, a beneficiary who challenges the proposed plan of investment has the burden of establishing that it will result in an abuse of discretion.

Acts 1951, ch. 125, §§ 1-6 (Williams, §§ 9596.12-9596.17); Acts 1968, ch. 518, § 1; 1971, ch. 61, § 1; 1974, ch. 634, § 1; T.C.A. (orig. ed.), §§ 35-319 — 35-324; Acts 1989, ch. 288, § 2; 1991, ch. 386, § 1; 2001, ch. 57, §§ 1, 2; 2002, ch. 696, § 15.

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

Law Reviews.

Selection and Removal of Fiduciaries (Robert L. McMurray), 26 No. 3 Tenn. B.J. 22 (1990).

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

35-3-118. Stocks or bonds held by fiduciary in nominee's name.

  1. Trustees, guardians and other fiduciaries owning stocks or registered bonds may hold them in the name of a nominee without mention of the fiduciary relationship in the stock certificates, stock registration books, or registered bond or bond registry; provided, that:
    1. The records and all reports and accounts rendered by the fiduciary clearly show the ownership of the stock or bond by the fiduciary, and the facts regarding its holding; and
    2. The nominee deposits with the fiduciary a signed statement showing the fiduciary ownership, either endorses the stock certificate or registered bond in blank, or signs a transfer power in blank, and attach it to the certificate or bond, and does not have possession of or access to the stock certificate or bond, except under the immediate supervision of the fiduciary.
  2. The fiduciary shall be personally liable for any loss resulting from any act of the nominee in connection with the securities so held.
  3. This section shall apply to all such fiduciary relationships.

Acts 1953, ch. 165, §§ 1, 3 (Williams, § 9596.8b); 1957, ch. 49, § 1; T.C.A. (orig. ed.), § 35-325.

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

Law Reviews.

Wills, Estates and Trusts (William J. Bowe), 6 Vand. L. Rev. 1126 (1953).

35-3-119. Tennessee valley authority obligations.

Notwithstanding any restrictions on investments contained in any laws of this state, the state and all public officers, municipal corporations, political subdivisions, and public bodies, all banks, bankers, trust companies, savings banks and institutions, building and loan associations, savings and loan associations, investment companies, and other persons carrying on a banking business, all insurance companies, insurance associations and other persons carrying on an insurance business, and all executors, administrators, guardians, trustees and other fiduciaries may legally invest any sinking funds, moneys or other funds belonging to them or within their control in any bonds or other obligations issued by the Tennessee valley authority pursuant to the Tennessee Valley Authority Act of 1933 (16 U.S.C. § 831), and any amendment to that act, and the bonds and other obligations shall be authorized security for all public deposits, it being the purpose of this section to authorize any persons, firms, corporations, associations, political subdivisions, bodies and officers, public or private, to use any funds owned or controlled by them, including, but not limited to, sinking, insurance, investment, retirement, compensation, pension and trust funds, and funds held on deposit, for the purchase of any such bonds or other obligations. Nothing contained in this section shall be construed as relieving any person, firm or corporation from any duty of exercising reasonable care in selecting securities.

Acts 1961, ch. 128, § 1; T.C.A., § 35-326.

Law Reviews.

The Right to Counsel for the Indigent Defendant in Tennessee (Charles H. Miller), 31 Tenn. L. Rev. 300 (1964).

35-3-120. Federally guaranteed loans and investments.

  1. Banks, trust companies, insurance companies, building and loan associations, credit unions, trustees and others acting in a fiduciary capacity, trust funds, pension and profit-sharing funds, real estate investment trusts, and other financial institutions, originating mortgagee institutions, and other institutions approved as mortgagees and otherwise meeting the requirements of the federal housing administration or veterans administration to act as mortgagees under the programs of these agencies may:
    1. Make loans and advances of credit and purchases of obligations representing loans and advances of credit that are eligible for credit insurance by the federal housing commissioner, and may obtain that insurance;
    2. Make loans secured by real property or leasehold, that the federal housing commissioner insures or makes a commitment to insure, and may obtain that insurance;
    3. Invest their funds, eligible for investment, in notes or bonds secured by mortgage or trust deed insured by the federal housing commissioner, and in debentures issued by the federal housing commissioner, and also in securities issued by the Federal National Mortgage Association; and
    4. Make any loans and advances of credit and purchases of obligations representing loans and advances of credit that are eligible to be guaranteed or insured in whole or in part by the veterans administration or administrator of veterans affairs, or secured by real property or leasehold as the administrator of veterans affairs makes a commitment to guarantee or insure.
  2. No law of this state, requiring security upon which loans or investments may be made, or prescribing the nature, amount or form of the security, or prescribing or limiting interest rates upon loans or investments, or limiting investments of capital or deposits, or prescribing or limiting the period for which loans or investments may be made, shall apply to loans or investments made pursuant to this section.

Acts 1961, ch. 43, §§ 1, 2; T.C.A., §§ 35-327, 35-328.

35-3-121. Investments in securities by banks or trust companies.

Unless the governing instrument, court order, or a statute specifically directs otherwise, a bank or trust company serving as trustee, guardian, agent, or in any other fiduciary capacity may invest in any security authorized by this chapter even if that fiduciary or an affiliate of that fiduciary, as defined in former § 35-3-117(d) [repealed], participates or has participated as a member of a syndicate underwriting the security, if:

  1. The fiduciary does not purchase the security from itself or its affiliate; and
  2. The fiduciary does not purchase the security from another syndicate member or an affiliate, pursuant to an implied or express agreement between the fiduciary or its affiliate and a selling member or its affiliate, to purchase all or part of each other's underwriting commitments.

Acts 1983, ch. 60, § 1; T.C.A., § 35-329.

Compiler's Notes. Former § 35-3-117(d), referred to in this section, was repealed by Acts 2002, ch. 696, § 15, effective July 1, 2002.

Law Reviews.

Selected Tennessee Legislation of 1983 (N. L. Resener, J. A. Whitson, K. J. Miller), 50 Tenn. L. Rev. 785 (1983).

35-3-122. Liability of fiduciaries for losses.

Whenever an instrument under which a fiduciary is acting reserves to the settlor or vests an advisory or investment committee or in any other person or persons including one (1) or more other fiduciaries, to the exclusion of the fiduciary or to the exclusion of one (1) or more of several fiduciaries, authority to direct the making or retention of any investment, or to perform any other act in the management or administration of the fiduciary account, the excluded fiduciary or fiduciaries shall not be liable, either individually or as a fiduciary, for any loss resulting from the making or retention of any investment or other act pursuant to that direction.

Acts 1987, ch. 89, § 2.

35-3-123. Trustee liability — Action upon written directions.

  1. A trustee of a revocable, irrevocable or testamentary trust is not liable to any beneficiary for any act performed or omitted pursuant to written directions from the person holding the power to revoke, terminate or amend the trust.
  2. A trustee of a revocable, irrevocable or testamentary trust is not liable for any investment action performed or omitted pursuant to written directions from the person to whom the power to direct the investment or management of the account is delegated by the trustor.

Acts 1989, ch. 288, § 3.

35-3-124. Investment in tuition units.

Notwithstanding any other law to the contrary, trustees and others acting in a fiduciary capacity, including governmental agencies such as court clerks, may invest funds held in trust for a minor through the purchase of tuition units on behalf of the minor under the Tennessee College Savings Trust Act, compiled in title 49, chapter 7, part 8.

Acts 1997, ch. 64, § 1; 2017, ch. 400, § 2.

Amendments. The 2017 amendment substituted “Tennessee College Savings Trust Act” for “Tennessee Baccalaureate Education System Trust Act” .

Effective Dates. Acts 2017, ch. 400, § 20. July 1, 2017.

Chapter 4
Uniform Common Trust Fund Act

35-4-101. Short title.

This chapter shall be known and may be cited as the “Uniform Common Trust Fund Act.”

Acts 1953, ch. 148, § 4 (Williams, § 9596.35); T.C.A. (orig. ed.), § 35-401.

Law Reviews.

Wills and Fiduciary Powers (Robert L. McMurray), 31 Tenn. L. Rev. 191 (1964).

Collateral References.

Construction of the Uniform Common Trust Fund Act. 64 A.L.R.2d 268.

35-4-102. Bank or trust company establishing common trust funds — Investing in trust funds.

Any bank or trust company qualified to act as fiduciary in this state may establish common trust funds for the purpose of furnishing investments to itself as fiduciary, or to itself and others as cofiduciaries, or to another bank or trust company which may, as such fiduciary or cofiduciary, invest funds that it lawfully holds for investment in interests in the common trust funds, if this investment is not prohibited by the instrument, judgment, decree or order creating the fiduciary relationship, and if, in the case of cofiduciaries, the bank or trust company procures the consent of its cofiduciaries to the investment.

Acts 1953, ch. 148, § 1 (Williams, § 9596.32); 1973, ch. 378, § 1; T.C.A. (orig. ed.), § 35-402.

35-4-103. Accounting for trust funds — Chancery court approval.

  1. Unless ordered by a court of competent jurisdiction, the bank or trust company operating the common trust funds is not required to render a court accounting with regard to the funds, but it may, by application to the chancery court, secure approval of such an accounting on such conditions as the court may establish.
  2. When an accounting of a common trust fund is presented to a court for approval, the court shall assign a date and place for hearing and order notice thereof by:
    1. Publication once a week for three (3) weeks, the first publication to be not less than twenty (20) days prior to the date of hearing, of a notice in a newspaper having a circulation in the county in which the bank or trust company or branch thereof operating the common trust fund is located;
    2. Mailing not less than fourteen (14) days prior to the date of the hearing a copy of the notice to all beneficiaries of the trusts participating in the common trust fund whose names are known to the bank or trust company from the records kept by it in the regular course of business in the administration of the trusts, directed to them at the addresses shown by those records; and
    3. Such further notice if any as the court may order.

Acts 1953, ch. 148, § 2 (Williams, § 9596.33); T.C.A. (orig. ed.), § 35-403.

Law Reviews.

The Tennessee Court System — Chancery Court (Frederic S. Le Clercq), 8 Mem. St. U.L. Rev. 281 (1978).

35-4-104. Uniformity of construction and interpretation.

This chapter shall be so interpreted and construed as to effectuate its general purpose to make uniform the law of those states that enact it.

Acts 1953, ch. 148, § 3 (Williams § 9596.34); T.C.A. (orig. ed.), § 35-404.

35-4-105. Fiduciary relationships to which chapter applicable.

This chapter applies to fiduciary relationships in existence on April 8, 1953, or established after that date.

Acts 1953, ch. 148, § 7; T.C.A. (orig. ed.), § 35-405.

Chapter 5
Judicial or Trust Sales

35-5-101. Twenty days' notice by publication.

  1. In any sale of land to foreclose a deed of trust, mortgage or other lien securing the payment of money or other thing of value or under judicial orders or process, advertisement of the sale shall be made at least three (3) different times in some newspaper published in the county where the sale is to be made.
  2. The first publication shall be at least twenty (20) days previous to the sale.
  3. This section shall not apply where the amount of indebtedness for the payment of which the property being sold does not amount to more than two hundred dollars ($200), in which event the owner of the property may order that advertisement be made by written notices posted as provided in § 35-5-103, instead of by notices published in a newspaper.
  4. Nothing in this section shall be construed as applying to any notice published in accordance with any contract entered into heretofore, and expressed in a mortgage, deed of trust or other legal instruments.
  5. In any sale of land to foreclose a deed of trust, mortgage, or other lien securing the payment of money or other thing of value or under judicial orders of process, the trustee or other party that sells the property shall send to the debtor and any co-debtor a copy of the notice required in § 35-5-104. The notice shall be sent on or before the first date of publication provided in subsection (b) by registered or certified mail, return receipt requested. The notice shall be sent to the following:
    1. If to the debtor, addressed to the debtor at:
      1. The mailing address of the property, if any; and
      2. The last known mailing address of the debtor or any other mailing address of the debtor specifically designated for purposes of receiving notices provided at least thirty (30) days prior to the first publication date in written correspondence or written notice in accordance with the loan agreement from the debtor to the creditor, but only if the last known mailing address of the debtor or other mailing address designated by the debtor is different from the mailing address of the property; and
    2. If to a co-debtor, addressed to the co-debtor at the last known mailing address of the co-debtor or any other mailing address of the co-debtor specifically designated for purposes of receiving notices provided at least thirty (30) days prior to the first publication date in written correspondence or written notice in accordance with the loan agreement from the co-debtor to the creditor, but only if the last known mailing address of the co-debtor or other mailing address designated by the co-debtor is both different from the mailing address of the property and different from the mailing address of the debtor determined as provided in subdivision (e)(1)(B).
  6. Unless postponement or adjournment is contractually prohibited, any sale hereunder may be adjourned and rescheduled one (1) or more times without additional newspaper publication, upon compliance with the following provisions:
    1. The sale must be held within one (1) year of the originally scheduled date;
    2. Each postponement or adjournment must be to a specified date and time, and must be announced at the date, time and location of each scheduled sale date;
    3. If the postponement or adjournment is for more than thirty (30) days, notice of the new date, time, and location must be mailed no less than (10) calendar days prior to the sale date via regular mail to the debtor and co-debtor; and
    4. Notice of the right to postpone or adjourn without additional newspaper publication shall not be required to be published in any newspaper publication.

Code 1858, § 2145 (deriv. Acts 1855-1856, ch. 83, § 1); Acts 1859-1860, ch. 60; Shan., § 3838; mod. Code 1932, § 7793; Acts 1943, ch. 123, § 1; mod. C. Supp. 1950, § 7793; Acts 1957, ch. 41, § 1; T.C.A. (orig. ed.), § 35-501; Acts 2006, ch. 801, § 10; 2008, ch. 743, § 1; 2011, ch. 505, § 2.

Compiler's Notes. Acts 2006, ch. 801,  § 1 provided that the act shall be known and may be cited as the “Tennessee Home Loan Protection Act of 2006.”

Cross-References. Advertising sales of land by execution, § 26-5-101.

Application to enjoin sale, title 29, ch. 23, part 2.

Certified mail in lieu of registered mail, § 1-3-111.

Court officer purchasing property sold through court, § 39-16-405.

Officer purchasing at own sale, misdemeanor, § 39-16-405.

Power of court to sell land, § 16-1-107.

Registration of decree, § 16-1-109.

Sales on execution, §§ 26-5-10126-5-114.

Sheriff's duty to advertise, § 8-8-201.

Vesting of title by decree, § 16-1-108.

Warranty of title and covenant of seizin, § 16-1-110.

Textbooks. Gibson's Suits in Chancery (7th ed., Inman), § 282.

Pritchard on Wills and Administration of Estates (5th ed., Phillips and Robinson), § 895.

Tennessee Jurisprudence, 16 Tenn. Juris., Judicial Sales, §§ 8, 13; 19 Tenn. Juris., Mortgages and Deeds of Trust, § 52.

Law Reviews.

Simple Real Estate Foreclosures Made Complex: The Byzantine Tennessee Process (John A. Walker, Jr.), 62 Tenn. L. Rev. 231 (1995).

Tennessee and the Installment Land Contract: A Viable Alternative to the Deed of Trust, 21 Mem. St. U.L. Rev. 551 (1991).

Attorney General Opinions. Minimum requirements for publication and notice to be given to the owner of real property during a foreclosure, OAG 05-095 (6/14/05), 2005 Tenn. AG LEXIS 97.

The provisions of T.C.A. § 35-5-501 do not apply to delinquent tax sales, OAG 07-135 (9/12/07), 2007 Tenn. AG LEXIS 135.

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.

35-5-102. Notice in newspaper not required.

If no newspaper is published in the county in which the land is to be sold, the advertisement in a newspaper is dispensed with, unless ordered by court.

Code 1858, § 2147 (deriv. Acts 1855-1856, ch. 83, § 2); Shan., § 3840; Code 1932, § 7795; T.C.A. (orig. ed.), § 35-502.

Law Reviews.

Power of Sale Foreclosure in Tennessee, 8 Mem. St. U.L. Rev. 871 (1978).

35-5-103. Posting written notices.

Whenever the advertisement cannot be made in a newspaper, the officer shall make publication of the sale for thirty (30) days by written notices posted in at least five (5) of the most public places in the county, one (1) of which shall be the courthouse door, and another in the neighborhood of the defendant; if of realty, in the civil district where the land lies.

Code 1858, § 2148 (deriv. Acts 1855-1856, ch. 83, § 3); Shan., § 3841; Code 1932, § 7796; Acts 1943, ch. 123, § 2; C. Supp. 1950, § 7796; T.C.A. (orig. ed.), § 35-503.

Cross-References. Notice of execution sale, §§ 26-5-10126-5-103.

Textbooks. Pritchard on Wills and Administration of Estates (5th ed., Phillips and Robinson), § 895.

Tennessee Jurisprudence,  12 Tenn. Juris., Executions, § 36; 16 Tenn. Juris., Judicial Sales, §§ 8, 13; 19 Tenn. Juris., Mortgages and Deeds of Trust, § 52.

Law Reviews.

Power of Sale Foreclosure in Tennessee, 8 Mem. St. U.L. Rev. 871 (1978).

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).

35-5-104. Contents of advertisement or notice — Contents of deed memorializing sale.

  1. The advertisement or notice shall:
    1. Give the names of the plaintiff and defendant, or parties interested;
    2. Give a concise description of the land; such description shall include a legal description, which means a reference to the deed book and page that contains the complete legal description of the property, and common description, which means, if available, the street address and map and parcel number of the property. In the event no street address exists, a subdivision, lot or tract number may be used. A metes and bounds description may be, but is not required to be, included in the description of the land;
    3. Mention the time and place of sale;
      1. Identify each and every lien or claimed lien of the United States with respect to which 26 U.S.C. § 7425(b) requires notice to be given to the United States in order for the sale of the land thus advertised not to be subject to the lien or claim of lien of the United States;
      2. For every lien or claim of lien of the United States so identified, affirmatively state that the notice required by 26 U.S.C. § 7425(b) to be given to the United States has been timely given;
      3. For every lien or claim of lien of the United States so identified, state that the sale of the land thus advertised will be subject to the right of the United States to redeem the land as provided for in 26 U.S.C. § 7425(d)(1);
      1. Identify each and every lien or claimed lien of the state with respect to which § 67-1-1433(b)(1) requires notice to be given to the state in order for the sale of the land thus advertised not to be subject to the lien or claim of lien of the state;
      2. For every lien or claim of lien of the state so identified, affirmatively state that the notice required by § 67-1-1433(b)(1) to be given to the state has been timely given; and
      3. For every lien or claim of lien of the state so identified, state that the sale of the land thus advertised will be subject to the right of the state to redeem the land as provided for in § 67-1-1433(c)(1); and
    4. For each concise description of land, provide the corresponding names of the parties interested.
  2. The deed memorializing the sale shall, in addition to any other requirements as may now or hereafter exist under the laws of the state with respect to the proper form of deeds, in order that they might qualify for recording in the various offices of registers of counties in this state, whenever subsection (a) has required notice to be given to the United States and/or to this state, state that the land described therein is conveyed subject to the rights of the United States to redeem the land as provided for in 26 U.S.C. § 7425(d)(1) and/or is subject to the right of this state to redeem the land as provided for in § 67-1-1433(c)(1), as appropriate, shall have attached to it, as exhibits, a copy of the notice thus provided to the United States, a copy of the written response of the United States to the notice thus provided, if any, a copy of the notice thus provided to the state, and a copy of the written response of the state to the notice thus provided, if any, as appropriate.
  3. Nothing in this section shall be construed to require inclusion of a street address if it does not exist or is not in common use. Also, utilization of the street address, if any, which appears in the records of the assessor of property with respect to the property involved shall be conclusively presumed to be in compliance with this section.
  4. For the purposes of this section, “parties interested” includes, without limitation, the record holders of any mortgage, deed of trust, or other lien that will be extinguished or adversely affected by the sale and which mortgage, deed of trust, or lien, or notice or evidence thereof, was recorded more than ten (10) days prior to the first advertisement or notice in the register's office of the county in which the real property is located. “Parties interested” also includes a person or entity named as nominee or agent of the owner of the obligation that is secured by the deed of trust and that is identifiable from information provided in the deed of trust, which shall include a mailing address or post office box of the nominee or agent.

Code 1858, § 2149 (deriv. Acts 1855-1856, ch. 83, § 1); Shan., § 3842; Code 1932, § 7797; Acts 1982, ch. 801, § 1; T.C.A. (orig. ed.), § 35-504; Acts 1992, ch. 621, § 1; 1994, ch. 618, § 1; 1999, ch. 66, § 1; 2011, ch. 505, § 1; 2015, ch. 213, §§ 1, 2.

Amendments. The 2015 amendment added (a)(6) and added the second sentence of (d).

Effective Dates. Acts 2015, ch. 213, § 4. July 1, 2015.

Textbooks. Gibson's Suits in Chancery (7th ed., Inman), §§ 277, 282.

Law Reviews.

Power of Sale Foreclosure in Tennessee, 8 Mem. St. U.L. Rev. 871 (1978).

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).

35-5-105. Notice in writing if printer refuses.

If the printer will not make the publication for the rates provided in § 8-21-1301, the officer or person conducting the sale shall make publication by written notices as provided in §§ 35-5-103 and 35-5-104.

Code 1858, § 2151 (deriv. Acts 1855-1856, ch. 83, § 3); Shan., § 3844; Code 1932, § 7799; T.C.A. (orig. ed.), § 35-506.

Textbooks. Tennessee Jurisprudence, 16 Tenn. Judicial Sales, § 8.

Law Reviews.

Power of Sale Foreclosure in Tennessee, 8 Mem. St. U.L. Rev. 871 (1978).

35-5-106. Sale without advertisement is not void.

Should the officer, or other person making the sale, proceed to sell without pursuing the provisions of this chapter, the sale shall not, on that account, be either void or voidable.

Code 1858, § 2152 (deriv. Acts 1855-1856, ch. 83, § 4); Shan., § 3845; Code 1932, § 7800; T.C.A. (orig. ed.), § 35-507.

Textbooks. Gibson's Suits in Chancery (7th ed., Inman), § 282.

Pritchard on Wills and Administration of Estates (5th ed., Phillips and Robinson), §§ 741, 895.

Tennessee Jurisprudence, 16 Tenn. Juris., Judicial Sales, §§ 8, 13.

Law Reviews.

Power of Sale Foreclosure in Tennessee, 8 Mem. St. U.L. Rev. 871 (1978).

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 §§ 35-5-10135-5-106 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).

35-5-107. Effect of noncompliance with chapter.

Any officer, or other person, referenced in § 35-5-106 who fails to comply with this chapter commits a Class C misdemeanor and is, moreover, liable to the party injured by the noncompliance, for all damages resulting from the failure.

Code 1858, § 2153 (deriv. Acts 1855-1856, ch. 83, § 5); Shan., § 3846; Code 1932, § 7801; T.C.A. (orig. ed.), § 35-508; Acts 1989, ch. 591, § 113.

Cross-References. Penalty for Class C misdemeanor, § 40-35-111.

Textbooks. Tennessee Jurisprudence, 19 Tenn. Juris., Mortgages and Deeds of Trust, § 59.

Law Reviews.

Power of Sale Foreclosure in Tennessee, 8 Mem. St. U.L. Rev. 871 (1978).

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).

35-5-108. Plan of division of land — Sale of portion of land.

At any time before ten o'clock a.m. (10:00 a.m.) on the day of sale, the defendant or other person whose property is to be sold may deliver to the officer or person making the sale, a plan of division of the lands to be sold, subscribed by the defendant or other person, bearing a date subsequent to the date of advertisement, in which case so much of the land as may be necessary to satisfy the debt and costs, and no more, shall be sold according to the plan furnished. If no such plan is furnished, the land may be sold without division.

Code 1858, § 2154 (deriv. Acts 1799, ch. 14, § 3); Shan., § 3847; Code 1932, § 7802; T.C.A. (orig. ed.), § 35-509.

Cross-References. Defendant dividing lands in execution sales, § 26-5-105.

Textbooks. Gibson's Suits in Chancery (7th ed., Inman), § 463.

Tennessee Jurisprudence, 19 Tenn. Juris., Mortgages and Deeds of Trust, § 59.

Law Reviews.

Power of Sale Foreclosure in Tennessee, 8 Mem. St. U.L. Rev. 871 (1978).

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).

35-5-109. Published ending time and published start time for auctions.

The published ending time for auctions conducted under this chapter on an internet-based bidding platform and the published start time for an in-person auction must be between the hours of nine o'clock a.m. (9:00 a.m.) and seven o'clock p.m. (7:00 p.m.) of the day fixed in the notice or advertisement. The day fixed may be any day Monday through Saturday, but must not be fixed on a state or federal legal holiday. However, this section does not apply to sales of parcels pursuant to title 67, chapter 5.

Code 1858, § 2155 (deriv. Acts 1807, ch. 99, § 1); Shan., § 3848; Code 1932, § 7803; T.C.A. (orig. ed.), § 35-510; Acts 2014, ch. 912, § 3; 2015, ch. 414, § 1; 2017, ch. 187, § 2; 2019, ch. 471, § 1.

Amendments. The 2015 amendment added the third sentence.

The 2017 amendment substituted “between the hours of nine o'clock a.m. (9:00 a.m.) and seven o'clock p.m. (7:00 p.m.)” for “between the hours of ten o'clock a.m. (10:00 a.m.) and four o'clock p.m. (4:00 p.m.)” in the first sentence.

The 2019 amendment rewrote the section which read: “The sale in all these cases shall be made between the hours of nine o'clock a.m. (9:00 a.m.) and seven o'clock p.m. (7:00 p.m.) of the day fixed in the notice or advertisement. The day fixed may be any day Monday through Saturday, but shall not be fixed on a state or federal legal holiday. However, this requirement shall not be applicable to sales of parcels pursuant to title 67, chapter 5.”

Effective Dates. Acts 2015, ch. 414, § 29. May 8, 2015.

Acts 2017, ch. 187, § 3. April 19, 2017.

Acts 2019, ch. 471, § 21. July 1, 2019.

Cross-References. Hours of sale, § 26-5-104.

Textbooks. Pritchard on Wills and Administration of Estates (5th ed., Phillips and Robinson), § 895.

35-5-110. Bidding on land sales may be reopened by clerks — Court's power not abridged.

In all sales of land made under orders, and decrees of the circuit, probate, chancery, appeals and supreme courts where an advance bid of as much as ten percent (10%) of the original bid is made, the clerk, or clerk and master, of the court is empowered, at no additional fee, commission or cost, to accept the advance bid and reopen the biddings on the sale, and to receive additional bids, and to hold the sale open for advance bids to some day by the officer designated, and give the purchaser and the parties, or their attorneys of record, notice of the reopening of the biddings, and to report this action to the court for confirmation without any order or decree of the court authorizing the reopening first being had, unless the court's order or decree for the sale of the land specifically prohibits the acceptance of an advance bid; provided, that nothing in this section shall be construed as abridging the rights and jurisdiction of the court to reopen the biddings on such terms as the court may deem right.

Acts 1899, ch. 37, § 1; Shan., § 3848a1; mod. Code 1932, § 7804; T.C.A. (orig. ed.), § 35-511; Acts 2014, ch. 930, § 1.

Textbooks. Tennessee Jurisprudence, 16 Tenn. Juris., Judicial Sales, § 29.

Law Reviews.

Power of Sale Foreclosure in Tennessee, 8 Mem. St. U.L. Rev. 871 (1978).

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).

35-5-111. State may bid at execution or judicial sales.

Whenever the state is interested in the proceeds of any execution sale or any judicial sale, to any extent whatsoever, the state, acting through its attorney general and reporter, may bid on and buy in property either real or personal, at that sale, to the same extent as any natural person might do. Any sums due and payable on behalf of the state, as costs of sale or as a part of the purchase price of the property so bid in and paid by the state, shall be paid out of the general fund of the state treasury upon the warrant of the governor.

Acts 1943, ch. 11, § 1; C. Supp. 1950, § 7804.1; T.C.A. (orig. ed.), § 35-512.

35-5-112. Auctioneer services and fee — Manner and method of sale of real property at discretion of court.

  1. Whenever real or personal property is to be sold at public sale under any order or decree of any court in this state, the court, judge or chancellor under whose jurisdiction the sale is to be made has the discretionary authority to secure the services of an auctioneer licensed in this state to conduct the public sale and to fix the auctioneer's fee, the fee to be not more than eight percent (8%) of the sale price on sales of real property and not more than ten percent (10%) of the sale price on sales of personal property, these fees not to include the expenses of sales, and to order the fee to be paid out of the proceeds of the sale.
  2. Whenever real property is sold at a public sale conducted by an auctioneer, the manner and method of sale is at the discretion of the court. As used in this section, “public sale” includes auctions on internet-based bidding platforms, in-person, on-site, or off-site auctions, and other accepted auction methods, so long as the auctions are open for participation by the public at large. The court, in its discretion, may impose additional conditions or procedures upon the sale of property as are reasonably necessary.
  3. If the clerk of the court or clerk and master is also a licensed auctioneer, then the clerk or clerk and master shall receive fees in that person's capacity as clerk, or clerk and master, or special commissioner, and shall not receive any extra fee as a licensed auctioneer.

Acts 1975, ch. 334, §§ 1, 2; 1976, ch. 772, § 1; 1978, ch. 769, § 1; T.C.A., §§ 35-513, 35-514; Acts 2011, ch. 320, § 1; 2015, ch. 414, § 2; 2019, ch. 471, § 2.

Amendments. The 2015 amendment added the second sentence of (b).

The 2019 amendment rewrote (b) which read: “Whenever real property is sold at a public sale conducted by an auctioneer, the sale shall be conducted on the real property to be sold. This subsection (b) shall not be applicable to sales of parcels pursuant to title 67, chapter 5.”

Effective Dates. Acts 2015, ch. 414, § 29. May 8, 2015.

Acts 2019, ch. 471, § 21. July 1, 2019.

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).

35-5-113. Auction sales in divorce proceedings.

The provisions and procedures of this chapter apply to all auction sales of property ordered by a court pursuant to § 36-4-121, to accomplish the equitable division of property in divorce cases. The court, in its discretion, may impose any additional conditions or procedures upon the sale of property in divorce cases as are reasonably designed to ensure that the property is sold for its fair market value.

Acts 1986, ch. 722, § 1.

35-5-114. Trustee's attendance at foreclosure — Successor trustee.

  1. In any sale of land to foreclose a deed of trust, mortgage, or other lien securing the payment of money or other thing of value, the trustee or person or entity holding a similar position may attend the foreclosure either in person or by an agent. If the trustee attends by an agent, the agent may receive bids and conduct the sale on behalf of the trustee. The trustee shall execute any applicable trustee's deed or similar conveyance instrument. The appointment of an agent by a trustee need not be by written instrument, nor is there any recording required relative to the appointment.
    1. The beneficiary may, unless the deed of trust contains specific language to the contrary, appoint a successor trustee at any time by filing a substitution of trustee for record with the register of deeds of the county in which the property is situated.
    2. The substitute trustee or its delegate shall succeed to all the power, duties, authority and title of the original trustee and any previous successor trustee or delegatee.
      1. In the event the substitution of trustee is not recorded prior to the first date of publication by the substitute trustee, the beneficiary shall include in the substitution of trustee instrument, which shall be recorded prior to the deed evidencing sale, the following statement:

        Beneficiary has appointed the substitute trustee prior to the first notice of publication as required by T.C.A. § 35-5-101 and ratifies and confirms all actions taken by the substitute trustee subsequent to the date of substitution and prior to the recording of this substitution.

      2. Once a substitution of trustee instrument containing the statement set forth in subdivision (b)(3)(A) is timely recorded, it shall act as conclusive proof as a matter of law that the substitute trustee has been timely appointed and has acted with authority of the beneficiary.
  2. A substitution of trustee shall be recorded prior to any sale, and no action may be instituted against any person who, acting in good faith without knowledge to the contrary, relies upon the validity of the substitution of trustee or written statements by the beneficiary or substitute trustee as to the authority of the substitute trustee.
  3. If the name of the substitute trustee is not included in the first publication, then, not less than ten (10) business days prior to the sale date, the substitute trustee shall send notice by registered or certified mail to the debtor or any co-debtor, as provided in § 35-5-101, and to any interested parties, giving the name and address of the substitute trustee. If the trustee is not a resident of this state, the notice shall include the name and address of a registered agent of the substitute trustee who is located in the state. Record notice of the mailing provided in this subsection (d) shall be evidenced by the substitute trustee's recordation of an affidavit recorded prior to the deed evidencing the sale or by recitation on the substitute trustee's deed.

Acts 1993, ch. 415, § 1; 2006, ch. 951, § 1.

Compiler's Notes. This section was originally designated as § 35-5-124, but has been redesignated as § 35-5-114.

Cross-References. Certified mail in lieu of registered mail, § 1-3-111.

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).

35-5-115. Discovery proceedings for nonresidents.

    1. IF a nonresident creditor holds indebtedness secured by residential real property that is located in this state and owned by a state resident, OR
    2. IF a nonresident trustee or agent is involved in foreclosure proceedings relative to residential real property that is located in this state and owned by a resident,
    3. THEN all discovery proceedings, including, but not limited to, the production of requested documents and the deposition of witnesses, shall be conducted in the county in which the residential real estate is located or in which the litigation is pending.
  1. The court in which such litigation is pending may make orders consistent with the purposes of this section to prevent undue burden on any party.

Acts 2003, ch. 174, § 1.

35-5-116. Trustee as necessary party.

  1. Any trustee named in a suit or proceeding, as related to a sale of real property under a trust deed or mortgage, may plead in the answer that the trustee is not a necessary party by a verified denial, stating the basis for the trustee's reasonable belief that the trustee was named as a party solely in the capacity as a trustee under a deed of trust, contract lien, or security instrument.
  2. Within thirty (30) days after the filing of the trustee's verified denial, a verified response is due from all parties to the suit or proceeding setting forth all matters, whether in law or fact, that rebut the trustee's verified denial.
  3. If a party has no objection or fails to file a timely verified response to the trustee's verified denial, the trustee shall be dismissed from the suit or proceeding without prejudice.
  4. If a respondent files a timely verified response to the trustee's verified denial, the matter shall be set for hearing. The court shall dismiss the trustee from the suit or proceeding without prejudice, if the court determines that the trustee is not a necessary party.
  5. A dismissal of the trustee pursuant to subsections (c) and (d) shall not prejudice a party's right to seek injunctive relief to prevent the trustee from proceeding with a foreclosure sale.
  6. A trustee shall not be liable for any good faith error resulting from reliance on any information in law or fact provided by the borrower or secured party or their respective attorney, agent, or representative or other third party.

Acts 2006, ch. 811, § 1.

35-5-117. [Repealed.]

Acts 2010, ch. 834, § 1; 2011, ch. 122, §§ 1-4; repealed by Acts 2011, ch. 122, § 4, effective January 1, 2013.

Compiler's Notes. Former section 35-5-117, concerned legal notices of foreclosure.

35-5-118. Deficiency judgment sufficient to fully satisfy indebtedness on real property after trustee's or foreclosure sale.

  1. In an action brought by a creditor to recover a balance still owing on an indebtedness after a trustee's or foreclosure sale of real property secured by a deed of trust or mortgage, the creditor shall be entitled to a deficiency judgment in an amount sufficient to satisfy fully the indebtedness.
  2. In all such actions, absent a showing of fraud, collusion, misconduct, or irregularity in the sale process, the deficiency judgment shall be for the total amount of indebtedness prior to the sale plus the costs of the foreclosure and sale, less the fair market value of the property at the time of the sale. The creditor shall be entitled to a rebuttable prima facie presumption that the sale price of the property is equal to the fair market value of the property at the time of the sale.
  3. To overcome the presumption set forth in subsection (b), the debtor must prove by a preponderance of the evidence that the property sold for an amount materially less than the fair market value of property at the time of the foreclosure sale. If the debtor overcomes the presumption, the deficiency shall be the total amount of the indebtedness prior to the sale plus the costs of the foreclosure and sale, less the fair market value of the property at the time of the sale as determined by the court.
    1. Any action for a deficiency judgment under this section shall be brought not later than the earlier of:
      1. Two (2) years after the date of the trustee's or foreclosure sale, exclusive of any period of time in which a petition for bankruptcy is pending; or
      2. The time for enforcing the indebtedness as provided for under §§ 28-1-102 and 28-2-111.
    2. Nothing contained in this section shall be construed as limiting a person entitled to bring such action from electing to sue on an indebtedness in lieu of, prior to, or contemporaneously with enforcement of a deed of trust or mortgage.

Acts 2010, ch. 1001, § 1.

Code Commission Notes.

Acts 2010, ch. 1001, § 1 purported to enact new § 35-5-117; however, § 35-5-117 was previously enacted by Acts 2010, ch. 834, and the section was redesignated as § 35-5-118 by the code commission.

Compiler's Notes. Acts 2010, ch. 1001, § 2 provided that the act, which enacted § 35-5-118, shall apply to all trustee or foreclosure sales of real property secured by a deed of trust for which the first foreclosure publication is given on or after September 1, 2010.

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).

35-5-119. Applicability of §§ 35-5-101(e), 35-5-104(a)(4) and (5), and 35-5-104(b).

The requirements of §§ 35-5-101(e), 35-5-104(a)(4) and (5), and 35-5-104(b) shall not be applicable to sales of parcels pursuant to title 67, chapter 5.

Acts 2015, ch. 414, § 3.

Effective Dates. Acts 2015, ch. 414, § 29. May 8, 2015.

Chapter 6
Uniform Principal and Income Act

Part 1
Definitions and Fiduciary Duties

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, §§ 35-6-10135-6-115 (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).

NOTES TO DECISIONS

1. Application of Law.

This act can have no application to litigation which was instigated prior to its enactment. McFadden v. Blair, 42 Tenn. App. 434, 304 S.W.2d 93, 1956 Tenn. App. LEXIS 144 (Tenn. Ct. App. 1956).

Collateral References.

Allocation, as between income and principal, of income on property used in paying legacies, debts, and expenses. 2 A.L.R.3d 1061.

Constitutionality of retrospective application of Uniform Principal and Income Act or other statutes relating to ascertainment of principal and income and apportionment of receipts and expenses among life tenants and remaindermen. 69 A.L.R.2d 1137.

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.

NOTES TO DECISIONS

1. Intent to Modify Trust.

Trial court correctly ordered a trust res to be distributed in accordance with the original unannotated document because the settlor's holographic notations were not sufficient to manifest a clear intent to modify her trust; the settlor did not make her changes in a separate instrument, she did not sign or initial her handwritten changes, and she did not communicate her changes to anyone or deliver a copy of the annotated trust document to another person. In re Elizabeth Beck Hoisington Living Trust, — S.W.3d —, 2017 Tenn. App. LEXIS 700 (Tenn. Ct. App. Oct. 19, 2017).

Because the trust did not specify that the method for modification provided in the trust was exclusive, the trial court was correct to consider whether the settlor's handwritten notations manifested clear and convincing evidence of the settlor's intent to modify the trust. In re Elizabeth Beck Hoisington Living Trust, — S.W.3d —, 2017 Tenn. App. LEXIS 700 (Tenn. Ct. App. Oct. 19, 2017).

Holographic document did not reference the trust in question, and thus the document did not manifest clear and convincing evidence of the settlor's intent to amend the trust. Miller v. Maples, — S.W.3d —, 2018 Tenn. App. LEXIS 697 (Tenn. Ct. App. Nov. 30, 2018).

COMMENTS TO OFFICIAL TEXT

“Income beneficiary.”

The definitions of income beneficiary (Section 102(5)) and income interest (Section 102(6)[§ 35-6-102(5)]) cover both mandatory and discretionary beneficiaries and interests. There are no definitions for “discretionary income beneficiary” or “discretionary income interest” because those terms are not used in the Act.

Inventory value.

There is no definition for inventory value in this Act because the provisions in which that term was used in the 1962 Act have either been eliminated (in the case of the underproductive property provision) or changed in a way that eliminates the need for the term (in the case of bonds and other money obligations, property subject to depletion, and the method for determining entitlement to income distributed from a probate estate).

“Net income.”

The reference to “transfers under this Act to or from income” means transfers made under Sections 104(a), 412(b), 502(b), 503(b), 504(a), and 506 [§§ 36-5-104(a), 35-6-412(b), 35-6-502(b), 35-6-503(b), 35-6-504(a), and 35-6-506].

“Terms of a trust.”

This term was chosen in preference to “terms of the trust instrument” (the phrase used in the 1962 Act) to make it clear that the Act applies to oral trusts as well as those whose terms are expressed in written documents. The definition is based on the Restatement (Second) of Trusts § 4 (1959) and the Restatement (Third) of Trusts § 4 (Tent. Draft No. 1, 1996). Constructional preferences or rules would also apply, if necessary, to determine the terms of the trust.

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).

NOTES TO DECISIONS

1. Fiduciary Discretion.

In a trust dispute between a beneficiary and trustees, the trustees were entitled to summary judgment because, inter alia, the meaning of “net income” was a legal issue under T.C.A. § 35-6-103(a)(3), allocating capital gains to principal, under T.C.A. § 35-6-404, in the trustees'  discretion, not a fact issue. Cartwright v. Jackson Capital Partners, Ltd. P'ship, 478 S.W.3d 596, 2015 Tenn. App. LEXIS 361 (Tenn. Ct. App. May 21, 2015), appeal denied, — S.W.3d —, 2015 Tenn. LEXIS 884 (Tenn. Oct. 16, 2015).

COMMENTS TO OFFICIAL TEXT

Prior Act.

The rule in Section 2(a) of the 1962 Act is restated in Section 103(a) [§ 35-6-103(a)], without changing its substance, to emphasize that the Act contains only default rules and that provisions in the terms of the trust are paramount. However, Section 2(a) of the 1962 Act applies only to the allocation of receipts and disbursements to or between principal and income. In this Act, the first sentence of Section 103(a) [§ 35-6-103(a)] states that it also applies to matters within the scope of Articles 2 and 3. Section 103(a)(2) [§ 35-6-103(a)(2)] incorporates the rule in Section 2(b) of the 1962 Act that a discretionary allocation made by the trustee that is contrary to a rule in the Act should not give rise to an inference of imprudence or partiality by the trustee.

The Act deletes the language that appears at the end of 1962 Act Section 2(a)(3) — “and in view of the manner in which men of ordinary prudence, discretion and judgment would act in the management of their affairs” — because persons of ordinary prudence, discretion and judgment, acting in the management of their own affairs do not normally think in terms of the interests of successive beneficiaries. If there is an analogy to an individual's decision-making process, it is probably the individual's decision to spend or to save, but this is not a useful guideline for trust administration. No case has been found in which a court has relied on the “prudent man” rule of the 1962 Act.

Fiduciary discretion.

The general rule is that if a discretionary power is conferred upon a trustee, the exercise of that power is not subject to control by a court except to prevent an abuse of discretion. Restatement (Second) of Trusts § 187. The situations in which a court will control the exercise of a trustee's discretion are discussed in the comments to § 187. See also id. § 233 Comment p.

Questions for which there is no provision.

Section 103(a)(4) [§ 35-6-103(a)(4)] allocates receipts and disbursements to principal when there is no provision for a different allocation in the terms of the trust, the will, or the Act. This may occur because money is received from a financial instrument not available at the present time (inflation-indexed bonds might have fallen into this category had they been announced after this Act was approved by the Commissioners on Uniform State Laws) or because a transaction is of a type or occurs in a manner not anticipated by the Drafting Committee for this Act or the drafter of the trust instrument.

Allocating to principal a disbursement for which there is no provision in the Act or the terms of the trust preserves the income beneficiary's level of income in the year it is allocated to principal, but thereafter will reduce the amount of income produced by the principal. Allocating to principal a receipt for which there is no provision will increase the income received by the income beneficiary in subsequent years, and will eventually, upon termination of the trust, also favor the remainder beneficiary. Allocating these items to principal implements the rule that requires a trustee to administer the trust impartially, based on what is fair and reasonable to both income and remainder beneficiaries. However, if the trustee decides that an adjustment between principal and income is needed to enable the trustee to comply with Section 103(b) [§ 35-6-103(b)], after considering the return from the portfolio as a whole, the trustee may make an appropriate adjustment under Section 104(a) [§ 35-6-104(a)].

Duty of impartiality.

Whenever there are two or more beneficiaries, a trustee is under a duty to deal impartially with them. Restatement of Trusts 3d: Prudent Investor Rule § 183 (1992). This rule applies whether the beneficiaries' interests in the trust are concurrent or successive. If the terms of the trust give the trustee discretion to favor one beneficiary over another, a court will not control the exercise of such discretion except to prevent the trustee from abusing it. Id. § 183, Comment a. “The precise meaning of the trustee's duty of impartiality and the balancing of competing interests and objectives inevitably are matters of judgment and interpretation. Thus, the duty and balancing are affected by the purposes, terms, distribution requirements, and other circumstances of the trust, not only at the outset but as they may change from time to time.” Id. § 232, Comment c.

The terms of a trust may provide that the trustee, or an accountant engaged by the trustee, or a committee of persons who may be family members or business associates, shall have the power to determine what is income and what is principal. If the terms of a trust provide that this Act specifically or principal and income legislation in general does not apply to the trust but fail to provide a rule to deal with a matter provided for in this Act, the trustee has an implied grant of discretion to decide the question. Section 103(b) [§ 35-6-103(b)] provides that the rule of impartiality applies in the exercise of such a discretionary power to the extent that the terms of the trust do not provide that one or more of the beneficiaries are to be favored. The fact that a person is named an income beneficiary or a remainder beneficiary is not by itself an indication of partiality for that beneficiary.

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).

COMMENTS TO OFFICIAL TEXT

Purpose and Scope of Provision.

The purpose of Section 104 [§ 35-6-104] is to enable a trustee to select investments using the standards of a prudent investor without having to realize a particular portion of the portfolio's total return in the form of traditional trust accounting income such as interest, dividends, and rents. Section 104(a) [§ 35-6-104(a)] authorizes a trustee to make adjustments between principal and income if three conditions are met: (1) the trustee must be managing the trust assets under the prudent investor rule; (2) the terms of the trust must express the income beneficiary's distribution rights in terms of the right to receive “income” in the sense of traditional trust accounting income; and (3) the trustee must determine, after applying the rules in Section 103(a) [§ 35-6-103(a)], that he is unable to comply with Section 103(b) [§ 35-6-103(b)]. In deciding whether and to what extent to exercise the power to adjust, the trustee is required to consider the factors described in Section 104(b) [§ 35-6-104(b)], but the trustee may not make an adjustment in circumstances described in Section 104(c) [§ 35-6-104(c)].

Section 104 [§ 35-6-104] does not empower a trustee to increase or decrease the degree of beneficial enjoyment to which a beneficiary is entitled under the terms of the trust; rather, it authorizes the trustee to make adjustments between principal and income that may be necessary if the income component of a portfolio's total return is too small or too large because of investment decisions made by the trustee under the prudent investor rule. The paramount consideration in applying Section 104(a) [§ 35-6-104(a)] is the requirement in Section 103(b) [§ 35-6-103(b)] that “a fiduciary must administer a trust or estate impartially, based on what is fair and reasonable to all of the beneficiaries, except to the extent that the terms of the trust or the will clearly manifest an intention that the fiduciary shall or may favor one or more of the beneficiaries.” The power to adjust is subject to control by the court to prevent an abuse of discretion. Restatement (Second) of Trusts § 187 (1959). See also id. §§ 183, 232, 233, Comment p (1959).

Section 104 [§ 35-6-104] will be important for trusts that are irrevocable when a State adopts the prudent investor rule by statute or judicial approval of the rule in Restatement of Trusts 3d: Prudent Investor Rule. Wills and trust instruments executed after the rule is adopted can be drafted to describe a beneficiary's distribution rights in terms that do not depend upon the amount of trust accounting income, but to the extent that drafters of trust documents continue to describe an income beneficiary's distribution rights by referring to trust accounting income, Section 104 [§ 35-6-104] will be an important tool in trust administration.

Power to Adjust.

The exercise of the power to adjust is governed by a trustee's duty of impartiality, which requires the trustee to strike an appropriate balance between the interests of the income and remainder beneficiaries. Section 103(b) [§ 35-6-103(b)] expresses this duty by requiring the trustee to “administer a trust or estate impartially, based on what is fair and reasonable to all of the beneficiaries, except to the extent that the terms of the trust or the will clearly manifest an intention that the fiduciary shall or may favor one or more of the beneficiaries.” Because this involves the exercise of judgment in circumstances rarely capable of perfect resolution, trustees are not expected to achieve perfection; they are, however, required to make conscious decisions in good faith and with proper motives.

In seeking the proper balance between the interests of the beneficiaries in matters involving principal and income, a trustee's traditional approach has been to determine the settlor's objectives from the terms of the trust, gather the information needed to ascertain the financial circumstances of the beneficiaries, determine the extent to which the settlor's objectives can be achieved with the resources available in the trust, and then allocate the trust's assets between stocks and fixed-income securities in a way that will produce a particular level or range of income for the income beneficiary. The key element in this process has been to determine the appropriate level or range of income for the income beneficiary, and that will continue to be the key element in deciding whether and to what extent to exercise the discretionary power conferred by Section 104(a) [§ 35-6-104(a)]. If it becomes necessary for a court to determine whether an abuse of the discretionary power to adjust between principal and income has occurred, the criteria should be the same as those that courts have used in the past to determine whether a trustee has abused its discretion in allocating the trust's assets between stocks and fixed-income securities.

A fiduciary has broad latitude in choosing the methods and criteria to use in deciding whether and to what extent to exercise the power to adjust in order to achieve impartiality between income beneficiaries and remainder beneficiaries or the degree of partiality for one or the other that is provided for by the terms of the trust or the will. For example, in deciding what the appropriate level or range of income should be for the income beneficiary and whether to exercise the power, a trustee may use the methods employed prior to the adoption of the 1997 Act in deciding how to allocate trust assets between stocks and fixed-income securities; or may consider the amount that would be distributed each year based on a percentage of the portfolio's value at the beginning or end of an accounting period, portfolio orthe average portfolio value for several accounting periods, in a manner similar to a unitrust, and may select a percentage that the trustee believes is appropriate for this purpose and use the same percentage or different percentages in subsequent years. The trustee may also use hypothetical portfolios of marketable securities to determine an appropriate level or range of income within which a distribution might fall.

An adjustment may be made prospectively at the beginning of an accounting period, based on a projected return or range of returns for a trust's portfolio, or retrospectively after the fiduciary knows the total realized or unrealized return for the period; and instead of an annual adjustment, the trustee may distribute a fixed dollar amount for several years, in a manner similar to an annuity, and may change the fixed dollar amount periodically. No inference of abuse is to be drawn if a fiduciary uses different methods or criteria for the same trust from time to time, or uses different methods or criteria for different trusts for the same accounting period.

While a trustee must consider the portfolio as a whole in deciding whether and to what extent to exercise the power to adjust, a trustee may apply different criteria in considering the portion of the portfolio that is composed of marketable securities and the portion whose market value cannot be determined readily, and may take into account a beneficiary's use or possession of a trust asset.

Under the prudent investor rule, a trustee is to incur costs that are appropriate and reasonable in relation to the assets and the purposes of the trust, and the same consideration applies in determining whether and to what extent to exercise the power to adjust. In making investment decisions under the prudent investor rule, the trustee will have considered the purposes, terms, distribution requirements, and other circumstances of the trust for the purpose of adopting an overall investment strategy having risk and return objectives reasonably suited to the trust. A trustee is not required to duplicate that work for principal and income purposes, and in many cases the decision about whether and to what extent to exercise the power to adjust may be made at the same time as the investment decisions. To help achieve the objective of reasonable investment costs, a trustee may also adopt policies that apply to all trusts or to individual trusts or classes of trusts, based on their size or other criteria, stating whether and under what circumstances the power to adjust will be exercised and the method of making adjustments; no inference of abuse is to be drawn if a trustee adopts such policies.

Three conditions to the exercise of the power to adjust.

The first of the three conditions that must be met before a trustee can exercise the power to adjust — that the trustee invest and manage trust assets as a prudent investor — is expressed in this Act by language derived from the Uniform Prudent Investor Act, but the condition will be met whether the prudent investor rule applies because the Uniform Act or other prudent investor legislation has been enacted, the prudent investor rule has been approved by the courts, or the terms of the trust require it. Even if a State's legislature or courts have not formally adopted the rule, the Restatement establishes the prudent investor rule as an authoritative interpretation of the common law prudent man rule, referring to the prudent investor rule as a “modest reformulation of the Harvard College dictum and the basic rule of prior Restatements.” Restatement of Trusts 3d: Prudent Investor Rule, Introduction, at 5. As a result, there is a basis for concluding that the first condition is satisfied in virtually all States except those in which a trustee is permitted to invest only in assets set forth in a statutory “legal list.”

The second condition will be met when the terms of the trust require all of the “income” to be distributed at regular intervals; or when the terms of the trust require a trustee to distribute all of the income, but permit the trustee to decide how much to distribute to each member of a class of beneficiaries; or when the terms of a trust provide that the beneficiary shall receive the greater of the trust accounting income and a fixed dollar amount (an annuity), or of trust accounting income and a fractional share of the value of the trust assets (a unitrust amount). If the trust authorizes the trustee in its discretion to distribute the trust's income to the beneficiary or to accumulate some or all of the income, the condition will be met because the terms of the trust do not permit the trustee to distribute more than the trust accounting income.

To meet the third condition, the trustee must first meet the requirements of Section 103(a) [§ 35-6-103(a)], i.e., she must apply the terms of the trust, decide whether to exercise the discretionary powers given to the trustee under the terms of the trust, and must apply the provisions of the Act if the terms of the trust do not contain a different provision or give the trustee discretion. Second, the trustee must determine the extent to which the terms of the trust clearly manifest an intention by the settlor that the trustee may or must favor one or more of the beneficiaries. To the extent that the terms of the trust do not require partiality, the trustee must conclude that she is unable to comply with the duty to administer the trust impartially. To the extent that the terms of the trust do require or permit the trustee to favor the income beneficiary or the remainder beneficiary, the trustee must conclude that she is unable to achieve the degree of partiality required or permitted. If the trustee comes to either conclusion — that she is unable to administer the trust impartially or that she is unable to achieve the degree of partiality required or permitted — she may exercise the power to adjust under Section 104(a) [§ 35-6-104].

Impartiality and productivity of income.

The duty of impartiality between income and remainder beneficiaries is linked to the trustee's duty to make the portfolio productive of trust accounting income whenever the distribution requirements are expressed in terms of distributing the trust's “income.” The 1962 Act implies that the duty to produce income applies on an asset by asset basis because the right of an income beneficiary to receive “delayed income” from the sale proceeds of underproductive property under Section 12 of that Act arises if “any part of principal … has not produced an average net income of a least 1% per year of its inventory value for more than a year ….” Under the prudent investor rule, “[t]o whatever extent a requirement of income productivity exists,… the requirement applies not investment by investment but to the portfolio as a whole.” Restatement of Trusts 3d: Prudent Investor Rule § 227, Comment i, at 34. The power to adjust under Section 104(a) [§ 35-6-104] is also to be exercised by considering net income from the portfolio as a whole and not investment by investment. Section 413(b) of this Act [§ 35-6-413(b)] eliminates the underproductive property rule in all cases other than trusts for which a marital deduction is allowed, and it applies to a marital deduction trust if the trust's assets “consist substantially of property that does not provide the surviving spouse with sufficient income from or use of the trust assets …” — in other words, the section applies by reference to the portfolio as a whole.

While the purpose of the power to adjust in Section 104(a) [§ 35-6-104(a)] is to eliminate the need for a trustee who operates under the prudent investor rule to be concerned about the income component of the portfolio's total return, the trustee must still determine the extent to which a distribution must be made to an income beneficiary and the adequacy of the portfolio's liquidity as a whole to make that distribution.

For a discussion of investment considerations involving specific investments and techniques under the prudent investor rule, see Restatement of Trusts 3d: Prudent Investor Rule § 227, Comments k-p.

Factors to consider in exercising the power to adjust.

Section 104(b) [§ 35-6-104(b)] requires a trustee to consider factors relevant to the trust and its beneficiaries in deciding whether and to what extent the power to adjust should be exercised. Section 2(c) of the Uniform Prudent Investor Act sets forth circumstances that a trustee is to consider in investing and managing trust assets. The circumstances in Section 2(c) of the Uniform Prudent Investor Act are the source of the factors in paragraphs (3) through (6) and (8) of Section 104(b) [§ 35-6-104(b)(3)-(6), (8)] (modified where necessary to adapt them to the purposes of this Act) so that, to the extent possible, comparable factors will apply to investment decisions and decisions involving the power to adjust. If a trustee who is operating under the prudent investor rule decides that the portfolio should be composed of financial assets whose total return will result primarily from capital appreciation rather than dividends, interest, and rents, the trustee can decide at the same time the extent to which an adjustment from principal to income may be necessary under Section 104 [§ 35-6-104]. On the other hand, if a trustee decides that the risk and return objectives for the trust are best achieved by a portfolio whose total return includes interest and dividend income that is sufficient to provide the income beneficiary with the beneficial interest to which the beneficiary is entitled under the terms of the trust, the trustee can decide that it is unnecessary to exercise the power to adjust.

Assets received from the settlor.

Section 3 of the Uniform Prudent Investor Act provides that “[a] trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.” The special circumstances may include the wish to retain a family business, the benefit derived from deferring liquidation of the asset in order to defer payment of income taxes, or the anticipated capital appreciation from retaining an asset such as undeveloped real estate for a long period. To the extent the trustee retains assets received from the settlor because of special circumstances that overcome the duty to diversify, the trustee may take these circumstances into account in determining whether and to what extent the power to adjust should be exercised to change the results produced by other provisions of this Act that apply to the retained assets. See Section 104(b)(5) [§ 35-6-104(b)(5)]; Uniform Prudent Investor Act § 3, Comment, 7B U.L.A. 18, at 25-26 (Supp. 1997); Restatement of Trusts 3d: Prudent Investor Rule § 229 and Comments a-e.

Limitations on the power to adjust.

The purpose of subsections (c)(1) through (4) is to preserve tax benefits that may have been an important purpose for creating the trust. Subsections (c)(5), (6), and (8) deny the power to adjust in the circumstances described in those subsections in order to prevent adverse tax consequences, and subsection (c)(7) denies the power to adjust to any beneficiary, whether or not possession of the power may have adverse tax consequences.

Under subsection (c)(1), a trustee cannot make an adjustment that diminishes the income interest in a trust that requires all of the income to be paid at least annually to a surviving spouse and for which an estate tax or gift tax marital deduction is allowed; but this subsection does not prevent the trustee from making an adjustment that increases the amount of income paid from a marital deduction trust to the surviving spouse. Subsection (c)(1) applies to a trust that qualifies for the marital deduction because the surviving spouse has a general power of appointment over the trust, but it applies to a qualified terminable interest property (QTIP) trust only if and to the extent that the fiduciary makes the election required to obtain the tax deduction. Subsection (c)(1) does not apply to a so-called “estate” trust. This type of trust qualifies for the marital deduction because the terms of the trust require the principal and undistributed income to be paid to the surviving spouse's estate when the spouse dies; it is not necessary for the terms of an estate trust to require the income to be distributed annually. Reg. § 20.2056(c)-2(b)(1)(iii).

Subsection (c)(3) applies to annuity trusts and unitrusts with no charitable beneficiaries as well as to trusts with charitable income or remainder beneficiaries; its purpose is to make it clear that a beneficiary's right to receive a fixed annuity or a fixed fraction of the value of a trust's assets is not subject to adjustment under Section 104(a) [§ 35-6-104(a)]. Subsection (c)(3) does not apply to any additional amount to which the beneficiary may be entitled that is expressed in terms of a right to receive income from the trust. For example, if a beneficiary is to receive a fixed annuity or the trust's income, whichever is greater, subsection (c)(3) does not prevent a trustee from making an adjustment under Section 104(a) [§ 35-6-104(a)] in determining the amount of the trust's income.

If subsection (c)(5), (6), (7), or (8), prevents a trustee from exercising the power to adjust, subsection (d) permits a cotrustee who is not subject to the provision to exercise the power unless the terms of the trust do not permit the cotrustee to do so.

Release of the power to adjust.

Section 104(e) [§ 35-6-104(e)] permits a trustee to release all or part of the power to adjust in circumstances in which the possession or exercise of the power might deprive the trust of a tax benefit or impose a tax burden. For example, if possessing the power would diminish the actuarial value of the income interest in a trust for which the income beneficiary's estate may be eligible to claim a credit for property previously taxed if the beneficiary dies within ten years after the death of the person creating the trust, the trustee is permitted under subsection (e) to release just the power to adjust from income to principal.

Trust terms that limit a power to adjust.

Section 104(f) [§ 35-6-104(f)] applies to trust provisions that limit a trustee's power to adjust. Since the power is intended to enable trustees to employ the prudent investor rule without being constrained by traditional principal and income rules, an instrument executed before the adoption of this Act whose terms describe the amount that may or must be distributed to a beneficiary by referring to the trust's income or that prohibit the invasion of principal or that prohibit equitable adjustments in general should not be construed as forbidding the use of the power to adjust under Section 104(a) [§ 35-6-104(a)] if the need for adjustment arises because the trustee is operating under the prudent investor rule. Instruments containing such provisions that are executed after the adoption of this Act should specifically refer to the power to adjust if the settlor intends to forbid its use. See generally, Joel C. Dobris, Limits on the Doctrine of Equitable Adjustment in Sophisticated Postmortem Tax Planning, 66 Iowa L. Rev. 273 (1981).

Examples.

The following examples illustrate the application of Section 104 [§ 35-6-104]:

Example (1) — T is the successor trustee of a trust that provides income to A for life, remainder to B. T has received from the prior trustee a portfolio of financial assets invested 20% in stocks and 80% in bonds. Following the prudent investor rule, T determines that a strategy of investing the portfolio 50% in stocks and 50% in bonds has risk and return objectives that are reasonably suited to the trust, but T also determines that adopting this approach will cause the trust to receive a smaller amount of dividend and interest income. After considering the factors in Section 104(b) [§ 35-6-104(b)], T may transfer cash from principal to income to the extent T considers it necessary to increase the amount distributed to the income beneficiary.

Example (2) — T is the trustee of a trust that requires the income to be paid to the settlor's son C for life, remainder to C's daughter D. In a period of very high inflation, T purchases bonds that pay double-digit interest and determines that a portion of the interest, which is allocated to income under Section 406 of this Act [§ 35-6-406], is a return of capital. In consideration of the loss of value of principal due to inflation and other factors that T considers relevant, T may transfer part of the interest to principal.

Example (3) — T is the trustee of a trust that requires the income to be paid to the settlor's sister E for life, remainder to charity F. E is a retired schoolteacher who is single and has no children. E's income from her social security, pension, and savings exceeds the amount required to provide for her accustomed standard of living. The terms of the trust permit T to invade principal to provide for E's health and to support her in her accustomed manner of living, but do not otherwise indicate that T should favor E or F. Applying the prudent investor rule, T determines that the trust assets should be invested entirely in growth stocks that produce very little dividend income. Even though it is not necessary to invade principal to maintain E's accustomed standard of living, she is entitled to receive from the trust the degree of beneficial enjoyment normally accorded a person who is the sole income beneficiary of a trust, and T may transfer cash from principal to income to provide her with that degree of enjoyment.

Example (4) — T is the trustee of a trust that is governed by the law of State X. The trust became irrevocable before State X adopted the prudent investor rule. The terms of the trust require all of the income to be paid to G for life, remainder to H, and also give T the power to invade principal for the benefit of G for “dire emergencies only.” The terms of the trust limit the aggregate amount that T can distribute to G from principal during G's life to 6% of the trust's value at its inception. The trust's portfolio is invested initially 50% in stocks and 50% in bonds, but after State X adopts the prudent investor rule T determines that, to achieve suitable risk and return objectives for the trust, the assets should be invested 90% in stocks and 10% in bonds. This change increases the total return from the portfolio and decreases the dividend and interest income. Thereafter, even though G does not experience a dire emergency, T may exercise the power to adjust under Section 104(a) to the extent that T determines that the adjustment is from only the capital appreciation resulting from the change in the portfolio's asset allocation. If T is unable to determine the extent to which capital appreciation resulted from the change in asset allocation or is unable to maintain adequate records to determine the extent to which principal distributions to G for dire emergencies do not exceed the 6% limitation, T may not exercise the power to adjust. See Joel C. Dobris, Limits on the Doctrine of Equitable Adjustment in Sophisticated Postmortem Tax Planning, 66 Iowa L. Rev. 273 (1981).

Example (5) — T is the trustee of a trust for the settlor's child. The trust owns a diversified portfolio of marketable financial assets with a value of $600,000, and is also the sole beneficiary of the settlor's IRA, which holds a diversified portfolio of marketable financial assets with a value of $900,000. The trust receives a distribution from the IRA that is the minimum amount required to be distributed under the Internal Revenue Code, and T allocates 10% of the distribution to income under Section 409(c) of this Act [§ 35-6-409(c)]. The total return on the IRA's assets exceeds the amount distributed to the trust, and the value of the IRA at the end of the year is more than its value at the beginning of the year. Relevant factors that T may consider in determining whether to exercise the power to adjust and the extent to which an adjustment should be made to comply with Section 103(b) [§ 35-6-103(b)] include the total return from all of the trust's assets, those owned directly as well as its interest in the IRA, the extent to which the trust will be subject to income tax on the portion of the IRA distribution that is allocated to principal, and the extent to which the income beneficiary will be subject to income tax on the amount that T distributes to the income beneficiary.

Example (6) — T is the trustee of a trust whose portfolio includes a large parcel of undeveloped real estate. T pays real property taxes on the undeveloped parcel from income each year pursuant to Section 501(3) [§ 35-6-501(3)]. After considering the return from the trust's portfolio as a whole and other relevant factors described in Section 104(b) [§ 35-6-104(b)], T may exercise the power to adjust under Section 104(a) [§ 35-6-104(a)] to transfer cash from principal to income in order to distribute to the income beneficiary an amount that T considers necessary to comply with Section 103(b) [§ 35-6-103(b)].

Example (7) — T is the trustee of a trust whose portfolio includes an interest in a mutual fund that is sponsored by T. As the manager of the mutual fund, T charges the fund a management fee that reduces the amount available to distribute to the trust by $2,000. If the fee had been paid directly by the trust, one-half of the fee would have been paid from income under Section 501(1) [§ 35-6-501(1)] and the other one-half would have been paid from principal under Section 502(a)(1) [§ 35-6-502(a)(1)]. After considering the total return from the portfolio as a whole and other relevant factors described in Section 104(b) [§ 35-6-104(b)], T may exercise its power to adjust under Section 104(a) [§ 35-6-104(a)] by transferring $1,000, or half of the trust's proportionate share of the fee, from principal to income.

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.
    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.

  11. 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.
  12. 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.

COMMENTS TO OFFICIAL TEXT

This section, which was added in 2010, allows a trustee to convert a mandatory income trust to a unitrust with an annual payment between 3% and 5% of the value of the trust corpus.

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.

COMMENTS TO OFFICIAL TEXT

This section, which was added in 2010, allows a new trust to be established as a unitrust with an annual payment between 3% and 5% of the value of the trust corpus.

Part 2
Decedent's Estate or Terminating Income Interest

35-6-201. Determination and distribution of net income.

After a decedent dies, in the case of an estate, or after an income interest in a trust ends, the following rules apply:

  1. A fiduciary of an estate or of a terminating income interest shall determine the amount of net income and net principal receipts received from property specifically given to a beneficiary under the rules in parts 3-5 of this chapter which apply to trustees and the rules in subdivision (5). The fiduciary shall distribute the net income and net principal receipts to the beneficiary who is to receive the specific property.
  2. A fiduciary shall determine the remaining net income of a decedent's estate or a terminating income interest under the rules in parts 3-5 of this chapter which apply to trustees and by:
    1. Including in net income all income from property used to discharge liabilities;
    2. Paying from income or principal, in the fiduciary's discretion, fees of attorneys, accountants, and fiduciaries; court costs and other expenses of administration; and interest on death taxes; but the fiduciary may pay those expenses from income of property passing to a trust for which the fiduciary claims an estate tax marital or charitable deduction only to the extent that the payment of those expenses from income will not cause the reduction or loss of the deduction; and
    3. Paying from principal all other disbursements made or incurred in connection with the settlement of a decedent's estate or the winding up of a terminating income interest, including debts, funeral expenses, disposition of remains, family allowances, and death taxes and related penalties that are apportioned to the estate or terminating income interest by the will, the terms of the trust, or applicable law.
  3. A fiduciary shall distribute to a beneficiary who receives a pecuniary amount outright the interest or any other amount provided by the will, the terms of the trust, or applicable law from net income determined under subdivision (2) or from principal to the extent that net income is insufficient. If a beneficiary is to receive a pecuniary amount outright from a trust after an income interest ends and no interest or other amount is provided for by the terms of the trust or applicable law, the fiduciary shall distribute the interest or other amount to which the beneficiary would be entitled under applicable law if the pecuniary amount were required to be paid under a will.
  4. A fiduciary shall distribute the net income remaining after distributions required by subdivision (3) of this section in the manner described in § 35-6-202 to all other beneficiaries, including a beneficiary who receives a pecuniary amount in trust, even if the beneficiary holds an unqualified power to withdraw assets from the trust or other presently exercisable general power of appointment over the trust.
  5. A fiduciary may not reduce principal or income receipts from property described in subdivision (1) of this section because of a payment described in §§ 35-6-501 or 35-6-502 to the extent that the will, the terms of the trust, or applicable law requires the fiduciary to make the payment from assets other than the property or to the extent that the fiduciary recovers or expects to recover the payment from a third party. The net income and principal receipts from the property are determined by including all of the amounts the fiduciary receives or pays with respect to the property, whether those amounts accrued or became due before, on, or after the date of a decedent's death or an income interest's terminating event, and by making a reasonable provision for amounts that the fiduciary believes the estate or terminating income interest may become obligated to pay after the property is distributed.

Acts 2000, ch. 829, § 1.

Law Reviews.

The Case of the Disappearing Inheritance Tax (Dan W. Holbrook), 36 No. 12 Tenn. B.J. 22 (2000).

COMMENTS TO OFFICIAL TEXT

Terminating income interests and successive income interests.

A trust that provides for a single income beneficiary and an outright distribution of the remainder ends when the income interest ends. A more complex trust may have a number of income interests, either concurrent or successive, and the trust will not necessarily end when one of the income interests ends. For that reason, the Act speaks in terms of income interests ending and beginning rather than trusts ending and beginning. When an income interest in a trust ends, the trustee's powers continue during the winding up period required to complete its administration. A terminating income interest is one that has ended but whose administration is not complete.

If two or more people are given the right to receive specified percentages or fractions of the income from a trust concurrently and one of the concurrent interests ends, e.g., when a beneficiary dies, the beneficiary's income interest ends but the trust does not. Similarly, when a trust with only one income beneficiary ends upon the beneficiary's death, the trust instrument may provide that part or all of the trust assets shall continue in trust for another income beneficiary. While it is common to think and speak of this (and even to characterize it in a trust instrument) as a “new” trust, it is a continuation of the original trust for a remainder beneficiary who has an income interest in the trust assets instead of the right to receive them outright. For purposes of this Act, this is a successive income interest in the same trust. The fact that a trust may or may not end when an income interest ends is not significant for purposes of this Act.

If the assets that are subject to a terminating income interest pass to another trust because the income beneficiary exercises a general power of appointment over the trust assets, the recipient trust would be a new trust; and if they pass to another trust because the beneficiary exercises a nongeneral power of appointment over the trust assets, the recipient trust might be a new trust in some States (see 5A Austin W. Scott & William F. Fratcher, The Law of Trusts § 640, at 483 (4th ed. 1989)); but for purposes of this Act a new trust created in these circumstances is also a successive income interest.

Gift of a pecuniary amount.

Section 201(3) and (4) [§ 35-6-201(3) and (4)] provide different rules for an outright gift of a pecuniary amount and a gift in trust of a pecuniary amount; this is the same approach used in Section 5(b)(2) of the 1962 Act.

Interest on pecuniary amounts.

Section 201(3) [§ 35-6-201(3)] provides that the beneficiary of an outright pecuniary amount is to receive the interest or other amount provided by applicable law if there is no provision in the will or the terms of the trust. Many States have no applicable law that provides for interest or some other amount to be paid on an outright pecuniary gift under an inter vivos trust; this section provides that in such a case the interest or other amount to be paid shall be the same as the interest or other amount required to be paid on testamentary pecuniary gifts. This provision is intended to accord gifts under inter vivos instruments the same treatment as testamentary gifts. The various state authorities that provide for the amount that a beneficiary of an outright pecuniary amount is entitled to receive are collected in Richard B. Covey, Marital Deduction and Credit Shelter Dispositions and the Use of Formula Provisions, App. B (Supp. 1997).

Administration expenses and interest on death taxes.

Under Section 201(2)(B) [§ 35-6-201(2)(B)] a fiduciary may pay administration expenses and interest on death taxes from either income or principal. An advantage of permitting the fiduciary to choose the source of the payment is that, if the fiduciary's decision is consistent with the decision to deduct these expenses for income tax purposes or estate tax purposes, it eliminates the need to adjust between principal and income that may arise when, for example, an expense that is paid from principal is deducted for income tax purposes or an expense that is paid from income is deducted for estate tax purposes.

The United States Supreme Court has considered the question of whether an estate tax marital deduction or charitable deduction should be reduced when administration expenses are paid from income produced by property passing in trust for a surviving spouse or for charity and deducted for income tax purposes. The Court rejected the IRS position that administration expenses properly paid from income under the terms of the trust or state law must reduce the amount of a marital or charitable transfer, and held that the value of the transferred property is not reduced for estate tax purposes unless the administration expenses are material in light of the income the trust corpus could have been expected to generate. Commissioner v. Estate of Otis C. Hubert, 117 S. Ct. 1124 (1997). The provision in Section 201(2)(B) [§ 35-6-201(2)(B)] permits a fiduciary to pay and deduct administration expenses from income only to the extent that it will not cause the reduction or loss of an estate tax marital or charitable contributions deduction, which means that the limit on the amount payable from income will be established eventually by Treasury Regulations.

Interest on estate taxes.

The IRS agrees that interest on estate and inheritance taxes may be deducted for income tax purposes without having to reduce the estate tax deduction for amounts passing to a charity or surviving spouse, whether the interest is paid from principal or income. Rev. Rul. 93-48, 93-2 C.B. 270. For estates of persons who died before 1998, a fiduciary may not want to deduct for income tax purposes interest on estate tax that is deferred under Section 6166 or 6163 because deducting that interest for estate tax purposes may produce more beneficial results, especially if the estate has little or no income or the income tax bracket is significantly lower than the estate tax bracket. For estates of persons who die after 1997, no estate tax or income tax deduction will be allowed for interest paid on estate tax that is deferred under Section 6166. However, interest on estate tax deferred under Section 6163 will continue to be deductible for both purposes, and interest on estate tax deficiencies will continue to be deductible for estate tax purposes if an election under Section 6166 is not in effect.

Under the 1962 Act, Section 13(c)(5) charges interest on estate and inheritance taxes to principal. The 1931 Act has no provision. Section 501(3) of this Act [§ 35-6-501(3)] provides that, except to the extent provided in Section 201(2)(B) or (C) [§ 35-6-201(2)(B), (C)], all interest must be paid from income.

35-6-202. Distribution to residuary and remainder beneficiaries.

  1. Each beneficiary described in § 35-6-201(4) is entitled to receive a portion of the net income equal to the beneficiary's fractional interest in undistributed principal assets, using values as of the distribution date. If a fiduciary makes more than one (1) distribution of assets to beneficiaries to whom this section applies, each beneficiary, including one who does not receive part of the distribution, is entitled, as of each distribution date, to the net income the fiduciary has received after the date of death or terminating event or earlier distribution date but has not distributed as of the current distribution date.
  2. In determining a beneficiary's share of net income, the following rules apply:
    1. The beneficiary is entitled to receive a portion of the net income equal to the beneficiary's fractional interest in the undistributed principal assets immediately before the distribution date, including assets that later may be sold to meet principal obligations.
    2. The beneficiary's fractional interest in the undistributed principal assets must be calculated without regard to property specifically given to a beneficiary and property required to pay pecuniary amounts not in trust.
    3. The beneficiary's fractional interest in the undistributed principal assets must be calculated on the basis of the aggregate value of those assets as of the distribution date without reducing the value by any unpaid principal obligation.
    4. The distribution date for purposes of this section may be the date as of which the fiduciary calculates the value of the assets if that date is reasonably near the date on which assets are actually distributed.
  3. If a fiduciary does not distribute all of the collected but undistributed net income to each person as of a distribution date, the fiduciary shall maintain appropriate records showing the interest of each beneficiary in that net income.
  4. A fiduciary may apply the rules in this section, to the extent that the fiduciary considers it appropriate, to net gain or loss realized after the date of death or terminating event or earlier distribution date from the disposition of a principal asset if this section applies to the income from the asset.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Relationship to prior Acts.   Section 202 [§ 35-6-202] retains the concept in Section 5(b)(2) of the 1962 Act that the residuary legatees of estates are to receive net income earned during the period of administration on the basis of their proportionate interests in the undistributed assets when distributions are made. It changes the basis for determining their proportionate interests by using asset values as of a date reasonably near the time of distribution instead of inventory values; it extends the application of these rules to distributions from terminating trusts; and it extends these rules to gain or loss realized from the disposition of assets during administration, an omission in the 1962 Act that has been noted by several commentators. See, e.g., Richard B. Covey, Marital Deduction and Credit Shelter Dispositions and the Use of Formula Provisions 80 (1984 & Supp. 1997); Thomas H. Cantrill, Fractional or Percentage Residuary Bequests: Allocation of Postmortem Income, Gain and Unrealized Appreciation, 10 Prob. Notes 322, 327 (1985).

Part 3
Apportionment at Beginning and End of Income Interest

35-6-301. When right to income begins and ends.

  1. An income beneficiary is entitled to net income from the date on which the income interest begins. An income interest begins on the date specified in the terms of the trust or, if no date is specified, on the date an asset becomes subject to a trust or successive income interest.
  2. An asset becomes subject to a trust:
    1. On the date it is transferred to the trust in the case of an asset that is transferred to a trust during the transferor's life;
    2. On the date of a testator's death in the case of an asset that becomes subject to a trust by reason of a will, even if there is an intervening period of administration of the testator's estate; or
    3. On the date of an individual's death in the case of an asset that is transferred to a fiduciary by a third party because of the individual's death.
  3. An asset becomes subject to a successive income interest on the day after the preceding income interest ends, as determined under subsection (d), even if there is an intervening period of administration to wind up the preceding income interest.
  4. An income interest ends on the day before an income beneficiary dies or another terminating event occurs, or on the last day of a period during which there is no beneficiary to whom a trustee may distribute income.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Period during which there is no beneficiary.   The purpose of the second part of subsection (d) is to provide that, at the end of a period during which there is no beneficiary to whom a trustee may distribute income, the trustee must apply the same apportionment rules that apply when a mandatory income interest ends. This provision would apply, for example, if a settlor creates a trust for grandchildren before any grandchildren are born. When the first grandchild is born, the period preceding the date of birth is treated as having ended, followed by a successive income interest, and the apportionment rules in Sections 302 and 303 [§§ 35-6-302 and 35-6-303] apply accordingly if the terms of the trust do not contain different provisions.

35-6-302. Apportionment of receipts and disbursements when decedent dies or income interest begins.

  1. A trustee shall allocate an income receipt or disbursement other than one to which § 35-6-201(1) applies to principal if its due date occurs before a decedent dies in the case of an estate or before an income interest begins in the case of a trust or successive income interest.
  2. A trustee shall allocate an income receipt or disbursement to income if its due date occurs on or after the date on which a decedent dies or an income interest begins and it is a periodic due date. An income receipt or disbursement must be treated as accruing from day to day if its due date is not periodic or it has no due date. The portion of the receipt or disbursement accruing before the date on which a decedent dies or an income interest begins must be allocated to principal and the balance must be allocated to income.
  3. An item of income or an obligation is due on the date the payer is required to make a payment. If a payment date is not stated, there is no due date for the purposes of this chapter. Distributions to shareholders or other owners from an entity to which § 35-6-401 applies are deemed to be due on the date fixed by the entity for determining who is entitled to receive the distribution or, if no date is fixed, on the declaration date for the distribution. A due date is periodic for receipts or disbursements that must be paid at regular intervals under a lease or an obligation to pay interest or if an entity customarily makes distributions at regular intervals.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Prior Acts.

Professor Bogert stated that “Section 4 of the [1962] Act makes a change with respect to the apportionment of the income of trust property not due until after the trust began but which accrued in part before the commencement of the trust. It treats such income as to be credited entirely to the income account in the case of a living trust, but to be apportioned between capital and income in the case of a testamentary trust. The [1931] Act apportions such income in the case of both types of trusts, except in the case of corporate dividends.” George G. Bogert, The Revised Uniform Principal and Income Act, 38 Notre Dame Law. 50, 52 (1962). The 1962 Act also provides that an asset passing to an inter vivos trust by a bequest in the settlor's will is governed by the rule that applies to a testamentary trust, so that different rules apply to assets passing to an inter vivos trust depending upon whether they were transferred to the trust during the settlor's life or by his will.

Having several different rules that apply to similar transactions is confusing. In order to simplify administration, Section 302 [§ 35-6-302] applies the same rule to inter vivos trusts (revocable and irrevocable), testamentary trusts, and assets that become subject to an inter vivos trust by a testamentary bequest.

Periodic payments.

Under Section 302 [§ 35-6-302], a periodic payment is principal if it is due but unpaid before a decedent dies or before an asset becomes subject to a trust, but the next payment is allocated entirely to income and is not apportioned. Thus, periodic receipts such as rents, dividends, interest, and annuities, and disbursements such as the interest portion of a mortgage payment, are not apportioned. This is the original common law rule. Edwin A. Howes, Jr., The American Law Relating to Income and Principal 70 (1905). In trusts in which a surviving spouse is dependent upon a regular flow of cash from the decedent's securities portfolio, this rule will help to maintain payments to the spouse at the same level as before the settlor's death. Under the 1962 Act, the pre-death portion of the first periodic payment due after death is apportioned to principal in the case of a testamentary trust or securities bequeathed by will to an inter vivos trust.

Nonperiodic payments.

Under the second sentence of Section 302(b) [§ 35-6-302(b)], interest on an obligation that does not provide a due date for the interest payment, such as interest on an income tax refund, would be apportioned to principal to the extent it accrues before a person dies or an income interest begins unless the obligation is specifically given to a devisee or remainder beneficiary, in which case all of the accrued interest passes under Section 201(1) [§ 35-6-201(1)] to the person who receives the obligation. The same rule applies to interest on an obligation that has a due date but does not provide for periodic payments. If there is no stated interest on the obligation, such as a zero coupon bond, and the proceeds from the obligation are received more than one year after it is purchased or acquired by the trustee, the entire amount received is principal under Section 406 [§ 35-6-406].

35-6-303. Apportionment when income interest ends.

  1. In this section, “undistributed income” means net income received before the date on which an income interest ends. Undistributed income does not include an item of income or expense that is due or accrued or net income that has been added or is required to be added to principal under the terms of the trust.
  2. When a mandatory income interest ends, the trustee shall pay to a mandatory income beneficiary who survives that date, or the estate of a deceased mandatory income beneficiary whose death causes the interest to end, the beneficiary's share of the undistributed income that is not disposed of under the terms of the trust unless the beneficiary has an unqualified power to revoke more than five percent (5%) of the trust immediately before the income interest ends. In the latter case, the undistributed income from the portion of the trust that may be revoked must be added to principal.
  3. When a trustee's obligation to pay a fixed annuity or a fixed fraction of the value of the trust's assets ends, the trustee shall prorate the final payment if and to the extent required by applicable law to accomplish a purpose of the trust or its settlor relating to income, gift, estate, or other tax requirements.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Prior Acts.

Both the 1931 Act (Section 4) and the 1962 Act (Section 4(d)) provide that a deceased income beneficiary's estate is entitled to the undistributed income. The Drafting Committee concluded that this is probably not what most settlors would want, and that, with respect to undistributed income, most settlors would favor the income beneficiary first, the remainder beneficiaries second, and the income beneficiary's heirs last, if at all. However, it decided not to eliminate this provision to avoid causing disputes about whether the trustee should have distributed collected cash before the income beneficiary died.

Accrued periodic payments.

Under the prior Acts, an income beneficiary or his estate is entitled to receive a portion of any payments, other than dividends, that are due or that have accrued when the income interest terminates. The last sentence of subsection (a) changes that rule by providing that such items are not included in undistributed income. The items affected include periodic payments of interest, rent, and dividends, as well as items of income that accrue over a longer period of time; the rule also applies to expenses that are due or accrued.

Example — accrued periodic payments. The rules in Section 302 [§ 35-6-302] and Section 303 [§ 35-6-303] work in the following manner: Assume that a periodic payment of rent that is due on July 20 has not been paid when an income interest ends on July 30; the successive income interest begins on July 31, and the rent payment that was due on July 20 is paid on August 3. Under Section 302(a) [§ 35-6-302(a)], the July 20 payment is added to the principal of the successive income interest when received. Under Section 302(b) [§ 35-6-302(b)], the entire periodic payment of rent that is due on August 20 is income when received by the successive income interest. Under Section 303 [§ 35-6-303], neither the income beneficiary of the terminated income interest nor the beneficiary's estate is entitled to any part of either the July 20 or the August 20 payments because neither one was received before the income interest ended on July 30. The same principles apply to expenses of the trust.

Beneficiary with an unqualified power to revoke.

The requirement in subsection (b) to pay undistributed income to a mandatory income beneficiary or her estate does not apply to the extent the beneficiary has an unqualified power to revoke more than five percent of the trust immediately before the income interest ends. Without this exception, subsection (b) would apply to a revocable living trust whose settlor is the mandatory income beneficiary during her lifetime, even if her will provides that all of the assets in the probate estate are to be distributed to the trust.

If a trust permits the beneficiary to withdraw all or a part of the trust principal after attaining a specified age and the beneficiary attains that age but fails to withdraw all of the principal that she is permitted to withdraw, a trustee is not required to pay her or her estate the undistributed income attributable to the portion of the principal that she left in the trust. The assumption underlying this rule is that the beneficiary has either provided for the disposition of the trust assets (including the undistributed income) by exercising a power of appointment that she has been given or has not withdrawn the assets because she is willing to have the principal and undistributed income be distributed under the terms of the trust. If the beneficiary has the power to withdraw 25% of the trust principal, the trustee must pay to her or her estate the undistributed income from the 75% that she cannot withdraw.

Part 4
Allocation of Receipts During Administration of Trust

35-6-401. Character of receipts.

  1. In this section, “entity” means a corporation, partnership, limited liability company, regulated investment company, real estate investment trust, common trust fund, or any other organization in which a trustee has an interest other than a trust or estate to which § 35-6-402 applies, a business or activity to which § 35-6-403 applies, or an asset-backed security to which § 35-6-415 applies.
  2. Except as otherwise provided in this section, a trustee shall allocate to income money received from an entity.
  3. A trustee shall allocate the following receipts from an entity to principal:
    1. Property other than money;
    2. Money received in one (1) distribution or a series of related distributions in exchange for part or all of a trust's interest in the entity;
    3. Money received in total or partial liquidation of the entity; and
    4. Money received from an entity that is a regulated investment company or a real estate investment trust if the money distributed is a capital gain dividend for federal income tax purposes.
  4. Money is received in partial liquidation:
    1. To the extent that the entity, at or near the time of a distribution, indicates that it is a distribution in partial liquidation; or
    2. If the total amount of money and property received in a distribution or series of related distributions is greater than twenty percent (20%) of the entity's gross assets, as shown by the entity's year-end financial statements immediately preceding the initial receipt.
  5. Money is not received in partial liquidation, nor may it be taken into account under subdivision (d)(2), to the extent that it does not exceed the amount of income tax that a trustee or beneficiary must pay on taxable income of the entity that distributes the money.
  6. A trustee may rely upon a statement made by an entity about the source or character of a distribution if the statement is made at or near the time of distribution by the entity's board of directors or other person or group of persons authorized to exercise powers to pay money or transfer property comparable to those of a corporation's board of directors.

Acts 2000, ch. 829, § 1.

Law Reviews.

Got Microsoft? Trustees Should Expect a Fight (Dan W. Holbrook), 41 No. 4 Tenn. B.J. 36 (2005).

COMMENTS TO OFFICIAL TEXT

Entities to which Section 401 [§ 35-6-401] applies.

The reference to partnerships in Section 401(a) [§ 35-6-401(a)] is intended to include all forms of partnerships, including limited partnerships, limited liability partnerships, and variants that have slightly different names and characteristics from State to State. The section does not apply, however, to receipts from an interest in property that a trust owns as a tenant in common with one or more co-owners, nor would it apply to an interest in a joint venture if, under applicable law, the trust's interest is regarded as that of a tenant in common.

Capital gain dividends.

Under the Internal Revenue Code and the Income Tax Regulations, a “capital gain dividend” from a mutual fund or real estate investment trust is the excess of the fund's or trust's net long-term capital gain over its net short-term capital loss. As a result, a capital gain dividend does not include any net short-term capital gain, and cash received by a trust because of a net short-term capital gain is income under this Act.

Reinvested dividends.

If a trustee elects (or continues an election made by its predecessor) to reinvest dividends in shares of stock of a distributing corporation or fund, whether evidenced by new certificates or entries on the books of the distributing entity, the new shares would be principal, but the trustee may determine, after considering the return from the portfolio as a whole, whether an adjustment under Section 104 [§ 35-6-104] is necessary as a result.

Distribution of property.

The 1962 Act describes a number of types of property that would be principal if distributed by a corporation. This becomes unwieldy in a section that applies to both corporations and all other entities. By stating that principal includes the distribution of any property other than money, Section 401 [§ 35-6-401] embraces all of the items enumerated in Section 6 of the 1962 Act as well as any other form of nonmonetary distribution not specifically mentioned in that Act.

Partial liquidations.

Under subsection (d)(1), any distribution designated by the entity as a partial liquidating distribution is principal regardless of the percentage of total assets that it represents. If a distribution exceeds 20% of the entity's gross assets, the entire distribution is a partial liquidation under subsection (d)(2) whether or not the entity describes it as a partial liquidation. In determining whether a distribution is greater than 20% of the gross assets, the portion of the distribution that does not exceed the amount of income tax that the trustee or a beneficiary must pay on the entity's taxable income is ignored.

Other large distributions.

A cash distribution may be quite large (for example, more than 10% but not more than 20% of the entity's gross assets) and have characteristics that suggest it should be treated as principal rather than income. For example, an entity may have received cash from a source other than the conduct of its normal business operations because it sold an investment asset; or because it sold a business asset other than one held for sale to customers in the normal course of its business and did not replace it; or it borrowed a large sum of money and secured the repayment of the loan with a substantial asset; or a principal source of its cash was from assets such as mineral interests, 90% of which would have been allocated to principal if the trust had owned the assets directly. In such a case the trustee, after considering the total return from the portfolio as a whole and the income component of that return, may decide to exercise the power under Section 104(a) [§ 35-6-104(a)] to make an adjustment between income and principal, subject to the limitations in Section 104(c) [§ 35-6-104(c)].

35-6-402. Distribution from trust or estate.

A trustee shall allocate to income an amount received as a distribution of income from a trust or an estate in which the trust has an interest other than a purchased interest, and shall allocate to principal an amount received as a distribution of principal from such a trust or estate. If a trustee purchases an interest in a trust that is an investment entity, or a decedent or donor transfers an interest in such a trust to a trustee, § 35-6-401 or § 35-6-415 applies to a receipt from the trust.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Terms of the distributing trust or estate.

Under Section 103(a) [§ 35-6-103(a)], a trustee is to allocate receipts in accordance with the terms of the recipient trust or, if there is no provision, in accordance with this Act. However, in determining whether a distribution from another trust or an estate is income or principal, the trustee should also determine what the terms of the distributing trust or estate say about the distribution — for example, whether they direct that the distribution, even though made from the income of the distributing trust or estate, is to be added to principal of the recipient trust. Such a provision should override the terms of this Act, but if the terms of the recipient trust contain a provision requiring such a distribution to be allocated to income, the trustee may have to obtain a judicial resolution of the conflict between the terms of the two documents.

Investment trusts.

An investment entity to which the second sentence of this section applies includes a mutual fund, a common trust fund, a business trust or other entity organized as a trust for the purpose of receiving capital contributed by investors, investing that capital, and managing investment assets, including asset-backed security arrangements to which Section 415 [§ 35-6-415] applies. See John H. Langbein, The Secret Life of the Trust: The Trust as an Instrument of Commerce, 107 Yale L.J. 165 (1997).

35-6-403. Business and other activities conducted by trustee.

  1. If a trustee who conducts a business or other activity determines that it is in the best interest of all the beneficiaries to account separately for the business or activity instead of accounting for it as part of the trust's general accounting records, the trustee may maintain separate accounting records for its transactions, whether or not its assets are segregated from other trust assets.
  2. A trustee who accounts separately for a business or other activity may determine the extent to which its net cash receipts must be retained for working capital, the acquisition or replacement of fixed assets, and other reasonably foreseeable needs of the business or activity, and the extent to which the remaining net cash receipts are accounted for as principal or income in the trust's general accounting records. If a trustee sells assets of the business or other activity, other than in the ordinary course of the business or activity, the trustee shall account for the net amount received as principal in the trust's general accounting records to the extent the trustee determines that the amount received is no longer required in the conduct of the business.
  3. Activities for which a trustee may maintain separate accounting records include:
    1. Retail, manufacturing, service, and other traditional business activities;
    2. Farming;
    3. Raising and selling livestock and other animals;
    4. Management of rental properties;
    5. Extraction of minerals and other natural resources;
    6. Timber operations; and
    7. Activities to which § 35-6-414 applies.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Purpose and scope.

The provisions in Section 403 [§ 35-6-403] are intended to give greater flexibility to a trustee who operates a business or other activity in proprietorship form rather than in a wholly-owned corporation (or, where permitted by state law, a single-member limited liability company), and to facilitate the trustee's ability to decide the extent to which the net receipts from the activity should be allocated to income, just as the board of directors of a corporation owned entirely by the trust would decide the amount of the annual dividend to be paid to the trust. It permits a trustee to account for farming or livestock operations, rental properties, oil and gas properties, timber operations, and activities in derivatives and options as though they were held by a separate entity. It is not intended, however, to permit a trustee to account separately for a traditional securities portfolio to avoid the provisions of this Act that apply to such securities.

Section 403 [§ 35-6-403] permits the trustee to account separately for each business or activity for which the trustee determines separate accounting is appropriate. A trustee with a computerized accounting system may account for these activities in a “subtrust”; an individual trustee may continue to use the business and record-keeping methods employed by the decedent or transferor who may have conducted the business under an assumed name. The intent of this section is to give the trustee broad authority to select business record-keeping methods that best suit the activity in which the trustee is engaged.

If a fiduciary liquidates a sole proprietorship or other activity to which Section 403 [§ 35-6-403] applies, the proceeds would be added to principal, even though derived from the liquidation of accounts receivable, because the proceeds would no longer be needed in the conduct of the business. If the liquidation occurs during probate or during an income interest's winding up period, none of the proceeds would be income for purposes of Section 201 [§ 35-6-201].

Separate accounts.

A trustee may or may not maintain separate bank accounts for business activities that are accounted for under Section 403 [§ 35-6-403]. A professional trustee may decide not to maintain separate bank accounts, but an individual trustee, especially one who has continued a decedent's business practices, may continue the same banking arrangements that were used during the decedent's lifetime. In either case, the trustee is authorized to decide to what extent cash is to be retained as part of the business assets and to what extent it is to be transferred to the trust's general accounts, either as income or principal.

35-6-404. Principal receipts.

A trustee shall allocate to principal:

  1. To the extent not allocated to income under this chapter, assets received from a transferor during the transferor's lifetime, a decedent's estate, a trust with a terminating income interest, or a payer under a contract naming the trust or its trustee as beneficiary;
  2. Money or other property received from the sale, exchange, liquidation, or change in form of a principal asset, including realized profit, subject to this chapter;
  3. Amounts recovered from third parties to reimburse the trust because of disbursements described in § 35-6-502(a)(7) or for other reasons to the extent not based on the loss of income;
  4. Proceeds of property taken by eminent domain, but a separate award made for the loss of income with respect to an accounting period during which a current income beneficiary had a mandatory income interest is income;
  5. Net income received in an accounting period during which there is no beneficiary to whom a trustee may or must distribute income; and
  6. Other receipts as provided in Part 4C, §§ 35-6-408 — 35-6-415.

Acts 2000, ch. 829, § 1.

NOTES TO DECISIONS

1. Allocation of Capital Gains to Principal.

In a trust dispute between a beneficiary and trustees, the trustees were entitled to summary judgment because, inter alia, the meaning of “net income” was a legal issue under T.C.A. § 35-6-103(a)(3), allocating capital gains to principal, under T.C.A. § 35-6-404, in the trustees'  discretion, not a fact issue. Cartwright v. Jackson Capital Partners, Ltd. P'ship, 478 S.W.3d 596, 2015 Tenn. App. LEXIS 361 (Tenn. Ct. App. May 21, 2015), appeal denied, — S.W.3d —, 2015 Tenn. LEXIS 884 (Tenn. Oct. 16, 2015).

COMMENTS TO OFFICIAL TEXT

Eminent domain awards.   Even though the award in an eminent domain proceeding may include an amount for the loss of future rent on a lease, if that amount is not separately stated the entire award is principal. The rule is the same in the 1931 and 1962 Acts.

35-6-405. Rental property.

To the extent that a trustee accounts for receipts from rental property pursuant to this section, the trustee shall allocate to income an amount received as rent of real or personal property, including an amount received for cancellation or renewal of a lease. An amount received as a refundable deposit, including a security deposit or a deposit that is to be applied as rent for future periods, must be added to principal and held subject to the terms of the lease and is not available for distribution to a beneficiary until the trustee's contractual obligations have been satisfied with respect to that amount.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Application of Section 403 [§ 35-6-403].

This section applies to the extent that the trustee does not account separately under Section 403 [§ 35-6-403] for the management of rental properties owned by the trust.

Receipts that are capital in nature.

A portion of the payment under a lease may be a reimbursement of principal expenditures for improvements to the leased property that is characterized as rent for purposes of invoking contractual or statutory remedies for nonpayment. If the trustee is accounting for rental income under Section 405 [§ 35-6-405], a transfer from income to reimburse principal may be appropriate under Section 504 [§ 35-6-405] to the extent that some of the “rent” is really a reimbursement for improvements. This set of facts could also be a relevant factor for a trustee to consider under Section 104(b) [§ 35-6-104(b)] in deciding whether and to what extent to make an adjustment between principal and income under Section 104(a) [§ 35-6-104(a)] after considering the return from the portfolio as a whole.

35-6-406. Obligation to pay money.

  1. An amount received as interest, whether determined at a fixed, variable, or floating rate, on an obligation to pay money to the trustee, including an amount received as consideration for prepaying principal, must be allocated to income without any provision for amortization of premium.
  2. A trustee shall allocate to principal an amount received from the sale, redemption, or other disposition of an obligation to pay money to the trustee more than one (1) year after it is purchased or acquired by the trustee, including an obligation whose purchase price or value when it is acquired is less than its value at maturity. If the obligation matures within one (1) year after it is purchased or acquired by the trustee, an amount received in excess of its purchase price or its value when acquired by the trust must be allocated to income.
  3. This section does not apply to an obligation to which § 35-6-409, § 35-6-410, § 35-6-411, § 35-6-412, § 35-6-414, or § 35-6-415 applies.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Variable or floating interest rates.

The reference in subsection (a) to variable or floating interest rate obligations is intended to clarify that, even though an obligation's interest rate may change from time to time based upon changes in an index or other market indicator, an obligation to pay money containing a variable or floating rate provision is subject to this section and is not to be treated as a derivative financial instrument under Section 414 [§ 35-6-414].

Discount obligations.

Subsection (b) applies to all obligations acquired at a discount, including short-term obligations such as U.S. Treasury Bills, long-term obligations such as U.S. Savings Bonds, zero-coupon bonds, and discount bonds that pay interest during part, but not all, of the period before maturity. Under subsection (b), the entire increase in value of these obligations is principal when the trustee receives the proceeds from the disposition unless the obligation, when acquired, has a maturity of less than one year. In order to have one rule that applies to all discount obligations, the Act eliminates the provision in the 1962 Act for the payment from principal of an amount equal to the increase in the value of U.S. Series E bonds. The provision for bonds that mature within one year after acquisition by the trustee is derived from the Illinois act. 760 ILCS 1½ (1996).

Subsection (b) also applies to inflation-indexed bonds — any increase in principal due to inflation after issuance is principal upon redemption if the bond matures more than one year after the trustee acquires it; if it matures within one year, all of the increase, including any attributable to an inflation adjustment, is income.

Effect of Section 104 [§ 35-6-104].

In deciding whether and to what extent to exercise the power to adjust between principal and income granted by Section 104(a) [§ 35-6-104(a)], a relevant factor for the trustee to consider is the effect on the portfolio as a whole of having a portion of the assets invested in bonds that do not pay interest currently.

35-6-407. Insurance policies and similar contracts.

  1. Except as otherwise provided in subsection (b), a trustee shall allocate to principal the proceeds of a life insurance policy or other contract in which the trust or its trustee is named as beneficiary, including a contract that insures the trust or its trustee against loss for damage to, destruction of, or loss of title to a trust asset. The trustee shall allocate dividends on an insurance policy to income if the premiums on the policy are paid from income, and to principal if the premiums are paid from principal.
  2. A trustee shall allocate to income proceeds of a contract that insures the trustee against loss of occupancy or other use by an income beneficiary, loss of income, or, subject to § 35-6-403, loss of profits from a business.
  3. This section does not apply to a contract to which § 35-6-409 applies.

Acts 2000, ch. 829, § 1.

35-6-408. Insubstantial allocations not required.

If a trustee determines that an allocation between principal and income required by § 35-6-409, § 35-6-410, § 35-6-411, § 35-6-412, or § 35-6-415 is insubstantial, the trustee may allocate the entire amount to principal unless one (1) of the circumstances described in § 35-6-104(c) applies to the allocation. This power may be exercised by a cotrustee in the circumstances described in § 35-6-104(d) and may be released for the reasons and in the manner described in § 35-6-104(e). An allocation is presumed to be insubstantial if:

  1. The amount of the allocation would increase or decrease net income in an accounting period, as determined before the allocation, by less than ten percent (10%); or
  2. The value of the asset producing the receipt for which the allocation would be made is less than ten percent (10%) of the total value of the trust's assets at the beginning of the accounting period.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

This section is intended to relieve a trustee from making relatively small allocations while preserving the trustee's right to do so if an allocation is large in terms of absolute dollars.

For example, assume that a trust's assets, which include a working interest in an oil well, have a value of $1,000,000; the net income from the assets other than the working interest is $40,000; and the net receipts from the working interest are $400. The trustee may allocate all of the net receipts from the working interest to principal instead of allocating 10%, or $40, to income under Section 411 [§ 35-6-411]. If the net receipts from the working interest are $35,000, so that the amount allocated to income under Section 411 [§ 35-6-411] would be $3,500, the trustee may decide that this amount is sufficiently significant to the income beneficiary that the allocation provided for by Section 411 [§ 35-6-411] should be made, even though the trustee is still permitted under Section 408 [§ 35-6-408] to allocate all of the net receipts to principal because the $3,500 would increase the net income of $40,000, as determined before making an allocation under Section 411 [§ 35-6-411], by less than 10%. Section 408 [§ 35-6-408] will also relieve a trustee from having to allocate net receipts from the sale of trees in a small woodlot between principal and income.

While the allocation to principal of small amounts under this section should not be a cause for concern for tax purposes, allocations are not permitted under this section in circumstances described in Section 104(c) [§ 35-6-104(c)] to eliminate claims that the power in this section has adverse tax consequences.

35-6-409. Deferred compensation, annuities, and similar payments.

  1. In this section:
    1. “Payment” means a payment that a trustee may receive over a fixed number of years or during the life of one (1) or more individuals because of services rendered or property transferred to the payer in exchange for future payments. The term includes a payment made in money or property from the payer's general assets or from a separate fund created by the payer. For purposes of subsections (d), (e), (f), and (g), the term also includes any payment from any separate fund, regardless of the reason for the payment; and
    2. “Separate fund” includes, without limitation, a private or commercial annuity, an individual retirement account, and a pension, profit-sharing, stock-bonus, or stock-ownership plan.
  2. To the extent that a payment is characterized as interest, a dividend, or a payment made in lieu of interest or a dividend, a trustee shall allocate the payment to income. The trustee shall allocate to principal the balance of the payment and any other payment received in the same accounting period that is not characterized as interest, a dividend, or an equivalent payment.
  3. If no part of a payment is characterized as interest, a dividend, or an equivalent payment, and all or part of the payment is required to be made, a trustee shall allocate to income ten percent (10%) of the part that is required to be made during the accounting period and the balance to principal. If no part of a payment is required to be made or the payment received is the entire amount to which the trustee is entitled, the trustee shall allocate the entire payment to principal. For purposes of this subsection (c), a payment is not “required to be made” to the extent that it is made because the trustee exercises a right of withdrawal.
  4. Except as otherwise provided in subsection (e), subsections (f) and (g) apply, and subsections (b) and (c) do not apply, in determining the allocation of a payment made from a separate fund to:
    1. A trust to which an election to qualify for a marital deduction under 26 U.S.C. § 2056(b)(7) or § 67-8-315(a)(6); or
    2. A trust that qualifies for the marital deduction under 26 U.S.C. § 2056(b)(5).
  5. Subsections (d), (f), and (g) do not apply if and to the extent that the series of payments would, without the application of subsection (d), qualify for the marital deduction under 26 U.S.C. § 2056(b)(7)(C).
  6. A trustee shall determine the internal income, without regard to its receipt by the trustee, of each separate fund for the accounting period as if the separate fund were a trust subject to this chapter. Upon request of the surviving spouse, the trustee shall demand that the person administering the separate fund distribute the internal income to the trust. The trustee shall allocate a payment from the separate fund to income to the extent of the internal income of the separate fund and distribute that amount to the surviving spouse. The trustee shall allocate the balance of the payment to principal. Upon request of the surviving spouse, the trustee shall allocate principal to income to the extent the internal income of the separate fund exceeds payments made from the separate fund to the trust during the accounting period.
  7. If a trustee cannot determine the internal income of a separate fund but can determine the value of the separate fund, the internal income of the separate fund is deemed to equal at least three percent (3%) of the fund's value, according to the most recent statement of value preceding the beginning of the accounting period. If the trustee can determine neither the internal income of the separate fund nor the fund's value, the internal income of the fund is deemed to equal the product of the interest rate and the present value of the expected future payments, as determined under 26 U.S.C. § 7520, for the month preceding the accounting period for which the computation is made.
  8. This section does not apply to a payment to which § 35-6-410 applies.

Acts 2000, ch. 829, § 1; 2010, ch. 725, § 1.

COMMENTS TO OFFICIAL TEXT

Scope.

Section 409 [T.C.A. § 35-6-409] applies to amounts received under contractual arrangements that provide for payments to a third party beneficiary as a result of services rendered or property transferred to the payer. While the right to receive such payments is a liquidating asset of the kind described in Section 410 [T.C.A. § 35-6-410] (i.e., “an asset whose value will diminish or terminate because the asset is expected to produce receipts for a period of limited duration”), these payment rights are covered separately in Section 409 [T.C.A. § 35-6-409] because of their special characteristics.

Section 409 [T.C.A. § 35-6-409] applies to receipts from all forms of annuities and deferred compensation arrangements, whether the payment will be received by the trust in a lump sum or in installments over a period of years. It applies to bonuses that may be received over two or three years and payments that may last for much longer periods, including payments from an individual retirement account (IRA), deferred compensation plan (whether qualified or not qualified for special federal income tax treatment), and insurance renewal commissions. It applies to a retirement plan to which the settlor has made contributions, just as it applies to an annuity policy that the settlor may have purchased individually, and it applies to variable annuities, deferred annuities, annuities issued by commercial insurance companies, and “private annuities” arising from the sale of property to another individual or entity in exchange for payments that are to be made for the life of one or more individuals. The section applies whether the payments begin when the payment right becomes subject to the trust or are deferred until a future date, and it applies whether payments are made in cash or in kind, such as employer stock (in-kind payments usually will be made in a single distribution that will be allocated to principal under the second sentence of subsection (c)).

The 1962 Act.

Under Section 12 of the 1962 Act, receipts from “rights to receive payments on a contract for deferred compensation” are allocated to income each year in an amount “not in excess of 5% per year” of the property's inventory value. While “not in excess of 5%” suggests that the annual allocation may range from zero to 5% of the inventory value, in practice the rule is usually treated as prescribing a 5% allocation. The inventory value is usually the present value of all the future payments, and since the inventory value is determined as of the date on which the payment right becomes subject to the trust, the inventory value, and thus the amount of the annual income allocation, depends significantly on the applicable interest rate on the decedent's date of death. That rate may be much higher or lower than the average long-term interest rate. The amount determined under the 5% formula tends to become fixed and remain unchanged even though the amount received by the trust increases or decreases.

Allocations Under Section 409(b) [T.C.A. § 35-6-409(b)].

Section 409(b) [T.C.A. § 35-6-409(b)] applies to plans whose terms characterize payments made under the plan as dividends, interest, or payments in lieu of dividends or interest. For example, some deferred compensation plans that hold debt obligations or stock of the plan's sponsor in an account for future delivery to the person rendering the services provide for the annual payment to that person of dividends received on the stock or interest received on the debt obligations. Other plans provide that the account of the person rendering the services shall be credited with “phantom” shares of stock and require an annual payment that is equivalent to the dividends that would be received on that number of shares if they were actually issued; or a plan may entitle the person rendering the services to receive a fixed dollar amount in the future and provide for the annual payment of interest on the deferred amount during the period prior to its payment. Under Section 409(b) [T.C.A. § 35-6-409(b)], payments of dividends, interest or payments in lieu of dividends or interest under plans of this type are allocated to income; all other payments received under these plans are allocated to principal.

Section 409(b) [T.C.A. § 35-6-409(b)] does not apply to an IRA or an arrangement with payment provisions similar to an IRA. IRAs and similar arrangements are subject to the provisions in Section 409(c) [T.C.A. § 35-6-409(c)].

Allocations Under Section 409(c) [T.C.A. § 35-6-409(c)].

The focus of Section 409 [T.C.A. § 35-6-409], for purposes of allocating payments received by a trust to or between principal and income, is on the payment right rather than on assets that may be held in a fund from which the payments are made. Thus, if an IRA holds a portfolio of marketable stocks and bonds, the amount received by the IRA as dividends and interest is not taken into account in determining the principal and income allocation except to the extent that the Internal Revenue Service may require them to be taken into account when the payment is received by a trust that qualifies for the estate tax marital deduction (a situation that is provided for in Section 409(d) [T.C.A. § 35-6-409(d)]). An IRA is subject to federal income tax rules that require payments to begin by a particular date and be made over a specific number of years or a period measured by the lives of one or more persons. The payment right of a trust that is named as a beneficiary of an IRA is not a right to receive particular items that are paid to the IRA, but is instead the right to receive an amount determined by dividing the value of the IRA by the remaining number of years in the payment period. This payment right is similar to the right to receive a unitrust amount, which is normally expressed as an amount equal to a percentage of the value of the unitrust assets without regard to dividends or interest that may be received by the unitrust.

An amount received from an IRA or a plan with a payment provision similar to that of an IRA is allocated under Section 409(c) [T.C.A. § 35-6-409(c)], which differentiates between payments that are required to be made and all other payments. To the extent that a payment is required to be made (either under federal income tax rules or, in the case of a plan that is not subject to those rules, under the terms of the plan), 10% of the amount received is allocated to income and the balance is allocated to principal. All other payments are allocated to principal because they represent a change in the form of a principal asset; Section 409 [T.C.A. § 35-6-409] follows the rule in Section 404(2) [T.C.A. § 35-6-404(2)], which provides that money or property received from a change in the form of a principal asset be allocated to principal.

Section 409(c) [T.C.A. § 35-6-409(c)] produces an allocation to income that is similar to the allocation under the 1962 Act formula if the annual payments are the same throughout the payment period, and it is simpler to administer. The amount allocated to income under Section 409 [T.C.A. § 35-6-409] is not dependent upon the interest rate that is used for valuation purposes when the decedent dies, and if the payments received by the trust increase or decrease from year to year because the fund from which the payment is made increases or decreases in value, the amount allocated to income will also increase or decrease.

Marital deduction requirements.

When an IRA or other retirement arrangement (a “plan”) is payable to a marital deduction trust, the IRS treats the plan as a separate property interest that itself must qualify for the marital deduction.  IRS Revenue Ruling 2006-26 said that, as written, Section 409 does not cause a trust to qualify for the IRS’ safe harbors.  Revenue Ruling 2006-26 was limited in scope to certain situations involving IRAs and defined contribution retirement plans.  Without necessarily agreeing with the IRS’ position in that ruling, the revision to this section is designed to satisfy the IRS’ safe harbor and to address concerns that might be raised for similar assets.  No IRS pronouncements have addressed the scope of Code § 2056(b)(7)(C).

Subsection (f) requires the trustee to demand certain distributions if the surviving spouse so requests.  The safe harbor of Revenue Ruling 2006-26 requires that the surviving spouse be separately entitled to demand the fund’s income (without regard to the income from the trust’s other assets) and the income from the other assets (without regard to the fund’s income).  In any event, the surviving spouse is not required to demand that the trustee distribute all of the fund’s income from the fund or from other trust assets.  Treas. Reg. § 20.2056(b)-5(f)(8).

Subsection (f) also recognizes that the trustee might not control the payments that the trustee receives and provides a remedy to the surviving spouse if the distributions under subsection (d)(1) are insufficient.

Subsection (g) addresses situations where, due to lack of information provided by the fund’s administrator, the trustee is unable to determine the fund’s actual income. The bracketed language is the range approved for unitrust payments by Treas. Reg. § 1.643(b)-1.  In determining the value for purposes of applying the unitrust percentage, the trustee would seek to obtain the value of the assets as of the most recent statement of value immediately preceding the beginning of the year.  For example, suppose a trust’s accounting period is January 1 through December 31.  If a retirement plan administrator furnishes information annually each September 30 and declines to provide information as of December 31, then the trustee may rely on the September 30 value to determine the distribution for the following year.  For funds whose values are not readily available, subsection (g) relies on Code section 7520 valuation methods because many funds described in Section 409 are annuities, and one consistent set of valuation principles should apply whether or not the fund is, in fact, an annuity.

Application of Section 104 [T.C.A. § 35-6-104].

Section 104(a) [T.C.A. § 35-6-104(a)] of this Act gives a trustee who is acting under the prudent investor rule the power to adjust from principal to income if, considering the portfolio as a whole and not just receipts from deferred compensation, the trustee determines that an adjustment is necessary. See Example (5) in the Comment following Section 104 [T.C.A. § 35-6-104].

35-6-410. Liquidating asset.

  1. In this section, “liquidating asset” means an asset whose value will diminish or terminate because the asset is expected to produce receipts for a period of limited duration. Liquidating asset includes a leasehold, patent, copyright, royalty right, and right to receive payments during a period of more than one (1) year under an arrangement that does not provide for the payment of interest on the unpaid balance. Liquidating asset does not include a payment subject to § 35-6-409, resources subject to § 35-6-411, timber subject to § 35-6-412, an activity subject to § 35-6-414, an asset subject to § 35-6-415, or any asset for which the trustee establishes a reserve for depreciation under § 35-6-503.
  2. A trustee shall allocate to income ten percent (10%) of the receipts from a liquidating asset and the balance to principal.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Prior Acts.

Section 11 of the 1962 Act allocates receipts from “property subject to depletion” to income in an amount “not in excess of 5%” of the asset's inventory value. The 1931 Act has a similar 5% rule that applies when the trustee is under a duty to change the form of the investment. The 5% rule imposes on a trust the obligation to pay a fixed annuity to the income beneficiary until the asset is exhausted. Under both the 1931 and 1962 Acts the balance of each year's receipts is added to principal. A fixed payment can produce unfair results. The remainder beneficiary receives all of the receipts from unexpected growth in the asset, e.g., if royalties on a patent or copyright increase significantly. Conversely, if the receipts diminish more rapidly than expected, most of the amount received by the trust will be allocated to income and little to principal. Moreover, if the annual payments remain the same for the life of the asset, the amount allocated to principal will usually be less than the original inventory value. For these reasons, Section 410 [§ 35-6-410] abandons the annuity approach under the 5% rule.

Lottery payments.

The reference in subsection (a) to rights to receive payments under an arrangement that does not provide for the payment of interest includes state lottery prizes and similar fixed amounts payable over time that are not deferred compensation arrangements covered by Section 409 [§ 35-6-409].

35-6-411. Minerals, water, and other natural resources.

  1. To the extent that a trustee accounts for receipts from an interest in minerals or other natural resources pursuant to this section, the trustee shall allocate them as follows:
    1. If received as nominal delay rental or nominal annual rent on a lease, a receipt must be allocated to income;
    2. If received from a production payment, a receipt must be allocated to income if and to the extent that the agreement creating the production payment provides a factor for interest or its equivalent. The balance must be allocated to principal;
    3. If an amount received as a royalty, shut-in-well payment, take-or-pay payment, bonus, or delay rental is more than nominal, ninety percent (90%) must be allocated to principal and the balance to income; and
    4. If an amount is received from a working interest or any other interest not provided for in subdivision (1), (2), or (3), ninety percent (90%) of the net amount received must be allocated to principal and the balance to income.
  2. An amount received on account of an interest in water that is renewable must be allocated to income. If the water is not renewable, ninety percent (90%) of the amount must be allocated to principal and the balance to income.
  3. This chapter applies whether or not a decedent or donor was extracting minerals, water, or other natural resources before the interest became subject to the trust.
  4. If a trust owns an interest in minerals, water, or other natural resources on June 30, 1999, the trustee may allocate receipts from the interest as provided in this chapter or in the manner used by the trustee before July 1, 1999. If the trust acquires an interest in minerals, water, or other natural resources on or after July 1, 1999, the trustee shall allocate receipts from the interest as provided in this chapter.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Prior Acts.

The 1962 Act allocates to principal as a depletion allowance, 27-½% of the gross receipts, but not more than 50% of the net receipts after paying expenses. The Internal Revenue Code no longer provides for a 27-½% depletion allowance, although the major oil-producing States have retained the 27-½% provision in their principal and income acts (Texas amended its Act in 1993, but did not change the depletion provision). Section 9 of the 1931 Act allocates all of the net proceeds received as consideration for the “permanent severance of natural resources from the lands” to principal.

Section 411 [§ 35-6-411] allocates 90% of the net receipts to principal and 10% to income. A depletion provision that is tied to past or present Code provisions is undesirable because it causes a large portion of the oil and gas receipts to be paid out as income. As wells are depleted, the amount received by the income beneficiary falls drastically. Allocating a larger portion of the receipts to principal enables the trustee to acquire other income producing assets that will continue to produce income when the mineral reserves are exhausted.

Application of Sections 403 and 408 [§§ 35-6-403 and 35-6-408].

This section applies to the extent that the trustee does not account separately for receipts from minerals and other natural resources under Section 403 [§ 35-6-403] or allocate all of the receipts to principal under Section 408 [§ 35-6-408].

Open mine doctrine.

The purpose of Section 411(c) [§ 35-6-411(c)] is to abolish the “open mine doctrine” as it may apply to the rights of an income beneficiary and a remainder beneficiary in receipts from the production of minerals from land owned or leased by a trust. Instead, such receipts are to be allocated to or between principal and income in accordance with the provisions of this Act. For a discussion of the open mine doctrine, see generally 3A Austin W. Scott & William F. Fratcher, The Law of Trusts § 239.3 (4th ed. 1988), and Nutter v. Stockton, 626 P.2d 861 (Okla. 1981).

Effective date provision.

Section 9(b) of the 1962 Act provides that the natural resources provision does not apply to property interests held by the trust on the effective date of the Act, which reflects concerns about the constitutionality of applying a retroactive administrative provision to interests in real estate, based on the opinion in the Oklahoma case of Franklin v. Margay Oil Corporation, 153 P.2d 486, 501 (Okla. 1944). Section 411(d) [§ 35-6-411(d)] permits a trustee to use either the method provided for in this Act or the method used before the Act takes effect. Lawyers in jurisdictions other than Oklahoma may conclude that retroactivity is not a problem as to property situated in their States, and this provision permits trustees to decide, based on advice from counsel in States whose law may be different from that of Oklahoma, whether they may apply this provision retroactively if they conclude that to do so is in the best interests of the beneficiaries.

If the property is in a State other than the State where the trust is administered, the trustee must be aware that the law of the property's situs may control this question. The outcome turns on a variety of questions: whether the terms of the trust specify that the law of a State other than the situs of the property shall govern the administration of the trust, and whether the courts will follow the terms of the trust; whether the trust's asset is the land itself or a leasehold interest in the land (as it frequently is with oil and gas property); whether a leasehold interest or its proceeds should be classified as real property or personal property, and if as personal property, whether applicable state law treats it as a movable or an immovable for conflict of laws purposes. See 5A Austin W. Scott & William F. Fratcher, The Law of Trusts §§ 648, at 531, 533-534; § 657, at 600 (4th ed. 1989).

35-6-412. Timber.

  1. To the extent that a trustee accounts for receipts from the sale of timber and related products pursuant to this section, the trustee shall allocate the net receipts to:
    1. Income to the extent that the amount of timber removed from the land does not exceed the rate of growth of the timber during the accounting periods in which a beneficiary has a mandatory income interest;
    2. Principal to the extent that the amount of timber removed from the land exceeds the rate of growth of the timber or the net receipts are from the sale of standing timber;
    3. Between income and principal if the net receipts are from the lease of timberland or from a contract to cut timber from land owned by a trust, by determining the amount of timber removed from the land under the lease or contract and applying the rules in subdivisions (1) and (2); or
    4. Principal to the extent that advance payments, bonuses, and other payments are not allocated pursuant to subdivision (1), (2), or (3).
  2. In determining net receipts to be allocated pursuant to subsection (a), a trustee shall deduct and transfer to principal a reasonable amount for depletion.
  3. This chapter applies whether or not a decedent or transferor was harvesting timber from the property before it became subject to the trust.
  4. If a trust owns an interest in timberland on June 30, 1999, the trustee may allocate net receipts from the sale of timber and related products as provided in this chapter or in the manner used by the trustee before July 1, 1999. If the trust acquires an interest in timberland on or after July 1, 1999, the trustee shall allocate net receipts from the sale of timber and related products as provided in this chapter.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Scope of section.

The rules in Section 412 [§ 35-6-412] are intended to apply to net receipts from the sale of trees and by-products from harvesting and processing trees without regard to the kind of trees that are cut or whether the trees are cut before or after a particular number of years of growth. The rules apply to the sale of trees that are expected to produce lumber for building purposes, trees sold as pulpwood, and Christmas and other ornamental trees. Subsection (a) applies to net receipts from property owned by the trustee and property leased by the trustee. The Act is not intended to prevent a tenant in possession of the property from using wood that he cuts on the property for personal, noncommercial purposes, such as a Christmas tree, firewood, mending old fences or building new fences, or making repairs to structures on the property.

Under subsection (a), the amount of net receipts allocated to income depends upon whether the amount of timber removed is more or less than the rate of growth. The method of determining the amount of timber removed and the rate of growth is up to the trustee, based on methods customarily used for the kind of timber involved.

Application of Sections 403 and 408 [§§ 35-6-403 and 35-6-408].

This section applies to the extent that the trustee does not account separately for net receipts from the sale of timber and related products under Section 403 [§ 35-6-403] or allocate all of the receipts to principal under Section 408 [§ 35-6-408]. The option to account for net receipts separately under Section 403 [§ 35-6-403] takes into consideration the possibility that timber harvesting operations may have been conducted before the timber property became subject to the trust, and that it may make sense to continue using accounting methods previously established for the property. It also permits a trustee to use customary accounting practices for timber operations even if no harvesting occurred on the property before it became subject to the trust.

35-6-413. Property not productive of income.

  1. If a marital deduction is allowed for all or part of a trust whose assets consist substantially of property that does not provide the spouse with sufficient income from or use of the trust assets, and if the amounts that the trustee transfers from principal to income under § 35-6-104 and distributes to the spouse from principal pursuant to the terms of the trust are insufficient to provide the spouse with the beneficial enjoyment required to obtain the marital deduction, the spouse may require the trustee to make property productive of income, convert property within a reasonable time, or exercise the power conferred by § 35-6-104(a). The trustee may decide which action or combination of actions to take.
  2. In cases not governed by subsection (a), proceeds from the sale or other disposition of an asset are principal without regard to the amount of income the asset produces during any accounting period.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Prior Acts' Conflict with Uniform Prudent Investor Act.

Section 2(b) of the Uniform Prudent Investor Act provides that “[a] trustee's investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole ….” The underproductive property provisions in Section 12 of the 1962 Act and Section 11 of the 1931 Act give the income beneficiary a right to receive a portion of the proceeds from the sale of underproductive property as “delayed income.” In each Act the provision applies on an asset by asset basis and not by taking into consideration the trust portfolio as a whole, which conflicts with the basic precept in Section 2(b) of the Prudent Investor Act. Moreover, in determining the amount of delayed income, the prior Acts do not permit a trustee to take into account the extent to which the trustee may have distributed principal to the income beneficiary, under principal invasion provisions in the terms of the trust, to compensate for insufficient income from the unproductive asset. Under Section 104(b)(7) of this Act [§ 35-6-104(b)(7)], a trustee must consider prior distributions of principal to the income beneficiary in deciding whether and to what extent to exercise the power to adjust conferred by Section 104(a) [§ 35-6-104(a)].

Duty to make property productive of income. In order to implement the Uniform Prudent Investor Act, this Act abolishes the right to receive delayed income from the sale proceeds of an asset that produces little or no income, but it does not alter existing state law regarding the income beneficiary's right to compel the trustee to make property productive of income. As the law continues to develop in this area, the duty to make property productive of current income in a particular situation should be determined by taking into consideration the performance of the portfolio as a whole and the extent to which a trustee makes principal distributions to the income beneficiary under the terms of the trust and adjustments between principal and income under Section 104 of this Act [§ 35-6-104].

Trusts for which the value of the right to receive income is important for tax reasons may be affected by Reg. § 1.7520-3(b)(2)(v) Example (1), § 20.7520-3(b)(2)(v) Examples (1) and (2), and § 25.7520-3(b)(2)(v) Examples (1) and (2), which provide that if the income beneficiary does not have the right to compel the trustee to make the property productive, the income interest is considered unproductive and may not be valued actuarially under those sections.

Marital deduction trusts.

Subsection (a) draws on language in Reg. § 20.2056(b)-5(f)(4) and (5) to enable a trust for a surviving spouse to qualify for a marital deduction if applicable state law is unclear about the surviving spouse's right to compel the trustee to make property productive of income. The trustee should also consider the application of Section 104 of this Act [§ 35-6-104] and the provisions of Restatement of Trusts 3d: Prudent Investor Rule § 240, at 186, app. § 240, at 252 (1992). Example (6) in the Comment to Section 104 [§ 35-6-104] describes a situation involving the payment from income of carrying charges on unproductive real estate in which Section 104 [§ 35-6-104] may apply.

Once the two conditions have occurred — insufficient beneficial enjoyment from the property and the spouse's demand that the trustee take action under this section — the trustee must act; but instead of the formulaic approach of the 1962 Act, which is triggered only if the trustee sells the property, this Act permits the trustee to decide whether to make the property productive of income, convert it, transfer funds from principal to income, or to take some combination of those actions. The trustee may rely on the power conferred by Section 104(a) [§ 35-6-104(a)] to adjust from principal to income if the trustee decides that it is not feasible or appropriate to make the property productive of income or to convert the property. Given the purpose of Section 413 [§ 35-6-413], the power under Section 104(a) [§ 35-6-104(a)] would be exercised to transfer principal to income and not to transfer income to principal.

Section 413 [§ 35-6-413] does not apply to a so-called “estate” trust, which will qualify for the marital deduction, even though the income may be accumulated for a term of years or for the life of the surviving spouse, if the terms of the trust require the principal and undistributed income to be paid to the surviving spouse's estate when the spouse dies. Reg. § 20.2056(c)-2(b)(1)(iii).

35-6-414. Derivatives and options.

  1. In this section, “derivative” means a contract or financial instrument or a combination of contracts and financial instruments which gives a trust the right or obligation to participate in some or all changes in the price of a tangible or intangible asset or group of assets, or changes in a rate, an index of prices or rates, or other market indicator for an asset or a group of assets.
  2. To the extent that a trustee does not account under § 35-6-403 for transactions in derivatives, the trustee shall allocate to principal receipts from and disbursements made in connection with those transactions.
  3. If a trustee grants an option to buy property from the trust, whether or not the trust owns the property when the option is granted, grants an option that permits another person to sell property to the trust, or acquires an option to buy property for the trust or an option to sell an asset owned by the trust, and the trustee or other owner of the asset is required to deliver the asset if the option is exercised, an amount received for granting the option must be allocated to principal. An amount paid to acquire the option must be paid from principal. A gain or loss realized upon the exercise of an option, including an option granted to a settlor of the trust for services rendered, must be allocated to principal.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Scope and application.

It is difficult to predict how frequently and to what extent trustees will invest directly in derivative financial instruments rather than participating indirectly through investment entities that may utilize these instruments in varying degrees. If the trust participates in derivatives indirectly through an entity, an amount received from the entity will be allocated under Section 401 [§ 35-6-401] and not Section 414 [§ 35-6-414]. If a trustee invests directly in derivatives to a significant extent, the expectation is that receipts and disbursements related to derivatives will be accounted for under Section 403 [§ 35-6-403]; if a trustee chooses not to account under Section 403 [§ 35-6-403], Section 414(b) [§ 35-6-414(b)] provides the default rule. Certain types of option transactions in which trustees may engage are dealt with in subsection (c) to distinguish those transactions from ones involving options that are embedded in derivative financial instruments.

Definition of “derivative.”

“Derivative” is a difficult term to define because new derivatives are invented daily as dealers tailor their terms to achieve specific financial objectives for particular clients. Since derivatives are typically contract-based, a derivative can probably be devised for almost any set of objectives if another party can be found who is willing to assume the obligations required to meet those objectives.

The most comprehensive definition of derivative is in the Exposure Draft of a Proposed Statement of Financial Accounting Standards titled “Accounting for Derivative and Similar Financial Instruments and for Hedging Activities,” which was released by the Financial Accounting Standards Board (FASB) on June 20, 1996 (No. 162-B). The definition in Section 414(a) [§ 35-6-414(a)] is derived in part from the FASB definition. The purpose of the definition in subsection (a) is to implement the substantive rule in subsection (b) that provides for all receipts and disbursements to be allocated to principal to the extent the trustee elects not to account for transactions in derivatives under Section 403 [§ 35-6-403]. As a result, it is much shorter than the FASB definition, which serves much more ambitious objectives.

A derivative is frequently described as including futures, forwards, swaps and options, terms that also require definition, and the definition in this Act avoids these terms. FASB used the same approach, explaining in paragraph 65 of the Exposure Draft:

The definition of derivative financial instrument in this Statement includes those financial instruments generally considered to be derivatives, such as forwards, futures, swaps, options, and similar instruments. The Board considered defining a derivative financial instrument by merely referencing those commonly understood instruments, similar to paragraph 5 of Statement 119, which says that “… a derivative financial instrument is a futures, forward, swap, or option contract, or other financial instrument with similar characteristics.” However, the continued development of financial markets and innovative financial instruments could ultimately render a definition based on examples inadequate and obsolete. The Board, therefore, decided to base the definition of a derivative financial instrument on a description of the common characteristics of those instruments in order to accommodate the accounting for newly developed derivatives. (Footnote omitted.)

Marking to market.

A gain or loss that occurs because the trustee marks securities to market or to another value during an accounting period is not a transaction in a derivative financial instrument that is income or principal under the Act — only cash receipts and disbursements, and the receipt of property in exchange for a principal asset, affect a trust's principal and income accounts.

Receipt of property other than cash.

If a trustee receives property other than cash upon the settlement of a derivatives transaction, that property would be principal under Section 404(2) [§ 35-6-404(2)].

Options.

Options to which subsection (c) applies include an option to purchase real estate owned by the trustee and a put option purchased by a trustee to guard against a drop in value of a large block of marketable stock that must be liquidated to pay estate taxes. Subsection (c) would also apply to a continuing and regular practice of selling call options on securities owned by the trust if the terms of the option require delivery of the securities. It does not apply if the consideration received or given for the option is something other than cash or property, such as cross-options granted in a buy-sell agreement between owners of an entity.

35-6-415. Asset-backed securities.

  1. In this section, “asset-backed security” means an asset whose value is based upon the right it gives the owner to receive distributions from the proceeds of financial assets that provide collateral for the security. Asset-backed securities includes an asset that gives the owner the right to receive from the collateral financial assets only the interest or other current return or only the proceeds other than interest or current return. Asset-backed securities does not include an asset to which § 35-6-401 or § 35-6-409 applies.
  2. If a trust receives a payment from interest or other current return and from other proceeds of the collateral financial assets, the trustee shall allocate to income the portion of the payment which the payer identifies as being from interest or other current return and shall allocate the balance of the payment to principal.
  3. If a trust receives one (1) or more payments in exchange for the trust's entire interest in an asset-backed security in one (1) accounting period, the trustee shall allocate the payments to principal. If a payment is one (1) of a series of payments that will result in the liquidation of the trust's interest in the security over more than one (1) accounting period, the trustee shall allocate ten percent (10%) of the payment to income and the balance to principal.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Scope of section.    Typical asset-backed securities include arrangements in which debt obligations such as real estate mortgages, credit card receivables and auto loans are acquired by an investment trust and interests in the trust are sold to investors. The source for payments to an investor is the money received from principal and interest payments on the underlying debt. An asset-backed security includes an “interest only” or a “principal only” security that permits the investor to receive only the interest payments received from the bonds, mortgages or other assets that are the collateral for the asset-backed security, or only the principal payments made on those collateral assets. An asset-backed security also includes a security that permits the investor to participate in either the capital appreciation of an underlying security or in the interest or dividend return from such a security, such as the “Primes” and “Scores” issued by Americus Trust. An asset-backed security does not include an interest in a corporation, partnership, or an investment trust described in the Comment to Section 402 [§ 35-6-402], whose assets consist significantly or entirely of investment assets. Receipts from an instrument that do not come within the scope of this section or any other section of the Act would be allocated entirely to principal under the rule in Section 103(a)(4) [§ 35-6-103(a)(4)], and the trustee may then consider whether and to what extent to exercise the power to adjust in Section 104 [§ 35-6-104], taking into account the return from the portfolio as whole and other relevant factors.

Part 5
Allocation of Disbursements During Administration of Trust

35-6-501. Disbursements from income.

A trustee shall make the following disbursements from income to the extent that they are not disbursements to which § 35-6-201(2)(B) or (C) applies:

  1. One half (½) of the regular compensation of the trustee and of any person providing investment advisory or custodial services to the trustee;
  2. One half (½) of all expenses for accountings, judicial proceedings, or other matters that involve both the income and remainder interests;
  3. All of the other ordinary expenses incurred in connection with the administration, management, or preservation of trust property and the distribution of income, including interest, ordinary repairs, regularly recurring taxes assessed against principal, and expenses of a proceeding or other matter that concerns primarily the income interest; and
  4. Recurring premiums on insurance covering the loss of a principal asset or the loss of income from or use of the asset.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Trustee fees.

The regular compensation of a trustee or the trustee's agent includes compensation based on a percentage of either principal or income or both.

Insurance premiums.

The reference in paragraph (4) to “recurring” premiums is intended to distinguish premiums paid annually for fire insurance from premiums on title insurance, each of which covers the loss of a principal asset. Title insurance premiums would be a principal disbursement under Section 502(a)(5) [§ 35-6-502(a)(5)].

Regularly recurring taxes.

The reference to “regularly recurring taxes assessed against principal” includes all taxes regularly imposed on real property and tangible and intangible personal property.

35-6-502. Disbursements from principal.

  1. A trustee shall make the following disbursements from principal:
    1. The remaining one half (½) of the disbursements described in § 35-6-501(1) and (2);
    2. All of the trustee's compensation calculated on principal as a fee for acceptance, distribution, or termination, and disbursements made to prepare property for sale;
    3. Payments on the principal of a trust debt;
    4. Expenses of a proceeding that concerns primarily principal, including a proceeding to construe the trust or to protect the trust or its property;
    5. Premiums paid on a policy of insurance not described in § 35-6-501(4) of which the trust is the owner and beneficiary;
    6. Estate, inheritance, and other transfer taxes, including penalties, apportioned to the trust; and
    7. Disbursements related to environmental matters, including reclamation, assessing environmental conditions, remedying and removing environmental contamination, monitoring remedial activities and the release of substances, preventing future releases of substances, collecting amounts from persons liable or potentially liable for the costs of those activities, penalties imposed under environmental laws or regulations and other payments made to comply with those laws or regulations, statutory or common law claims by third parties, and defending claims based on environmental matters.
  2. If a principal asset is encumbered with an obligation that requires income from that asset to be paid directly to the creditor, the trustee shall transfer from principal to income an amount equal to the income paid to the creditor in reduction of the principal balance of the obligation.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Environmental expenses.

All environmental expenses are payable from principal, subject to the power of the trustee to transfer funds to principal from income under Section 504 [§ 35-6-504]. However, the Drafting Committee decided that it was not necessary to broaden this provision to cover other expenditures made under compulsion of governmental authority. See generally the annotation at 43 A.L.R.4th 1012 (Duty as Between Life Tenant and Remainderman with Respect to Cost of Improvements or Repairs Made Under Compulsion of Governmental Authority).

Environmental expenses paid by a trust are to be paid from principal under Section 502(a)(7) [§ 35-6-502(a)(7)] on the assumption that they will usually be extraordinary in nature. Environmental expenses might be paid from income if the trustee is carrying on a business that uses or sells toxic substances, in which case environmental cleanup costs would be a normal cost of doing business and would be accounted for under Section 403 [§ 35-6-403]. In accounting under that Section, environmental costs will be a factor in determining how much of the net receipts from the business is trust income. Paying all other environmental expenses from principal is consistent with this Act's approach regarding receipts — when a receipt is not clearly a current return on a principal asset, it should be added to principal because over time both the income and remainder beneficiaries benefit from this treatment. Here, allocating payments required by environmental laws to principal imposes the detriment of those payments over time on both the income and remainder beneficiaries.

Under Sections 504(a) and 504(b)(5) [§ 35-6-504(a), (b)(5)], a trustee who makes or expects to make a principal disbursement for an environmental expense described in Section 502(a)(7) [§ 35-6-502(a)(7)] is authorized to transfer an appropriate amount from income to principal to reimburse principal for disbursements made or to provide a reserve for future principal disbursements.

The first part of Section 502(a)(7) [§ 35-6-502(a)(7)] is based upon the definition of an “environmental remediation trust” in Treas. Reg. § 301.7701-4(e) (as amended in 1996). This is not because the Act applies to an environmental remediation trust, but because the definition is a useful and thoroughly vetted description of the kinds of expenses that a trustee owning contaminated property might incur. Expenses incurred to comply with environmental laws include the cost of environmental consultants, administrative proceedings and burdens of every kind imposed as the result of an administrative or judicial proceeding, even though the burden is not formally characterized as a penalty.

Title proceedings.

Disbursements that are made to protect a trust's property, referred to in Section 502(a)(4) [§ 35-6-502(a)(4)], include an “action to assure title” that is mentioned in Section 13(c)(2) of the 1962 Act.

Insurance premiums.

Insurance premiums referred to in Section 502(a)(5) [§ 35-6-502(a)(5)] include title insurance premiums. They also include premiums on life insurance policies owned by the trust, which represent the trust's periodic investment in the insurance policy. There is no provision in the 1962 Act for life insurance premiums.

Taxes.

Generation-skipping transfer taxes are payable from principal under subsection (a)(6).

35-6-503. Transfers from income to principal for depreciation.

  1. In this section, “depreciation” means a reduction in value due to wear, tear, decay, corrosion, or gradual obsolescence of a fixed asset having a useful life of more than one (1) year.
  2. A trustee may transfer to principal a reasonable amount of the net cash receipts from a principal asset that is subject to depreciation, but may not transfer any amount for depreciation:
    1. Of that portion of real property used or available for use by a beneficiary as a residence or of tangible personal property held or made available for the personal use or enjoyment of a beneficiary;
    2. During the administration of a decedent's estate; or
    3. Under this section if the trustee is accounting under § 35-6-403 for the business or activity in which the asset is used.
  3. An amount transferred to principal need not be held as a separate fund.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Prior Acts.    The 1931 Act has no provision for depreciation. Section 13(a)(2) of the 1962 Act provides that a charge shall be made against income for “… a reasonable allowance for depreciation on property subject to depreciation under generally accepted accounting principles ….” That provision has been resisted by many trustees, who do not provide for any depreciation for a variety of reasons. One reason relied upon is that a charge for depreciation is not needed to protect the remainder beneficiaries if the value of the land is increasing; another is that generally accepted accounting principles may not require depreciation to be taken if the property is not part of a business. The Drafting Committee concluded that the decision to provide for depreciation should be discretionary with the trustee. The power to transfer funds from income to principal that is granted by this section is a discretionary power of administration referred to in Section 103(b) [§ 35-6-103(b)], and in exercising the power a trustee must comply with Section 103(b) [§ 35-6-103(b)].

One purpose served by transferring cash from income to principal for depreciation is to provide funds to pay the principal of an indebtedness secured by the depreciable property. Section 504(b)(4) [§ 35-6-504(b)(4)] permits the trustee to transfer additional cash from income to principal for this purpose to the extent that the amount transferred from income to principal for depreciation is less than the amount of the principal payments.

35-6-504. Transfers from income to reimburse principal.

  1. If a trustee makes or expects to make a principal disbursement described in this section, the trustee may transfer an appropriate amount from income to principal in one (1) or more accounting periods to reimburse principal or to provide a reserve for future principal disbursements.
  2. Principal disbursements to which subsection (a) applies include the following, but only to the extent that the trustee has not been and does not expect to be reimbursed by a third party:
    1. An amount chargeable to income but paid from principal because it is unusually large, including extraordinary repairs;
    2. A capital improvement to a principal asset, whether in the form of changes to an existing asset or the construction of a new asset, including special assessments;
    3. Disbursements made to prepare property for rental, including tenant allowances, leasehold improvements, and broker's commissions;
    4. Periodic payments on an obligation secured by a principal asset to the extent that the amount transferred from income to principal for depreciation is less than the periodic payments; and
    5. Disbursements described in § 35-6-502(a)(7).
  3. If the asset whose ownership gives rise to the disbursements becomes subject to a successive income interest after an income interest ends, a trustee may continue to transfer amounts from income to principal as provided in subsection (a).

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Prior Acts.   The sources of Section 504 [§ 35-6-504] are Section 13(b) of the 1962 Act, which permits a trustee to “regularize distributions,” if charges against income are unusually large, by using “reserves or other reasonable means” to withhold sums from income distributions; Section 13(c)(3) of the 1962 Act, which authorizes a trustee to establish an allowance for depreciation out of income if principal is used for extraordinary repairs, capital improvements and special assessments; and Section 12(3) of the 1931 Act, which permits the trustee to spread income expenses of unusual amount “throughout a series of years.” Section 504 [§ 35-6-504] contains a more detailed enumeration of the circumstances in which this authority may be used, and includes in subsection (b)(4) the express authority to use income to make principal payments on a mortgage if the depreciation charge against income is less than the principal payments on the mortgage.

35-6-505. Income taxes.

  1. A tax required to be paid by a trustee based on receipts allocated to income must be paid from income.
  2. A tax required to be paid by a trustee based on receipts allocated to principal must be paid from principal, even if the tax is called an income tax by the taxing authority.
  3. A tax required to be paid by a trustee on the trust's share of an entity's taxable income must be paid:
    1. From income to the extent that receipts from the entity are allocated only to income;
    2. From principal to the extent that receipts from the entity are allocated only to principal;
    3. Proportionately from principal and income to the extent that receipts from the entity are allocated to both income and principal; and
    4. From principal to the extent that the tax exceeds the total receipts from the entity.
  4. After applying subsections (a)-(c), the trustee shall adjust income or principal receipts to the extent that the trust's taxes are reduced because the trust receives a deduction for payments made to a beneficiary.

Acts 2000, ch. 829, § 1; 2010, ch. 725, § 2.

COMMENTS TO OFFICIAL TEXT

Taxes on Undistributed Entity Taxable Income.    When a trust owns an interest in a pass-through entity, such as a partnership or S corporation, it must report its share of the entity’s taxable income regardless of how much the entity distributes to the trust. Whether the entity distributes more or less than the trust’s tax on its share of the entity’s taxable income, the trust must pay the taxes and allocate them between income and principal.

Subsection (c) requires the trust to pay the taxes on its share of an entity’s taxable income from income or principal receipts to the extent that receipts from the entity are allocable to each. This assures the trust a source of cash to pay some or all of the taxes on its share of the entity’s taxable income. Subsection (d) recognizes that, except in the case of an Electing Small Business Trust (ESBT), a trust normally receives a deduction for amounts distributed to a beneficiary. Accordingly, subsection (d) requires the trust to increase receipts payable to a beneficiary as determined under subsection (c) to the extent the trust’s taxes are reduced by distributing those receipts to the beneficiary.

Because the trust’s taxes and amounts distributed to a beneficiary are interrelated, the trust may be required to apply a formula to determine the correct amount payable to a beneficiary.  This formula should take into account that each time a distribution is made to a beneficiary, the trust taxes are reduced and amounts distributable to a beneficiary are increased.  The formula assures that after deducting distributions to a beneficiary, the trust has enough to satisfy its taxes on its share of the entity’s taxable income as reduced by distributions to beneficiaries.

Example (1)  –  Trust T receives a Schedule K-1 from Partnership P reflecting taxable income of $1 million. Partnership P distributes $100,000 to T, which allocates the receipts to income. Both Trust T and income Beneficiary B are in the 35 percent tax bracket. Trust T’s tax on $1 million of taxable income if $350,000. Under Subsection (c) T’s tax must be paid from income receipts because receipts from the entity are allocated only to income. Therefore, T must apply the entire $100,000 of income receipts to pay its tax.  In this case, Beneficiary B receives nothing.

Example (2)  –  Trust T receives a Schedule K-1 from Partnership P reflecting taxable income of $1 million. Partnership P distributes $500,000 to T, which allocates the receipts to income. Both Trust T and income Beneficiary B are in the 35 percent tax bracket. Trust T’s tax on $1 million of taxable income is $350,000. Under Subsection (c), T’s tax must be paid from income receipts because receipts from P are allocated only to income. Therefore, T uses $350,000 of the $500,000 to pay its taxes and distributes the remaining $150,000 to B. The $150,000 payment to B reduces T’s taxes by $52,500, which it must pay to B. But the $52,500 further reduces T’s taxes by $18,375, which it also must pay to B. In fact, each time T makes a distribution to B, its taxes are further reduced, causing another payment to be due B.

Alternatively, T can apply the following algebraic formula to determine the amount payable to B:

D = (C-R*K)/(1-R)

D = Distribution to income beneficiary

C = Cash paid by the entity to the trust

R = tax rate on income

K = entity’s K-1 taxable income

Applying the formula to Example (2) above, Trust T must pay $230,769 to B so that after deducting the payment, T has exactly enough to pay its tax on the remaining taxable income from P.

Taxable Income per K-1  $1,000,000

[1]

Payment to beneficiary  $230,769

Trust Taxable Income  $769,231

35 percent tax  $269,231

Partnership Distribution  $ 500,000

Fiduciary’s Tax Liability  (269,231)

Payable to the Beneficiary  $ 230,769

In addition, B will report $230,769 on his or her own personal income tax return, paying taxes of $80,769. Because Trust T withheld $269,231 to pay its taxes and B paid $80,769 taxes of its own, B bore the entire $350,000 tax burden on the $1 million of entity taxable income, including the $500,000 that the entity retained that presumably increased the value of the trust’s investment entity.

If a trustee determines that it is appropriate to do so, it should consider exercising the discretion granted in T.C.A. Section 35-6-506 to adjust between income and principal. Alternatively, the trustee may exercise the power to adjust under T.C.A. Section 35-6-104 to the extent it is available and appropriate under the circumstances, including whether a future distribution from the entity that would be allocated to principal should be reallocated to income because the income beneficiary already bore the burden of taxes on the reinvested income. In exercising the power, the trust should consider the impact that future distributions will have on any current adjustments.

35-6-506. Adjustments between principal and income because of taxes.

  1. A fiduciary may make adjustments between principal and income to offset the shifting of economic interests or tax benefits between income beneficiaries and remainder beneficiaries which arise from:
    1. Elections and decisions, other than those described in subsection (b), that the fiduciary makes from time to time regarding tax matters;
    2. An income tax or any other tax that is imposed upon the fiduciary or a beneficiary as a result of a transaction involving or a distribution from the estate or trust; or
    3. The ownership by an estate or trust of an interest in an entity whose taxable income, whether or not distributed, is includable in the taxable income of the estate, trust, or a beneficiary.
  2. If the amount of an estate tax marital deduction or charitable contribution deduction is reduced because a fiduciary deducts an amount paid from principal for income tax purposes instead of deducting it for estate tax purposes, and as a result estate taxes paid from principal are increased and income taxes paid by an estate, trust, or beneficiary are decreased, each estate, trust, or beneficiary that benefits from the decrease in income tax shall reimburse the principal from which the increase in estate tax is paid. The total reimbursement must equal the increase in the estate tax to the extent that the principal used to pay the increase would have qualified for a marital deduction or charitable contribution deduction but for the payment. The proportionate share of the reimbursement for each estate, trust, or beneficiary whose income taxes are reduced must be the same as its proportionate share of the total decrease in income tax. An estate or trust shall reimburse principal from income.

Acts 2000, ch. 829, § 1.

COMMENTS TO OFFICIAL TEXT

Discretionary adjustments.

Section 506(a) [§ 35-6-506(a)] permits the fiduciary to make adjustments between income and principal because of tax law provisions. It would permit discretionary adjustments in situations like these: (1) A fiduciary elects to deduct administration expenses that are paid from principal on an income tax return instead of on the estate tax return; (2) a distribution of a principal asset to a trust or other beneficiary causes the taxable income of an estate or trust to be carried out to the distributee and relieves the persons who receive the income of any obligation to pay income tax on the income; or (3) a trustee realizes a capital gain on the sale of a principal asset and pays a large state income tax on the gain, but under applicable federal income tax rules the trustee may not deduct the state income tax payment from the capital gain in calculating the trust's federal capital gain tax, and the income beneficiary receives the benefit of the deduction for state income tax paid on the capital gain. See generally Joel C. Dobris, Limits on the Doctrine of Equitable Adjustment in Sophisticated Postmortem Tax Planning, 66 Iowa L. Rev. 273 (1981).

Section 506(a)(3) [§ 35-6-506(a)(3)] applies to a qualified Subchapter S trust (QSST) whose income beneficiary is required to include a pro rata share of the S corporation's taxable income in his return. If the QSST does not receive a cash distribution from the corporation that is large enough to cover the income beneficiary's tax liability, the trustee may distribute additional cash from principal to the income beneficiary. In this case the retention of cash by the corporation benefits the trust principal. This situation could occur if the corporation's taxable income includes capital gain from the sale of a business asset and the sale proceeds are reinvested in the business instead of being distributed to shareholders.

Mandatory adjustment.

Subsection (b) provides for a mandatory adjustment from income to principal to the extent needed to preserve an estate tax marital deduction or charitable contributions deduction. It is derived from New York's EPTL § 11-1.2 (A), which requires principal to be reimbursed by those who benefit when a fiduciary elects to deduct administration expenses on an income tax return instead of the estate tax return. Unlike the New York provision, subsection (b) limits a mandatory reimbursement to cases in which a marital deduction or a charitable contributions deduction is reduced by the payment of additional estate taxes because of the fiduciary's income tax election. It is intended to preserve the result reached in Estate of Britenstool v. Commissioner, 46 T.C. 711 (1966), in which the Tax Court held that a reimbursement required by the predecessor of EPTL § 11-1.2(A) resulted in the estate receiving the same charitable contributions deduction it would have received if the administration expenses had been deducted for estate tax purposes instead of for income tax purposes. Because a fiduciary will elect to deduct administration expenses for income tax purposes only when the income tax reduction exceeds the estate tax reduction, the effect of this adjustment is that the principal is placed in the same position it would have occupied if the fiduciary had deducted the expenses for estate tax purposes, but the income beneficiaries receive an additional benefit. For example, if the income tax benefit from the deduction is $30,000 and the estate tax benefit would have been $20,000, principal will be reimbursed $20,000 and the net benefit to the income beneficiaries will be $10,000.

Irrevocable grantor trusts.

Under Sections 671-679 of the Internal Revenue Code [26 U.S.C. §§ 671-679] (the “grantor trust” provisions), a person who creates an irrevocable trust for the benefit of another person may be subject to tax on the trust's income or capital gains, or both, even though the settlor is not entitled to receive any income or principal from the trust. Because this is now a well-known tax result, many trusts have been created to produce this result, but there are also trusts that are unintentionally subject to this rule. The Act does not require or authorize a trustee to distribute funds from the trust to the settlor in these cases because it is difficult to establish a rule that applies only to trusts where this tax result is unintended and does not apply to trusts where the tax result is intended. Settlors who intend this tax result rarely state it as an objective in the terms of the trust, but instead rely on the operation of the tax law to produce the desired result. As a result it may not be possible to determine from the terms of the trust if the result was intentional or unintentional. If the drafter of such a trust wants the trustee to have the authority to distribute principal or income to the settlor to reimburse the settlor for taxes paid on the trust's income or capital gains, such a provision should be placed in the terms of the trust. In some situations the Internal Revenue Service may require that such a provision be placed in the terms of the trust as a condition to issuing a private letter ruling.

Part 6
Miscellaneous Provisions

35-6-601. Application and construction of chapter 6.

Section 35-15-1101 controls all application and construction of chapter 6.

Acts 2000, ch. 829, § 1; 2013, ch. 390, § 1.

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. (c) 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.

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 such effective date, that statute continues to apply to the right even if it has been repealed or superseded.

35-6-602. Application of act to existing trusts and estates.

This act applies to every trust or decedent's estate existing on or after July 1, 2000, except as otherwise expressly provided in the will or terms of the trust or in this act.

Acts 2000, ch. 829, § 1.

Chapter 7
Tennessee Uniform Transfers to Minors Act

35-7-101. Short title.

This chapter shall be known and may be cited as the “Tennessee Uniform Transfers to Minors Act.”

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-201.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

Cross-References. Gift tax, title 67, ch. 8, part 1.

Persons 18 years of age or older have the same rights, duties and responsibilities as a person of 21 years of age or older, § 1-3-113.

Textbooks. Pritchard on Wills and Administration of Estates (5th ed., Phillips and Robinson), § 1026.

Tennessee Forms (Robinson, Ramsey and Harwell), No. 4-614.

Tennessee Jurisprudence.  18 Tenn. Juris., Minors, § 2.

Law Reviews.

Confused by tax reforms? Follow these 10 key rules for better estate planning in Tennessee (Dan W. Holbrook), 37 No. 8 Tenn. B.J. 12 (2001).

The Uniform Gifts to Minors Act: A Patent Ambiguity (Margaret M. Mahoney), 34 Vand. L. Rev. 495 (1981).

Where There's a Will: The 95% family-owned test for family limited partnerships (Dan Holbrook), 37 No. 1 Tenn. B.J. 31 (2001).

Collateral References.

Construction and Effect of Uniform Gifts to Minors Act. 50 A.L.R.3d 528.

35-7-102. Chapter definitions.

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

  1. “Adult” means an individual who has attained twenty-one (21) years of age;
  2. “Benefit plan” means an employer's plan for the benefit of an employee or partner;
  3. “Broker” means a person lawfully engaged in the business of effecting transactions in securities or commodities for the person's own account or for the account of others;
  4. “Court” means the chancery, probate and juvenile courts and other courts having probate jurisdiction, which shall have concurrent jurisdiction under this chapter;
  5. “Custodial property” means:
    1. Any interest in property transferred to a custodian under this chapter; and
    2. The income from and proceeds of that interest in property;
  6. “Custodian” means a person so designated, including a person designated as a joint custodian pursuant to § 35-7-111, or a successor or substitute custodian designated according to this chapter;
  7. “Financial institution” means a bank, trust company, savings institution, or credit union, chartered and supervised under state or federal law;
  8. “Guardian” means a person appointed by or qualified in a court to act as a general, limited, or temporary guardian or conservator of a minor's property or person or a person legally authorized to perform substantially the same functions;
  9. “Legal representative” means an individual's personal representative, guardian or conservator;
  10. “Member of the minor's family” means the minor's parent, stepparent, spouse, grandparent, brother, sister, uncle, or aunt, whether of the whole or half blood or by adoption;
  11. “Minor” means an individual who has not attained twenty-one (21) years of age, although the minor may already be of legal age;
  12. “Person” means an individual, corporation, organization, or other legal entity;
  13. “Personal representative” means an executor, administrator, successor personal representative, or special administrator of a decedent's estate or a person legally authorized to perform substantially the same functions;
  14. “Qualified minor’s trust” means any trust, including a trust created by the custodian, that satisfies the requirements of federal Internal Revenue Code § 2503(c) (26 U.S.C. § 2503(c)), and the regulations implementing that section;
  15. “State” includes any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, and any territory or possession subject to the legislative authority of the United States;
  16. “Transfer” means a transaction that creates custodial property under this chapter;
  17. “Transferor” means a person who makes a transfer under this chapter; and
  18. “Trust company” means a financial institution, corporation, or other legal entity, authorized to exercise general trust powers.

Acts 1992, ch. 664, § 1; 1996, ch. 593, § 1; T.C.A. § 35-7-202; Acts 2007, ch. 8, § 11.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-103. Scope and jurisdiction.

  1. This chapter applies to a transfer made on or after October 1, 1992, that refers to this chapter in the designation by which the transfer is made, if at the time of the transfer, the transferor, the minor, or the custodian is a resident of this state or the custodial property is located in this state. The custodianship so created remains subject to this chapter despite a subsequent change in residence of a transferor, the minor, or the custodian, or the removal of custodial property from this state.
  2. A person designated as custodian under this chapter is subject to personal jurisdiction in this state with respect to any matter relating to the custodianship.
  3. A transfer that purports to be made and that is valid under the Uniform Transfers to Minors Act, the Uniform Gifts to Minors Act, or substantially similar act, of another state is governed by the law of the designated state and may be executed and is enforceable in this state, if at the time of the transfer, the transferor, the minor, or the custodian is a resident of the designated state or the custodial property is located in the designated state.
  4. This chapter shall not be construed as an exclusive method for making gifts or other transfers to minors.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-203.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-104. Nomination of custodian.

  1. A person having the right to designate the recipient of property transferable upon the occurrence of a future event may revocably nominate a custodian to receive the property for a minor beneficiary upon the occurrence of the event by naming the custodian followed in substance by the words “as custodian for  (name of minor) under the Tennessee Uniform Transfers to Minors Act.” The nomination may name one (1) or more persons as substitute custodians to whom the property must be transferred, in the order named, if the first nominated custodian dies before the transfer or is unable, declines, or is ineligible to serve. The nomination may be made in a will, a trust, a deed, an instrument exercising a power of appointment, or in a writing designating a beneficiary of contractual rights which is registered with or delivered to the payor, issuer, or other obligor of the contractual rights.
  2. A custodian nominated under this section must be a person to whom a transfer of property of that kind may be made under § 35-7-110(a).
  3. The nomination of a custodian under this section does not create custodial property until the nominating instrument becomes irrevocable or a transfer to the nominated custodian is completed. Unless the nomination of a custodian has been revoked, upon the occurrence of the future event, the custodianship becomes effective and the custodian shall enforce a transfer of the custodial property pursuant to § 35-7-110.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-204.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-105. Transfer by gift or exercise of power of appointment.

A person may make a transfer by irrevocable gift to, or the irrevocable exercise of a power of appointment in favor of, a custodian for the benefit of a minor pursuant to § 35-7-110.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-205.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-106. Transfer authorized by will or trust.

  1. A personal representative or trustee may make an irrevocable transfer pursuant to § 35-7-110, to a custodian for the benefit of a minor as authorized in the governing will or trust or by a judicial order.
  2. If the testator or settlor has nominated a custodian under § 35-7-104, to receive the custodial property, the transfer must be made to that person.
  3. If the testator or settlor has not nominated a custodian or all persons so nominated as custodian die before the transfer or are unable, decline, or are ineligible to serve, the personal representative or the trustee, as the case may be, shall designate the custodian from among those eligible to serve as custodian for property of that kind under § 35-7-110(a).

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-206.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-107. Other transfer by fiduciary.

  1. Subject to subsection (c), a personal representative or trustee may make an irrevocable transfer to another adult or trust company as custodian for the benefit of a minor pursuant to § 35-7-110, in the absence of a will or under a will or trust that does not contain an authorization to do so.
  2. Subject to subsection (c), a guardian may make an irrevocable transfer to another adult or trust company as custodian for the benefit of the minor pursuant to § 35-7-110.
  3. A transfer under subsection (a) or (b) may be made only if:
    1. The personal representative, trustee, or guardian considers the transfer to be in the best interest of the minor;
    2. The transfer is not prohibited by or inconsistent with provisions of the applicable will, trust agreement, or other governing instrument; and
    3. The transfer is authorized by the court if it exceeds twenty-five thousand dollars ($25,000) in value.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-207.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-108. Transfer by obligor.

  1. Subject to subsections (b) and (c), a person not subject to § 35-7-106 or § 35-7-107, who holds property of, or owes a liquidated debt or judgment to, a minor not having a guardian may make an irrevocable transfer to a custodian for the benefit of the minor pursuant to § 35-7-110.
  2. If a person having the right to do so under § 35-7-104 has nominated a custodian under this chapter to receive the custodial property, the transfer must be made to that person.
  3. If no custodian has been nominated, or all persons so nominated as custodian die before the transfer or are unable, decline, or are ineligible to serve, a transfer under this section may be made to an adult member of the minor's family or to a trust company unless the property exceeds twenty-five thousand dollars ($25,000) in value. If the transfer exceeds twenty-five thousand dollars ($25,000) in value, it may be made only if it is authorized by the court.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-208.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-109. Receipt for custodial property.

A written acknowledgment of delivery by a custodian constitutes a sufficient receipt and discharge for custodial property transferred to the custodian pursuant to this chapter.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-209.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-110. Manner of creating custodial property and effecting transfer — Designation of initial custodian — Control.

  1. Custodial property is created and a transfer is made whenever:
    1. An uncertificated security or a certificated security in registered form is either:
      1. Registered in the name of the transferor, an adult other than the transferor, or a trust company, followed in substance by the words “as custodian for  (name of minor) under the Tennessee Uniform Transfers to Minors Act”; or
      2. Delivered if in certificated form, or any document necessary for the transfer of an uncertificated security is delivered, together with any necessary endorsement to an adult other than the transferor or to a trust company as custodian, accompanied by an instrument in substantially the form set forth in subsection (b);
    2. Money is paid or delivered, or a security held in the name of a broker, financial institution, or its nominee is transferred, to a broker or financial institution for credit to an account in the name of the transferor, an adult other than the transferor, or a trust company, followed in substance by the words: “as custodian for  (name of minor) under the Tennessee Uniform Transfers to Minors Act”;
    3. The ownership of a life or endowment insurance policy or annuity contract is either:
      1. Registered with the issuer in the name of the transferor, an adult other than the transferor, or a trust company, followed in substance by the words: “as custodian for  (name of minor) under the Tennessee Uniform Transfers to Minors Act”; or
      2. Assigned in a writing delivered to an adult other than the transferor or to a trust company whose name in the assignment is followed in substance by the words: “as custodian for  (name of minor) under the Tennessee Uniform Transfers to Minors Act”;
    4. An irrevocable exercise of a power of appointment or an irrevocable present right to future payment under a contract is the subject of a written notification delivered to the payor, issuer, or other obligor that the right is transferred to the transferor, an adult other than the transferor, or a trust company, whose name in the notification is followed in substance by the words: “as custodian for  (name of minor) under the Tennessee Uniform Transfers to Minors Act”;
    5. A deed for an interest in real property is recorded in the name of the transferor, an adult other than the transferor, or a trust company, followed in substance by the words: “as custodian for  (name of minor) under the Tennessee Uniform Transfers to Minors Act”;
    6. A certificate of title issued by a department or agency of a state or of the United States which evidences title to tangible personal property is either:
      1. Issued in the name of the transferor, an adult other than the transferor, or a trust company followed in substance by the words “as custodian for  (name of minor) under the Tennessee Uniform Transfers to Minors Act”; or
      2. Delivered to an adult other than the transferor or to a trust company, endorsed to that person followed in substance by the words “as custodian for  (name of minor) under the Tennessee Uniform Transfers to Minors Act”; or
    7. An interest in any property not described in subdivisions (a)(1)-(6) is transferred to an adult other than the transferor or to a trust company by a written instrument in substantially the form set forth in subsection (b).
  2. An instrument in the following form satisfies the requirements of subdivisions (a)(1)(B) and (7):

    TRANSFER UNDER THE TENNESSEE UNIFORM TRANSFERS TO MINORS ACT I,   (name of transferor or name and representative capacity if a fiduciary) hereby transfer to  (name of custodian) , as custodian for  (name of minor) , under the Tennessee Uniform Transfers to Minors Act, the following:  (insert a description of the custodial property sufficient to identify it). Dated  (Signature) (name of custodian)  acknowledges receipt of the property described above as custodian for the minor named above under the Tennessee Uniform Transfers to Minors Act. Dated  (Signature of Custodian)

    Click to view form.

  3. As an alternative to the form of transfer set out in subdivisions (a)(1)-(6), custodial property may be registered, held, recorded or otherwise created in the name of the minor, followed in substance by the words “minor, by  (name of custodian or custodians) under the Tennessee Uniform Transfers to Minors Act”.
  4. A transferor shall place the custodian in control of the custodial property as soon as practicable.

Acts 1992, ch. 664, § 1; 1996, ch. 593, § 2; T.C.A. § 35-7-210.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-111. Transfers — Single and joint custodians.

A transfer may be made only for one (1) minor, and up to two (2) persons may be the custodians. All custodial property held under this chapter by the same custodian or custodians for the benefit of the same minor constitutes a single custodianship. If more than one (1) person is appointed a custodian, such persons shall act as joint custodians under this chapter and, unless specified in any document creating the custodial property, each joint custodian shall have full power and authority to act alone with respect to the custodial property. If either joint custodian resigns, dies, becomes incapacitated or is removed, then the remaining one (1) of them may serve as sole custodian without the necessity of appointing a successor joint custodian.

Acts 1992, ch. 664, § 1; 1996, ch. 593, § 3; T.C.A. § 35-7-211.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-112. Validity and effect of transfer.

  1. The validity of a transfer made in a manner prescribed in this chapter is not affected by:
    1. Failure of the transferor to comply with sections hereof concerning possession and control;
    2. Designation of an ineligible custodian, except designation of the transferor in the case of property for which the transferor is ineligible to serve as custodian under this chapter; or
    3. Death or incapacity of a person nominated or designated as custodian or the written disclaimer of the office by that person.
  2. A transfer made pursuant to this chapter is irrevocable, and the custodial property is indefeasibly vested in the minor, but the custodian has all the rights, powers, duties, and authority provided in this chapter, and neither the minor nor the minor's legal representative has any right, power, duty, or authority with respect to the custodial property except as provided in this chapter.
  3. By making a transfer, the transferor incorporates in the disposition all the provisions of this chapter and grants to the custodian, and to any third person dealing with a person designated as custodian, the respective powers, rights, and immunities provided in this chapter.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-212.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-113. Care of custodial property.

  1. A custodian shall:
    1. Take control of custodial property;
    2. Register or record title to custodial property, except tangible personal property of a type for which registration or recording of title is not required under Tennessee law; and
    3. Collect, hold, manage, invest, and reinvest custodial property.
  2. In dealing with custodial property, a custodian shall observe the standard of care that would be observed by a prudent person dealing with property of another and is not limited by any other statute restricting investments by fiduciaries. If a custodian has a special skill or expertise or is named custodian on the basis of representations of a special skill or expertise, the custodian shall use that skill or expertise. However, a custodian, in the custodian's discretion and without liability to the minor or the minor's estate, may retain any custodial property received from a transferor.
  3. A custodian may invest in or pay premiums on life insurance or endowment policies on:
    1. The life of the minor only if the minor or the minor's estate is the sole beneficiary; or
    2. The life of another person in whom the minor has an insurable interest;

      only to the extent that the minor, the minor's estate, or the custodian in the capacity of custodian, is the irrevocable beneficiary.

  4. A custodian at all times shall keep custodial property separate and distinct from all other property in a manner sufficient to identify it clearly as custodial property of the minor. Custodial property consisting of an undivided interest is so identified if the minor's interest is held as a tenant in common and is fixed. Custodial property subject to recordation is so identified if it is recorded, and custodial property subject to registration is so identified if it is either registered or held in an account designated in the name of the custodian, followed in substance by the words “as a custodian for (name of minor) under the Tennessee Uniform Transfers to Minors Act.”
  5. A custodian shall keep records of all transactions with respect to custodial property, including information necessary for the preparation of the minor's tax returns, and shall make them available for inspection at reasonable intervals by a parent or legal representative of the minor or by the minor if the minor has attained fourteen (14) years of age.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-213.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-114. Powers of custodian.

  1. A custodian, acting in a custodial capacity, has all the rights, powers, and authority over custodial property that unmarried adult owners have over their own property, but a custodian may exercise those rights, powers, and authority in that capacity only.
  2. This section does not relieve a custodian from liability for breach of duties of care under § 35-7-113.
  3. The custodian is authorized to invest some or all of the custodial property in the Internal Revenue Code Section 529 plan, if the custodian determines the investment to be in the best interest of the minor.

Acts 1992, ch. 664, § 1; 2005, ch. 99, § 7; T.C.A. § 35-7-214.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

The full citation for Internal Revenue Code Section 529, referred to in this section, is 26 U.S.C. § 529.

35-7-115. Use of custodial property.

  1. A custodian may deliver or pay to the minor or expend for the minor's benefit so much of the custodial property as the custodian considers advisable for the use and benefit of the minor, without court order and without regard to:
    1. The duty or ability of the custodian personally or of any other person to support the minor; or
    2. Any other income or property of the minor which may be applicable or available for that purpose.
  2. On petition of an interested person or the minor, if the minor has attained fourteen (14) years of age, the court may order the custodian to deliver or pay to the minor or expend for the minor's benefit so much of the custodial property as the court considers advisable for the use and benefit of the minor.
  3. A delivery, payment, or expenditure under this section is in addition to, not in substitution for, and does not affect any obligation of a person to support the minor.

Acts 1992, ch. 664, § 1;; T.C.A. § 35-7-215.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-116. Custodian's expenses, compensation, and bond.

  1. A custodian is entitled to reimbursement from custodial property for reasonable expenses incurred in the performance of the custodian's duties.
  2. Except for one who is a transferor under § 35-7-105, a custodian has a non-cumulative election during each calendar year to charge reasonable compensation for services performed during that year.
  3. Except as provided in § 35-7-119(f), a custodian need not give a bond.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-216.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-117. Exemption of third person from liability.

A third person in good faith and without court order may act on the instructions of or otherwise deal with any person purporting to make a transfer or purporting to act in the capacity of a custodian and, in the absence of knowledge, is not responsible for determining:

  1. The validity of the purported custodian's designation;
  2. The propriety of, or the authority under this chapter for, any act of the purported custodian;
  3. The validity or propriety under this chapter of any instrument or instructions executed or given either by the person purporting to make a transfer or by the purported custodian; or
  4. The propriety of the application of any property of the minor delivered to the purported custodian.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-217.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-118. Liability to third persons.

  1. A claim based on:
    1. A contract entered into by a custodian acting in a custodial capacity;
    2. An obligation arising from the ownership or control of custodial property; or
    3. A tort committed during the custodianship;

      may be asserted against the custodial property by proceeding against the custodian in the custodial capacity, whether or not the custodian or the minor is personally liable therefor.

  2. A custodian is not personally liable:
    1. On a contract properly entered into in the custodial capacity unless the custodian fails to reveal that capacity and to identify the custodianship in the contract; or
    2. For an obligation arising from control of custodial property or for a tort committed during the custodianship unless the custodian is personally at fault.
  3. A minor is not personally liable for an obligation arising from ownership of custodial property or for a tort committed during the custodianship unless the minor is personally at fault.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-218.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-119. Renunciation, resignation, death, or removal of custodian — Designation of successor custodian.

  1. A person nominated under § 35-7-104, or designated under § 35-7-110, as custodian may decline to serve by delivering a written disclaimer to the person who made the nomination or to the transferor or the transferor's legal representative. If the event giving rise to a transfer has not occurred and no substitute custodian able, willing and eligible to serve was nominated, the person who made the nomination may nominate a substitute custodian; otherwise, the transferor or the transferor's legal representative shall designate a substitute custodian at the time of the transfer, in either case from among the persons eligible to serve as custodian for that kind of property. The custodian so designated has the rights of a successor custodian.
  2. A custodian at any time may designate a trust company or an adult other than a transferor under this chapter as successor custodian by executing and dating an instrument of designation before a subscribing witness other than the successor. If the instrument of designation does not contain or is not accompanied by the resignation of the custodian, the designation of the successor does not take effect until the custodian resigns, dies, becomes incapacitated, or is removed.
  3. A custodian may resign at any time by delivering written notice to the minor if the minor has attained fourteen (14) years of age and to the successor custodian and by delivering the custodial property to the successor custodian.
  4. If a custodian is ineligible, dies, or becomes incapacitated without having effectively designated a successor and the minor has attained fourteen (14) years of age, the minor may designate as a successor custodian, in the manner prescribed in subsection (b), an adult member of the minor's family, a guardian or conservator of the minor, or a trust company. If the minor has not attained fourteen (14) years of age or fails to act within sixty (60) days after the ineligibility, death, or incapacity, the guardian of the minor becomes successor custodian. If the minor has no guardian or the guardian declines to act, the transferor, the legal representative of the transferor or of the custodian, an adult member of the minor's family, or any other interested person may petition the court to designate a successor custodian.
  5. A custodian who declines to serve under subsection (a) or resigns under subsection (c), or the legal representative of a deceased or incapacitated custodian, as soon as practicable, shall put the custodial property and records in the possession and control of the successor custodian. The successor custodian by action may enforce the obligation to deliver custodial property and records and becomes responsible for each item as received.
  6. A transferor, the legal representative of a transferor, an adult member of the minor's family, a guardian or conservator of the person or property of the minor, or the minor if the minor has attained fourteen (14) years of age may petition the court to remove the custodian for cause and to designate a successor custodian other than a transferor under § 35-7-105, or to require the custodian to give appropriate bond.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-219.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-120. Accounting by and determination of liability of custodian.

  1. A minor who has attained fourteen (14) years of age, the minor's guardian or conservator of the person or legal representative, an adult member of the minor's family, a transferor, or a transferor's legal representative may petition the court:
    1. For an accounting by the custodian or the custodian's legal representative; or
    2. For a determination of responsibility, as between the custodial property and the custodian personally, for claims against the custodial property unless the responsibility has been adjudicated in an action under § 35-7-118, to which the minor or the minor's legal representative was a party.
  2. A successor custodian may petition the court for an accounting by the predecessor custodian.
  3. The court, in a proceeding under this chapter or in any other proceeding, may require or permit the custodian or the custodian's legal representative to account.
  4. If a custodian is removed under § 35-7-119(f), the court shall require an accounting and order delivery of the custodial property and records to the successor custodian and the execution of all instruments required for transfer of the custodial property.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-220.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-121. Termination of custodianship.

  1. The custodian shall transfer in an appropriate manner the custodial property to the minor or to the minor's estate upon the earlier of:
    1. The minor's attainment of twenty-one (21) years of age; provided, that this transfer can be withheld until the minor's attainment of up to twenty-five (25) years of age if the instrument so provides, and if the gift is an inter vivos gift, the instrument further expressly states that deferring termination of custodianship beyond the minor's attainment of twenty-one (21) years of age will cause the transfer to be a gift of a future interest which may have adverse federal and state gift tax consequences; or
    2. The minor's death.
  2. At any time a custodian may transfer part or all of the custodial property to a qualified minor’s trust without court order. The transfer terminates the custodianship to the extent of the transfer.

Acts 1992, ch. 664, § 1; 1995, ch. 513, § 1; 1999, ch. 491, § 8; T.C.A. § 35-7-221; Acts 2007, ch. 8, § 12.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-122. Applicability.

This chapter also applies to a transfer made on or after October 1, 1992, if:

  1. The transfer purports to have been made under the Tennessee Uniform Gifts to Minors Act; or
  2. The instrument by which the transfer purports to have been made uses in substance the designation “as custodian under the Uniform Gifts to Minors Act” or “as custodian under the Uniform Transfers to Minors Act” of any other state, and the application of this chapter is necessary to validate the transfer.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-222.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-123. Effect on existing custodianships.

  1. Any transfer of custodial property as now defined in this chapter, including transfers of real property, made before October 1, 1992, is validated, notwithstanding that there was no specific authority in the Tennessee Uniform Gifts to Minors Act for the coverage of custodial property of that kind or for a transfer from that source at the time the transfer was made.
  2. This chapter applies to all transfers made before October 1, 1992, in a manner and form prescribed in the Tennessee Uniform Gifts to Minors Act, except insofar as the application impairs constitutionally vested rights or extends the duration of custodianships beyond eighteen (18) years of age of the minor which were in existence on October 1, 1992.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-223.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-124. Uniformity of application and construction.

This chapter shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this chapter among states enacting it.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-224.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-125. Repeals prior act.

The Tennessee Uniform Gifts to Minors Act, formerly compiled in this chapter, is repealed. To the extent that this chapter, by virtue of § 35-7-123, does not apply to transfers made in a manner prescribed in the Tennessee Uniform Gifts to Minors Act or to the powers, duties and immunities conferred by transfers in that manner upon custodians and persons dealing with custodians, the repeal of the Tennessee Uniform Gifts to Minors Act does not affect those transfers or those powers, duties and immunities.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-225.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

35-7-126. Severability.

If any provision of this chapter or its application to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of this chapter that can be given effect without the invalid provision or application, and to this end the provisions of this chapter are severable.

Acts 1992, ch. 664, § 1; T.C.A. § 35-7-226.

Compiler's Notes. Former part 1, §§ 35-7-10135-7-110 (Acts 1957, ch. 112, §§ 1-10; 1961, ch. 232, § 1; 1963, ch. 65, §§ 1-9; 1968, ch. 600, §§ 1-10; 1972, ch. 612, § 6; 1973, ch. 190, § 1; 1975, ch. 294, § 1; 1976, ch. 393, § 1; 1983, ch. 336, § 1; T.C.A., §§ 35-801 — 35-810), concerning the Uniform Gifts to Minors Act, was repealed by Acts 1992, ch. 664, § 1 effective October 1, 1992. See present § 35-7-125. For present law see this chapter.

Chapter 8
Revised Uniform Fiduciary Access to Digital Assets Act

35-8-101. Short title.

This chapter shall be known and may be cited as the “Revised Uniform Fiduciary Access to Digital Assets Act.”

Acts 2016, ch. 570, § 2.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Compiler's Notes. Former chapter 8, §§ 35-8-10135-8-111 (Acts 1959, ch. 246, §§ 1-11; T.C.A., §§ 35-901 — 35-911), the Uniform Act for Simplification of Fiduciary Security Transfers, was repealed by Acts 1997, ch. 79, § 20, effective January 1, 1998.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-102. Chapter definitions.

In this chapter:

  1. “Account” means an arrangement under a terms-of-service agreement in which a custodian carries, maintains, processes, receives, or stores a digital asset of the user or provides goods or services to the user;
  2. “Agent” means an attorney-in-fact granted authority under a durable or nondurable power of attorney;
  3. “Carries” means engages in the transmission of an electronic communication;
  4. “Catalogue of electronic communications” means information that identifies each person with which a user has had an electronic communication, the time and date of the communication, and the electronic address of the person;
  5. “Conservator” means a person appointed by a court to manage the estate of a person with a disability. “Conservator” includes a limited conservator;
  6. “Content of an electronic communication” means information concerning the substance or meaning of the communication which:
    1. Has been sent or received by a user;
    2. Is in electronic storage by a custodian providing an electronic communication service to the public or is carried or maintained by a custodian providing a remote-computing service to the public; and
    3. Is not readily accessible to the public;
  7. “Court” means any court of record that has jurisdiction to hear matters concerning personal representatives, conservators, guardians, agents acting pursuant to a power of attorney, or trustees;
  8. “Custodian” means a person who carries, maintains, processes, receives, or stores a digital asset of a user;
  9. “Designated recipient” means a person chosen by a user using an online tool to administer digital assets of the user;
  10. “Digital asset” means an electronic record in which an individual has a right or interest. “Digital asset” does not include an underlying asset or liability unless the asset or liability is itself an electronic record;
  11. “Electronic” means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities;
  12. “Electronic communication” has the same meaning as defined in 18 U.S.C. § 2510(12);
  13. “Electronic communication service” means a custodian that provides to a user the ability to send or receive an electronic communication;
  14. “Fiduciary” means an original, additional, or successor personal representative, conservator, guardian, agent, or trustee;
  15. “Guardian” means a person appointed by a court to manage the estate of a minor. “Guardian” includes a limited guardian;
  16. “Information” means data, text, images, videos, sounds, codes, computer programs, software, databases, or the like;
  17. “Limited conservator” means a conservator with partial, restricted, or temporary powers;
  18. “Limited guardian” means a guardian with partial, restricted, or temporary powers;
  19. “Minor” means an unemancipated individual who has not attained eighteen (18) years of age and who has not otherwise been emancipated, and for whom a guardian has been appointed. “Minor” includes an individual for whom an application for the appointment of a guardian is pending;
  20. “Online tool” means an electronic service provided by a custodian that allows the user, in an agreement distinct from the terms-of-service agreement between the custodian and user, to provide directions for disclosure or nondisclosure of digital assets to a third person;
  21. “Person” means an individual, estate, business or nonprofit entity; public corporation; government or governmental subdivision, agency, or instrumentality; or other legal entity;
  22. “Person with a disability” means an individual eighteen (18) years of age or older determined by a court to be in need of partial or full supervision, protection, and assistance by reason of mental illness, physical illness or injury, developmental disability, or other mental or physical incapacity, and for whom a conservator has been appointed. “Person with a disability” includes an individual for whom an application for the appointment of a conservator is pending;
  23. “Personal representative” means an executor, administrator, special administrator, or person that performs substantially the same function under law of this state other than this chapter;
  24. “Power of attorney” means an instrument that grants an agent authority to act in the place of a principal;
  25. “Principal” means an individual who grants authority to an agent in a power of attorney;
  26. “Record” means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form;
  27. “Remote-computing service” means a custodian that provides to a user computer-processing services or the storage of digital assets by means of an electronic communications system, as defined in 18 U.S.C. § 2510(14);
  28. “Terms-of-service agreement” means an agreement that controls the relationship between a user and a custodian;
  29. “Trustee” means a fiduciary with legal title to property under an agreement or declaration that creates a beneficial interest in another. “Trustee” includes a successor trustee;
  30. “User” means a person who has an account with a custodian; and
  31. “Will” includes a codicil, testamentary instrument that only appoints an executor, and instrument that revokes or revises a testamentary instrument.

Acts 2016, ch. 570, § 3.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-103. Applicability of chapter.

  1. This chapter applies to:
    1. A fiduciary or agent acting under a will or power of attorney executed before, on, or after July 1, 2016;
    2. A personal representative acting for a decedent who died before, on, or after July 1, 2016;
    3. A conservatorship or guardianship proceeding, whether pending in a court or commenced before, on, or after July 1, 2016; and
    4. A trustee acting under a trust created before, on, or after July 1, 2016.
  2. This chapter applies to a custodian if the user resides in this state or resided in this state at the time of the user's death.
  3. This chapter does not apply to a digital asset of an employer used by an employee in the ordinary course of the employer's business.

Acts 2016, ch. 570, § 4.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-104. User direction for disclosure of digital assets.

  1. A user may use an online tool to direct the custodian to disclose to a designated recipient or not to disclose some or all of the user's digital assets, including the content of electronic communications. If the online tool allows the user to modify or delete a direction at all times, a direction regarding disclosure using an online tool overrides a contrary direction by the user in a will, trust, power of attorney, or other dispositive or nominative instrument.
  2. If a user has not used an online tool to give direction under subsection (a) or if the custodian has not provided an online tool, the user may allow or prohibit in a will, trust, power of attorney, or other dispositive or nominative instrument, disclosure to a fiduciary of some or all of the user's digital assets, including the content of electronic communications sent or received by the user.
  3. A user's direction under subsection (a) or (b) overrides a contrary provision in a terms-of-service agreement that does not require the user to act affirmatively and distinctly from the user's assent to the terms of service.

Acts 2016, ch. 570, § 5.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-105. Rights of custodian or user.

  1. This chapter does not change or impair a right of a custodian or a user under a terms-of-service agreement to access and use digital assets of the user.
  2. This chapter does not give a fiduciary or designated recipient any new or expanded rights other than those held by the user for whom, or for whose estate, the fiduciary or designated recipient acts or represents.
  3. A fiduciary's or designated recipient's access to digital assets may be modified or eliminated by a user, by federal law, or by a terms-of-service agreement if the user has not provided direction under § 35-8-104.

Acts 2016, ch. 570, § 6.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-106. Disclosure of digital assets — Powers of custodian — Administrative fee.

  1. When disclosing digital assets of a user under this chapter, the custodian may at its sole discretion:
    1. Grant a fiduciary or designated recipient full access to the user's account;
    2. Grant a fiduciary or designated recipient partial access to the user's account sufficient to perform the tasks with which the fiduciary or designated recipient is charged; or
    3. Provide a fiduciary or designated recipient a copy in a record of any digital asset that, on the date the custodian received the request for disclosure, the user could have accessed if the user were alive and had full capacity and access to the account.
  2. A custodian may assess a reasonable administrative charge for the cost of disclosing digital assets under this chapter.
  3. A custodian need not disclose under this chapter a digital asset deleted by a user.
  4. If a user directs or a fiduciary requests a custodian to disclose under this chapter some, but not all, of the user's digital assets, the custodian need not disclose the assets if segregation of the assets would impose an undue burden on the custodian. If the custodian believes the direction or request imposes an undue burden, the custodian or fiduciary may seek an order from the court to disclose:
    1. A subset limited by date of the user's digital assets;
    2. All of the user's digital assets to the fiduciary or designated recipient;
    3. None of the user's digital assets; or
    4. All of the user's digital assets to the court for review in camera.

Acts 2016, ch. 570, § 7.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-107. Disclosure of content of electronic communications of deceased user.

If a deceased user consented or a court directs disclosure of the contents of electronic communications of the user, the custodian shall disclose to the personal representative of the estate of the user the content of an electronic communication sent or received by the user if the representative gives the custodian:

  1. A written request for disclosure in physical or electronic form;
  2. A certified copy of the death certificate of the user;
  3. A certified copy of any of the following: the letters of administration or letters testamentary appointing the personal representative; a small-estate affidavit under title 30, chapter 4; or a court order;
  4. Unless the user provided direction using an online tool, a copy of the user's will, trust, power of attorney, or other dispositive or nominative instrument evidencing the user's consent to disclosure of the content of electronic communications; and
  5. If requested by the custodian:
    1. A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the user's account;
    2. Evidence linking the account to the user; or
    3. A finding by the court that:
      1. The user had a specific account with the custodian, identifiable by the information specified in subdivision (5)(A);
      2. Disclosure of the content of electronic communications of the user would not violate 18 U.S.C. §§ 2701 et seq., 47 U.S.C. § 222, or other applicable law;
      3. Unless the user provided direction using an online tool, the user consented to disclosure of the content of electronic communications; or
      4. Disclosure of the content of electronic communications of the user is reasonably necessary for administration of the estate.

Acts 2016, ch. 570, § 8.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-108. Disclosure of other digital assets of deceased user.

Unless the user prohibited disclosure of digital assets or the court directs otherwise, a custodian shall disclose to the personal representative of the estate of a deceased user a catalogue of electronic communications sent or received by the user and digital assets, other than the content of electronic communications, of the user, if the representative gives the custodian:

  1. A written request for disclosure in physical or electronic form;
  2. A certified copy of the death certificate of the user;
  3. A certified copy of any of the following: the letters of administration or letters testamentary appointing the personal representative; a small-estate affidavit under title 30, chapter 4; or a court order; and
  4. If requested by the custodian:
    1. A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the user's account;
    2. Evidence linking the account to the user;
    3. An affidavit stating that disclosure of the user's digital assets is reasonably necessary for administration of the estate; or
    4. A finding by the court that:
      1. The user had a specific account with the custodian, identifiable by the information specified in subdivision (4)(A); or
      2. Disclosure of the user's digital assets is reasonably necessary for administration of the estate.

Acts 2016, ch. 570, § 9.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-109. Disclosure of content of electronic communications to principal.

To the extent a power of attorney expressly grants an agent authority over the content of electronic communications sent or received by the principal and unless directed otherwise by the principal or the court, a custodian shall disclose to the agent the content if the agent gives the custodian:

  1. A written request for disclosure in physical or electronic form;
  2. An original or a copy of the power of attorney expressly granting the agent authority over the content of electronic communications of the principal;
  3. A certification by the agent, under penalty of perjury, that the power of attorney is in effect; and
  4. If requested by the custodian:
    1. A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the principal's account; or
    2. Evidence linking the account to the principal.

Acts 2016, ch. 570, § 10.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-110. Disclosure of other digital assets of principal.

Unless otherwise ordered by the court, directed by the principal, or provided by a power of attorney, a custodian shall disclose to an agent with specific authority over digital assets or general authority to act on behalf of a principal a catalogue of electronic communications sent or received by the principal and digital assets, other than the content of electronic communications, of the principal if the agent gives the custodian:

  1. A written request for disclosure in physical or electronic form;
  2. An original or a copy of the power of attorney that gives the agent specific authority over digital assets or general authority to act on behalf of the principal;
  3. A certification by the agent, under penalty of perjury, that the power of attorney is in effect; and
  4. If requested by the custodian:
    1. A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the principal's account; or
    2. Evidence linking the account to the principal.

Acts 2016, ch. 570, § 11.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-111. Disclosure of digital assets held in trust when trustee is original user.

Unless otherwise ordered by the court or provided in a trust, a custodian shall disclose to a trustee that is an original user of an account any digital asset of the account held in trust, including a catalogue of electronic communications of the trustee and the content of electronic communications.

Acts 2016, ch. 570, § 12.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-112. Disclosure of digital assets held in trust when trustee is not original user.

Unless otherwise ordered by the court, directed by the user, or provided in a trust, a custodian shall disclose to a trustee that is not an original user of an account the content of an electronic communication sent or received by an original or successor user and carried, maintained, processed, received, or stored by the custodian in the account of the trust if the trustee gives the custodian:

  1. A written request for disclosure in physical or electronic form;
  2. A certified copy of the trust instrument or a certification of the trust under § 35-15-1013, that includes consent to disclosure of the content of electronic communications to the trustee;
  3. A certification by the trustee, under penalty of perjury, that the trust exists and the trustee is a currently acting trustee of the trust; and
  4. If requested by the custodian:
    1. A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the trust's account; or
    2. Evidence linking the account to the trust.

Acts 2016, ch. 570, § 13.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-113. Disclosure of other digital assets held in trust when trustee is original user.

Unless otherwise ordered by the court, directed by the user, or provided in a trust, a custodian shall disclose, to a trustee that is not an original user of an account, a catalogue of electronic communications sent or received by an original or successor user and stored, carried, or maintained by the custodian in an account of the trust and any digital assets, other than the content of electronic communications, in which the trust has a right or interest if the trustee gives the custodian:

  1. A written request for disclosure in physical or electronic form;
  2. A certified copy of the trust instrument or a certification of the trust under § 35-15-1013;
  3. A certification by the trustee, under penalty of perjury, that the trust exists and the trustee is a currently acting trustee of the trust; and
  4. If requested by the custodian:
    1. A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the trust's account; or
    2. Evidence linking the account to the trust.

Acts 2016, ch. 570, § 14.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-114. Disclosure of other digital assets held in trust when trustee is not original user.

  1. After an opportunity for a hearing under title 34, chapter 1, the court may grant a guardian or conservator access to the digital assets of a minor or person with a disability.
  2. Unless otherwise ordered by the court or directed by the user, a custodian shall disclose to a guardian or conservator the catalogue of electronic communications sent or received by a minor or person with a disability and any digital assets, other than the content of electronic communications, in which the minor or person with a disability has a right or interest if the guardian or conservator gives the custodian:
    1. A written request for disclosure in physical or electronic form;
    2. A certified copy of the court order that gives the guardian or conservator authority over the digital assets of the minor or person with a disability; and
    3. If requested by the custodian:
      1. A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the account of the minor or person with a disability; or
      2. Evidence linking the account to the minor or person with a disability.
  3. A guardian or conservator with general authority to manage the assets of a minor or person with a disability may request a custodian of the digital assets of the minor or person with a disability to suspend or terminate an account of the minor or person with a disability for good cause. A request made under this section must be accompanied by a certified copy of the court order giving the guardian or conservator authority over the property of the minor or person with a disability.

Acts 2016, ch. 570, § 15.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-115. Disclosure of digital assets to guardian or conservator.

  1. The legal duties imposed on a fiduciary charged with managing tangible property apply to the management of digital assets, including:
    1. The duty of care;
    2. The duty of loyalty; and
    3. The duty of confidentiality.
  2. A fiduciary's or designated recipient's authority with respect to a digital asset of a user:
    1. Except as otherwise provided in § 35-8-104, is subject to the applicable terms of service;
    2. Is subject to other applicable law, including copyright law;
    3. In the case of a fiduciary, is limited by the scope of the fiduciary's duties; and
    4. May not be used to impersonate the user.
  3. A fiduciary with authority over the property of a decedent, minor, person with a disability, principal, or settlor has the right to access any digital asset in which the decedent, minor, person with a disability, principal, or settlor had a right or interest and that is not held by a custodian or subject to a terms-of-service agreement.
  4. A fiduciary acting within the scope of the fiduciary's duties is an authorized user of the property of the decedent, minor, person with a disability, principal, or settlor for the purpose of applicable computer-fraud and unauthorized-computer-access laws, including the Tennessee Personal and Commercial Computer Act of 2003, compiled in title 39, chapter 14, part 6.
  5. A fiduciary with authority over the tangible personal property of a decedent, minor, person with a disability, principal, or settlor:
    1. Has the right to access the property and any digital asset stored in it; and
    2. Is an authorized user for the purpose of applicable computer-fraud and unauthorized-computer-access laws, including title 39, chapter 14, part 6.
  6. A custodian may disclose information in an account to a fiduciary of the user when the information is required to terminate an account used to access digital assets licensed to the user.
  7. A fiduciary of a user may request a custodian to terminate the user's account. A request for termination must be in writing, in either physical or electronic form, and accompanied by:
    1. If the user is deceased, a certified copy of the death certificate of the user;
    2. A certified copy of the letters of administration or letters testamentary appointing the personal representative; a certified copy of the small-estate affidavit under title 30, chapter 4; a certified copy of a court order; an original or a copy of a power of attorney; or a certified copy of the trust instrument or a certification of the trust under § 35-15-1013, giving the fiduciary authority over the account; and
    3. If requested by the custodian:
      1. A number, username, address, or other unique subscriber or account identifier assigned by the custodian to identify the user's account;
      2. Evidence linking the account to the user; or
      3. A finding by the court that the user had a specific account with the custodian, identifiable by the information specified in subdivision (g)(3)(A).

Acts 2016, ch. 570, § 16.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-116. Fiduciary duty.

  1. Not later than sixty (60) days after receipt of the information required under §§ 35-8-107 — 35-8-115, a custodian shall comply with a request under this chapter from a fiduciary or designated recipient to disclose digital assets or terminate an account. If the custodian fails to comply, the fiduciary or designated recipient may apply to the court for an order directing compliance.
  2. An order under subsection (a) directing compliance must contain a finding that compliance is not in violation of 18 U.S.C. § 2702.
  3. A custodian may notify the user that a request for disclosure or to terminate an account was made under this chapter.
  4. A custodian may deny a request under this chapter from a fiduciary or designated recipient for disclosure of digital assets or to terminate an account if the custodian is aware of any lawful access to the account following the receipt of the fiduciary's request.
  5. This chapter does not limit a custodian's ability to obtain or require a fiduciary or designated recipient requesting disclosure or termination under this chapter to obtain a court order which:
    1. Specifies that an account belongs to the minor, person with a disability, principal, or settlor;
    2. Specifies that there is sufficient consent from the minor, person with a disability, principal, or settlor to support the requested disclosure; and
    3. Contains a finding required by law other than this chapter.
  6. A custodian and the custodian's officers, employees, and agents are immune from liability for an act or omission done in good faith in compliance with this chapter.

Acts 2016, ch. 570, § 17.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-117. Uniformity of application and construction.

In applying and construing this chapter, consideration must be given to the need to promote uniformity of the law with respect to its subject matter among states that enact it.

Acts 2016, ch. 570, § 18.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

35-8-118. Electronic signatures — Global and National Commerce Act.

This chapter modifies, limits, or supersedes the Electronic Signatures in Global and National Commerce Act (15 U.S.C. §§ 7001 et seq.), but does not modify, limit, or supersede Section 101(c), Electronic Signatures in Global and National Commerce Act (15 U.S.C. § 7001(c)), or authorize electronic delivery of any of the notices described in Section 103(b), Electronic Signatures in Global and National Commerce Act (15 U.S.C. § 7003(b)).

Acts 2016, ch. 570, § 19.

Code Commission Notes.

Acts 2016, ch. 570, § 1 enacted this chapter as chapter 51 of Title 35, but the chapter has been redesignated as chapter 8 by authority of the Code Commission.

Effective Dates. Acts 2016, ch. 570, § 24. July 1, 2016.

Chapter 9
Administration of Private Foundations, Charitable Trusts or Split-Interest Trusts

35-9-101. Prohibited acts.

In the administration of any trust that is a “private foundation,” as defined in § 509 of the Internal Revenue Code of 1954 (26 U.S.C. §  509), a “charitable trust,” as defined in § 4947(a)(1) of the Internal Revenue Code of 1954 (26 U.S.C. §  4947(a)(1)), or a “split-interest trust,” as defined in § 4947(a)(2) of the Internal Revenue Code of 1954  (26 U.S.C. §  4947(a)(2)), the following acts are prohibited:

  1. Engaging in any act of self-dealing, as defined in § 4941(d) of the Internal Revenue Code of 1954  (26 U.S.C. §  4941(d)), that would give rise to any liability for the tax imposed by § 4941(a) of the Internal Revenue Code of 1954 (26 U.S.C. §  4941(a));
  2. Retaining any excess business holdings (as defined in § 4943(c) of the Internal Revenue Code of 1954 26 U.S.C. §  4943(c)),  that would give rise to any liability for the tax imposed by § 4943(a) of the Internal Revenue Code of 1954 (26 U.S.C. §  4943(a));
  3. Making any investments that would jeopardize the carrying out of any of the exempt purposes of the trust, within the meaning of § 4944 of the Internal Revenue Code of 1954 (26 U.S.C. §  4944), so as to give rise to any liability for the tax imposed by § 4944(a) of the Internal Revenue Code of 1954 (26 U.S.C. §  4944(a)); or
  4. Making any taxable expenditures (as defined in § 4945(d) of the Internal Revenue Code of 1954 (26 U.S.C. §  4945(d)), that would give rise to any liability for the tax imposed by § 4945(a) of the Internal Revenue Code of 1954 (26 U.S.C. §  4945(a)); provided, that this section does not apply either to those split-interest trusts or to amounts of those split-interest trusts that are not subject to the prohibitions applicable to private foundations by reason of § 4947 of the Internal Revenue Code of 1954 (26 U.S.C. §  4947).

Acts 1971, ch. 3, § 1; T.C.A., § 35-1001.

Collateral References.

Validity, construction, and effect of provisions of charitable trust providing for accumulation of income. 6 A.L.R.4th 903.

35-9-102. Distribution of amounts to avoid tax liability.

In the administration of any trust that is a private foundation or that is a charitable trust, there shall be distributed, for the purposes specified in the trust instrument, for each taxable year, amounts at least sufficient to avoid liability for the tax imposed by § 4942(a) of the Internal Revenue Code of 1954 (26 U.S.C. §  4942(a)).

Acts 1971, ch. 3, § 2; T.C.A., § 35-1002.

35-9-103. Applicability of §§ 35-9-101 and 35-9-102.

Sections 35-9-101 and 35-9-102 do not apply to any trust to the extent that a court of competent jurisdiction determines that the application would be contrary to the terms of the instrument governing the trust and that the same may not properly be changed to conform to those sections.

Acts 1971, ch. 3, § 3; T.C.A., § 35-1003.

35-9-104. Powers of courts and attorney general and reporter unimpaired.

Nothing in this chapter shall impair the rights and powers of the courts or the attorney general and reporter of this state with respect to any trust.

Acts 1971, ch. 3, § 4; T.C.A., § 35-1004.

35-9-105. References to Internal Revenue Code.

All references to sections of the Internal Revenue Code of 1954 (U.S.C. title 26), include future amendments to those sections and corresponding provisions of future internal revenue laws.

Acts 1971, ch. 3, § 5; T.C.A., § 35-1005.

35-9-106. Authority to amend trust for tax benefits.

  1. It is the purpose of this section to preserve the intent of testators and grantors of testamentary and inter vivos charitable remainder trusts created prior to and after August 31, 1972, by minimizing the imposition of federal income and excise taxes, imposed upon the assets of such trusts, and thereby preserving the maximum amount of the trust assets for the charitable, educational, religious and benevolent purposes for which their remainders were intended. The attorney general and reporter shall perform such acts as, in the attorney general and reporter's opinion, will result in the effectuation of this declaration of purpose.
    1. Notwithstanding any provisions to the contrary in the governing instrument or in any other law of this state, the trustee of any split-interest trust as defined in § 4947(a)(2) of the Internal Revenue Code of 1954 (26 U.S.C. §  4947(a)(2)), with the consent of all the beneficiaries under the governing instrument, may, without application to any court and either before or after the funding of the trust, amend the governing instrument to conform to §§ 170(f), 642(c)(5), 664, 2055(e), and 2522(c) of the Internal Revenue Code of 1954  (26 U.S.C. §§  170(f), 642(c)(5), 664, 2055(e), and 2522(c)), to the extent applicable, by executing a written amendment to the trust for that purpose. Consent shall not be required as to individual beneficiaries not living at the time of amendment or as to charitable beneficiaries not named or not in existence at the time of amendment. The possibility of beneficial interests arising after the amendment of the governing instruments shall not defeat the ability to amend. In the case of an individual beneficiary not competent to give consent, the consent of the beneficiary's guardian or conservator, if any, or the consent of a guardian ad litem appointed by a court of competent jurisdiction, shall be treated as the consent of the beneficiary. A copy of the proposed amendment, executed by the trustee and consented to by all beneficiaries whose consent is required under this subdivision (b)(1), shall be delivered in person or by registered mail to the attorney general and reporter. The attorney general and reporter may, within sixty (60) days after receipt of the proposed amendment, indicate by registered mail to the trustee any specific objections to the proposed amendment, in which event subdivision (b)(2) shall apply if the attorney general and reporter does not withdraw the objections. In the case of any amendment to a trust created by will or to a trust created by inter vivos instrument, unless otherwise provided, the amendment shall be deemed to apply as of the date of death of the decedent or as of the date of gift.
    2. In the event that all of the trustees and beneficiaries under the governing instrument do not consent to the amendment, or in the event there are no named beneficiaries, any court of competent jurisdiction shall have the power to amend the governing instrument in accordance with subdivision (b)(1) upon petition of the trustee or any beneficiary and upon a subsequent finding by the court that the testator's or the grantor's intention would not be defeated by the amendment. A copy of the petition shall be delivered in person or by registered mail to the attorney general and reporter.
    3. Unless otherwise expressly provided in the governing instrument, any devise, bequest or transfer in a testamentary or inter vivos trust for religious, educational, charitable or benevolent uses to be determined by the trustee or any other person shall be made only to organizations and for purposes within the meaning of §§ 170(c), 2055(a), and 2522(a) of the Internal Revenue Code of 1954  (26 U.S.C. §§  170(c), 2055(a), and 2522(a)).
    4. This section also applies to executors and administrators of estates of decedents whose wills create trusts described in subdivision (b)(1).
  2. All references to sections of the Internal Revenue Code of 1954 refer to the Internal Revenue Code of 1954 as it exists on August 31, 1972. All references to the Internal Revenue Code of 1954 in subdivisions (b)(1) and (3) refer to the Internal Revenue Code of 1954 as it exists on June 4, 1975.
  3. This section applies in the case of all decedents dying after December 31, 1969, and in the case of all irrevocable inter vivos trusts created after July 31, 1969.

Acts 1975, ch. 329, § 1; T.C.A., § 35-1006.

Cross-References. Certified mail instead of registered mail, § 1-3-111.

Law Reviews.

Charitable Bequests: Delegating Discretion to Choose the Objects of the Testator's Beneficence (Denise Caffrey), 44 Tenn. L. Rev.  307 (1977).

35-9-107. Reformation of trusts to comply with tax regulations.

  1. It is the purpose of this section to permit and authorize the reformation of certain inter vivos and testamentary charitable remainder trusts created prior to and after December 10, 1998, to comply with applicable federal tax regulations regarding qualifying payments to noncharitable beneficiaries. Such reformations shall be permitted and authorized upon the unanimous written consent of all living individual grantors, living individual beneficiaries, charitable remainder beneficiaries named or otherwise provided for in the trust agreement, and the trustee, with the concurrence of the attorney general and reporter. The attorney general and reporter shall perform such acts as, in the attorney general and reporter's opinion, will effectuate this declaration of purpose.
    1. Notwithstanding any provision to the contrary in the governing instrument or in any other law of this state, the trustee of any charitable remainder trust described in § 1.664-3(a)(1)(i)(b) of the Internal Revenue Code Regulations, (26 CFR 1.664-3(a)(1)(i)(b)), as currently adopted, or as may be subsequently amended, may, without application to any court and either before or after the funding of such trust, reform the trust to meet the definition of a charitable remainder unitrust described in § 1.664-3(a)(1)(i)(c) of the Internal Revenue Code Regulations, (26 CFR 1.664-3(a)(1)(i)(c)), as currently adopted, or as may be subsequently amended. In order to effectuate this reformation, the trustee shall obtain the written consent of all living grantors, living beneficiaries, charitable beneficiaries named or otherwise provided for in the trust agreement, and the trustee, together with the written concurrence of the attorney general and reporter. If the charitable beneficiary is to be determined by a person having discretion to select or name the charitable beneficiary at the time the trust terminates, the consent of that person shall be required. Consent shall not be required as to individual beneficiaries or grantors not living at the time of reformation or as to charitable remainder beneficiaries not named or not in existence at the time of reformation.
    2. The possibility of beneficial interests arising after the reformation of the trust instrument shall not defeat the ability to reform the trust pursuant to this section. In the case of an individual beneficiary or grantor not competent to give consent, the consent of that beneficiary's or grantor's guardian or conservator, if any, or the consent of a guardian ad litem appointed by a court of competent jurisdiction, shall be treated as the consent of the beneficiary or grantor. A copy of the proposed reformation, executed by the trustee and consented to by all living grantors, living beneficiaries, and charitable beneficiaries named or otherwise provided for in the trust agreement, shall be delivered to the attorney general and reporter. The attorney general and reporter shall, within thirty (30) days after receipt, either concur with the proposed reformation or state any specific objections to the proposed reformation in writing and delivered to the trustee by registered mail. If the attorney general and reporter state objections and those objections are not resolved to the attorney general's and reporter's satisfaction or the attorney general and reporter does not withdraw the objections, subdivision (b)(3) shall apply.
    3. In the event that all of the living grantors, living beneficiaries, and charitable remainder beneficiaries do not consent to the reformation, any court of competent jurisdiction shall have the power to reform the governing instrument in accordance with subdivision (b)(1) upon petition by the trustee or any beneficiary. A copy of the petition shall be delivered in person or by registered mail to the attorney general and reporter.

Acts 2000, ch. 600, § 1.

Cross-References. Certified mail instead of registered mail, § 1-3-111.

35-9-108. Information or actions that cannot be required.

  1. For the purposes of this section, “private foundation” has the same meaning ascribed to “private foundation” in § 509(a) of the Internal Revenue Code of 1986 (26 U.S.C. §  509(a)), as amended.
  2. No private foundation shall be required by a department, agency, board, or other entity of state or local government to:
    1. Disclose the race, religion, gender, national origin, socioeconomic status, age, ethnicity, disability, marital status, or sexual orientation of:
      1. The foundation's employees, officers, directors, trustees, or contributors, without the prior written consent of the individual or individuals in question; or
      2. Any individual, or of the employees, officers, directors, trustees, members, or owners of any entity, that has received monetary or in-kind contributions or grants from, or contracted with, the foundation, without the prior written consent of the individual or individuals in question;
    2. Hire, appoint, or elect an individual of any particular race, religion, gender, national origin, socioeconomic status, age, ethnicity, disability, marital status, or sexual orientation as an employee, officer, director, or trustee of the foundation;
    3. Disqualify, remove, or prohibit service of an individual as an officer, director, or trustee of the foundation based upon such individual's familial relationship to other officers, directors, or trustees of the foundation or a contributor to the foundation;
    4. Hire, appoint, or elect an individual as an officer, director, or trustee of the foundation who does not share a familial relationship with the other officers, directors, or trustees of the foundation or with a contributor to the foundation; or
    5. Except as a lawful condition or requirement on the expenditure of particular funds imposed by the contributor or grantor of such funds, distribute the foundation's funds to, or contract with, any individual or entity based upon the:
      1. Race, religion, gender, national origin, socioeconomic status, age, ethnicity, disability, marital status, or sexual orientation of the individual or of the employees, officers, directors, trustees, members, or owners of the entity; or
      2. Populations, locales, or communities served by the individual or entity.

Acts 2013, ch. 193, § 1.

Chapter 10
Uniform Management of Institutional Funds Act

Part 1
Uniform Management of Institutional Funds Act of 1973 [Repealed]

35-10-101. [Repealed.]

Compiler's Notes. Former Part 1, §§ 35-10-10135-10-109 (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, §§ 35-10-10135-10-109 (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, §§ 35-10-10135-10-109 (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, §§ 35-10-10135-10-109 (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, §§ 35-10-10135-10-109 (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, §§ 35-10-10135-10-109 (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, §§ 35-10-10135-10-109 (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, §§ 35-10-10135-10-109 (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, §§ 35-10-10135-10-109 (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.

35-10-201. Short title.

This part shall be known and may be cited as the “Uniform Prudent Management of Institutional Funds Act.”

Acts 2007, ch. 186, § 1.

Law Reviews.

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).

35-10-202. Part definitions.

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

  1. “Charitable purpose” means the relief of poverty, the advancement of education or religion, the promotion of health, the promotion of a governmental purpose, or any other purpose the achievement of which is beneficial to the community;
  2. “Endowment fund” means an institutional fund or part thereof that, under the terms of a gift instrument, is not wholly expendable by the institution on a current basis. The term does not include assets that an institution designates as an endowment fund for its own use;
  3. “Gift instrument” means a record or records, including an institutional solicitation, under which property is granted to, transferred to, or held by an institution as an institutional fund;
  4. “Institution” means:
    1. A person, other than an individual, organized and operated exclusively for charitable purposes;
    2. A government or governmental subdivision, agency, or instrumentality, to the extent that it holds funds exclusively for a charitable purpose; and
    3. A trust that had both charitable and noncharitable interests, after all noncharitable interests have terminated;
  5. “Institutional fund” means a fund held by an institution exclusively for charitable purposes. “Institutional fund”  does not include:
    1. Program-related assets;
    2. A fund held for an institution by a trustee that is not an institution; or
    3. A fund in which a beneficiary that is not an institution has an interest, other than an interest that could arise upon violation or failure of the purposes of the fund;
  6. “Person” means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, public corporation, government or governmental subdivision, agency, or instrumentality, or any other legal or commercial entity;
  7. “Program-related asset” means an asset held by an institution primarily to accomplish a charitable purpose of the institution and not primarily for investment; and
  8. “Record” means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.

Acts 2007, ch. 186, § 2.

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).

COMMENTS TO OFFICIAL TEXT

Subsection (1). Charitable Purpose.

The definition of charitable purpose follows that of UTC § 405 and Restatement (Third) of Trusts § 28 (2003). This long-familiar standard derives from the English Statute of Charitable Uses, enacted in 1601.

Some 17 states have created statutory definitions of charitable purpose for various purposes.  See, e.g.,  10 Pa. Cons. Stat. § 162.3 (2005) (defining charitable purpose within the Solicitation of Funds for Charitable Purposes Act to include “humane,” “patriotic,” social welfare and advocacy,” and “civic” purposes).  The definition in subsection (1) applies for purposes of this Act and does not affect other definitions of charitable purpose.

Subsection (2). Endowment Fund.

An endowment fund is an institutional fund or a part of an institutional fund that is not wholly expendable by the institution on a current basis. A restriction that makes a fund an endowment fund arises from the terms of a gift instrument.  If an institution has more than one endowment fund, under Section 3 [§ 35-10-203] the institution can manage and invest some or all endowment funds together.  Section 4 and Section 6 [§§ 35-10-204 and 35-10-206] must be applied to individual funds and cannot be applied to a group of funds that may be managed collectively for investment purposes.

Board-designated funds are institutional funds but not endowment funds. The rules on expenditures and modification of restrictions in this Act do not apply to restrictions that an institution places on an otherwise unrestricted fund that the institution holds for its own benefit. The institution may be able to change these restrictions itself, subject to internal rules and to the fiduciary duties that apply to those that manage the institution.

If an institution transfers assets to another institution, subject to the restriction that the other institution hold the assets as an endowment, then the second institution will hold the assets as an endowment fund.

Subsection (3). Gift Instrument.

The term gift instrument refers to the records that establish the terms of a gift and may consist of more than one document.  The definition clarifies that the only legally binding restrictions on a gift are the terms set forth in writing.

As used in this definition, “record” is an expansive concept and means a writing in any form, including electronic. The term includes a will, deed, grant, conveyance, agreement, or memorandum, and also includes writings that do not have a donative purpose. For example, under some circumstances the bylaws of the institution, minutes of the board of directors, or canceled checks could be a gift instrument or be one of several records constituting a gift instrument.  Although the term can include any of these records, a record will only become a gift instrument if both the donor and the institution were or should have been aware of its terms when the donor made the gift.  For example, if a donor sends a contribution to an institution for its general purposes, then the articles of incorporation may be used to clarify those purposes.  If, in contrast, the donor sends a letter explaining that the institution should use the contribution for its “educational projects concerning teenage depression,” then any funds received in response must be used for that purpose and not for broader purposes otherwise permissible under the articles of incorporation.

Solicitation materials may constitute a gift instrument. For example, a solicitation that suggests in writing that any gifts received pursuant to the solicitation will be held as an endowment may be integrated with other writings and may be considered part of the gift instrument. Whether the terms of the solicitation become part of the gift instrument will depend upon the circumstances, including whether a subsequent writing superseded the terms of the solicitation.  Each gift received in response to a solicitation will be subject to any restrictions indicated in the gift instrument pertaining to that gift.  For example, if an initial gift establishes an endowment fund, and the charity then solicits additional gifts “to be held as part of the Charity X Endowment Fund,” those additional gifts will each be subject to the restriction that the gifts be held as part of that endowment fund.

The term gift instrument includes matching funds provided by an employer or some other person.  Whether matching funds are treated as part of the endowment fund or otherwise will depend on the terms of the matching gift.

The term gift instrument also includes an appropriation by a legislature or other public or governmental body for the benefit of an institution.

Subsection (4). Institution.

The Act applies generally to institutions organized and operated exclusively for charitable purposes. The term includes charitable organizations created as nonprofit corporations, unincorporated associations, governmental subdivisions or agencies, or any form of entity, however organized, that is organized and operated exclusively for charitable purposes. The term includes a trust organized and operated exclusively for charitable purposes, but only if a charity acts as trustee.  This approach leaves unchanged the coverage of UMIFA.  The exclusion of “individual” from the definition of institution is not intended to exclude a corporation sole.

Although UPMIFA does not apply to all charitable trusts, many of UPMIFA’s provisions derive from trust law.  Prudent investor standards apply to trustees of charitable trusts in states that have adopted UPIA.  Trustees of charitable trusts can use the doctrines of cy pres and deviation to modify trust provisions, and the UTC includes a number of modification provisions.  The Uniform Principal and Income Act permits allocation between principal and income to facilitate total-return investing.  Charitable trusts not included in UPMIFA, primarily those managed by corporate trustees and individuals, will lose the benefits of UPMIFA’s endowment spending rule and the provision permitting a charity to apply cy pres, without court supervision, for modifications to a small, old fund.  Enacting jurisdictions may choose to incorporate these rules into existing trust statutes to provide the benefits to charitable funds managed by corporate trustees.

The definition of institution includes governmental organizations that hold funds exclusively for the purposes listed in the definition. A governmental entity created by state law  may fall outside the definition on account of the form of organization under which the state created it. Because state arrangements are so varied, creating a definition that encompasses all charitable entities created by states is not feasible. States should consider applying the core principles of UPMIFA to such governmental institutions. For example, the control over a state university may be held by a State Board of Regents. In that situation, the state may have created a governing structure by statute or in the state constitution so that the university is, in effect, privately chartered. The Drafting Committee does not intend to exclude these universities from the definition of institution, but additional state legislation may be necessary to address particular situations.

Subsection (5). Institutional Fund.

The term institutional fund includes any fund held by an institution for charitable purposes, whether the fund is expendable currently or subject to restrictions. The term does not include a fund held by a trustee that is not an institution.

Some institutions combine assets from multiple funds for investment purposes, and some institutions invest funds from different institutions in a common fund.  Typically each fund is assigned units representing the share value of the individual fund.  The assets are invested collectively, permitting more efficient investment and improved diversification of the overall portfolio.  The collective fund makes annual distributions to the individual funds based on the units held by each fund.  For purposes of Section 3 [and Section 5] [§§ 35-10-203 and 35-10-205], the collective fund is considered one institutional fund.  Section 4 and Section 6 [§§ 35-10-204 and 35-10-206] apply to each fund individually and not to the collective fund.

Assets held by an institution primarily for program-related purposes rather than exclusively for investment are not subject to UPMIFA.  For example, a university may purchase land adjacent to its campus for future development.  The purchase might not meet prudent investor standards for commercial real estate, but the purchase may be appropriate because the university needs to build a new dormitory.  The classroom buildings, administration buildings, and dormitories held by the university all have value as property, but the university does not hold those buildings as financial assets for investment purposes.  The Act excludes from the prudent investor norms those assets that a charity uses to conduct its charitable activities, but does not exclude assets that have a tangential tie to the charitable purpose of the institution but are held primarily for investment purposes.

A fund held by an institution is not an institutional fund if any beneficiary of the fund is not an institution. For example, a charitable remainder trust held by a charity as trustee for the benefit of the donor during the donor’s lifetime, with the remainder interest held by the charity, is not an institutional fund. However, this subsection treats as an institution a charitable remainder trust that continues to operate for charitable purposes after the termination of the noncharitable interests. The Act will have only a limited effect on a charitable remainder trust that terminates after the noncharitable interest ends.  During the period required to complete the distribution of the trust’s property, the prudence norm will apply to the actions of the trustee, but the short timeframe will affect investment decision making.

Subsection (6). Person.

The Act uses as the definition of person the definition approved by the National Conference of Commissioners on Uniform State Laws.  The definition of institution uses the term person, but to be an institution a person must be organized and operated exclusively for charitable purposes.  A person with a commercial purpose cannot be an institution.  Thus, although the definition of person includes “business trust” and “any other . . . commercial entity,” the Act does not apply to an entity organized for business purposes and not exclusively for charitable purposes. Further, the definition of person includes trusts, but only trusts managed by charities can be institutional funds.  UPMIFA does not apply to trusts managed by corporate trustees or by individual trustees.

If a governing instrument provides that a fund will revert to the donor if, and only if, the institution ceases to exist or the purposes of the fund fail, then the fund will be considered an institutional fund until such contingency occurs.

Subsection (7). Program-Related Asset.

Although UPMIFA does not apply to program-related assets, if program-related assets serve, in part, as investments for an institution, then the institution should identify categories for reporting those investments and should establish investment criteria for the investments that are reasonably related to achieving the institution’s charitable purposes.  For example, a program providing below-market loans to inner-city businesses may be “primarily to accomplish a charitable purpose of the institution” but also can be considered, in part, an investment.  The institution should create reasonable credit standards and other guidelines for the program to increase the likelihood that the loans will be repaid.

Subsection (8). Record.

This definition was added to clarify that the definition of instrument includes electronic records as defined in Section 2(8) of the Uniform Electronic Transactions Act (1999) [§ 47-10-102(7)].

35-10-203. Standard of conduct in managing and investing institutional fund.

  1. Subject to the intent of a donor expressed in a gift instrument, an institution, in managing and investing an institutional fund, shall consider the charitable purposes of the institution and the purposes of the institutional fund.
  2. In addition to complying with the duty of loyalty imposed by law other than this part, each person responsible for managing and investing an institutional fund shall manage and invest the fund in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.
  3. In managing and investing an institutional fund, an institution:
    1. May incur only costs that are appropriate and reasonable in relation to the assets, the purposes of the institution, and the skills available to the institution; and
    2. Shall make a reasonable effort to verify facts relevant to the management and investment of the fund.
  4. An institution may pool two (2) or more institutional funds for purposes of management and investment.
  5. Except as otherwise provided by a gift instrument, the following rules apply:
    1. In managing and investing an institutional fund, the following factors, if relevant, must be considered:
      1. General economic conditions;
      2. The possible effect of inflation or deflation;
      3. The expected tax consequences, if any, of investment decisions or strategies;
      4. The role that each investment or course of action plays within the overall investment portfolio of the fund;
      5. The expected total return from income and the appreciation of investments;
      6. Other resources of the institution;
      7. The needs of the institution and the fund to make distributions and to preserve capital; and
      8. An asset's special relationship or special value, if any, to the charitable purposes of the institution;
    2. Management and investment decisions about an individual asset must be made not in isolation but rather in the context of the institutional fund's portfolio of investments as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the fund and to the institution;
    3. Except as otherwise provided by law other than this part, an institution may invest in any kind of property or type of investment consistent with this section;
    4. An institution shall diversify the investments of an institutional fund unless the institution reasonably determines that, because of special circumstances, the purposes of the fund are better served without diversification;
    5. Within a reasonable time after receiving property, an institution shall make and carry out decisions concerning the retention or disposition of the property or to rebalance a portfolio, in order to bring the institutional fund into compliance with the purposes, terms, distribution requirements, and other circumstances of the institution and the requirements of this part; and
    6. A person that has special skills or expertise, or is selected in reliance upon the person's representation that the person has special skills or expertise, has a duty to use those skills or that expertise in managing and investing institutional funds.

Acts 2007, ch. 186, § 3.

COMMENTS TO OFFICIAL TEXT

Purpose and Scope of Revisions.

This section adopts the prudence standard for investment decision making. The section directs directors or others responsible for managing and investing the funds of an institution to act as a prudent investor would, using a portfolio approach in making investments and considering the risk and return objectives of the fund. The section lists the factors that commonly bear on decisions in fiduciary investing and incorporates the duty to diversify investments absent a conclusion that special circumstances make a decision not to diversify reasonable. Thus, the section follows modern portfolio theory for investment decision making. Section 3 [§ 35-10-203] applies to all funds held by an institution, regardless of whether the institution obtained the funds by gift or otherwise and regardless of whether the funds are restricted.

The Drafting Committee discussed extensively the standard that should govern nonprofit managers. UMIFA states the standard as “ordinary business care and prudence under the facts and circumstances prevailing at the time of the action or decision.” Since the decision in Stern v. Lucy Webb Hayes National Training School for Deaconesses, 381 F. Supp. 1003 (1974), the trend has been to hold directors of nonprofit corporations to a standard nominally similar to the corporate standard but with the recognition that the facts and circumstances considered include the fact that the entity is a charity and not a business corporation.

The language of the prudence standard adopted in UPMIFA is derived from the RMNCA and from the prudent investor rule of UPIA. The standard is consistent with the business judgment standard under corporate law, as applied to charitable institutions. That is, a manager operating a charitable organization under the business judgment rule would look to the same factors as those identified by the prudent investor rule. The standard for prudent investment set forth in Section 3 [§ 35-10-203] first states the duty of care as articulated in the RMNCA, but provides more specific guidance for those managing and investing institutional funds by incorporating language from UPIA.  The criteria derived from UPIA are consistent with good practice under current law applicable to nonprofit corporations.

Trust law norms already inform managers of nonprofit corporations.  The Preamble to UPIA explains:  “Although the Uniform Prudent Investor Act by its terms applies to trusts and not to charitable corporations, the standards of the Act can be expected to inform the investment responsibilities of directors and officers of charitable corporations.”  See also, Restatement (Third) of Trusts:  Prudent Investor Rule § 379, Comment b, at 190 (1992) (stating that “absent a contrary statute or other provision, the prudent investor rule applies to investment of funds held for charitable corporations.”).  Trust precedents have routinely been found to be helpful but not binding authority in corporate cases.

The Drafting Committee decided that by adopting language from both the RMNCA and UPIA, UPMIFA could clarify that common standards of prudent investing apply to all charitable institutions.  Although the principal trust authorities, UPIA § (2)(a), Restatement (Third) of Trusts § 337, UTC § 804, and Restatement (Second) of Trusts § 174 (prudent administration) use the phrase “care, skill and caution,” the Drafting Committee decided to use the more familiar corporate formulation as found in RMNCA.  The standard also appears in Sections 3, 4 and 5 of UPMIFA [§§ 35-10-203 - 35-10-205].  The Drafting Committee does not intend any substantive change to the UPIA standard and believes that “reasonable care, skill, and caution” are implicit in the term “care” as used in the RMNCA.  The Drafting Committee included the detailed provisions from UPIA, because the Committee believed that the greater precision of the prudence norms of the Restatement and UPIA, as compared with UMIFA, could helpfully inform managers of charitable institutions.  For an explanation of the Prudent Investor Act, see  John H. Langbein, The Uniform Prudent Investor Act and the Future of Trust Investing , 81 Iowa L. Rev. 641 (1996), and for a discussion of the effect UPIA has had on investment decision making, see  Max M. Schanzenbach & Robert H. Sitkoff, Did Reform of Prudent Trust Investment Laws Change Trust Portfolio Allocation? , 50 J. L. & Econ. (forthcoming 2007).

Section 3 [§ 35-10-203] has incorporated the provisions of UPIA with only a few exceptions.  UPIA applies to private trusts and is entirely default law.  The settlor of a private trust has complete control over virtually all trust provisions.  See UTC § 105.  Because UPMIFA applies to charitable organizations, UPMIFA  makes the duty of care, the duty to minimize costs, and the duty to investigate mandatory.  The duty of loyalty is mandatory under applicable organization law, corporate or trust.  Other than these duties, the provisions of Section 3 [§ 35-10-203] are default rules. A gift instrument or the governing instruments of an institution can modify these duties, but the charitable purpose doctrine limits the extent to which an institution or a donor can restrict these duties.  In addition, subsection (a) of Section 3 [§ 35-10-203] reminds the decision maker that the intent of a donor expressed in a gift instrument will control decision making.  Further, the decision maker must consider the charitable purposes of the institution and the purposes of the institutional fund for which decisions are being made.  These factors are specific to charitable organizations; UPIA § 2(a) states the duty to consider similar factors in the private trust context.

UPMIFA does not include the duty of impartiality, stated in UPIA § 6, because nonprofit corporations do not confront the multiple beneficiaries problem to which the duty is addressed.  Under UPIA, a trustee must treat the current beneficiaries and the remainder beneficiaries with due regard to their respective interests, subject to alternative direction from the trust document.  A nonprofit corporation typically creates one charity.  The institution may serve multiple beneficiaries, but those beneficiaries do not have enforceable rights in the institution in the same way that beneficiaries of a private trust do.  Of course, if a charitable trust is created to benefit more than one charity, rather than being created to carry out a charitable purpose, then UPIA will apply the duty of impartiality to that trust.

In other respects, the Drafting Committee made changes to language from UPIA only where necessary to adapt the language for charitable institutions.  No material differences are intended.  Subsection (e)(1)(D) of Section 3 of UPMIFA [§ 35-10-203] does not include a clause that appears at the end of UPIA § 2(c)(4) (“which may include financial assets, interest in closely held enterprises, tangible and intangible personal property, and real property.”).  The Drafting Committee deemed this clause unnecessary for charitable institutions.  The language of subsection (e)(1)(G) reflects a modification of the language of UPIA § (2)(c)(7).  Other minor modifications to the UPIA provisions make the language more appropriate for charitable institutions.

The duties imposed by this section apply to those who govern an institution, including directors and trustees, and to those to whom the directors or managers delegate responsibility for investment and management of institutional funds.  The standard applies to officers and employees of an institution and to agents who invest and manage institutional funds. Volunteers who work with an institution will be subject to the duties imposed here, but state and federal statutes may provide reduced liability for persons who act without compensation.  UPMIFA does not affect the application of those shield statutes.

Subsection (a). Donor Intent and Charitable Purposes.

Subsection (a) states the overarching duty to comply with donor intent as expressed in the terms of the gift instrument.  The emphasis in the Act on giving effect to donor intent does not mean that the donor can or should control the management of the institution.  The other fundamental duty is the duty to consider the charitable purposes of the institution and of the institutional fund in making management and investment decisions.  UPIA § 2(a) states a similar duty to consider the purposes of a trust in investing and managing assets of a trust.

Subsection (b).  Duty of Loyalty.

Subsection (b) reminds those managing and investing institutional funds that the duty of loyalty will apply to their actions, but Section 3 [§ 35-10-203] does not state the loyalty standard that applies.  The Drafting Committee was concerned, at least nominally, that different standards of loyalty may apply to directors of nonprofit corporations and to trustees of charitable trusts.  The RMNCA provides that under the duty of loyalty a director of a nonprofit corporation should act “in a manner the director reasonably believes to be in the best interests of the corporation.”  RMNCA § 8.30.  The trust law articulation of the loyalty standard uses “sole interests” rather than “best interests.”  As the Restatement of Trusts explains, “[t]he trustee is under a duty to the beneficiary to administer the trust solely in the interest of the beneficiary.”  Restatement (Second) of Trusts § 170 (1).  Although the standards for loyalty, like the standard of care, are merging, see  Evelyn Brody, Charitable Governance:  What’s Trust Law Got to do With It?  Chi.-Kent L. Rev. (2005); John H. Langbein, Questioning the Trust Law Duty of Loyalty: Sole Interest or Best Interest , 114 Yale L.J. 929 (2005), the Drafting Committee concluded that formulating a duty of loyalty provision for UPMIFA was unnecessary.  Thus the duty of loyalty under nonprofit corporation law will apply to charities organized as nonprofit corporations, and the duty of loyalty under trust law will apply to charitable trusts.

Subsection (b). Duty of Care.

Subsection (b) also applies the duty of care to performance of investment duties. The language derives from § 8.30 of the RMNCA.  This subsection states the duty to act in good faith, “with the care an ordinarily prudent person in a like position would exercise under similar circumstances.”  Although the language in the RMNCA and in UPMIFA is similar to that of § 8.30 of the Model Business Corporation Act (3d ed. 2002), the standard as applied to persons making decisions for charities is informed by the fact that the institution is a charity and not a business corporation.  Thus, in UPMIFA the references to “like position” and “similar circumstances” mean that the charitable nature of the institution affects the decision making of a prudent person acting under the standard set forth in subsection (b).  The duty of care involves considering the factors set forth in subsection (e)(1).

Subsection (c)(1). Duty to Minimize Costs.

Subsection (c)(1) tracks the language of UPIA § 7 and requires an institution to minimize costs. An institution may prudently incur costs by hiring an investment advisor, but the costs incurred should be appropriate under the circumstances. See UPIA § 7 cmt; Restatement (Third) of Trusts: Prudent Investor Rule § 227, cmt. M, at 58 (1992); Restatement (Second) of Trusts § 188 (1959). The duty is consistent with the duty to act prudently under § 8.30 of the RMNCA.

Subsection (c)(2). Duty to Investigate.

This subsection incorporates the traditional fiduciary duty to investigate, using language from UPIA § 2(d). The subsection requires persons who make investment and management decisions to investigate the accuracy of the information used in making decisions.

Subsection (d). Pooling Funds.

An institution holding more than one institutional fund may find that pooling its funds for investment and management purposes will be economically beneficial.  The Act permits pooling for these purposes.  The prohibition against commingling no longer prevents pooling funds for investment and management purposes.  See UPIA § 3, cmt. (duty to diversify aided by pooling); UPIA § 7, cmt. (pooling to minimize costs); Restatement (Third) of Trusts: Duty to Segregate and Identify Trust Property § 84 (T.D. No. 4 2005).  Funds will be considered individually for other purposes of the Act, including for the spending rule for endowment funds of Section 4 [§ 35-10-204] and the modification rules of Section 6 [§ 35-10-206].

Subsection (e)(1). Prudent Decision Making.

Subsection (e)(1) takes much of its language from UPIA § 2(c). In making decisions about whether to acquire or retain an asset, the institution should consider the institution’s mission, its current programs, and the desire to cultivate additional donations from a donor, in addition to factors related more directly to the asset’s potential as an investment.

Subsection (e)(1)(C) reflects the fact that some organizations will invest in taxable investments that may generate unrelated business taxable income for income tax purposes.

Assets held primarily for program-related purposes are not subject to UPMIFA. The management of those assets will continue to be governed by other laws applicable to the institution. Other assets may not be held primarily for program-related purposes but may have both investment purposes and program-related purposes. Subsections (a) and (e)(1)(H) indicate that a prudent decision maker can take into consideration the relationship between an investment and the purposes of the institution and of the institutional fund in making an investment that may have a program-related purpose but not be primarily program-related. The degree to which an institution uses an asset to accomplish a charitable purpose will affect the weight given that factor in a decision to acquire or retain the asset.

Subsection (e)(2). Portfolio Approach.

This subsection reflects the use of portfolio theory in modern investment practice. The language comes from UPIA § 2(b), which follows the articulation of the prudent investor standard in Restatement (Third) of Trusts: Prudent Investor Rule § 227(a) (1992).

Subsection (e)(3). Broad Investment Authority.

Consistent with the portfolio theory of investment, this subsection permits a broad range of investments.  The language derives from UPIA § 2(e).

Section 4 of UMIFA indicated that an institution could invest “without restriction to investments a fiduciary may make.”  The committee removed this language from subsection (e)(3) as unnecessary, because states no longer have legal lists restricting fiduciary investing to the specific types of investments identified in statutory lists.

Subsection (e)(3) also provides that other law may limit the authority under this subsection.  In addition, all of subsection (e) is subject to contrary provisions in a gift instrument, and a gift instrument may restrict the ability to invest in particular assets.  For example, the gift instrument for a particular institutional fund might preclude the institution from investing the assets of the fund in companies that produce tobacco products.

In her book, Governing Nonprofit Organizations: Federal and State Law and Regulation 434 (Harv. Univ. Press 2004), Marion R. Fremont-Smith reports that some large charities pledge their endowment funds as security for loans.  Subsection (e)(3) permits this sort of debt financing, subject to the guidelines of subsection (e)(1).

Subsection (e)(4). Duty to Diversify.

This subsection assumes that prudence requires diversification but permits an institution to determine that nondiversification is appropriate under exceptional circumstances.  A decision not to diversify must be based on the needs of the charity and not solely for the benefit of a donor.  A decision to retain property in the hope of obtaining additional contributions from the same donor may be considered made for the benefit of the charity, but the appropriateness of that decision will depend on the circumstances.  This subsection derives its language from UPIA § 3. See  UPIA § 3 cmt. (discussing the rationale for diversification); Restatement (Third) of Trusts: Prudent Investor Rule § 227 (1992).

Subsection (e)(5). Disposing of Unsuitable Assets.

This subsection imposes a duty on an institution to review the suitability of retaining property contributed to the institution within a reasonable period of time after the institution receives the property.  Subsection (e)(5) requires the institution to make a decision but does not require a particular outcome.  The institution may consider a variety of factors in making its decision, and a decision to retain the property either for a period of time or indefinitely may be a prudent decision.

Section 4(2) of UMIFA specifically authorized an institution to retain property contributed by a donor.  The comment explained that an institution might retain property in the hope of obtaining additional contributions from the donor.  Under UPMIFA the potential for developing additional contributions by retaining property contributed to the institution would be among the “other circumstances” that the institution might consider in deciding whether to retain or dispose of the property.  The institution must weigh the potential for obtaining additional contributions with all other factors that affect the suitability of retaining the property in the investment portfolio.

The language of subsection (e)(5) comes from UPIA § 4, which restates Restatement (Third) of Trusts: Prudent Investor Rule § 229 (1992), which adopted language from Restatement (Second) of Trusts § 231 (1959). See  UPIA § 4 cmt.

Subsection (e)(6). Special Skills or Expertise.

Subsection (e)(6) states the rule provided in UPIA § 2(f) requiring a trustee to use the trustee’s own skills and expertise in carrying out the trustee’s fiduciary duties. The comment to RMNCA § 8.30 describes the existence of a similar rule under the law of nonprofit corporations.  Section 8.30(a)(2) provides that in discharging duties a director must act “with the care an ordinarily prudent person in a like position would exercise under similar circumstances. . . .”  The comment explains that”[t]he concept of ‘under similar circumstances’ relates not only to the circumstances of the corporation but to the special background, qualifications, and management experience of the individual director and the role the director plays in the corporation.”  After describing directors chosen for their ability to raise money, the comment notes that “[n]o special skill or expertise should be expected from such directors unless their background or knowledge evidences some special ability.”

The intent of subsection (e)(6) is that a person managing or investing institutional funds must use the person’s own judgment and experience, including any particular skills or expertise, in carrying out the management or investment duties.  For example, if a charity names a person as a director in part because the person is a lawyer, the lawyer’s background may allow the lawyer to recognize legal issues in connection with funds held by the charity.  The lawyer should identify the issues for the board, but the lawyer is not expected to provide legal advice.  A lawyer is not expected to be able to recognize every legal issue, particularly issues outside the lawyer’s area of expertise, simply because the board member is lawyer.  See  ALI Principles of the Law of Nonprofit Organizations, Preliminary Draft No. 3 (May 12, 2005) § 315 (Duty of Care), cmt. c.

UMIFA contained two provisions that authorized investments in pooled or common investment funds. UMIFA §§ 4(3), 4(4). The Drafting Committee concluded that Section 3(e)(3) of UPMIFA [§ 35-10-203(e)(3)] authorizes these investments. The decision not to include the two provisions in UPMIFA implies no disapproval of such investments.

35-10-204. Appropriation for expenditure or accumulation of endowment fund — Rules of construction.

  1. Subject to the intent of a donor expressed in the gift instrument and to subsection (d), an institution may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines is prudent for the uses, benefits, purposes, and duration for which the endowment fund is established. Unless stated otherwise in the gift instrument, the assets in an endowment fund are donor-restricted assets until appropriated for expenditure by the institution. In making a determination to appropriate or accumulate, the institution shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and shall consider, if relevant, the following factors:
    1. The duration and preservation of the endowment fund;
    2. The purposes of the institution and the endowment fund;
    3. General economic conditions;
    4. The possible effect of inflation or deflation;
    5. The expected total return from income and the appreciation of investments;
    6. Other resources of the institution; and
    7. The investment policy of the institution.
  2. To limit the authority to appropriate for expenditure or accumulate under subsection (a), a gift instrument must specifically state the limitation.
  3. Terms in a gift instrument designating a gift as an endowment, or a direction or authorization in the gift instrument to use only “income”, “interest”, “dividends”, or “rents, issues, or profits”, or “to preserve the principal intact”, or words of similar import:
    1. Create an endowment fund of permanent duration unless other language in the gift instrument limits the duration or purpose of the fund; and
    2. Do not otherwise limit the authority to appropriate for expenditure or accumulate under subsection (a).
    1. The appropriation for expenditure in any year of an amount greater than seven percent (7%) of the fair market value of an endowment fund, calculated on the basis of market values determined at least quarterly and averaged over a period of not less than three (3) years immediately preceding the year in which the appropriation for expenditure was made, creates a rebuttable presumption of imprudence.
    2. For an endowment fund in existence for fewer than three (3) years, the fair market value of the endowment fund must be calculated for the period the endowment fund has been in existence.
    3. This subsection (d) does not:
      1. Apply to an appropriation for expenditure permitted under law other than this part or by the gift instrument; or
      2. Create a presumption of prudence for an appropriation for expenditure of an amount less than or equal to seven (7%) percent of the fair market value of the endowment fund.

Acts 2007, ch. 186, § 4.

COMMENTS TO OFFICIAL TEXT

Purpose and Scope of Revisions.

This section revises the provision in UMIFA that permitted the expenditure of appreciation of an endowment fund to the extent the fund had appreciated in value above the fund’s historic dollar value. UMIFA defined historic dollar value to mean all contributions to the fund, valued at the time of contribution. Instead of using historic dollar value as a limitation, UPMIFA applies a more carefully articulated prudence standard to the process of making decisions about expenditures from an endowment fund.  The expenditure rule of Section 4 [§ 35-10-204] applies only to the extent that a donor and an institution have not reached some other agreement about spending from an endowment.  If a gift instrument sets forth specific requirements for spending, then the charity must comply with those requirements.  However, if the gift instrument uses more general language, for example directing the charity to “hold the fund as an endowment” or “retain principal and spend income,” then Section 4 [§ 35-10-204] provides a rule of construction to guide the charity.

Prior to the promulgation of UMIFA, “income” for trust accounting purposes meant interest and dividends but not capital gains, whether or not realized.  Many institutions assumed that trust accounting principles applied to charities organized as nonprofit corporations, and the rules limited the institutions’ ability to invest their endowment funds effectively.  UMIFA addressed this problem by construing “income” in gift instruments to include a prudent amount of capital gains, both realized and unrealized.  Under UMIFA an institution could spend appreciation in addition to spending income determined under trust accounting rules.  This rule of construction likely carried out the intent of the donor better than a rule limiting spending to trust accounting income, while permitting the charity to invest in a manner that could generate better returns for the fund.

UPMIFA also applies a rule of construction to terms like “income” or “endowment.”  The assumption in the Act is that a donor who uses one of these terms intends to create a fund that will generate sufficient gains to be able to make ongoing distributions from the fund while at the same time preserving the purchasing power of the fund.  Because historic dollar value under UMIFA was a number fixed in time, the use of that approach may not have adequately captured the intent of a donor who wanted the endowment fund to continue to maintain its value in current dollars.  UPMIFA takes a different approach, directing the institution to determine spending based on the total assets of the endowment fund rather than determining spending by adding a prudent amount of appreciation to trust accounting income.

UPMIFA requires the persons making spending decisions for an endowment fund to focus on the purposes of the endowment fund as opposed to the purposes of the institution more generally, as was the case under UMIFA.  When the institution considers the purposes and duration of the fund, the institution will give priority to the donor’s general intent that the fund be maintained permanently.  Although the Act does not require that a specific amount be set aside as “principal,” the Act assumes that the charity will act to preserve “principal” (i.e., to maintain the purchasing power of the amounts contributed to the fund) while spending “income” (i.e. making a distribution each year that represents a reasonable spending rate, given investment performance and general economic conditions).  Thus, an institution should monitor principal in an accounting sense, identifying the original value of the fund (the historic dollar value) and the increases in value necessary to maintain the purchasing power of the fund.

Subsection (a).  Expenditure of Endowment Funds.

Subsection (a) uses the RMNCA articulation of the standard of care for decision making under Section 4 [§ 35-10-204].  The change in language does not reflect a substantive change.  The comment to Section 3 [§ 35-10-203] more fully describes that standard of care.

Section 4 [§ 35-10-204] permits expenditures from an endowment fund to the extent the institution determines that the expenditures are prudent after considering the factors listed in subsection (a).  These factors emphasize the importance of the intent of the donor, as expressed in a gift instrument.  Section 4 [§ 35-10-204] looks to written documents as evidence of donor’s intent and does not require an institution to rely on oral expressions of intent.  By requiring written evidence of intent, the Act protects reliance by the donor and the institution on the written terms of a donative agreement. Informal conversations may be misremembered and may be subject to multiple interpretations.  Of course, oral expressions of intent may guide an institution in further carrying out a donor’s wishes and in understanding a donor’s intent.

The factors in subsection (a) require attention to the purposes of the institution and the endowment fund, economic conditions, and present and reasonably anticipated resources of the institution. As under UMIFA, determinations under Section 4 [§ 35-10-204] do not depend on the characterization of assets as income or principal and are not limited to the amount of income and unrealized appreciation.  The authority in Section 4 [§ 35-10-204] is permissive, however, and an institution organized as a trust may continue to make spending decisions under trust accounting principles so long as doing so is prudent.

Institutions have operated effectively under UMIFA and have operated more conservatively than the historic dollar value rule would have permitted. Institutions have little incentive to maximize allowable spending.  Good practice has been to provide for modest expenditures while maintaining the purchasing power of a fund. Institutions have followed this practice even though UMIFA (1) does not require an institution to maintain a fund’s purchasing power and (2) does allow an institution to spend any amounts in a fund above historic dollar value, subject to the prudence standard.  The Drafting Committee concluded that eliminating historic dollar value and providing institutions with more discretion would not lead to depletion of endowment funds. Instead, UPMIFA should encourage institutions to establish a spending policy that will be responsive to short-term fluctuations in the value of the fund. Section 4 [§ 35-10-204] allows an institution to maintain appropriate levels of expenditures in times of economic downturn or economic strength. In some years, accumulation rather than spending will be prudent, and in other years an institution may appropriately make expenditures even if a fund has not generated investment return that year.

Several levels of safeguard exist to prevent an institution from depleting an endowment fund or diverting assets from the purposes for which the fund was created.  In comparison with UMIFA, UPMIFA provides greater direction to the institution with respect to making a prudent determination about spending from an endowment. UMIFA told the decision maker to consider “long and short term needs of the institution in carrying out its educational, religious, charitable, or other eleemosynary purposes, its present and anticipated financial requirements, expected total return on its investments, price level trends, and general economic conditions.”  UPMIFA clarifies that in making spending decisions the institution should attempt to ensure that the value of the fund endures while still providing that some amounts be spent for the purposes of the endowment fund.  In UPMIFA prudent decision making emphasizes the endowment aspect of the fund, rather than the overall purposes or needs of the institution.

In addition to the guidance provided by Section 4 [§ 35-10-204], other safeguards exist.  Donors can restrict gifts and can provide specific instructions to donee institutions regarding appropriate uses for assets contributed. Within institutions, fiduciary duties govern the persons making decisions on expenditures. Those persons must operate both with the best interests of the institution in mind and in keeping with the intent of donors. If an institution diverts an institutional fund from the charitable purposes of the institution, the state attorney general can enforce the charitable interests of the public. By relying on these safeguards while providing institutions with adequate discretion to make appropriate expenditures, the Act creates a standard that takes into consideration the diversity of the charitable sector. The committee expects that accumulated experience with such spending formulas will continue to inform institutional practice under the Act.

Distinguishing Legal and Accounting Standards.

Deleting historic dollar value does not transform any portion of an endowment fund into unrestricted assets from a legal standpoint.  An endowment fund is restricted because of the donor’s intent that the fund be restricted by the prudent spending rule, that the fund not be spent in the current year, and that the fund continue to maintain its value for a long time.  Regardless of the treatment of endowment fund from an accounting standpoint, legally an endowment fund should not be considered unrestricted.  Subsection (a) states that endowment funds will be legally restricted until the institution appropriates funds for expenditure.  The UMIFA statutes in Utah and Maine contain similar language. 13 Me. Rev. Stat. Ann. tit. 13 § 4106 (West 2005); Utah Code Ann. 1953 § 13-29-3 (2005).   See, also,  advisory published by Mass. Attorney General, “The Attorney General's Position on FASB Statement of Financial Accounting Standards No. 117, ¶ 22 and Related G.L.C. 180A Issues” (January 2004) http://www.ago.state.ma.us/filelibrary/fasb.pdf (last visited May 22, 2006) (concerning the treatment of endowments as legally restricted assets).

The term “endowment fund” includes funds that may last in perpetuity but also funds that are created to last for a fixed term of years or until the institution achieves a specified objective. Section 4 [§ 35-10-204] requires the institution to consider the intended duration of the fund in making determinations about spending. For example, if a donor directs that a fund be spent over 20 years, Section 4 [§ 35-10-204] will guide the institution in making distribution decisions. The institution would amortize the fund over 20 years rather than try to maintain the fund in perpetuity.  For an endowment fund of limited duration, spending at a rate higher than rates typically used for endowment spending will be both necessary and prudent.

Subsection (c).  Rule of Construction.

Donor’s intent must be respected in the process of making decisions to expend endowment funds. Section 4 [§ 35-10-204] does not allow an institution to convert an endowment fund into a non-endowment fund nor does the section allow the institution to ignore a donor’s intent that a fund be maintained as an endowment. Rather, subsection (c) provides rules of construction to assist institutions in interpreting donor’s intent. Subsection (c) assumes that if a donor wants an institution to spend “only the income” from a fund, the donor intends that the fund both support current expenditures and be preserved permanently.  The donor is unlikely to be concerned about designation of particular returns as “income” or “principal” under accounting principles. Rather the donor is more likely to assume that the institution will use modern total-return investing techniques to generate enough funds to distribute while maintaining the long-term viability of the fund. Subsection (c) is an intent effectuating provision that provides default rules to construe donor’s intent.

As subsection (b) explains, a donor who wants to specify particular spending guidelines can do so.  For example, a donor might require that a charity spend between three and five percent of an endowed gift each year, regardless of investment performance or other factors.  Because the charity agrees to the restriction in accepting the gift, the restriction will govern spending decisions by the charity.  Another donor might want to limit expenditures to trust accounting income and not want the institution to be able to expend appreciation.  An instruction to “pay only the income” will not be specific enough, but an instruction to “pay only interest and dividend income earned by the fund and not to make other distributions of the kind authorized by Section 4 [§ 35-10-204] of UPMIFA” should be sufficient.  If a donor indicates that the rules on investing or expenditures under Section 4 [§ 35-10-204] do not apply to a particular fund, then as a practical matter the institution will probably invest the fund separately. Thus, a decision by a donor to require fund specific expenditure rules will likely also have consequences in the way the institution invests the fund.

Retroactive Application of the Rule of Construction.

A constructional rule resolves an ambiguity, in this case, because donors use words like endowment or income without specific directions regarding the intended meaning.  Changing a statutory constructional rule does not change the underlying intent, and instead changes the way an ambiguity is resolved, in an attempt to increase the likelihood of giving effect to the intent of most donors.

If a donor has stated in a gift instrument specific directions as to spending, then the institution must respect those wishes, but many donors do not give precise instructions about how to spend endowment funds.  In Section 4 [§ 35-10-204] UPMIFA provides guidance for giving effect to a donor’s intent when the donor has not been specific. Like Section 3 of UMIFA, Section 4 [§ 35-10-204] of UPMIFA is a rule of construction, so it does not violate either donor intent or the Constitution.

The issue of whether to apply a rule of construction retroactively was considered in connection with UMIFA.  When the New Hampshire legislature considered UMIFA, the Senate asked the New Hampshire Supreme Court for an opinion regarding whether UMIFA, if adopted, would violate a provision of the state constitution prohibiting retrospective laws, and also whether the statute would encroach on the functions of the judicial branch.  The opinion answered no to both questions.  Opinion of the Justices, Request of the Senate No. 6667, 113 N.H. 287, 306 A.2d 55 (1973).

More recently the Colorado Supreme Court considered the retroactive application of another constructional statute, one that deems the designation of a spouse as the beneficiary of a life insurance policy to be revoked in a case in which the marriage was dissolved after the naming of the spouse as beneficiary.  In re Estate of DeWitt, 54 P. 3d 849 (Colo. 2002). In holding that retroactive application of the statute did not violate the Contracts Clause, the court cited approvingly from a statement prepared by the Joint Editorial Board for Uniform Trusts and Estates Acts (JEB). JEB Statement Regarding the Constitutionality of Changes in Default Rules as Applied to PreExisting Documents, 17 Am. Coll. Tr. & Est. Couns. Notes 184 app. II (1991).

The JEB Statement explains that the purpose of the anti-retroactivity norm is to protect a transferor who relies on existing rules of law.  By definition, however, rules of construction apply only in situations in which a transferor did not spell out his or her intent and hence did not rely on the then-current rule of construction.   See also In re Gardner's Trust, 266 Minn. 127, 132, 123 N.W. 2d 69, 73 (1963) (“[I]t is doubtful whether the testatrix had any clear intention in mind at the time the will was executed.  It is equally plausible that if she had thought about it at all she would have desired to have the dividends go where the law required them to go at the time they were received by the trustee.”) (Uniform Principal and Income Act).

Non-retroactivity would produce serious practical problems:  If the Act were not retroactive, a charity would need to keep two sets of books for each endowment fund created before the enactment of UPMIFA, if new funds were added after the enactment.  The burden that such a rule would impose is out of proportion to the benefit sought.

Subsection (d).  Rebuttable Presumption of Imprudence.

The Drafting Committee debated at length whether to include a presumption of imprudence for spending above a fixed percentage of the value of the fund.  The Drafting Committee decided to include a presumption in the Act in brackets, as an option for states to consider, and to include in these Comments a discussion of the advantages and disadvantages of including a presumption in the Act.

Some who commented on the Act viewed the presumption as linked to the retroactive application of the rule of construction of subsection (c).  A donor who contributed to an endowment fund under UMIFA may have assumed that the historic dollar value of the gift would be subject to a no-spending rule under the statute.  Because UPMIFA removes the concept of historic dollar value, the bracketed presumption of imprudence would assure the donor that spending from an endowment fund will be so limited.

Those in favor of the presumption of imprudence argued that the presumption would curb the temptation that a charity might have to spend endowment assets too rapidly.  Although the presumption would be rebuttable, and spending above the identified percentage might, in some years and for some charities, be prudent, institutions would likely be reluctant to authorize spending above seven percent.  In addition, the presumption would give the attorney general a benchmark of sorts.

A variety of considerations cut against including a presumption of imprudence in the statute.  A fixed percentage in the statute might be perceived as a safe harbor that could lead institutions to spend more than is prudent.  Although the provision should not be read to imply that spending below seven percent will be considered prudent, some charities might interpret the statute in that way.  Decision makers might be pressured to spend up to the percentage, and in doing so spend more than is prudent, without adequate review of the prudence factors as required under the Act.

Perhaps the biggest problem with including a presumption in the statute is the difficulty of picking a number that will be appropriate in view of the range of institutions and charitable purposes and the fact that economic conditions will change over time.  Under recent economic conditions, a spending rate of seven percent is too high for most funds, but in a period of high inflation, seven percent might be too low.  In making a prudent decision regarding how much to spend from an endowment fund, each institution must consider a variety of factors, including the particular purposes of the fund, the wishes of the donors, changing economic factors, and whether the fund will receive future donations.

Whether or not a statute includes the presumption, institutions must remember that prudence controls decision making. Each institution must make decisions on expenditures based on the circumstances of the particular charity.

Application of Presumption.

For a state wishing to adopt a presumption of imprudence, subsection (d) provides language.  Under subsection (d), a rebuttable presumption of imprudence will arise if expenditures in one year exceed seven percent of the assets of an endowment fund.  The subsection applies a rolling average of three or more years in determining the value of the fund for purposes of calculating the seven-percent amount.  An institution can rebut the presumption of imprudence if circumstances in a particular year make expenditures above that amount prudent.  The concept and the language for the presumption of imprudence comes from Mass. Gen. L. ch. 180A, § 2 (2004).  Massachusetts enacted this rule in 1975 as part of its UMIFA statute.  New Mexico adopted the same presumption in 1978. N.M.S.A. § 46-9-2 (C) (2004).  New Hampshire has a similar provision.  N.H. Rev. Stat. § 292-B:6.

The period that a charity uses to calculate the presumption (three or more years) and the frequency of valuation (at least quarterly) will be binding in any determination of whether the presumption applies.  For example, if a charity values an endowment fund on a quarterly basis and averages the quarterly values over three years to determine the fair market value of the fund for purposes calculating seven percent of the fund, the charity’s choices of three years as a smoothing period and quarterly as a valuation period cannot be challenged.  If the charity makes an appropriation that is less than seven percent of this value, then the presumption of imprudence does not arise even if the appropriation would exceed seven percent of the value of the fund calculated based on monthly valuations averaged over five years.

If sufficient evidence establishes, by the preponderance of the evidence, the facts necessary to raise the presumption of imprudence, then the institution will have to carry the burden of production of (i.e., the burden of going forward with) other evidence that would tend to demonstrate that its decision was prudent.  The existence of the presumption does not shift the burden of persuasion to the charity.

Expenditures from an endowment fund may include distributions for charitable purposes and amounts used for the management and administration of the fund, including annual charges for fundraising. The value of a fund, as calculated for purposes of determining the seven percent amount, will reflect increases due to contributions and investment gains and decreases due to distributions and investment losses.  The seven percent figure includes charges for fundraising and administrative expenses other than investment management expenses.  All costs or fees associated with an endowment fund are factors that prudent decision makers consider.  High costs or fees of investment management could be considered imprudent regardless of whether spending exceeds seven percent of the fund’s value.

The presumption of imprudence does not create an automatic safe harbor. Expenditures at six percent might well be imprudently high.  See  James P. Garland, The Fecundity of Endowments and Long-Duration Trusts , The Journal of Portfolio Management (2005). Evidence reviewed by the Drafting Committee suggests that at present few funds can sustain spending at a rate above five percent.  See  Roger G. Ibbotson & Rex A. Sinquefield, Stocks, Bonds, Bills, and Inflation: Historical Returns (1926-1987) (Research Foundation of the Institute of Chartered Financial Analysts, 1989).  Indeed, under current conditions five percent can be too high.  See  Joel C. Dobris, Why Five? The Strange, Magnetic, and Mesmerizing Affect of the Five Percent Unitrust and Spending Rate on Settlors, Their Advisers, and Retirees , 40 Real Prop. Prob. & Tr. J. 39 (2005).  Further, spending at a lower rate, particularly in the early years of an endowment, may result in greater distributions over time.  See  DeMarche Associates, Inc, Spending Policies and Investment Planning for Foundations: A Structure for Determining a Foundation’s Asset Mix (Council on Foundations: 3d ed. 1999).  A presumption of imprudence can serve as a reminder that spending at too high a rate will jeopardize the long-term nature of an endowment fund.  If an endowment fund is intended to continue permanently, the institution should take special care to limit annual spending to a level that protects the purchasing power of the fund.

Subsection (d) provides that the terms of the gift instrument can provide additional spending authority.  For example, if a gift instrument directs that an institution expend a fund over a ten-year period, exhausting the fund after ten years, spending at a rate higher than seven percent will be necessary.

Subsection (d) does not require an institution to spend a minimum amount each year.  The prudence standard and the needs of the institution will supply sufficient guidance regarding whether to accumulate rather than to spend in a particular year.

Spending above seven percent in any one year will not necessarily be imprudent.  For some endowment funds fluctuating spending rates may be appropriate.  Although the Act does not apply the percentage for the presumption on a rolling basis (e.g., 21 percent over three years), some endowment funds may prudently spend little or nothing in some years and more than seven percent in other years.  For example, a charity planning a construction project might decide to spend nothing from an endowment for three years and then in the fourth year might spend 20 percent of the value of the fund for construction costs.  The decision to accumulate in years one through three and then to spend 20 percent in the fourth year might be prudent for the charity, depending on the other factors.  The charity should maintain adequate records during the accumulation period and should document the decision-making process in the fourth year to be able to meet the burden of production associated with the presumption.  Another charity might prudently spend 20 percent in year one and nothing for the following three years.  That charity would also need to document the decision-making process through which the decision to spend occurred and maintain records explaining why the decision was prudent under the circumstances.

A charity might establish a “capital replacement fund” designed to provide funds to the institution for repair or replacement of major items of equipment.  Disbursements from such a fund will likely fluctuate, with limited expenditures in some years and big expenditures in others. The fund would not exhibit a uniform spending rate.  Indeed, an advantage of a capital replacement fund is the ability to absorb a significant capital expenditure in a single year without a negative impact on the operating budget of the institution.  Disbursements might average five percent per year but would vary, with spending in some years more and in some years less.  Even if this fund is an endowment fund subject to Section 4 [§ 35-10-204], spending above seven percent in a particular year could well be prudent.  Subsection (d) does not preclude spending above seven percent.

A charity creating a capital replacement fund or a building fund might chose to adopt spending rules for the fund that would not be subject to UPMIFA.  Specific donor intent can supersede the rules of UPMIFA.  If the charity creates a gift instrument that establishes appropriate rules on spending for the fund, and if donors agree to those restrictions, then the UPMIFA rules on spending, including the bracketed presumption, will not apply.

Institutions with Limited Investment and Spending Experience.

Several attorneys general and other charity officials raised concerns about whether small institutions would be able to adjust to a spending rule based solely on prudence, without the bright-line guidance of historic dollar value.  Some charity regulators who spoke with the Drafting Committee noted that large institutions have sophisticated investment strategies, access to good investment advisors, and experience with spending rules that maintain purchasing power for endowment funds.  For these institutions, the rules of UPMIFA should work well.  For smaller institutions, however, the state regulators thought that additional guidance could be helpful.  After discussing strategies to address this concern, the Drafting Committee decided to include in these comments an additional optional provision that a state could choose to include in its UPMIFA statute.

The optional provision focuses on institutions with endowment funds valued, in the aggregate, at less than $2,000,000.  The number is in brackets to indicate that it could be set higher or lower.  The number was chosen to address the concern of the state regulators that some small charities might be more likely to spend imprudently than large charities.  The Drafting Committee selected $2,000,000 as the value that might include most unsophisticated institutions but would not be overinclusive.

The optional provision creates a notification requirement for an institution with a small endowment that plans to spend below historic dollar value.  If an institution subject to the provision decides to appropriate an amount that would cause the value of its endowment funds to drop below the aggregate historic dollar value for all of its endowment funds, then the institution will have to notify the attorney general before proceeding with the expenditure.  The provision does not require that the institution obtain the approval of the attorney general before making the distribution.  Rather, the notification requirement gives the attorney general the opportunity to take a closer look at the institution and its spending decision, to educate the institution on prudent decision making for endowment funds, and to intervene if the attorney general determines that the spending would be imprudent for the institution.  Although the Drafting Committee thinks that the prudence standard in UPMIFA provides adequate guidance to all institutions within the scope of the Act, if a state chooses to adopt a notification provision for institutions with small endowments, the Drafting Committee recommends the following language:

(-) If an institution has endowment funds with an aggregate value of less than [$2,000,000], the institution shall notify the [Attorney General] at least [60 days] prior to an appropriation for expenditure of an amount that would cause the value of the institution’s endowment funds to fall below the aggregate historic dollar value of the institution’s endowment funds, unless the expenditure is permitted or required under law other than this [act] or in the gift instrument.  For purposes of this subsection, “historic dollar value” means the aggregate value in dollars of (i) each endowment fund at the time it became an endowment fund, (ii) each subsequent donation to the fund at the time the donation is made, and (iii) each accumulation made pursuant to a direction in the applicable gift instrument at the time the accumulation is added to the fund.  The institution’s determination of historic dollar value made in good faith is conclusive.

35-10-205. Delegation of management and investment functions.

  1. Subject to any specific limitation set forth in a gift instrument or in law other than this part, an institution may delegate to an external agent the management and investment of an institutional fund to the extent that an institution could prudently delegate under the circumstances. An institution shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, in:
    1. Selecting an agent;
    2. Establishing the scope and terms of the delegation, consistent with the purposes of the institution and the institutional fund; and
    3. Periodically reviewing the agent's actions in order to monitor the agent's performance and compliance with the scope and terms of the delegation.
  2. In performing a delegated function, an agent owes a duty to the institution to exercise reasonable care to comply with the scope and terms of the delegation.
  3. An institution that complies with subsection (a) is not liable for the decisions or actions of an agent to which the function was delegated.
  4. By accepting delegation of a management or investment function from an institution that is subject to the laws of this state, an agent submits to the jurisdiction of the courts of this state in all proceedings arising from or related to the delegation or the performance of the delegated function.
  5. An institution may delegate management and investment functions to its committees, officers, or employees as authorized by law of this state other than this part.

Acts 2007, ch. 186, § 5.

COMMENTS TO OFFICIAL TEXT

The prudent investor standard in Section 4 [§ 35-10-204] presupposes the power to delegate.  For some types of investment, prudence requires diversification, and diversification may best be accomplished through the use of pooled investment vehicles that entail delegation.  The Drafting Committee decided to put Section 5 [§ 35-10-205] in brackets because many states already provide sufficient authority to delegate authority through other statutes.  If such authority exists, then an enacting state should enact UPMIFA without Section 5 [§ 35-10-205].  Enacting delegation rules that duplicate existing rules could be confusing and might create conflicts.  For charitable trusts, UPIA provides the same delegation rules as those in Section 5 [§ 35-10-205].  For nonprofit corporations, nonprofit corporation statutes often provide comparable rules.  A state enacting UPMIFA must be certain that its laws authorize delegation, either through other statutes or by enacting Section 5 [§ 35-10-205].

Section 5 [§ 35-10-205] incorporates the delegation rule found in UPIA § 9, updating the delegation rules in UMIFA § 5. Section 5 [§ 35-10-205] permits the decision makers in an institution to delegate management and investment functions to external agents if the decision makers exercise reasonable skill, care, and caution in selecting the agent, defining the scope of the delegation and reviewing the performance of the agent.  In some circumstances, the scope of the delegation may include redelegation.  For example, an institution may select an investment manager to assist with investment decisions.  The delegation may include the authority to redelegate to investment managers with expertise in particular investment areas.  All decisions to delegate require the exercise of reasonable care, skill, and caution in selecting, instructing, and monitoring agents.  Further, decision makers cannot delegate the authority to make decisions concerning expenditures and can only delegate management and investment functions. Subsection (c) protects decision makers who comply with the requirement for proper delegation from liability for actions or decisions of the agents.  In making decisions concerning delegation, the institution must be mindful of Section 3(c)(1) [§ 35-10-203(c)(1)] of UPMIFA, the provision that directs the institution  to incur only reasonable costs in managing and investing an institutional fund.

Section 5 [§ 35-10-205] does not address issues of internal delegation and potential liability for internal delegation, and subsection (c) does not affect laws that govern personal liability of directors or trustees for matters outside the scope of Section 5 [§ 35-10-205]. Directors will look to nonprofit corporation laws for these rules, while trustees will look to trust law. See , e.g., RMNCA, § 8.30(b) (permitting directors to rely on information prepared by an officer or employee of the institution if the director reasonably believes the officer or employee to be reliable and competent in the matters presented).

The language of subsection (c) is similar to that of UPIA § 9(c) and RMNCA § 8.30(d).  The decision not to include the terms “beneficiaries” or “members” in subsection (c) does not indicate a decision that this section does not create immunity from claims brought by beneficiaries or members. Instead, a decision maker who complies with section 5 will be protected from any liability resulting from actions or decisions made by an external agent.

Subsection (d) creates personal jurisdiction over the agent. This subsection is not a choice of law rule.

Subsection (e) notes that law other than this Act governs internal delegation.  Section 5 of UMIFA included internal delegation as well as external delegation, due to a concern at that time that trust law concepts might govern internal delegation in nonprofit corporations. With the widespread adoption of nonprofit corporation statutes, that concern no longer exists. The decision not to address internal delegation in UPMIFA does not suggest that a governing board of a nonprofit corporation cannot delegate to committees, officers, or employees.  Rather, a nonprofit corporation must look to other law, typically a nonprofit corporation statute, for the rules governing internal delegation.

35-10-206. Release or modification of restrictions on management, investment, or purpose.

  1. If the donor consents in a record, an institution may release or modify, in whole or in part, a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund. A release or modification may not allow a fund to be used for a purpose other than a charitable purpose of the institution.
  2. The court, upon application of an institution, may modify a restriction contained in a gift instrument regarding the management or investment of an institutional fund if the restriction has become impracticable or wasteful, if it impairs the management or investment of the fund, or if, because of circumstances not anticipated by the donor, a modification of a restriction will further the purposes of the fund. The institution shall notify the attorney general and reporter of the application, and the attorney general and reporter must be given an opportunity to be heard. To the extent practicable, any modification must be made in accordance with the donor's probable intention.
  3. If a particular charitable purpose or a restriction contained in a gift instrument on the use of an institutional fund becomes unlawful, impracticable, impossible to achieve, or wasteful, the court, upon application of an institution, may modify the purpose of the fund or the restriction on the use of the fund in a manner consistent with the charitable purposes expressed in the gift instrument. The institution shall notify the attorney general and reporter of the application, and the attorney general and reporter must be given an opportunity to be heard.
  4. If an institution determines that a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund is unlawful, impracticable, impossible to achieve, or wasteful, the institution, sixty (60) days after notification to the attorney general and reporter, may release or modify the restriction, in whole or part, if:
    1. The institutional fund subject to the restriction has a total value of less than one hundred fifty thousand dollars ($150,000). This dollar limit shall increase by an amount of five thousand dollars ($5,000) on July 1, 2011, and on each July 1 in subsequent years;
    2. More than twenty (20) years have elapsed since the fund was established; and
    3. The institution uses the property in a manner consistent with the charitable purposes expressed in the gift instrument.

Acts 2007, ch. 186, § 6; 2010, ch. 639, § 1.

COMMENTS TO OFFICIAL TEXT

Section 6 [§ 35-10-206] expands the rules on releasing or modifying restrictions that are found in Section 7 of UMIFA. Subsection (a) restates the rule from UMIFA allowing the release of a restriction with donor consent.  Subsections (b) and (c) make clear that an institution can always ask a court to apply equitable deviation or cy pres to modify or release a restriction, under appropriate circumstances.  Subsection (d), a new provision, permits an institution to apply cy pres on its own for small funds that have existed for a substantial period of time, after giving notice to the state attorney general.

Although UMIFA stated that it did not “limit the application of the doctrine of cy pres ”, UMIFA § 7(d), what that statement meant under the Act was unclear.  UMIFA itself appeared to permit only a release of a restriction and not a modification.  That all-or-nothing approach did not adequately protect donor intent.  See  Yale Univ. v. Blumenthal, 621 A.2d 1304 (Conn. 1993).  By expressly including deviation and cy pres, UPMIFA requires an institution to seek modifications that are “in accordance with the donor’s probable intention” for deviation and “in a manner consistent with the charitable purposes expressed in the gift instrument” for cy pres.

Individual Funds.

The rules on modification require that the institution, or a court applying a court-ordered doctrine, review each institutional fund separately.  Although an institution may manage institutional funds collectively, for purposes of this Section [§ 35-10-206] each fund must be considered individually.

Subsection (a).  Donor Release.

Subsection (a) permits the release of a restriction if the donor consents. A release with donor consent cannot change the charitable beneficiary of the fund. Although the donor has the power to consent to a release of a restriction, this section does not create a power in the donor that will cause a federal tax problem for the donor. The gift to the institution is a completed gift for tax purposes, the property cannot be diverted from the charitable beneficiary, and the donor cannot redirect the property to another use by the charity.  The donor has no retained interest in the fund.

Subsection (b).  Equitable Deviation.

Subsection (b) applies the rule of equitable deviation, adapting the language of UTC § 412 to this section.  See also Restatement (Third) of Trusts § 66 (2003).  Under the deviation doctrine, a court may modify restrictions on the way an institution manages or administers a fund in a manner that furthers the purposes of the fund.  Deviation implements the donor’s intent.  A donor commonly has a predominating purpose for a gift and, secondarily, an intent that the purpose be carried out in a particular manner.  Deviation does not alter the purpose but rather modifies the means in order to carry out the purpose.

Sometimes deviation is needed on account of circumstances unanticipated when the donor created the restriction.  In other situations the restriction may impair the management or investment of the fund.  Modification of the restriction may permit the institution to carry out the donor’s purposes in a more effective manner.  A court applying deviation should attempt to follow the donor’s probable intention in deciding how to modify the restriction.  Consistent with the doctrine of equitable deviation in trust law, subsection (b) does not require an institution to notify donors of the proposed modification.  Good practice dictates notifying any donors who are alive and can be located with a reasonable expenditure of time and money.  Consistent with the doctrine of deviation under trust law, the institution must notify the attorney general who may choose to participate in the court proceeding.  The attorney general protects donor intent as well as the public’s interest in charitable assets.  Attorney general is in brackets in the Act because in some states another official enforces the law of charities.

Subsection (c).  Cy Pres.

Subsection (c) applies the rule of cy pres from trust law,  authorizing the court to modify the purpose of an institutional fund.  The term “modify” encompasses the release of a restriction as well as an alteration of a restriction and also permits a court to order that the fund be paid to another institution.  A court can apply the doctrine of cy pres only if the restriction in question has become unlawful, impracticable, impossible to achieve, or wasteful.  This standard, which comes from UTC § 413, updates the circumstances under which cy pres may be applied by adding “wasteful” to the usual common law articulation of the doctrine.  Any change must be made in a manner consistent with the charitable purposes expressed in the gift instrument.  See also Restatement (Third) of Trusts § 67 (2003).  Consistent with the doctrine of cy pres, subsection (c) does not require an institution seeking cy pres to notify donors.  Good practice will be to notify donors whenever possible.  As with deviation, the institution must notify the attorney general who must have the opportunity to be heard in the proceeding.

Subsection (d).  Modification of Small, Old Funds.

Subsection (d) permits an institution to release or modify a restriction according to cy pres principles but without court approval if the amount of the institutional fund involved is small and if the institutional fund has been in existence for more than 20 years. The rationale is that under some circumstances a restriction may no longer make sense but the cost of a judicial cy pres proceeding will be too great to warrant a change in the restriction. The Drafting Committee discussed at length the parameters for allowing an institution to apply cy pres without court supervision. The Committee drafted subsection (d) to balance the needs of an institution to serve its charitable purposes efficiently with the policy of enforcing donor intent. The Committee concluded that an institutional fund with a value of $25,000 [now $150,000] or less is sufficiently small that the cost of a judicial proceeding will be out of proportion to its protective purpose. The Committee included a requirement that the institutional fund be in existence at least 20 years ,as a further safeguard for fidelity to donor intent.  The 20-year period begins to run from the date of inception of the fund and not from the date of each gift to the fund. The amount and the number of years have been placed in brackets to signal to an enacting jurisdiction that it may wish to designate a higher or lower figure.  Because the amount should reflect the cost of a judicial proceeding to obtain a modification, the number may be higher in some states and lower in others.

As under judicial cy pres, an institution acting under subsection (d) must change the restriction in a manner that is in keeping with the intent of the donor and the purpose of the fund. For example, if the value of a fund is too small to justify the cost of administration of the fund as a separate fund, the term “wasteful” would allow the institution to combine the fund with another fund with similar purposes. If a fund has been created for nursing scholarships and the institution closes its nursing school, the institution might appropriately decide to use the fund for other scholarships at the institution. In using the authority granted under subsection (d), the institution must determine which alternative use for the fund reasonably approximates the original intent of the donor. The institution cannot divert the fund to an entirely different use. For example, the fund for nursing scholarships could not be used to build a football stadium.

An institution seeking to modify a provision under subsection (d) must notify the attorney general of the planned modification.  The institution must wait 60 days before proceeding; the attorney general may take action if the proposed modification appears inappropriate.

Notice to Donors.

The Drafting Committee decided not to require notification of donors under subsections (b), (c), and (d).  The trust law rules of equitable deviation and cy pres do not require donor notification and instead depend on the court and the attorney general to protect donor intent and the public’s interest in charitable assets.

With regard to subsection (d), the Drafting Committee concluded that an institution should not be required to give notice to donors.  Subsection (d) can only be used for an old and small fund.  Locating a donor who contributed to the fund more than 20 years earlier may be difficult and expensive.  If multiple donors each gave a small amount to create a fund 20 years earlier, the task of locating all of those donors would be harder still.  The Drafting Committee concluded that an institution’s concern for donor relations would serve as a sufficient incentive for notifying donors when donors can be located.

35-10-207. Reviewing compliance.

Compliance with this part is determined in light of the facts and circumstances existing at the time a decision is made or action is taken, and not by hindsight.

Acts 2007, ch. 186, § 7.

35-10-208. Application to existing institutional funds.

This part applies to institutional funds existing on or established after July 1, 2007. As applied to institutional funds existing on July 1, 2007, this part governs only decisions made or actions taken on or after July 1, 2007.

Acts 2007, ch. 186, § 8.

35-10-209. Relation to Electronic Signatures in Global and National Commerce Act.

This part modifies, limits, and supersedes the Electronic Signatures in Global and National Commerce Act (15 U.S.C. § 7001 et seq.), but does not modify, limit, or supersede § 101 of that act (15 U.S.C. § 7001(a)), or authorize electronic delivery of any of the notices described in § 103 of that act (15 U.S.C. § 7003(b)).

Acts 2007, ch. 186, § 9.

35-10-210. Uniformity of application and construction.

In applying and construing the uniform act set out in this part, consideration must be given to the need to promote uniformity of the law with respect to its subject matter among states that enact it.

Acts 2007, ch. 186, § 10.

Chapter 11
Fundraising for Catastrophic Illnesses

35-11-101. Funds placed in trust — Trustee.

  1. All funds raised to meet the medical or related expenses of a named individual suffering from a catastrophic illness shall be placed in trust with a bank or trust company organized and doing business under the laws of any state or territory of the United States, including the District of Columbia, and authorized to do business in this state. The trustee of this trust shall be either an individual, or a bank or trust company. The funds placed with a bank or trust company shall be considered to be held in trust, and the bank or trust company considered a trustee, as those terms are used in this chapter, if the bank or trust company maintains the funds in its name as custodian for the benefit of the injured individual, and limits disbursements to those for which the funds are raised or that are permitted by §§ 35-11-103 and 35-11-105.
  2. As used in this chapter, “catastrophic illness” includes organ transplants.

Acts 1989, ch. 386, § 1; 2007, ch. 430, § 2.

Cross-References. Certain fundraising deemed unlawful, § 35-11-111.

Charitable trusts, title 35, ch. 9.

35-11-102. Trust relationship prerequisite to accepting contributions — Beneficiaries.

  1. Before accepting any contributions for such fundraising activities, the organizer or promoter shall enter into a trust relationship with a bank or trust company or shall establish a trust in the name of an individual, “  [name of beneficiary] trust,  trustee”, or words to the same effect; provided, that if in violation of this chapter contributions are accepted prior to entering into the trust relationship, then those contributions shall be placed in trust immediately upon establishment of the required trust relationship.
  2. The beneficiary of the trust shall be the named individual for whom the funds are being raised.
  3. Contingent beneficiaries shall be selected as provided in § 35-11-103.
  4. On the establishment of a trust for purposes regulated by this chapter, the trustee shall file written notice of the establishment of the trust on forms prescribed by the secretary of state with the division of charitable solicitation in the office of the secretary of state. No person or entity may solicit funds on behalf of an individual with a catastrophic illness that is subject to this chapter prior to the filing of this notice with the division. For any trust regulated under this chapter on July 1, 2007, the notice shall be filed on or before August 1, 2007.
  5. A trustee, other than a bank or trust company acting as trustee, shall file an accounting of the trust with the division of charitable solicitations each year on the anniversary of the establishment of the trust.

Acts 1989, ch. 386, § 1; 2007, ch. 430, §§ 3, 6.

Cross-References. Certain fundraising deemed unlawful, § 35-11-111.

35-11-103. Transfer of remaining funds — Contingent beneficiaries.

  1. If the expenses of the illness of the beneficiary are less than the funds held in trust or the beneficiary dies before the funds held in trust are depleted, any remaining balance shall be transferred to the contingent beneficiary.
  2. When the trust is established, the named beneficiary shall select the manner in which a contingent beneficiary shall be named. If the named beneficiary is a minor or is incompetent, the parent or guardian shall select the manner in which a contingent beneficiary shall be named. The selection of the contingent beneficiary shall be made as follows:
    1. An institution involved in research to find a cure for a catastrophic illness shall be named;
    2. An individual, if known, who suffers from a catastrophic illness and is in need of financial help for valid reimbursable medical expenses, as defined in § 35-11-105, shall be named; or
    3. The trustee shall be authorized to select:
      1. An institution involved in research to find a cure for a catastrophic illness; or
      2. An individual who suffers from a catastrophic illness whether the name of such individual is known at the death of the named beneficiary or comes to the attention of the trustee within one (1) year after the death of the named beneficiary. The selection of this individual by the trustee is not limited to an individual for whom a trust has been established at the bank or trust company. If an individual beneficiary cannot be named within one (1) year, the option in subdivision (b)(3)(A) shall automatically occur.
  3. Modification of the selection of the contingent beneficiary may be made before the death of the named beneficiary or before the disbursement of funds to the selected contingent beneficiary.
  4. The transfer to a contingent beneficiary shall occur as quickly as is reasonably feasible.

Acts 1989, ch. 386, § 2.

35-11-104. Payment and deposit of contributions.

  1. All contributions for funds raised in accordance with this chapter made by check shall be made payable to the bank or trust company or the trust established by this chapter.
  2. All cash contributions shall be deposited as quickly as is reasonably feasible to the trust.

Acts 1989, ch. 386, § 3; 2007, ch. 430, § 4.

35-11-105. Disbursement of funds — Valid reimbursable medical expenses.

  1. Funds shall be disbursed by the trustee upon the presentation of a statement for valid reimbursable medical expenses incurred by the named individual for the treatment of the catastrophic illness and for the payment of reasonable solicitation costs and expenses, when appropriate, incurred by the organizer, promoter or solicitor.
  2. “Valid reimbursable medical expenses” are those deductible medical expenses described in the Internal Revenue Code (U.S.C. title 26).

Acts 1989, ch. 386, § 3; 2007, ch. 430, § 5.

35-11-106. Powers of institutions apply to trusts.

All powers and authority that are conferred on banks and trust companies in the administration and maintenance of trust funds in those institutions shall also apply to trusts created by this chapter.

Acts 1989, ch. 386, § 3.

35-11-107. Civil penalties — Appeal.

In addition to any other penalty or remedy available under law, the secretary of state or the designee of the secretary may assess a civil penalty, pursuant to § 48-101-514, against any person or entity that violates a provision of this chapter. The person or entity against whom the penalty is assessed shall have appeal rights pursuant to § 48-101-514.

Acts 2007, ch. 430, § 7.

35-11-108. Right to inspect records for trusts.

The secretary of state or the secretary's designee shall have the right to inspect the records for trusts established under this part, subject to title 45, chapter 10 and the Federal Right to Financial Privacy Act (12 U.S.C. § 3401 et seq.)

Acts 2007, ch. 430, § 8.

35-11-109. Subpoena power.

The secretary of state or the secretary's designee shall have the right to issue subpoenas to obtain records relevant to a solicitation or a trust established under this part, subject to title 45, chapter 10 and the Federal Right to Financial Privacy Act (12 U.S.C. § 3401 et seq.)

Acts 2007, ch. 430, § 9.

35-11-110. Rules and regulations.

The secretary of state may adopt rules and regulations to carry out this chapter in accordance with the Uniform Administrative Procedures Act, compiled in title 4, chapter 5.

Acts 2007, ch. 430, § 10.

35-11-111. Unlawful fundraising.

  1. It is an offense for any fundraising to occur for the purposes described in §§ 35-11-101 and 35-11-102 in violation of this chapter.
  2. It is an offense for trust funds raised for the purposes described in §§ 35-11-101 and 35-11-102 to be distributed in violation of this chapter.
  3. A violation of subsection (a) or (b) is a Class B misdemeanor.

Acts 1989, ch. 386, § 4; 2007, ch. 430, § 1.

Cross-References. Penalty for Class B misdemeanor, § 40-35-111.

35-11-112. Exemptions.

    1. This chapter shall not apply to any nonprofit corporation that is:
      1. Incorporated under the laws of Tennessee;
      2. Exempt from federal income taxation under 26 U.S.C. § 501(c)(3); and
      3. Requested by a patient or a patient's family to raise funds for an organ transplant for a specific individual.
    2. Any funds remaining in a particular account shall revert to the general fund of the corporation to be used to assist other similarly situated persons.
    1. This chapter shall not apply to any nonprofit corporation that:
      1. Is incorporated under the laws of Tennessee and is exempt from federal income taxation under 26 U.S.C. § 501(c)(3); and
      2. Solicits and accepts contributions of funds for the purpose of providing minors suffering from a catastrophic illness with nonmedical gifts or benefits to fulfill a desire or wish of the minor.
    2. A portion of such funds may be used to provide appropriate adult supervision if required by the gift.
    3. Any such funds raised for a particular minor and unexpended shall revert to the general fund of the corporation to be used to provide gifts or benefits for a similar minor.

Acts 1989, ch. 386, §§ 5, 6.

Chapter 12
Uniform Transfer on Death Security Registration

35-12-101. Short title.

This chapter shall be known and may be cited as the “Uniform Transfer on Death Security Registration Act.”

Acts 1995, ch. 471, § 1.

35-12-102. Chapter definitions.

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

  1. “Beneficiary form” means a registration of a security which indicates the present owner of the security and the intention of the owner regarding the person who will become the owner of the security upon the death of the owner;
  2. “Devisee” means any person designated in a will to receive a disposition of real or personal property;
  3. “Heirs” means those persons, including the surviving spouse, who are entitled under the statutes of intestate succession to the property of a decedent;
  4. “Person” means an individual, a corporation, an organization, or other legal entity;
  5. “Personal representative” includes executor, administrator, successor personal representative, special administrator, and persons who perform substantially the same function under the law governing their status;
  6. “Property” includes both real and personal property or any interest therein and means anything that may be the subject of ownership;
  7. “Register,” including its derivatives, means to issue a certificate showing the ownership of a certificated security or, in the case of an uncertificated security, to initiate or transfer an account showing ownership of securities;
  8. “Registering entity” means a person who originates or transfers a security title by registration, and includes a broker maintaining security accounts for customers and a transfer agent or other person acting for or as an issuer of securities;
  9. “Security” means a share, participation, or other interest in property, in a business, or in an obligation of an enterprise or other issuer, and includes a certificated security, an uncertificated security, and a security account;
  10. “Security account” means a:
    1. Reinvestment account associated with a security, a securities account with a broker, a cash balance in a brokerage account, cash, interest, earnings, or dividends earned or declared on a security in an account, a reinvestment account, or a brokerage account, whether or not credited to the account before the owner's death;
    2. Custody account or an investment management account with a trust company or a trust division of a bank with trust powers, including the securities in the account, a cash balance in the account, cash, cash equivalents, interest, earnings, or dividends earned or declared on a security in the account, whether or not credited to the account before the owner's death; or
    3. Cash balance or other property held for or due to the owner of a security as a replacement for or product of an account security, whether or not credited to the account before the owner's death; and
  11. “State” includes any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, and any territory or possession subject to the legislative authority of the United States.

Acts 1995, ch. 471, § 1; 2012, ch. 562, § 1.

35-12-103. Who may obtain beneficiary form — Owners hold as joint tenants.

Only individuals whose registration of a security shows sole ownership by one (1) individual or multiple ownership by two (2) or more with right of survivorship, rather than as tenants in common, may obtain registration in beneficiary form. Multiple owners of a security registered in beneficiary form hold as joint tenants with right of survivorship, as tenants by the entireties, or as owners of community property held in survivorship form, and not as tenants in common.

Acts 1995, ch. 471, § 1.

35-12-104. Authorization.

A security may be registered in beneficiary form if the form is authorized by this or a similar statute of the state of organization of the issuer or registering entity, the location of the registering entity's principal office, the office of its transfer agent or its office making the registration, or by this or a similar statute of the law of the state listed as the owner's address at the time of registration. A registration governed by the law of a jurisdiction in which this or similar legislation is not in force or was not in force when a registration in beneficiary form was made is nevertheless presumed to be valid and authorized as a matter of contract law.

Acts 1995, ch. 471, § 1.

35-12-105. Designation.

A security, whether evidenced by certificate or account, is registered in beneficiary form when the registration includes a designation of a beneficiary to take the ownership at the death of the owner or the deaths of all multiple owners.

Acts 1995, ch. 471, § 1.

35-12-106. Evidence of beneficiary form.

Registration in beneficiary form may be shown by the words “transfer on death” or the abbreviation “TOD,” or by the words “pay on death” or the abbreviation “POD,” after the name of the registered owner and before the name of a beneficiary.

Acts 1995, ch. 471, § 1.

35-12-107. No effect until death.

The designation of a TOD beneficiary on a registration in beneficiary form has no effect on ownership until the owner's death. A registration of a security in beneficiary form may be cancelled or changed at any time by the sole owner or all then surviving owners without the consent of the beneficiary.

Acts 1995, ch. 471, § 1.

35-12-108. Effect upon death.

On death of a sole owner or the last to die of all multiple owners, ownership of securities registered in beneficiary form passes to the beneficiary or beneficiaries who survive all owners. On proof of death of all owners, compliance with any applicable requirements of the registering entity, and procurement of any inheritance tax waiver as required by § 67-8-417, a security registered in beneficiary form may be reregistered in the name of the beneficiary or beneficiaries who survived the death of all owners. Until division of the security after the death of all owners, multiple beneficiaries surviving the death of all owners hold their interests as tenants in common. If no beneficiary survives the death of all owners, the security belongs to the estate of the deceased sole owner or the estate of the last to die of all multiple owners.

Acts 1995, ch. 471, § 1.

35-12-109. Registration.

  1. A registering entity is not required to offer or to accept a request for security registration in beneficiary form. If a registration in beneficiary form is offered by a registering entity, the owner requesting registration in beneficiary form assents to the protections given to the registering entity by this chapter.
  2. By accepting a request for registration of a security in beneficiary form, the registering entity agrees that the registration will be implemented on death of the deceased owner as provided in this chapter.
  3. A registering entity is discharged from all claims to a security by the estate, creditors, heirs, or devisees of a deceased owner if it registers a transfer of the security in accordance with § 35-12-108 and does so in good faith reliance on the registration, on this chapter, and on information provided to it by affidavit of the personal representative of the deceased owner, or by the surviving beneficiary or by the surviving beneficiary's representatives, or other information available to the registering entity. The protections of this chapter do not extend to a reregistration or payment made after a registering entity has received written notice from any claimant to any interest in the security objecting to implementation of a registration in beneficiary form. No other notice or other information available to the registering entity affects its right to protection under this chapter.
  4. The protection provided by this chapter to the registering entity of a security does not affect the rights of beneficiaries in disputes between themselves and other claimants to ownership of the security transferred or its value or proceeds.

Acts 1995, ch. 471, § 1.

35-12-110. Transfer.

  1. A transfer on death resulting from a registration in beneficiary form is effective by reason of the contract regarding the registration between the owner and the registering entity and this chapter and is not testamentary.
  2. This chapter does not limit the rights of creditors of security owners against beneficiaries and other transferees under other laws of this state.

Acts 1995, ch. 471, § 1.

35-12-111. Establishment of terms and conditions.

  1. A registering entity offering to accept registrations in beneficiary form may establish the terms and conditions under which it will receive requests for registrations in beneficiary form, and for implementation of registrations in beneficiary form, including requests for cancellation of previously registered TOD beneficiary designations and requests for reregistration to effect a change of beneficiary. The terms and conditions so established may provide for proving death, avoiding or resolving any problems concerning fractional shares, designating primary and contingent beneficiaries, and substituting a named beneficiary's descendants to take in the place of the named beneficiary in the event of the beneficiary's death. Substitution may be indicated by appending to the name of the primary beneficiary the letters LDPS, standing for “lineal descendants per stirpes.” This designation substitutes a deceased beneficiary's descendants who survive the owner for a beneficiary who fails to so survive, the descendants to be identified and to share in accordance with the law of the beneficiary's domicile at the owner's death governing inheritance by descendants of an intestate. Other forms of identifying beneficiaries who are to take on one (1) or more contingencies, and rules for providing proofs and assurances needed to satisfy reasonable concerns by registering entities regarding conditions and identities relevant to accurate implementation of registrations in beneficiary form, may be contained in a registering entity's terms and conditions.
  2. The following are illustrations of registrations in beneficiary form which a registering entity may authorize:
    1. Sole owner-sole beneficiary: John S. Brown TOD (or POD) John S. Brown Jr.
    2. Multiple owners-sole beneficiary: John S. Brown, Mary B Brown JT TEN TOD John S. Brown Jr.
    3. Multiple owners-primary and secondary (substituted) beneficiaries: John S. Brown, Mary B. Brown JT TEN TOD, John S. Brown Jr. SUB BENE, Peter Q. Brown or John S. Brown, Mary B. Brown JT TEN TOD, John S. Brown Jr. LDPS.

Acts 1995, ch. 471, § 1.

35-12-112. Construction.

  1. This chapter shall be liberally construed and applied to promote its underlying purposes and policy and to make uniform the laws with respect to the subject of this chapter among states enacting it.
  2. Unless displaced by the particular provisions of this chapter, the principles of law and equity supplement its provisions.

Acts 1995, ch. 471, § 1.

35-12-113. Application.

This chapter applies to registrations of securities in beneficiary form made before or after July 1, 1995, by decedents dying on or after July 1, 1995.

Acts 1995, ch. 471, § 1.

Chapter 13
Charitable Beneficiaries

35-13-101. Short title.

This chapter shall be known and may be cited as the “Tennessee Charitable Beneficiaries Act of 1997.”

Acts 1997, ch. 300, § 1.

Compiler's Notes. Acts 1997, ch. 300, § 2, provides that this chapter shall take effect upon becoming law as to all estates or trusts under administration or other entities administering a charitable gift or discretionary charitable gift, regardless of the date of the gift instrument or when administration began, the public welfare requiring it.

Cross-References. Charitable Gift Annuity Act, title 56, ch. 52.

Law Reviews.

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

Symposium: The Role of Federal Law in Private Wealth Transfer: Comment, Is Federalization of Charity Law All Bad? What States Can Learn from the Internal Revenue Code, 67 Vand. L. Rev. 1621 (2014).

Symposium: The Role of Federal Law in Private Wealth Transfer: In Search of the Probate Exception, 67 Vand. L. Rev. 1533 (2014).

35-13-102. Purpose — Chapter definitions.

  1. This chapter declares that the public policy of this state, as declared in its cases and statutes, favors gifts to charity that improve the general welfare through acts of philanthropy.
  2. As used in this chapter, unless the context otherwise requires:
    1. “Attorney general and reporter” means the attorney general and reporter of Tennessee or the attorney general and reporter's designee;
    2. “Charitable beneficiary” means the United States, any state that is part of the United States, or any political subdivision of a state, the District of Columbia, any corporation, trust, fraternal society or other organization described in §§ 170(b)(1)(A), 170(c), 2055(a) and 2522(a) of the Internal Revenue Code (26 U.S.C. §§ 170(b)(1)(A), 170(c), 2055(a) and 2522(a)), that is exempt from taxation under § 501(c)(3) of the Internal Revenue Code (26 U.S.C. §§ 170(b)(1)(A), 170(c), 2055(a) and 2522(a)), or any church, synagogue, other religious organization, or any other organization, entity or association to which a gift would be deductible under §§ 170(b)(1)(A), 170(c), 2055(a) and 2522(a) of the Internal Revenue Code;
    3. “Charitable gift” means any gift clearly intended for charitable purposes;
    4. “Charitable purpose” means any purpose generally considered charitable at common law, or for any charitable purpose under any section of Tennessee Code Annotated, or for any purpose described in §§ 170(b)(1)(A), 170(c), 2055(a) and 2522(a) of the Internal Revenue Code. A reference to the applicable section or sections of Tennessee Code Annotated or the Internal Revenue Code sufficiently describes the charitable purposes of the gift;
    5. “Court” means the chancery court or other court exercising equity jurisdiction or a probate court of record;
    6. “Discretionary charitable gift” means a charitable gift that has indefinite beneficiaries, objects, purposes or subjects;
    7. “Donor” means the person making the lifetime or testamentary charitable gift;
    8. “Gift instrument” means a will, deed, grant, conveyance, trust agreement, memorandum, writing or other governing document that creates the charitable gift;
    9. “Internal Revenue Code” means the Internal Revenue Code of 1986 (U.S.C. title 26); and
    10. “Tax-exempt” means that the organization, trust or beneficiary referred to is one that is described in § 501(c)(3) of the Internal Revenue Code.
  3. The words “humane,” “beneficial,” “beneficent,” “worthy,” “philanthropic,” “humanitarian” or their derivatives or similar language in the gift instrument shall be presumed to be synonyms for “charitable” as used in this chapter, unless expressly indicated not to be charitable by the context in which they are used.

Acts 1997, ch. 300, § 1.

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).

35-13-103. Gift instrument to control disposition of gift.

A gift instrument that specifies the charitable beneficiaries, objects, purposes or subjects of the charitable gift controls the disposition or administration of the charitable gift, except as provided in §§ 35-13-114 and 35-13-107.

Acts 1997, ch. 300, § 1.

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).

35-13-104. [Repealed.]

Compiler's Notes. Former § 35-13-104 (Acts 1997, ch. 300, § 1), concerning the definiteness of gift a instrument, was repealed by Acts 2004, ch. 537, § 98, effective July 1, 2004.

35-13-105. Discretionary charitable gifts.

When the donor makes a discretionary charitable gift the following provisions apply:

  1. The person to whom discretion is given shall choose the charitable beneficiaries and charitable purposes within a reasonable time after having accepted the duty to select the beneficiaries or purposes of the discretionary charitable gift.
  2. If a donor makes a testamentary discretionary charitable gift not in trust and does not expressly designate the person to select the charitable beneficiaries or the charitable purposes, the personal representative of the donor's estate shall select the beneficiaries or the charitable purposes, or both, of the gift.
  3. If a donor makes a testamentary discretionary charitable gift in trust and does not expressly designate the person to select the charitable beneficiaries or the charitable purposes, the trustee shall select the charitable beneficiaries or the charitable purposes, or both, of the gift and, if appropriate, shall establish a trust or charitable corporation or other legal entity to implement the discretionary charitable gift.
  4. If the court receives notice that the person having the discretion is not ready, willing or able to perform the selection duties within a reasonable time or to establish the trust or other organization, the court shall select the person to exercise the discretion. If the discretionary gift is in trust, the court may exercise the power granted under the Uniform Trust Code, compiled in chapter 15 of this title.

Acts 1997, ch. 300, § 1.

35-13-106. [Repealed.]

Compiler's Notes. Former § 35-13-106 (Acts 1997, ch. 300, § 1), concerning the illegality, impossibility, or impracticability of gifts, was repealed by Acts 2004, ch. 537, § 99, effective July 1, 2004.

35-13-107. Change in tax-exempt status of beneficiary.

IF:

  1. a gift made to a trust is to take effect at a date later than the date of the gift instrument; and
  2. when the gift instrument is executed, the gift to the trust would qualify for a charitable deduction under the Internal Revenue Code (26 U.S.C.), if the gift were then effective; and
  3. the trust, or beneficiary of the trust, loses its tax-exempt status before the gift takes effect; THEN

    the donor shall be presumed to have intended that the trust should be tax-exempt when the gift was to take effect, unless the donor clearly indicated in the gift instrument that the designated beneficiary should receive the gift even if the gift is not eligible for the charitable deduction. The court has jurisdiction to reform the trust by selecting another tax-exempt beneficiary, or to select another tax-exempt trust, and to select one (1) or more charitable purposes of the gift.

Acts 1997, ch. 300, § 1.

35-13-108. Validity under rules of remoteness or rule against perpetuities.

No charitable gift shall fail for remoteness of vesting or for any violation of the rule against perpetuities.

Acts 1997, ch. 300, § 1.

Law Reviews.

Symposium: The Role of Federal Law in Private Wealth Transfer: Comment, Perpetuities and the Genius of a Free State, 67 Vand. L. Rev. 1823 (2014).

35-13-109. Validity where no trustee.

No trust to which a charitable gift or a discretionary charitable gift is or has been made shall fail for lack of a trustee. If there is no trustee, the title to any trust property intended for a charitable purpose shall vest in the clerk of the court that has jurisdiction and venue of the trust as determined under § 35-13-110 until the court either appoints a trustee or orders distribution of the gift.

Acts 1997, ch. 300, § 1.

35-13-110. Attorney general and reporter to be party to court actions affecting gifts — Court approval of disposition.

  1. In all court actions directly affecting the amount, administration or disposition of a charitable gift or a discretionary charitable gift, the court may require that the attorney general and reporter be made a party to represent the charitable beneficiaries, potential charitable beneficiaries and all citizens of the state in all legal matters pertaining to the amount, administration and disposition of a charitable gift or discretionary charitable gift. The attorney general and reporter may sue and be sued, and, insofar as the suit against the attorney general and reporter is against the state, the state expressly consents to be sued. The attorney general and reporter may designate a district attorney general to prosecute or defend any court action.
  2. It is unlawful to settle any litigation concerning the validity of a charitable gift or discretionary charitable gift without first obtaining the approval of the court. The court shall approve a settlement only after determining that the interest of the people of the state, as true beneficiaries of any charitable gift, has been served.

Acts 1997, ch. 300, § 1.

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).

35-13-111. Venue of court action.

  1. If the gift instrument is a will and the estate is in administration, or if the gift under a will is not in trust, the venue of any court action is in the county in which the donor's will was or is being administered.
  2. If the gift instrument is an inter-vivos trust or a testamentary trust under a fully administered will, venue of any court action shall be in any county in which a trustee resides, or is located if not an individual, or in which a majority of the beneficiaries, or potential beneficiaries, reside or are located.
  3. If neither subsection (a) nor (b) applies, venue is in Davidson County, in a court of competent jurisdiction; provided, that the court may transfer the court action to a more convenient forum.
  4. With the consent of the court in which an action is pending, the parties may waive the venue provisions of subsections (a), (b) and (c).

Acts 1997, ch. 300, § 1.

35-13-112. Trust in violation of state or federal law.

If the department of revenue makes a written determination that the operation of a charitable trust violates § 35-9-101 or if the Internal Revenue Service makes such a written determination with respect to the corresponding provisions of the Internal Revenue Code (26 U.S.C.), and provides the written determination to the trustee, the trustee shall furnish a copy of the determination to the attorney general and reporter, and any other person may notify the attorney general and reporter of the determination. The attorney general and reporter may take any action that is deemed necessary to protect the interest of the people of the state.

Acts 1997, ch. 300, § 1.

35-13-113. Construction with other laws.

This chapter is deemed cumulative to any equitable doctrine or remedy or statute having for its object the same or similar purposes of this chapter.

Acts 1997, ch. 300, § 1.

35-13-114. Cy pres.

Section 35-15-413 shall also apply to charitable gifts, as defined in § 35-13-102, whether given before or after April 12, 2007, on the same basis as charitable trusts.

Acts 2007, ch. 24, § 34.

Chapter 14
Uniform Prudent Investor Act

35-14-101. Short title.

This chapter shall be known and may be cited as the “Tennessee Uniform Prudent Investor Act of 2002.”

Acts 2002, ch. 696, § 1.

Compiler's Notes. Acts 2002, ch. 696, § 17 provided that the Tennessee code commission is requested to include the official comments of the National Commissioners on Uniform State Laws in any publication containing the Tennessee Uniform Prudent Investor Act.

Law Reviews.

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).

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).

35-14-102. Chapter definitions.

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

  1. “Governing instrument” means:
    1. A will, deed, trust instrument or agency agreement;
    2. For purposes of subdivision (1)(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 chapter 15, part 12;
  2. “Trust” means any fiduciary relationship created by a governing instrument; and
  3. “Trustee” means any fiduciary as defined in § 35-15-103.

Acts 2002, ch. 696, § 2; 2013, ch. 390, § 2.

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.

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.

35-14-103. Prudent investor rule.

  1. Except as otherwise provided in subsection (b), a trustee who invests and manages trust assets owes a duty to the beneficiaries of the trust to comply with the prudent investor rule set forth in this chapter.
  2. The prudent investor rule, a default rule, may be expanded, restricted, eliminated, or otherwise altered by the provisions of a trust. A trustee is not liable to a beneficiary to the extent that the trustee acted in reliance on the provisions of the trust.

Acts 2002, ch. 696, § 3.

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 [§§ 35-14-10435-14-111] 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).

35-14-104. Standard of care — Portfolio strategy — Risk and return objectives.

  1. A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.
  2. A trustee's investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.
  3. Among circumstances that a trustee may consider in investing and managing trust assets the following are relevant to the trust or its beneficiaries:
    1. General economic conditions;
    2. The possible effect of inflation or deflation;
    3. The expected tax consequences of investment decisions or strategies;
    4. The role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property;
    5. The expected total return from income and the appreciation of capital;
    6. Other resources of the beneficiaries;
    7. Needs for liquidity, regularity of income, and preservation or appreciation of capital; and
    8. An asset's special relationship or special value, if any, to the purposes of the trust or to one (1) or more of the beneficiaries.
  4. A trustee shall make a reasonable effort to verify facts relevant to the investment and management of trust assets.
  5. In addition to the permissible investments listed in §§ 35-3-102 — 35-3-111, a trustee may invest in any kind of property or type of investment consistent with the standards of this chapter.
  6. A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee's representation that the trustee has special skills or expertise, has a duty to use those special skills or expertise.
  7. The powers granted by this section to trustees, guardians and other fiduciaries shall be in addition to the powers existing under other provisions of this code authorizing investments by fiduciaries.

Acts 2002, ch. 696, § 4.

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).

35-14-105. Diversification.

  1. A trustee shall diversify the investments of the trust:
    1. Unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying, or
    2. Except as otherwise provided in subsection (b).
    1. In the absence of express provisions to the contrary in the governing instrument, a fiduciary may without liability continue to hold property received into a trust at its inception or subsequently added to it or acquired pursuant to proper authority if and as long as the fiduciary, in the exercise of good faith and reasonable prudence, discretion and intelligence, may consider that retention is in the best interest of the trust and its beneficiaries or in furtherance of the goals of the trustor as determined from that instrument. Such property may include capital stock in the corporate fiduciary and stock in any corporation controlling, controlled by or under common control with such fiduciary; and the fiduciary may acquire additional shares of such stock by stock dividends, stock splits, exchanges and conversions for other stock or debentures and exercise of rights to acquire stock of the corporation or another corporation acquiring the stock of the corporation by merger, consolidation or reorganization.
    2. In the absence of express provisions to the contrary in the governing instrument, a deposit of trust funds at interest in any bank, savings and loan association or other financial institution (including the fiduciary and an affiliated depository institution) shall be a qualified investment to the extent that such deposit is insured under any present or future law of the United States. The fiduciary may also hold deposits in such institutions without interest in reasonable amounts and for reasonable times for operating expenses, anticipated distributions and pending investments.
    1. Notwithstanding any other provision of this chapter to the contrary, and except as otherwise provided in the governing instrument, the duties of a trustee regarding the acquisition, retention or ownership of a contract of insurance on the life of the grantor of the trust, or on the lives of the grantor and the grantor's spouse, children, grandchildren, or parents, do not include a duty to:
      1. Determine whether any contract of life insurance in the trust, or to be acquired by the trust, is or remains a proper investment;
        1. As to the type of insurance contract;
        2. As to the quality of the insurance company;
        3. Or otherwise.
      2. Diversify the investment; or
      3. Exercise any policy options, rights, or privileges available under any contract of life insurance in the trust, including any right to borrow the cash value or reserve of the policy, acquire a paid-up policy, or convert to a different policy.
    2. The trustee is not liable to the beneficiaries of the contract of insurance or to any other party for loss arising from the absence of these duties regarding insurance contracts under this subsection (c).

Acts 2002, ch. 696, § 5.

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…”

35-14-106. Duties at inception of trusteeship.

Within a reasonable time after accepting a trusteeship or receiving trust assets, a trustee shall review the trust assets and make and implement decisions concerning the retention and disposition of assets, in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust, and with the requirements of this chapter.

Acts 2002, ch. 696, § 6.

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.

35-14-107. Loyalty.

A trustee shall invest and manage the trust assets solely in the interest of the beneficiaries.

Acts 2002, ch. 696, § 7.

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.”

35-14-108. Impartiality.

If a trust has two (2) or more beneficiaries, the trustee shall act impartially in investing and managing the trust assets, taking into account any differing interests of the beneficiaries.

Acts 2002, ch. 696, § 8.

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).

35-14-109. Investment costs.

In investing and managing trust assets, a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee.

Acts 2002, ch. 696, § 9.

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).

35-14-110. Reviewing compliance.

Compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee's decision or action and not by hindsight.

Acts 2002, ch. 696, § 10.

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.

35-14-111. Delegation of investment and management functions.

  1. A trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances. The trustee shall exercise reasonable care, skill, and caution in:
    1. Selecting an agent;
    2. Establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and
    3. Periodically reviewing the agent's actions in order to monitor the agent's performance and compliance with the terms of the delegation.
  2. In performing a delegated function, an agent owes a duty to the trust to exercise reasonable care to comply with the terms of the delegation.
  3. A trustee who complies with the requirements of subsection (a) is not liable to the beneficiaries or to the trust for the decisions or actions of the agent to whom the function was delegated.
  4. By accepting the delegation of a trust function from the trustee of a trust that is subject to the law of this state, an agent submits to the jurisdiction of the courts of this state.

Acts 2002, ch. 696, § 11.

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.

35-14-112. Language invoking standard of act.

The following terms or comparable language in the provisions of a trust, unless otherwise limited or modified, authorizes any investment or strategy permitted under this chapter: “investments permissible by law for investment of trust funds,” “legal investments,” “authorized investments,” “using the judgment and care under the circumstances then prevailing that persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital,” “prudent man rule,” “prudent trustee rule,” “prudent person rule,” and “prudent investor rule.”

Acts 2002, ch. 696, § 12.

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.

35-14-113. Application to existing trusts.

  1. This chapter applies to trusts existing on and created after July 1, 2002. As applied to trusts existing on July 1, 2002, this chapter governs only decisions or actions occurring after that date.
  2. This section shall not apply in any situation governed by the Uniform Veterans Guardianship Act, compiled in title 34, chapter 5.

Acts 2002, ch. 696, § 13.

35-14-114. Court authority.

Nothing in this chapter abrogates or restricts the power of an appropriate court in proper cases to direct or permit the fiduciary to deviate from the terms of the governing instrument or restrains a fiduciary from taking any action regarding the making or retention of investments.

Acts 2002, ch. 696, § 14.

Chapter 15
Tennessee Uniform Trust Code

Part 1
General Provisions and Definitions

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).

2013 RESTATED COMMENTS TO OFFICIAL TEXT

Use of Terms — Controlling Law and Comments

Throughout these comments, whether in upper or lower case, the following terms apply:

“Comments,” when not preceded by or otherwise containing a reference to the comments of some matter other than these comments, mean these comments.

“Title,” “Chapter” and “Part” respectively mean: a title of the Tennessee Code; a chapter of its relevant title therein; and a part of its relevant chapter therein.

“Title 35” means title 35 of the Tennessee Code.

“Tennessee Trust Statutes” mean any statute, together with the comments thereto, found in title 35, including but not limited to: Chapter 6, Tennessee’s adoption of the Uniform Principal and Income Act (“Tennessee Uniform Principal and Income Act”); Chapter 14, the Tennessee Uniform Prudent Investor Act of 2002 (“Tennessee Uniform Prudent Investor Act”); Chapter 15, the Tennessee Uniform Trust Code (“Tennessee Uniform Trust Code”); Chapter 16, the Tennessee Investment Services Trust Act of 2007 (Tennessee Investment Services Trust Act”); and Chapter 17, the Tennessee Community Property Trust Act of 2010 (“Tennessee Community Property Trust Act”).

“Tennessee law,” individually and collectively, means any code, act, statute or law (together with any comments to such) of the state of Tennessee; or the holding or ruling of any court, judicial or administrative body of the state of Tennessee.

“Uniform law,” “uniform code,” “uniform act” or “uniform legislation,” individually and collectively, mean any uniform code, act, law or other legislation (together with any amendments and comments to such) proposed for adoption by the Uniform Law Commission (“ULC,” also known as the National Conference of Commissioners on Uniform State Laws or “NCCUSL,” both nomenclatures being included in the acronym “ULC – NCCUSL,” sometimes referred to in these comments as “commission” and the members of which sometimes referred to in the these comments as “commissioners”). Regardless of whether or not any of the Tennessee trust statutes were or are based on any uniform law, code or act, such Tennessee trust statutes are not included within the meaning of any of the terms uniform law, uniform code or uniform act; the Tennessee trust statutes being a distinct and integrated set of trust laws, separate therefrom.

“Uniform trust code” means the Uniform Trust Code (together with any amendments and comments to such) pro-posed for adoption by ULC – NCCUSL.

“Section,” as well as any other subdivision of any matter, when not preceded by or otherwise containing a reference to the terms “Tennessee,” “Tennessee Code” or “T.C.A.,” means a section or other subdivision of legislation (or any other matter compiled by number), other than the sections and subdivisions thereof contained in the Tennessee Code. When the word section is followed by a number between 101 and 1106 and contains no other words modifying it or otherwise referencing it to a specific matter compiled by numbers, section means a section of the Uniform Trust Code as proposed for adoption by ULC – NCCUSL.

“Restatement” means one or more restatements of the law (together with any comments thereto), individually and collectively, as such are published by the American Law Institute.

“Foreign jurisdiction” means the same as does such term in T.C.A. § 35-15-103.

“Foreign law,” individually and collectively, means any code, act, statute or law (together with any comments to such) of any foreign jurisdiction; or the holding or ruling of any court, judicial or administrative body of any foreign jurisdiction.

“Other law,” individually and collectively, means any foreign law; any uniform law, code or act; and any restatement.

Throughout these comments any reference to a code, act, statute, law or other holding, when not preceded by or otherwise containing a reference to the word “Tennessee,” an abbreviation relative to such reference including the letters “T.C.A.” or a citation to the ruling of any court, judicial or administrative body of the state of Tennessee, refers to other law and not to Tennessee law.

Controlling Law and Controlling Comments

As originally adopted, numerous provisions of title 35, chapters 6, 14 and 15 were modified and diverge, in some cases significantly, from their respective uniform codes as well as related restatements. Moreover, there are no uniform code provisions addressing the subjects covered by title 35, chapters 16 and 17. Finally, since their initial adoption, various amendments to the Tennessee trust statutes have also been enacted. For example since its initial adoption in 2004, the Tennessee Uniform Trust Code underwent amendment in 2005, substantial amendment in 2007, further amendment in 2010 and substantial amendment in 2013. This has resulted in further divergence from uniform law and related restatements, such divergence sometimes being significant. This 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.

Accordingly, regardless of the fact that throughout these comments references are made to other law, including various uniform acts and restatements, as well as to foreign law, none of such are controlling to the extent they conflict with Tennessee law. While attempts have been made throughout these comments to identify other law (e.g., by use of words such as “according to ULC - NCCUSL”), the fact that any such other law is not so identified does not alter the above.

Finally, relative to any other law, any cross reference to Tennessee law (e.g., by inclusion of a given section from the Tennessee Code or the changing of nomenclature of various parts of codification from that used in foreign law to that used in the Tennessee Code; such as “article” to “part;” or “section” to “subsection” or “subdivision”) does not in itself signify the Tennessee law so cross-referenced is in accord with such other law, and to the extent such other law is in conflict with the cross-referenced Tennessee law, the Tennessee law controls.

Default Rule

According to ULC - NCCUSL, most of the Uniform Trust Code consists of default rules that apply only if the terms of the trust fail to address or insufficiently cover a particular issue. Pursuant to section 105 [T.C.A. § 35-15-105 ], a drafter is free to override a substantial majority of the Code’s provisions. The relatively limited number of exceptions (called “mandatory rules”) are scheduled in subsection 105(b) [T.C.A. § 35-15-105(b) ].

It is a primary 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. Therefore, the number of mandatory rules under the Tennessee Uniform Trust Code are fewer than those found in the Uniform Trust Code. Moreover, T.C.A. § 35-15-105(a) specifically provides that the rule that states that statutes in derogation of the common law are to be strictly construed has no application to T.C.A. § 35-15-105. Finally, such section provides that, except as restricted by T.C.A. § 35-15-105(b), courts shall give maximum effect to the principle of freedom of disposition and to the enforceability of trust instruments.

Innovative Provisions

According to ULC - NCCUSL, much of the Uniform Trust Code is a codification of the common law of trusts. But the Code does contain a number of innovative provisions. Among the more significant are specification of the rules of trust law that are not subject to override in the trust's terms (section 105) [T.C.A. § 35-15-105 ], the inclusion of a comprehensive part on representation of beneficiaries (part 3) [T.C.A. §§  35-15-30135-15-305 ], rules on trust modification and termination that will enhance flexibility (sections 410-417) [T.C.A. §§ 35-15-41035-15-417 ], and the inclusion of a part collecting the special rules pertaining to revocable trusts (part 6) [T.C.A. §§ 35-15-60135-15-604 ].

Existing Uniform Laws on Trust Law Subjects

According to UCL – NCCUSL, certain older uniform acts are incorporated into the Uniform Trust Code, while other uniform acts, addressing more specialized topics, continue to be available for enactment in free-standing form. As mentioned above certain portions of the Tennessee trust statutes diverge, in some cases significantly, from the Uniform Trust Code, as well as from other uniform acts and restatements, in all cases intentionally and after significant consideration.

According to UCL – NCCUSL, the following uniform acts are incorporated into or otherwise superseded by the Uniform Trust Code:

Uniform Probate Code (UPC) Article VII. Originally approved in 1969, Article VII has been enacted in about fifteen (15) jurisdictions. Article VII, although titled ‘Trust Administration,’ is a modest statute, addressing only a limited number of topics. Except for its provisions on trust registration, Article VII is superseded by the Uniform Trust Code. Its provisions on jurisdiction are incorporated into part 2 [T.C.A. §§ 35-15-20135-15-204 ] of the Code, and its provision on trustee liability to persons other than beneficiaries are replaced by section 1010 [T.C.A. § 35-15-1010 ].

Uniform Prudent Investor Act (1994) [T.C.A. §§ 35-14-101  et seq.]. This Act has been enacted in thirty-five (35) jurisdictions. This Act, and variant forms enacted in a number of other states, has displaced the older ‘prudent man’ standard, bringing trust law into line with modern investment practice. States that have enacted the Uniform Prudent Investor Act are encouraged to recodify it as part of their enactment of the Uniform Trust Code. The Tennessee Uniform Prudent Investor Act of 2002 is codified at title 35, chapter 14 and is incorporated by reference in the Tennessee Uniform Trust Code at T.C.A. § 35-15-901.

Uniform Trustee Powers Act (1964). This Act has been enacted in sixteen (16) states. The Act contains a list of specific trustee powers and deals with other selected issues, particularly relations of a trustee with persons other than beneficiaries. The Uniform Trustee Powers Act is outdated and is entirely superseded by the Uniform Trust Code, principally at sections 815, 816, and 1012 [T.C.A. §§ 35-15-815, 35-15-816,  and 35-15-1012 ]. States enacting the Uniform Trust Code should repeal their existing trustee powers legislation.

Uniform Trusts Act (1937). This largely overlooked Act of similar name was enacted in only six (6) states, none within the past several decades. Despite a title suggesting comprehensive coverage of its topic, this Act, like Article VII of the UPC, addresses only a limited number of topics. These include the duty of loyalty, the registration and voting of securities, and trustee liability to persons other than beneficiaries. States enacting the Uniform Trust Code should repeal this earlier namesake.

According to ULC - NCCUSL, the following uniform acts are not affected by enactment of the Uniform Trust Code and do not need to be amended or repealed:

Uniform Common Trust Fund Act [T.C.A. §§ 35-4-101  et seq.]. Originally approved in 1938, this Act has been en-acted in thirty-four (34) jurisdictions. The Uniform Trust Code does not address the subject of common trust funds. In recent years, many banks have replaced their common trust funds with mutual funds that may also be available to non-trust customers. The Code addresses investment in mutual funds at subsection 802(f) [T.C.A. § 35-15-802(f)  now repealed].

Uniform Custodial Trust Act (1987). This Act has been enacted in fourteen (14) jurisdictions. This Act allows standard trust provisions to be automatically incorporated into the terms of a trust simply by referring to the Act. This Act is not displaced by the Uniform Trust Code but complements it.

Uniform Management of Institutional Funds Act (1972) [T.C.A. § 35-10-101  et seq.]. This Act has been enacted in forty-seven (47) jurisdictions. It governs the administration of endowment funds held by charitable, religious, and other eleemosynary institutions. The Uniform Management of Institutional Funds Act establishes a standard of prudence for use of appreciation on assets, provides specific authority for the making of investments, authorizes the delegation of this authority, and specifies a procedure, through either donor consent or court approval, for removing restrictions on the use of donated funds.

Uniform Principal and Income Act (1997) [T.C.A. § 35-6-101  et seq.]. The 1997 Uniform Principal and Income Act is a major revision of the widely enacted uniform act of the same name approved in 1962. Because this Act addresses issues with respect both to decedent’s estates and trusts, a jurisdiction enacting the revised Uniform Principal and In-come Act may wish to include it either as part of the Uniform Trust Code or as part of its probate laws. The Tennessee version of the Uniform Principal and Income Act is as title 35, chapter 6 and has been incorporated by reference into the Tennessee Uniform Trust Code at T.C.A. § 35-15-901.

Uniform Statutory Rule Against Perpetuities. Originally approved in 1986, this Act has been enacted in twenty-seven (27) jurisdictions. The Act reforms the durational limit on when property interests, including interests created under trusts, must vest or fail. The Uniform Trust Code does not limit the duration of trusts or alter the time when interests must otherwise vest, but leaves this issue to other state law. The Code may be enacted without change regardless of the status of the perpetuities law in the enacting jurisdiction. Tennessee has adopted a modified version of this uniform act as the Tennessee Uniform Statutory Rule Against Perpetuities at T.C.A. § 66-1-201 et seq. The Tennessee Uniform Statutory Rule Against Perpetuities differs from the uniform act in two major respects. Unlike the uniform act, the Tennessee legislation, which was effective July 1, 1994, has always generally applied retroactively as well as prospectively, while the uniform act only applies prospectively. Moreover, as to any trust created after June 30, 2007, or that becomes irrevocable after June 30, 2007, the Tennessee legislation extends the ninety (90) year term found in the uniform act to three hundred sixty (360) years. On a related note, at T.C.A. § 35-15-106(b)(1) the Tennessee Uniform Trust Code specifically abolishes the common law prohibition against accumulations of income and provides that no provision in a trust directing or authorizing accumulation of trust income is invalid.

Uniform Supervision of Trustees for Charitable Purposes Act (1954) - This Act, which has been enacted in four States, is limited to mechanisms for monitoring the actions of charitable trustees. Unlike the Uniform Trust Code, the Supervision of Trustees for Charitable Purposes Act does not address the substantive law of charitable trusts.

Uniform Testamentary Additions to Trusts Act. This Act is available in two versions: the 1960 Act, with twenty four (24) enactments; and the 1991 Act, with twenty (20) enactments through 1999. As its name suggests, this Act validates pourover devises to trusts. Because it validates provisions in wills, it is incorporated into the Uniform Probate Code, not into the Uniform Trust Code.

Role of Restatement of Trusts: According to ULC - NCCUSL, the Restatement (Second) of Trusts was approved by the American Law Institute in 1957. Work on the Restatement Third began in the late 1980s. The portion of Restatement Third relating to the prudent investor rule and other investment topics was completed and approved in 1990. A tentative draft of the portion of Restatement Third relating to the rules on the creation and validity of trusts was approved in 1996, and the portion relating to the office of trustee, trust purposes, spendthrift provisions and the rights of creditors was approved in 1999. The Uniform Trust Code was drafted in close coordination with the writing of the Restatement Third.

The Tennessee trust statutes concur that much of the Uniform Trust Code’s coordination with, and citation in its comments to, the Restatements of Trusts is appropriate. Notwithstanding such, in certain cases the Tennessee trust statutes and comments thereto, diverge, sometimes significantly, from the provisions contained in both these Restatements of Trust, as well as in restatements covering fields of law that are related to, or impact upon, trusts. This divergence was undertaken deliberately and after significant consideration.

For example, T.C.A. § 35-15-106 provides that, generally, 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 their related comments because none of such have any force or effect relative to trusts governed by the laws of Tennessee.

As a result, the Tennessee trust statutes’ retain the traditional view regarding distinctive treatment of spendthrift, mandatory, support and discretionary trusts. That view controls a number of things regarding a trust, including the Tennessee trust statutes’ retention of the traditional standard by which a trustee’s exercise or refusal to exercise discretion is judged in general, as well as regarding distributions, specifically. Therefore, the Tennessee trust statutes reject the existence of any duty of reasonableness in exercising a trustee’s discretion that is or may be implied by the Restatement (Third) of Trusts or the Uniform Trust Code. Moreover, under the Tennessee trust statutes, a beneficiary (or that beneficiary's creditors) cannot generally force a trustee to make a distribution.

Similarly, under the Tennessee trust statutes, a beneficiary’s interest in a discretionary trust is protected from anticipation or alienation by that beneficiary or that beneficiary’s creditors, even if the trust does not contain spendthrift protection language. Additionally, the Tennessee trust statutes provide that discretionary, support and most remainder interests are not property interests, but only expectancies, thereby facilitating stronger creditor protection, as well as the use of advanced transfer tax planning techniques.

Overview of Uniform Trust Code and Tennessee Uniform Trust Code Differences.

While the Uniform Trust Code consists of eleven (11) articles, the Tennessee Uniform Trust Code is comprised of twelve (12) parts. The first eleven (11) track in general format and coverage the similar articles of the Uniform Trust Code, but in some cases diverge significantly from the uniform code. Moreover, unlike in the Uniform Trust Code, part 11 of the Tennessee Uniform Trust Code contains substantive as well as transitional and effective date provisions. Part twelve (12) of the Tennessee Uniform Trust Code contains detailed provisions not found in the Uniform Trust Code that provide for true directed trusts (sometimes called multi-participant or reserved powers trusts). Although Tennessee has had statutes fully providing for true directed trusts since the late 1980s, such provisions being contained in title 35, chapter 3, they were initially only addressed in the other Tennessee trust statutes by reference. Part twelve (12) of the Tennessee Uniform Trust Code contains significantly more detailed provisions governing the operation of directed trusts than do Tennessee’s original 1980s directed trust statutes. Finally, many modifications to various other provisions of the Tennessee Uniform Trust Code and certain other provisions of the Tennessee trust statutes have been made to coordinate those provisions with such part twelve (12).

Part 1. General Provisions and Definitions.

According to UCL – NCCUSL, in addition to definitions, this part addresses miscellaneous but important topics. The Uniform Trust Code is primarily default law and can generally be modified by the provisions of a trust instrument.

This also applies to part one (1) of the Tennessee Uniform Trust Code. However, as stated above the Tennessee trust statutes stand for the principles that a settlor’s intent is paramount and that one should have the broadest freedom to dispose of assets as that person sees fit. Therefore, the Tennessee Uniform Trust Code provides settlors with significantly more freedom to draft trust terms departing from its default provisions than does the Uniform Trust Code. While certain limitations regarding that freedom still remain in T.C.A. § 35-15-105(b), those limitations are fewer in number and in certain cases, less restrictive, than in section 105 of the Uniform Trust Code. Moreover, unlike the Uniform Trust Code and Restatement (Third) of Trusts, the Tennessee Uniform Trust Code explicitly states that any purpose of a trust that is stated by a settlor in a trust instrument to be material is to be treated as material for all purposes under the Tennessee trust statutes.

Another goal of the Tennessee Uniform Trust Code is 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. Therefore, the Tennessee Uniform Trust Code allows any person having the requisite nexus (such being defined therein) with a jurisdiction to choose that jurisdiction’s law as controlling over a trust. A settlor can then designate that controlling law by including a state jurisdiction provision in a trust. When such provision designates that Tennessee law controls, Tennessee obtains jurisdiction over the trust and its law controls the validity, construction and administration of a trust (or any part thereof, as a settlor desires). In the absence of such a state jurisdiction provision, the laws of the jurisdiction where the trust was executed determine its validity and the laws of descent, while the laws of the trust’s principal place of administration determine its administration. Except as otherwise expressly provided by the terms of a governing instrument, the Tennessee Uniform Trust Code provides that such place of administration is Tennessee if all or part of such administration takes place in Tennessee. Nevertheless, by following a relatively simple procedure, the trustee (or appropriate fiduciary) of a trust may transfer the principal place of administration to another jurisdiction within or without the United States. Moreover, unlike the Uniform Trust Code under which such power can be blocked by a single qualified beneficiary, the Tennessee Uniform Trust Code requires that timely objection to the transfer be made by a majority of the qualified beneficiaries or the transfer will proceed.

Furthermore and notwithstanding provisions contained in the Restatement (Second) Conflicts of Laws, in keeping with the policy of the state of Tennessee and its overriding emphasis on settlor’s intent and freedom of disposition, the Tennessee Uniform Trust Code rejects the concept that any law governing a trust is in any way controlled by a jurisdiction's public policy or dependent upon which jurisdiction has the most significant relationship to a matter at issue.

Finally, when a state jurisdiction provision designates that Tennessee law controls, the Tennessee Uniform Trust Code explicitly provides that no foreign country has any jurisdiction, power or effect over that trust or any disposition under it. Moreover, in such case no foreign country has any power to set the trust or any of its provisions aside, or at-tempt to do so. Therefore, a foreign country’s failure to recognize trusts, or the fact a trust avoids a foreign country’s 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; are irrelevant and are not respected by Tennessee. Any laws of a foreign country relative to forced heirship, legitime, forced share or similar rights are rejected and are unenforceable under the Tennessee Uniform Trust Code. Therefore, no judgment of any foreign country will be recognized or enforced by Tennessee to the extent such judgment concerns a trust having a state jurisdiction provision designating the law of Tennessee as controlling.

According to UCL – NCCUSL, in order to encourage nonjudicial resolution of disputes, the Uniform Trust Code provides more certainty for when such settlements are binding. While the Code does not prescribe the exact rules to be applied to the construction of trusts, it does extend to trusts whatever rules the enacting jurisdiction has on the construction of wills. The Uniform Trust Code, although comprehensive, does not legislate on every issue. Its provisions are supplemented by the common law of trusts and principles of equity.

While the Tennessee Uniform Trust Code generally follows this model, such code contains provisions that more easily facilitate nonjudicial resolution than does the Uniform Trust Code. Moreover, as noted above there are various provisions in the Tennessee trust statutes that specifically diverge from and override what some foreign jurisdictions perceive to be appropriate “common law or principles of equity.” A few examples of such overriding Tennessee provisions include: i) the invalidity of any common law restrictions on accumulations of income; and ii) the law relative to what constitutes a discretionary trust, the construction and interpretation of same, as well as how discretion under same should be exercised. As described above, the Tennessee trust statutes’ position on the latter issue is intentionally not in accord with the common law as such is interpreted in §§ 50, 56, 58, 59 and 60 of the Restatement (Third) of Trusts and such sections’ comments.

Part 2. Judicial Proceedings.

According to ULC - NCCUSL, this part addresses selected issues involving judicial proceedings concerning trusts, particularly trusts having contacts with more than one (1) state or country. The courts in the trust’s principal place of administration have jurisdiction over both the trustee and the beneficiaries as to any matter relating to the trust. Optional provisions on subject matter jurisdiction and venue are provided. The minimal coverage of this part was deliberate. The drafting committee concluded that most issues related to jurisdiction and procedure are not appropriate to a trust code, but are best left to other bodies of law.

In light of the fact that the Tennessee Uniform Trust Code provides greater certainty regarding controlling law and principal place of administration than does the Uniform Trust Code, the former likewise gives more certainty regarding appropriate subject matter jurisdiction and venue.

Part 3. Representation.

According to ULC - NCCUSL, this part deals with the representation of beneficiaries and other interested persons, both by fiduciaries (personal representatives, guardians and conservators), and through what is known as virtual representation. The representation principles of the part apply to settlement of disputes, whether by a court or nonjudicially. They apply for the giving of required notices. They apply for the giving of consents to certain actions. The part also authorizes a court to appoint a representative if the court concludes that representation of a person might otherwise be inadequate. The court may appoint a representative to represent and approve a settlement on behalf of a minor, incapacitated, or unborn person or person whose identity or location is unknown and not reasonably ascertainable.

While the Tennessee Uniform Trust Code generally follows this model, such code contains provisions that more easily facilitate virtual representation and more classes of persons can be so represented than under the Uniform Trust Code. For example, the Tennessee Uniform Trust Code only requires that there be no material  conflict of interest be-tween the representative and the person(s) represented. On the other hand the Uniform Trust Code has no such materiality threshold, thereby more often precluding virtual representation. Also under the Tennessee Uniform Trust Code, remote descendants can be so represented and those who are subject to any  power of appointment may be represented by the power holder. Finally a settlor or the beneficiaries can designate in writing a person or persons who can represent and bind beneficiaries.

Part 4. Creation, Validity, Modification and Termination of Trust.

According to ULC - NCCUSL, this part specifies the requirements for creating, modifying and terminating trusts. Most of the requirements relating to creation of trusts (sections 401 through 409 [T.C.A. §§ 35-15-40135-15-409 ]) track traditional doctrine, including requirements of intent, capacity, property, and valid trust purpose. The Uniform Trust Code articulates a three-part classification system for trusts: noncharitable, charitable, and honorary. Noncharitable trusts, the most common type, require an ascertainable beneficiary and a valid purpose. Charitable trusts, on the other hand, by their very nature are created to benefit the public at large. The so called honorary or purposes trust, although unenforceable at common law, is valid and enforceable under the Uniform Trust Code despite the absence of an ascertainable beneficiary. The most common example is a trust for the care of an animal.

Sections 410 through 417 [T.C.A. §§ 35-15-41035-15-417 ] provide a series of interrelated rules on when a trust may be terminated or modified other than by its express terms. The overall objective of these sections is to enhance flexibility consistent with the principle that preserving the settlor’s intent is paramount. Termination or modification may be allowed upon beneficiary consent if the court concludes that the trust or a particular provision no longer serves a material purpose or if the settlor concurs; by the court in response to unanticipated circumstances or to remedy ineffective administrative terms; or by the court or trustee if the trust is of insufficient size to justify continued administration under its existing terms. Trusts may be reformed to correct a mistake of law or fact, or modified to achieve the settlor’s tax objectives. Trusts may be combined or divided. Charitable trusts may be modified or terminated under cy pres to better achieve the settlor’s charitable purposes.

While the Tennessee Uniform Trust Code generally follows this model, such code contains provisions that, relative to the Uniform Trust Code: allow broader trust purposes; better facilitate the assurance of settlor’s intent; extend the enforceable periods of purpose trusts and trusts for the care of animals; as well as better facilitate the modification, termination combination or division of trusts.

Part 5. Creditor’s Claims; Spendthrift and Discretionary Trusts.

According to ULC - NCCUSL, this part addresses the validity of a spendthrift provision and other issues relating to the rights of creditors to reach the trust to collect a debt. To the extent a trust is protected by a spendthrift provision, a beneficiary’s creditor may not reach the beneficiary’s interest until distribution is made by the trustee. To the extent not protected by a spendthrift provision, a creditor can reach the beneficiary’s interest, subject to the court’s power to limit the award. Certain categories of claims are exempt from a spendthrift restriction, including certain governmental claims and claims for child support or alimony. Other issues addressed in this part include creditor claims against discretionary trusts; creditor claims against a settlor, whether the trust is revocable or irrevocable; and the rights of creditors when a trustee fails to make a required distribution within a reasonable time.

The provisions of part five (5) of the Tennessee Uniform Trust Code diverge, in many cases significantly, from the provisions contained in Uniform Trust Code, as well as from the Restatement (Third) of Trusts, on which much of part 5 of the Uniform Trust Code was based.

Part five (5) of the Tennessee Uniform Trust Code offers far more creditor protection to trusts and their beneficiaries than does the Uniform Trust Code or the Restatement (Third) of Trusts. This is achieved in a number of ways, some of which are enumerated hereafter.

Relative to spendthrift trusts, T.C.A. § 35-15-503 contains no exception creditors other than the state of Tennessee, and then only to the extent that a statute of the state of Tennessee so provides. The protection given by the Tennessee Uniform Trust Code to discretionary trusts is far broader than that provided by the Uniform Trust Code and, unlike under the latter, there are no exception creditors relative to an interest held in a discretionary trust.

When combined with the Tennessee Uniform Trust Code’s definition of what constitutes a discretionary trust, only a limited number of the types of trusts typically used for donative purposes do not obtain the benefit of such creditor protection. This is in keeping with the objective of the Tennessee trust statutes that a settlor should have the broadest freedom to dispose of their assets to whom, and in the manner, they wish (and to only those persons, and in only such manner, as a settlor wishes). Such creditor protection respects that the assets in the trust initially belonged to the settlor and not the beneficiary. When those assets are put in a discretionary trust, the beneficiary obtained only beneficial rights that do not rise to the status of a property interest and, therefore, cannot be reached by creditors. Under the Tennessee trust statutes, an irrevocable special needs trust is shielded from claims by creditors of the settlor regardless of whether or not such trust complies with the provisions of chapter 16, the Tennessee Investment Services Trust Act. Finally, any interest of a beneficiary under a support trust likewise does not rise to the status of a property interest and is therefore protected from creditors, even absent a spendthrift provision. Notwithstanding the above, the Tennessee trust statutes still respect the right of beneficiaries of support and mandatory interests to obtain redress for a trustee’s failure to respect such interests due such beneficiaries under them. However, no creditor of any such beneficiary has such right and can only reach a distribution made from such interests after the distribution is made and then in only specified circumstances.

Part 6. Revocable Trusts.

According to ULC - NCCUSL, this short part deals with issues of significance not totally settled under current law. The basic policy of this part and of the Uniform Trust Code in general is to treat the revocable trust as the functional equivalent of a will. The part specifies a standard of capacity, provides that a trust is presumed revocable unless its terms provide otherwise, prescribes the procedure for revocation or amendment of a revocable trust, addresses the rights of beneficiaries during the settlor's lifetime, and provides a statute of limitations on contests.

Part 6 of the Tennessee Uniform Trust Code generally follows this model. However, the Tennessee Uniform Trust Code makes it clear that no inter vivos trust need be executed with the formalities of a will and, relative to the Uniform Trust Code, has a shorter statute of limitation on contests. Part 6 of the Tennessee Uniform Trust Code also contains certain other differences relative to the Uniform Trust Code, such differences being in conformity with the spirit of the overall objectives of the Tennessee trust statutes.

Part 7. Office of Trustee.

According to ULC - NCCUSL, this part contains a series of default rules dealing with the office of trustee, all of which may be modified in the terms of the trust. Rules are provided on acceptance of office and bonding. The role of the cotrustee is addressed, including the extent that one cotrustee may delegate to another, and the extent to which one (1) cotrustee can be held liable for actions of another trustee. Also covered are changes in trusteeship, including the circumstances when a vacancy must be filled, the procedure for resignation, the grounds for removal, and the process for appointing a successor trustee. Finally, standards are provided for trustee compensation and reimbursement for expenses.

Part 7 of the Tennessee Uniform Trust Code generally follows this model. However, such part is augmented by numerous provisions to provide default rules that are substantially equivalent to those dealing with the office of a trustee, but that apply to other fiduciaries that exist in the case of a directed trust governed by Part 12. Moreover, all fiduciaries have a statutory duty to keep all other fiduciaries reasonably informed about the administration of the trust to the extent such other fiduciaries do not have such knowledge. This is to assure that all such fiduciaries have the material information necessary to perform their respective duties.

Part 8. Duties and Powers of Trustee.

According to ULC - NCCUSL, this part states the fundamental duties of a trustee and enumerates the trustee’s powers. The duties listed are not new, although some of the particulars have changed over the years. This part was drafted where possible to conform to the Uniform Prudent Investor Act. The Uniform Prudent Investor Act prescribes a trustee’s responsibilities with respect to the management and investment of trust property. This part also addresses a trustee’s duties regarding distributions to beneficiaries.

Part 8 of the Tennessee Uniform Trust Code generally follows this model. However, such part is augmented by numerous provisions to: add flexibility; conform to the Tennessee Uniform Trust Code’s extensive directed trust provisions; allow for “quiet” trusts under certain circumstances; require any beneficiary who is eligible to receive information concerning the trust to agree in writing to keep confidential any such information that is confidential before receiving same; and require the various fiduciaries to keep each other reasonably informed with the information necessary for them to respectively carry out their duties.

Moreover, due to the Tennessee Uniform Trust Code’s view on the distinctions among mandatory, support and discretionary interests, this part of such code contains significant variances from the Uniform Trust Code relative to the exercise of powers over such interests.

Finally, the Tennessee Uniform Trust Code contains a detailed but flexible statutory provision expressly authorizing a trustee having a power to invade principal to do so by appointing such principal in trust; i.e., a “decanting” power.

Part 9. Uniform Prudent Investor Act — Uniform Principal and Income Act.

According to ULC - NCCUSL, this part provides a place for a jurisdiction to enact, reenact or codify its version of the Uniform Prudent Investor Act [ULC - NCCUSL does not mention the Uniform Principal and Income Act relative to its part 9]. States adopting the Uniform Trust Code which have previously enacted the Uniform Prudent Investor Act are encouraged to reenact their version of the Prudent Investor Act in this part.

Both the Tennessee Uniform Prudent Investor Act of 2002, title 35, part 14, T.C.A. § 35-14-101 et seq., and Tennessee's version of the Uniform Principal and Income Act, title 35, part 6, T.C.A. § 35-6-101 et seq., were adopted prior to the Tennessee Uniform Trust Code. As with the Tennessee Uniform Trust Code, both have been amended since their respective enactments and in certain cases, both diverge, sometimes significantly, from their respective uniform codes, as well as from various restatements. Instead of “reenacting” the Tennessee Uniform Prudent Investor Act of 2002 in part 9, the Tennessee Uniform Trust Code incorporates therein by reference such act, codified at title 35, part 14, as well as Tennessee’s version of the Uniform Principal and Income Act, codified at title 35, part 6.

Part 10. Liability of Trustees and Rights of Persons Dealing With Trustees.

According to ULC - NCCUSL, sections 1001 through 1009 [T.C.A. §§ 35-15-100135-15-1009 ] list the remedies for breach of trust, describe how money damages are to be determined, provide a statute of limitations on claims against a trustee, and specify other defenses, including consent of a beneficiary and recognition of and limitations on the effect of an exculpatory clause. Sections 1010 through 1013 [T.C.A. §§ 35-15-101035-15-1013 ] address trustee relations with persons other than beneficiaries. The objective is to encourage third parties to engage in commercial transactions with trustees to the same extent as if the property were not held in trust.

In the Tennessee Uniform Trust Code, T.C.A. §§ 35-15-100135-15-1009 track in general format and coverage Uniform Trust Code sections 1001 through 1009. However, T.C.A. § 35-15-1003 reverses the rule of Uniform Trust Code section 1003 and provides that absent a breach of trust, a trustee is not liable for a loss or depreciation in the value of trust property or for not having made a profit. T.C.A. § 35-15-1004 allows trustees to use trust funds to pay fees, as well as reasonable costs and expenses incurred in a nonjudicial proceeding when the parties to the proceeding agree to such in writing. Such section also provides for an award made by mediators or arbitrators of fees, costs and expenses, relative to a proceeding involving trust administration to be paid from the trust. T.C.A. § 35-15-1005 provides: for more flexibility regarding the adequacy of disclosure of facts indicating the existence of a potential claim for breach of trust; does not require a trustee to inform a beneficiary of the time after such disclosure by which any proceeding must be commenced; and shortens in other situations the statute of limitations relative to the Uniform Trust Code from five (5) years to three (3). Such section also provides similar limitations periods for actions against a trustee for breach of trust brought by the various other fiduciaries that can exist in a directed trust or similar setting and provides that if a claim is barred against all beneficiaries, such other fiduciary is likewise barred from making a claim against a trustee.

Likewise, T.C.A. §§ 35-15-101035-15-1013 track in general format and coverage Uniform Trust Code sections 1010 through 1013. However, T.C.A. §§  35-15-1010 and 35-15-1011 provide a trustee with significantly greater protection from personal liability than does the Uniform Trust Code. T.C.A. § 35-15-1013, regarding certifications of trust, diverges significantly from Uniform Trust Code section 1013.

Finally in keeping with the Tennessee trust statutes’ emphasis on freedom of disposition and settlor’s intent, T.C.A. § 35-15-1014 expressly provides for the enforceability of no-contest, in terrorem and forfeiture provisions contained in trust instruments. However, such provisions will not be enforced if the beneficiary bringing the action triggering same had probable cause to do so under grounds specified in such section. Such section also contains exceptions to enforceability of such provisions in the case of actions brought for certain other reasons, some of which include: to challenge the actions of a fiduciary to the extent that fiduciary has breached his duties; for construction or interpretation; or an agreement among persons in resolution of a matter relating to the trust.

Part 11. Miscellaneous Provisions.

According to ULC – NCCUSL, part 11 of the Uniform Trust Code is primarily an effective date provision. Moreover, the Uniform Trust Code is intended to have the widest possible application, consistent with constitutional limitations The Code applies not only to trusts created on or after the effective date, but also to trusts in existence on the date of enactment.

While the Tennessee Uniform Trust Code, as well as the Tennessee trust statutes in general, are intended to have the widest possible application, consistent with constitutional limitations, various provisions in the Tennessee trust statutes should better assure such application.

Moreover, part 11 of the Tennessee Uniform Trust Code contains multiple substantive provisions and is far more than “an effective date provision.” As covered in detail above, T.C.A. § 35-15-1101 reverses the provisions of section 1101 of the Uniform Trust Code and expressly states that, relative to the subject matter of title 35, no consideration shall be given to any need to promote uniformity among states and that such other states’ acts. Unlike the Uniform Trust Code, the Tennessee Uniform Trust Code contains no severability clause, it being intended that the Tennessee Uniform Trust Code, as well as the Tennessee trust statutes in general, be fully applicable as written.

Finally, in keeping with the Tennessee trust statutes’ emphasis on freedom of disposition and settlor’s intent, part 11 of the Tennessee Uniform Trust Code contains two sections having no corresponding provision in the Uniform Trust Code. One makes it very difficult for a settlor of a trust to be deemed an alter ego of the trustee of such trust, while the other makes it exceedingly difficult to sustain that the a settlor’s or beneficiary’s influence over a trust gives either do-minion and control over such trust.

Part 12. Miscellaneous Provisions.

As stated above, the Uniform Trust Code does not contain a part 12, nor does it contain similar provisions to those provided in part 12 of the Tennessee Uniform Trust Code. Part 12 (12) of the Tennessee Uniform Trust Code contains comprehensive and detailed provisions governing the operation of true directed trusts not found in the nominal coverage of “powers to direct” under section 808 of the Uniform Trust Code. Such Part 12 (12) also provides significantly more detailed provisions governing the operation of true directed trusts than do Tennessee’s original 1980s directed trust statutes. Finally, many modifications to various other provisions of the Tennessee Uniform Trust Code and certain other provisions of the Tennessee trust statutes have been made to coordinate those provisions with such part twelve (12).

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.

NOTES TO DECISIONS

1. Applicability.

In a dispute over lottery winnings, T.C.A. § 35-15-1005 did not apply to equitable claims of constructive and resulting trusts because the complaint did not refer to an express trust or trust created pursuant to a statute, judgment, or decree. Findley v. Hubbard, — S.W.3d —, 2018 Tenn. App. LEXIS 382 (Tenn. Ct. App. July 2, 2018).

2013 RESTATED COMMENTS TO OFFICIAL TEXT

Section Comment.

The Tennessee Uniform Trust Code, while comprehensive, applies only to express trusts. Excluded from the Code’s coverage are resulting and constructive trusts, which are not express trusts but remedial devices imposed by law. For the requirements for creating an express trust and the methods by which express trusts are created, see sections 401-402 [T.C.A. §§ 35-15-401  and 35-15-402 ]. The Tennessee Uniform Trust Code does not attempt to distinguish express trusts from other legal relationships with respect to property, such as agencies and contracts for the benefit of third parties. For the distinctions, see Restatement (Third) of Trusts §§ 2 , 5 (Tentative Draft No. 1, approved 1996); Restatement (Second) of Trusts §§ 2 , 5-16C (1959).

The Tennessee Uniform Trust Code is directed primarily at trusts that arise in an estate planning or other donative context, but express trusts can arise in other contexts. For example, a trust created pursuant to a divorce action would be included, even though such a trust is not donative but is created pursuant to a bargained-for exchange.

Moreover, an express trust can be created by an entity, including but not limited to a corporation, partnership, limited liability company or any other entity of similar type to any of such (under the laws of any state, the United States of America or any foreign country, all as such terms are defined in T.C.A. § 35-15-103). An express trust can also be created by a trust (governed under the laws of any state, the United States of America or any foreign country, all as such terms are defined in T.C.A. § 35-15-103). This could happen in a number of situations. Among other ways, a trust can create another trust due to the exercise of a trustee’s power of appointment (i.e., through a decanting), or through a power holder’s exercise of any other power of appointment. Regardless, such express trusts are covered by the Tennessee Uniform Trust Code.

Commercial trusts come in numerous forms, including trusts created pursuant to a state business trust act and trusts created to administer specified funds, such as to pay a pension or to manage pooled investments. Commercial trusts are often subject to special-purpose legislation and case law, which in some respects displace the usual rules stated in the Tennessee Uniform Trust Code. See  John H. Langbein, The Secret Life of the Trust: The Trust as an Instrument of Commerce, 107 Yale L.J. 165 (1997) .

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

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. §§ 35-15-30135-15-305 ] 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