The New Iowa Trust Code

1. The New Iowa Trust Code Sheldon F. Kurtz Percy Bordwell Professor of Law University of Iowa College of Law Presented by Iowa Law School Continuing Legal Education

2. Topics • Meaning of Trust • Formalities of Creation • Termination and Modification • Spendthrift Trusts • Revocable Trusts • Contesting Trusts • Trust Administration • Fiduciary Duties • Charitable Trusts • Rules of Construction

3. Meaning of Trust

4. Definition of Trust A legal device that separates the responsibilities of managing and administering property from the enjoyment of property

5. Definition of Trust • Includes an express private or charitable trust • Excludes: • Totten trust (A in trust for B) • Custodial arrangements • Business or investment trusts • Voting trusts • Constructive or resulting trusts (equitable remedies)

6. Trusts to Which Code Applies—Section 633.1106 • Trusts created before or after Trust Code becomes effective (7/1/00) • Generally, all proceedings concerning trusts commenced before or after effective date. • Common law of trusts applies except to extent Trust Code modifies common law rules

7. Formalities of Creation

8. Methods of Creating A Trust-Section 633.2101 • By transfer to another as trustee during settlor’s lifetime • By settlor’s will • By declaration of trust (settlor declares himself trustee for another) • Exercise of a power of appointment in favor of another as trustee • An enforceable promise by trustee to transfer property to another

9. Requirements for Validity of a Trust-Section 633.2102 • Settlor must have been competent • Settlor must have intent to create trust • Same person is not sole trustee and sole beneficiary • Trust has a definite beneficiary or beneficiaries who will be ascertained within period of rule against perpetuities unless trust is a charitable trust, an honorary trust, or trust for care of animal • A definite beneficiary includes beneficiaries named by a power to select beneficiaries granted to trustee or another person (such as by a power of appointment)

10. Meaning of “Settlor” • “Settlor” means any person, including a testator, who creates a trust • Iowa Code Section 633.1102 (13).

11. Statute of Frauds-Section 633.2103 • To be valid, trust must be evidenced by • A written instrument signed by trustee or trustee’s agent, if authorized in writing, or • A written instrument conveying the property in trust signed by the settlor or by the settlor’s agent if authorized in writing

12. When Instrument Must be Signed-Section 633.2103 • If a declaration of trust, then written instrument must be signed by settlor: • Before or at the time of declaration • After the time of declaration but before the settlor has transferred property • If a transfer in trust, written instrument must be signed: • By settlor, concurrently with or before the transfer • By trustee, concurrently with or before transfer, or after transfer but before trustee has distributed property to another person • The Iowa Trust Code appears to invalidate oral trusts as, unlike the Uniform Trust Code, it has no provision permitting proof of oral trusts.

13. Purposes for Which Trust Can be Created—Section 633.2104 • A trust may be created for any lawful private or charitable purpose • If created for a private purpose, it must be administered for the beneficiaries’ benefit

14. Honorary Trusts—Section 633.2105 • A trust for a lawful but noncharitable purpose having no definite ascertainable beneficiaries is valid so long as it is to be performed for only 21 years, even if the terms of the trust contemplate a longer duration • A trust for the care of animals living at the settlor’s death is valid and the trust terminates when no living animals described by the trust are living • Honorary trusts are enforceable by the person named in the instrument to enforce them, or absent such person, by a court appointed person.

15. Termination and Modifications

16. Termination or Modification of Trusts—Section 633.2201 • A trust terminates if: • The trust term expires • The trust purpose if fulfilled • The trust purpose becomes unlawful or impossible to fulfill • The trust is revoked • At termination, the trustee can exercise powers necessary to wind up the trust’s affairs and distribute trust property to beneficiaries

17. Modification or Termination by Settlor and All Beneficiaries—Section 633.2202 • Irrevocable trusts are terminable upon consent of settlor and all beneficiaries • A beneficiary is a person who is eligible to receive income or principal or would receive the income or principal if the trust were to terminate • Upon termination, trust property distributable as settlor and beneficiaries agree or, absent agreement, as ordered by court. • For this purpose consent of a person who may bind a beneficiary or otherwise act on beneficiary’s behalf is considered consent of beneficiary

18. Consent on Behalf of Beneficiaries—Who Can Bind Whom • Settlor with power of revocation or holder of person with general inter vivos power binds persons whose interest subject to power • Donee of general testamentary power can bind persons whose interest subject to power absent conflict of interest

19. Consent on Behalf of Beneficiaries—Who can bind Whom • The following persons absent a conflict of interest can bind others: • Conservator for ward • Trustee for beneficiaries of the trust • Personal representative for estate beneficiaries • Minors, unborn or incompetents are bound by “another person having a substantially identical interest…to the extent the person’s interest is adequately represented.” • This reflects doctrine of virtual representation

20. Modification or Termination of Irrevocable Trust if no Material Purpose-Section 633.2203 • Irrevocable trust can be terminated or modified either by court order with consent of all beneficiaries if continuance on same or different terms not necessary to carry out material purpose • A beneficiary is a person who is eligible to receive income or principal or would receive the income or principal if the trust were to terminate • Consent of a person who can bind a beneficiary is considered the beneficiary’s consent

21. Comparison to Common Law • At common law, since all beneficiaries had to consent, trust not terminable if some beneficiaries minor or unborn • E. g. A for life, then to A’s children. If A capable of having children, no termination. Under Iowa Code, termination is possible • Under Iowa case law, spendthrift clause is a material purpose. Under Uniform Trust Code, it is not. Iowa Trust Code does not purport to change the Iowa case law.

22. Modification or Termination of Administrative Provisions • Trustee or beneficiary may petition court to modify or terminate an administrative provision if: • Changed unanticipated circumstances • Continuation of trust under its terms “would defeat or substantially impair the accomplishment of the” trust’s purposes. • Or, terms should be modified to carry out purposes of the trust.

23. Trust with Uneconomically Low Value—Section 633.2205 • Court can terminate trust or modify terms of noncharitable trust or appoint new trustee if court finds that “the value of the . . .[trust] is insufficient to justify the cost of administration involved and that continuation of the trust under its existing terms would defeat or significantly impair the accomplishment of the trust purposes • No comparable provision at common law

24. Trust with Uneconomically Low Value—Section 633.2205 • Proceeding initiated by a trustee or a beneficiary • If trust terminated, trust property distributed “in accordance with the probable intention of the settlor under the circumstances.”

25. Reformation Generally; Tax Objectives—Section 633.2206 • Trust terms can be reformed to conform to settlor’s intent if failure to conform was due to mistake of fact or law and the settlor’s intent is ascertainable • Trust terms can be construed or modified in ways that do not violate settlor’s intent and to achieve the settlor’s tax objectives

26. Trust Combinations—Section 633.2207 • If two or more trusts have substantially similar terms the trustee may combine the two without court order • If they do not have substantially similar terms upon petition of trustee or beneficiary court can combine them if court “determines that administration as a single trust will not defeat or significantly impair the accomplishment of the trust purposes or the rights of the beneficiaries.” • The court order shall include a finding as to which trust provisions control • No comparable provision under the common law

27. Division of Trusts into Multiple Trusts—Section 633.2208 • Trustee can divide trust into multiple trusts with substantially similar terms and without court approval if a division will neither defeat nor substantially impair the trust purposes or the beneficiaries’ rights • Court, upon petition of trustee or beneficiary, can divide a trust into multiple trusts even if the terms are not similar if the court determines that dividing the trust is in the best interest of beneficiaries and will not defeat or substantially impair the trust purposes or beneficiaries rights. • Query: Where do the trust terms for the new trust come from? • No comparable common law rule

28. Spendthrift Trusts

29. Spendthrift Trusts, Generally—Section 633.2301 • This section validates spendthrift trusts • Unlike Uniform Trust Code, it validates them even as against the claims of unpaid alimony and child support. • Shame • Iowa Code Trust silent on validity of clause against government tax claims • Iowa Trust Code is silent on rights of creditors to reach interest of beneficiary of discretionary trust.

30. Exceptions to Spendthrift Protection—Section 633.2302 • Spendthrift provision invalidas against • Creditor of a beneficiary if beneficiary is the settlor (The self-settled trust rule) • An beneficiary’s creditor with respect to a distribution to be made upon an event terminating or partially terminating the trust • Presumably this means that when a distribution is about to be made to a beneficiary creditor can reach it. Language unclear and if so construed what is effect of such clause as against mandatory income beneficiary?

31. Self-Settled Trusts—Section 633.2303 If a settlor is the beneficiary of a trust, then: • A transferee or creditor can reach the maximum amount that the trustee could distribute to the settlor, and • If there are multiple settlors, the amount reachable cannot exceed the “portion of the trust attributable to each settlor’s contribution.

32. Revocable Trusts

33. Revocable Trusts-Competency to Create, Revoke or Modify—Section 633.3101 • Same as competency to make a will • Aggrieved persons can attack the revocable trust in the same manner as they could attack the validity of a will

34. Revocation or Modification—Section 633.3102 • Trust is revocable or modifiable unless trust instrument expressly states it is irrevocable. (Contrary to common-law rule, and rule inapplicable to pre-effective date trusts) Watch your back on this one!!!!!!!!!!!!!

35. Revocation or Modification—Section 633.3102 • If multiple settlors, each can revoke to extent of portion contributed by the settlor • A revocable trust can be revoked or modified by: • Compliance with the manner of revocation or termination set forth in the trust • If such method is not exclusive, then by a writing, other than a will, signed by settlor and delivered to trustee • By will or codicil of the settlor that refers to the trust and devises property that otherwise would have passed under the trust

36. Revocation or Modification—Section 633.3102 • Upon termination of revocable trust, property distributed as settlor directs • Settlor’s power of attorney may exercise power of revocation only if the power of attorney expressly provides • A conservator may revoke or modify a revocable trust with court approval

37. Rights of Settlor—Section 633.3103 • So long as settlor has a power to revoke, the settlor • Has all the rights of beneficiaries • Trust duties are owed to the settlor

38. Rights of Settlor’s Creditors-Section 633.3104 • Creditors of a settlor of a revocable trust can reach trust assets during settlor’s life • Creditors of estate of settlor of revocable trust can reach trust assets to pay debts and expenses to extent settlor’s estate is insufficient to pay those debts and expenses.

39. Rights of Creditors of Holder of A Presently Exercisable General Power of Appointment—Section 633.3105 • Can reach trust property to same extent creditors of settlor of a revocable trust could reach the property during donee’s life or at donee’s death.

40. Contesting Trust

41. Limitation of Contest of Trust-Section 633.3108 • Unless the provisions of 633.3109 apply: • Proceeding to contest validity of trust must be brought within 1 year of settlor’s death. • Within 6 months of settlor’s death and if validity of trust not yet being contested, trustee may distribute trust property in accordance with its terms.

42. Notice to Creditors, Spouse and Beneficiaries-Section 633.3109 • A creditor of the settlor can enforce its claims against the assets of the revocable trust within 1 year of decedent’s death unless notice is published under 633.230 or 633.304 (nonclaims statute). • If such notice is published creditors’ rights governed by those provisions. • If no 230 or 304 notice, trustee can publish notice independently to creditor and heirs advising them they can contest trust or present claims within later of 60 days or 30 days of mailing of notice.

43. Trust Administration

44. Trust Administration: Acceptance or Rejection of Trust-Section 633.4101 • A person accepts the office of trustee by: • signing the trust instrument, • signing a separate written acceptance, • knowingly accepting delivery of the trust property (unless there is a risk of damage to the trust property and acceptance is based on a willingness to preserve the trust property combined with a written rejection of the office of trustee), • exercising powers as a trustee, or • performing duties as a trustee. • A person named in a trust instrument may decline to serve as trustee in a written notification

45. Bond—Section 633.4102 • Bond is not required unless: • Expressly required in trust instrument • Bond necessary to protect interests of beneficiaries regardless of trust’s terms • Cost of bond charged to trust • Bank or trust company not required to give bond even if a contrary provision in the trust instrument

46. Actions of Co-Trustees—Section 633.4103 • Unless trust instrument otherwise provides: • Cotrustees act by majority vote • In case of impasse, any trustee can petition court to decide issue, or majority can consent to alternative dispute resolution • If vacancy occurs, remaining trustees can act as if they are the only trustees • If co-trustee unavailable to act because of absence, illness, or other temporary incapacity, remaining co-trustees can act

47. Vacancy in Office of Trusteeship—Section 633.4104 • A vacancy in the office of trustee must be filled if the trust has no trustee or the trust terms require that a vacancy in the co-trustee’s office must be filled.

48. Filling Vacancies • The vacancy shall be filled according to the following: • By the person named or described in the trust instrument becomes the trustee. • If no person is named or the named person refuses the position, the trustee shall be selected according to one of the following: • By majority vote of the adult beneficiaries and the representative of any minor/incompetent beneficiaries as defined in 633.6303. • By the court on petition of an interested person. The court shall consider people nominated by the adult beneficiaries or representatives. 633.4105. • The beneficiaries allowed to vote are those currently eligible to receive trust income or a distribution of principal if the trust was terminated at the time of the vote.

49. Resignation of Trustee—Section 633.4106 • A trustee may resign by any of the following methods: • According to the trust terms. • With consent from the person holding the power to revoke the trust. • By the consent of the adult beneficiaries if the trust is irrevocable. • By written notice from the trustee to the person holding the power to revoke the trust if the trustee’s duties are changed substantially. • By filing a petition with the court to resign.

50. Removal of Trustee-Section 633.4107 • In accordance with the terms of the trust • By petition of settlor, co-trustee, or beneficiary • For following reasons: • Committed a material breach of trust • Unfit to administer the trust • Hostility or lack of cooperation among co-trustees impairing administration of trust • Investment performance consistently and substantially substandard • Other proper cause