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The Uniform Trust Code Kevin D. Millard Millard Law Firm PC November 2004

Contents I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. Public policy themes underlying the UTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 III. Creation, validity, and revocation of trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 IV. Trust self-governance and representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 V. Rights of creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 VI. Other rules for revocable trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 VII. Trusteeship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 VIII. Powers and duties of trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 IX. Liability of trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 X. Modification and termination of trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 XI. Provisions to facilitate commercial transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 XII. Effective date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 XIII. What's the fuss about? Controversial aspects of the UTC . . . . . . . . . . . . . . . . . . . . . . . 46 Appendix A ­ UTC Text With Changes Recommended for Colorado . . . . . . . . . . . . . . . . . . . A 1 Appendix B ­ 2004 UTC Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B 1 Appendix C ­ Colorado Cases Citing the Restatements of Trusts . . . . . . . . . . . . . . . . . . . . . . C 1 I. Introduction A. Drafting the Uniform Trust Code (2000) (UTC) took seven years, beginning in 1993. The Code was approved by the National Conference of Commissioners on Uniform State Laws (NCCUSL) on August 3, 2000, and by the House of Delegates of the American Bar Association at its mid-year meeting in February, 2001. The UTC has also been approved by the Real Property, Probate and Trust Law section of the ABA and by AARP. At the time this outline is prepared, the UTC has been enacted in ten jurisdictions: District of Columbia, Kansas, Maine, Missouri, Nebraska, New Hampshire, New Mexico, Tennessee, Utah, and Wyoming. In Colorado, a committee was formed in 1997 to study the UTC. I refer to this committee throughout this outline as the Colorado UTC committee. 1. This Colorado UTC committee (a subcommittee of the Statutory Revisions Committee of the Trust and Estate Section of the Colorado Bar

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Association) submitted its report in August 2001, recommending that Colorado adopt the UTC with a few relatively minor changes. 2. The text of the UTC, with the changes recommended by the Colorado UTC committee, appears in Appendix A. The Colorado UTC Committee's full report, which is a section-by-section analysis of the UTC including the text of the UTC, the official comments, Colorado committee comments, current Colorado law, and the committee recommendations, is available to CBA Trust & Estate section members at the section website: http://www.cobar.org/group/index.cfm?EntityID=TRUST. The full text of the UTC, including the official comments and amendments that were approved by NCCUSL in 2001 and 2003, is available at the NCCUSL archives web site: http://www.law.upenn.edu/bll/ulc/ulc.htm#uta. Several additional amendments were approved at NCCUSL's 2004 annual meeting. The text of those amendments in included in Appendix B and can also be found at the NCCUSL archives web site.. The Colorado UTC committee's recommendation to adopt the UTC in Colorado was adopted by the Statutory Revisions Committee and by the Council of the Trust and Estate Section on September 13, 2001, and was subsequently approved by the Colorado Bar Association's Legislative Policy Committee. The Colorado UTC committee attempted to have the UTC introduced in the 2002 legislative session, and worked with then Senator Thiebault, the potential sponsor, but the bill was not introduced in 2002. Bills to enact the UTC were introduced in 2003 and 2004 but did not pass. It is not yet clear whether a UTC bill will be introduced in the 2005 session.

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This outline, long as it is, cannot be a comprehensive treatise on the UTC and does not attempt to cover every aspect of the UTC. Rather, it provides an overview of the structure and content of the UTC, and then discusses a number of specific issues addressed by the UTC. The outline also summarizes public policy themes that underlie the UTC. Finally, the outline discusses some of the aspects of the UTC that have proved to be controversial in states that have enacted, or are considering enacting, the UTC, and summarizes the extent to which the UTC has been amended to address some of those concerns. The UTC is the first national attempt to provide a model for a comprehensive codification of the law of trusts. David M. English, Is There a Uniform Trust Act

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in Your Future? Probate & Property 25 (Jan./Feb. 2000). (California, Georgia, Indiana, and Texas already had trust codes prior to the UTC.) F. The need for a Uniform Trust Code. 1. The impetus for a trust code arises from the fact that the use of trusts has increased substantially in recent years, coupled with a recognition that in many states the case law on trusts is thin. UTC, Prefatory Note. This has been called the "massification" or "pedestrianization" of trusts, and can be traced to the publication in 1965 of Norman F. Dacey, How to Avoid Probate. Joel C. Dobris, Changes in the Role and the Form of the Trust at the New Millennium, or, We Don't Have to Think of England Anymore, 62 Alb. L. Rev. 543, 563 (1998). The existing statutory and case law on trusts is sparse. a. As to statutory trust law in Colorado, consider, for example, how little of The Green Book: Selected Colorado Materials on Wills, Estates, Trusts, and Taxes (David K. Johns ed., Continuing Legal Education in Colorado, Inc.) is devoted to the law of trusts as opposed to the law of wills and other matters. A sense of the scarcity of Colorado case law on trusts can be gained by considering how little of James R. Wade, Colorado Law of Wills, Trusts and Fiduciary Administration, (rev. 1998 ed., supplemented 2001, Continuing Legal Education in Colorado, Inc.) is devoted to the law of trusts. One section of chapter 19, and chapters 26 and 46, are devoted to trusts. The balance of this book is devoted largely to the laws of wills and probate administration, although matters of trust administration are also addressed.

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While several existing uniform laws deal with trusts, they do not treat the subject comprehensively. a. The following uniform acts are either incorporated into or superseded by the UTC (UTC, Prefatory Note): (1) Article VII of the Uniform Probate Code, which deals with trust registration, jurisdiction and venue for proceedings concerning trusts, and (in a very general way) trustee duties and liabilities. These provisions have been adopted in Colorado as C.R.S. §§ 15-16-101 et seq. Colorado later added C.R.S. § 15-16-401, dealing with the consolidation 3

and division of trusts. Earlier drafts of the UTC incorporated a trust registration provision, but that provision was dropped. In Colorado, the UTC committee recommended that the existing trust registration provisions be retained, but the other trust provisions of the UPC (C.R.S. §§ 15-16-201 through 15-16-401) would be superseded by the UTC. (2) The Uniform Prudent Investor Act (1994). Article 9 of the UTC is simply a "blank space" into which an enacting jurisdiction may insert the Uniform Prudent Investor Act. When Colorado enacted the Prudent Investor Act in 1995 (C.R.S. §§ 15-1.1-101 et seq.; see also C.R.S. 15-1-304.1 as to the effective date of the Prudent Investor Act in Colorado) it expanded the scope of the Act to apply to other fiduciaries (such as personal representatives) as well as trustees. Consequently, the Colorado UTC committee recommended that the existing Colorado Prudent Investor Act be retained and not be incorporated into the UTC. Uniform Trustee Powers Act (1964). The Colorado Fiduciaries' Powers Act (C.R.S. §§ 15-1-801 et seq.) deals with powers of personal representatives, special administrators, and conservators, as well as trustees. The Colorado UTC committee recommended retaining the Colorado Fiduciaries' Powers Act, and providing that trustee powers set forth in the UTC will be in addition to powers under the Fiduciaries' Powers Act. Uniform Trusts Act (1937). This act addressed only limited topics, and was not widely adopted.

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The following uniform acts dealing at least in part with trusts are not affected by the UTC (UTC, Prefatory Note): (1) (2) Uniform Common Trust Fund Act. Uniform Custodial Trust Act (1987). This act was adopted in Colorado as C.R.S. §§ 15-1.5-101 et seq. Uniform Management of Institutional Funds Act (1972). This act was adopted in Colorado as C.R.S. §§ 15-1-1101 et seq.

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Uniform Principal and Income Act (1997). This act was adopted in Colorado as C.R.S. §§ 15-1-401 et seq. Uniform Probate Code. The Uniform Probate Code as adopted in Colorado is at C.R.S. §§ 15-10-101 et seq. Uniform Statutory Rule Against Perpetuities. This act was adopted in Colorado as C.R.S. §§ 15-11-1101 et seq. In 2001, Colorado USRAP was amended to provide that an interest in a trust is valid, even if it might vest or terminate beyond the period of the rule, if "all or part of the income or principal of the trust may be distributed, in the discretion of the trustee, to a person who is living when the trust is created." C.R.S. § 15-11-1102(1)(c). Uniform Supervision of Trustees for Charitable Purposes Act. Uniform Testamentary Additions to Trusts Act. This act was adopted in Colorado as C.R.S. § 15-11-511.

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Overview of the UTC 1. Article 1--General Provisions and Definitions a. In addition to definitions, Article 1 includes provisions on governing law, the principal place of administration of a trust, methods and waiver of notice, nonjudicial settlements, and rules of construction. Section 105 is perhaps the most significant section in the UTC. (1) The UTC consists mostly of default rules that may be modified by, or "drafted around" in, the trust instrument. This idea is consistent with common law: the settlor is generally free to include whatever provisions he or she wants in the trust instrument. However, there are certain boundaries beyond which the settlor may not go. For example, a settlor could not provide that the trustee owes no fiduciary duties to the beneficiaries without destroying the fundamental nature of the trust relationship. And, 5

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although spendthrift provisions are generally valid and enforceable in the United States, in most states a spendthrift provision is ineffective as to the settlor's interest in the trust, on public policy grounds. (3) One of the UTC's innovations is to identify, in Section 105, those provisions of trust law that are so fundamental to the nature of the trust relationship or which reflect such fundamental public policy that they may not be overridden by the settlor. Except for these few mandatory rules, the UTC consists of default rules that will yield to a contrary intention expressed in the terms of the trust.

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Article 2--Judicial Proceedings, deals with jurisdiction, venue, and the authority and availability of the court to resolve disputes concerning trust interpretation and administration. Article 3--Representation, deals both with representation by fiduciaries and virtual representation. Article 4--Creation, Validity, Modification, and Termination of Trust a. The UTC largely codifies existing law as to the creation and validity of trusts. As to the modification and termination of trusts, the UTC makes the law more flexible, but adheres to the fundamental principal that the primary objective is to carry out the settlor's intent.

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Article 5--Creditor's Claims; Spendthrift and Discretionary Trusts, codifies existing law as to the fundamental principles, and takes a fairly conservative approach to exceptions to the protection afforded by spendthrift and discretionary provisions. Article 6--Revocable Trusts, addresses several issues concerning the now ubiquitous revocable living trust as to which the law is unsettled. Article 7--Office of the Trustee, deals with acceptance of the trust, bond, cotrustees, trustee succession issues, and trustee compensation.

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Article 8--Duties and Powers of Trustee, codifies the trustee's powers and duties. These provisions are default rules except for the several fundamental duties that may not be modified. Article 9--Uniform Prudent Investor Act. This article is simply a "blank space" into which an enacting jurisdiction may insert the Uniform Prudent Investor Act. Because Colorado expanded the scope of the Prudent Investor Act to apply to other fiduciaries (such as personal representatives) as well as trustees, it is anticipated that Colorado will leave its existing Prudent Investor Act in place and not incorporate it into the UTC. Article 10--Liability of Trustees and Rights of Persons Dealing with Trustee. This article deals with remedies and damages for a trustee's breach of trust, trustee defenses, including a statute of limitations, and provisions to facilitate a trustee engaging in commercial transactions. Article 11--Miscellaneous Provisions, includes the effective date provision and other typical uniform law provisions. As drafted (and with a few specific exceptions), the UTC will apply to existing trusts as well as trusts created after the effective date.

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Public policy themes underlying the UTC. A. Most of trust law is default rules. In general, the settlor of a trust is free to change the default rules in the trust document. "It is sometimes said that the trust instrument is the trustee's charter, that the intention of the settlor is the law of the trust." 1A William F. Fratcher, Scott on Trusts § 59 (4th ed., Aspen Publishers Inc. 2000) (footnote omitted). Some rules of trust law are so fundamental that they are mandatory and may not be varied or waived by the settlor. "It is sometimes said that the trust instrument is the trustee's charter, that the intention of the settlor is the law of the trust. This is not, of course, literally true, since the purposes of the trust or some of its provisions may be illegal." 1A William F. Fratcher, Scott on Trusts § 59 (4th ed., Aspen Publishers Inc. 2000) (footnote omitted). Scott (and the Restatement (Second) of Trusts) use the term "illegal" to include purposes that are against public policy. See Restatement (Second) of Trusts § 59 ("A trust can be created for any purpose which is not illegal"). The nonwaivable provisions (UTC § 105(b)) are: 1. The requirements for creating a trust;

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The duty of a trustee to act in good faith and in accordance with the purposes of the trust; The requirement that a trust and its terms be for the benefit of its beneficiaries, and that the trust have a purpose that is lawful, not contrary to public policy, and possible to achieve; The power of the court to modify or terminate a trust under UTC Sections 410 through 416; The effect of a spendthrift provision and the rights of certain creditors and assignees to reach a trust as provided in UTC Article 5; The power of the court under UTC Section 702 to require, dispense with, or modify or terminate a bond; The power of the court under UTC Section 708(b) to adjust a trustee's compensation specified in the terms of the trust which is unreasonably low or high; The duty under UTC Section 813(b)(2) and (3) to notify qualified beneficiaries of an irrevocable trust who have attained 25 years of age of the existence of the trust, of the identity of the trustee, and of their right to request trustee's reports; The duty under UTC Section 813(a) to respond to the request of a beneficiary of an irrevocable trust for trustee's reports and other information reasonably related to the administration of a trust; The effect of an exculpatory term under UTC Section 1008; The rights under UTC Sections 1010 through 1013 of a person other than a trustee or beneficiary; Periods of limitation for commencing a judicial proceeding; The power of the court to take such action and exercise such jurisdiction as may be necessary in the interests of justice; and The subject-matter jurisdiction of the court and venue for commencing a proceeding as provided in UTC Sections 203 and 204.

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The settlor's intent should be given effect, regardless of technical deficiencies, unless the intent is illegal, impossible or impracticable. See Edward C. Halbach, Jr., Symposium on Law in the Twentieth Century: Uniform Acts, Restatements, and Trends in American Trust Law at Century's End, 88 Calif. L. Rev. 1877, 1881 (2000). A corollary of this theme is that the doctrine of substantial compliance (or "harmless error") developed in the law of wills (see C.R.S. § 1511-503 should also be applied to the law of trusts. Id. at 1884. This has been referred to as "getting rid of all the rules that foolishly impede the settlor's intent." Joel C. Dobris, Changes in the Role and the Form of the Trust at the New Millennium, or, We Don't Have to Think of England Anymore, 62 Alb. L. Rev. 543, 567 n.110 (1998). The trust and its terms must be for the benefit of the beneficiaries. See Restatement (Third) of Trusts § 27(2). This is really just another way of expressing the idea that some rules of trust law are so fundamental that they are nonwaivable: even though most rules of trust law (such as the duties to diversify and to invest prudently) are default rules rather than mandatory rules, it does not follow that the settlor is free to authorize any conceivable departure from the default rules. A default rule is one that the settlor can abridge, but only to the extent that the settlor's term is "for the benefit of [the] beneficiaries." The requirement that there be benefit to the beneficiaries sets outer limits on the settlor's power to abridge the default law. Trust law's deference to the settlor's direction always presupposes that the direction is beneficiary-regarding. John H. Langbein, Mandatory Rules in the Law of Trusts, 98 Nw. U. L. Rev. 1105 at 1112 (Spring 2004).

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The beneficiaries, trustees, and court should be allowed some degree of flexibility to deal with changed or unanticipated circumstances, so long as doing so will not violate the settlor's lawful intent. This is a variation on the theme that he trust must be for the benefit of the beneficiaries. A typical revocable living trust is the functional equivalent of a will, and therefore the rules that apply to wills (for example, as to capacity, rights of creditors, and construction) should generally apply to revocable living trusts. The law should facilitate a trustee's ability to deal with third parties.

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Creation, validity, and revocation of trusts. 9

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The UTC largely codifies existing law as to the creation, validity, and revocation of trusts. Methods of creating trusts--A trust may be created by a transfer of property to another as trustee during the settlor's life or by will or other disposition taking effect at death, by an owner of property declaring that he or she holds the property as trustee, or by exercising a power of appointment in favor of a trustee. UTC § 401. See Restatement (Third) of Trusts § 10 (2001); Restatement (Second) of Trusts § 17 (1959); 1 William F. Fratcher, Scott on Trusts § 17 (4th ed., Aspen Publishers Inc. 2000); George T. Bogert, Trusts § 10 (6th ed., West 1987). The requirements for creation of a trust (UTC § 402) are: 1. The settlor must have capacity. See Restatement (Third) of Trusts § 11 (2001); Restatement (Second) of Trusts §§ 18-22 (1959), and Restatement (Third) of Property: Wills and Other Donative Transfers § 8.1 (2001). The settlor must indicate the intention to create a trust. See Restatement (Third) of Trusts § 13 (2001); Restatement (Second) of Trusts § 23 (1959). The trust must have a definite beneficiary (see Restatement (Third) of Trusts §§ 44-46 (2001); Restatement (Second) of Trusts §§ 112-122 (1959), unless the trust is a charitable trust (charitable trusts are expressly authorized by UTC § 405) or an authorized trust for the care of an animal or other "honorary" trust. UTC §§ 408 and 409 authorize so-called "honorary" trusts in certain circumstances. Section 408 allows a trust to be created for the care of an animal, and section 409 authorizes other trusts for a noncharitable purpose to be enforced for up to twenty-one years. Colorado previously enacted C.R.S. § 15-11-901 authorizing certain honorary trusts and trusts for animals. The Colorado UTC committee recommended that the existing provisions be retained and that UTC §§ 408 and 409 not be enacted in Colorado. The trustee must have duties to perform. See Restatement (Third) of Trusts § 2 (2001); Restatement (Second) of Trusts § 2 (1959). The same person may not be the sole beneficiary and the sole trustee. This is a statement of the doctrine of merger. However, as the Comment to UTC § 402 points out, the doctrine applies only if all beneficial interests are vested in the same person. Thus, the doctrine of merger prevents the creation of a trust for the benefit of the settlor for life, remainder to the settlor's estate, if the settlor is the sole trustee, but does not prevent the

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creation of a trust for the benefit of the settlor for life, remainder the settlor's children, even where the settlor is the sole trustee and retains the right to amend or revoke the trust. In re Estate of Brenner, 547 P.2d 938 (Colo. App. 1976). D. A trust may be created for any purpose that is lawful, not against public policy, and possible to achieve. UTC § 404. See Restatement (Third) of Trusts §§ 27-30 (2001); Restatement (Second) of Trusts §§ 59-65 (1959). Governing law as to validity of a trust. The UTC provides that a trust not created by will is valid if its creation complies with the law of the jurisdiction where the trust was executed, or where, at the time of creation, the settlor was domiciled, had a place of abode, or was a national, or where the trustee was domiciled or had a place of business, or where any trust property was located. UTC § 403. This provision is similar to Uniform Probate Code § 2-506 and C.R.S. § 15-11-506 as to wills. Is a living trust harder to contest than a will? 1. Some promoters of revocable living trusts as will substitutes, especially promoters who are not lawyers, tout as one of the benefits that a revocable living trust is not as vulnerable to a contest as is a will. Some of these claims are truly outrageous: "trusts are virtually impossible to contest," DontNeedALawyer.com <http://www.dontneedalawyer.com> (July 17, 2001); "Being a private contract, the terms of the trust contract are incontestable by disgruntled heirs or any other third party," The Gordon Mead Bennett Living Trust Workshops, Lesson 7 <http://www.trustgordon.com/lesson7.com> (July 17, 2001). The only evidence that I have ever seen cited in support of the assertion that a living trust is less vulnerable to a contest than a will is that there is little case law involving contests of revocable living trusts. However, this scarcity of case law may largely reflect the relative youth of the revocable living trust as compared to the will. T. Jack Challis, Contesting Inter Vivos Trusts, 26 ACTEC Notes 221 (Winter 2000). One ground for a will contest that generally will not apply to a living trust is that the instrument was not duly executed, because the UTC does not impose any formal requirements for the execution of a trust. This is consistent with the common law (Restatement of the Law of Property (Wills and Other Donative Transfers) §7.1 cmt. b (2001) ("A revocable inter vivos trust is not a will and hence does not have to be executed in accordance with the formalities of a will"), which does not even require a living trust to be in writing. Restatement (Third) of Trusts § 20 (2001); 11

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Restatement (Second) of Trusts §§ 39 and 52 (1959). Of course, the statute of frauds may require a writing if the trust holds real estate. Id. C.R.S. § 38-10-106 generally requires a trust of real estate to be in writing and signed by the settlor. 3. The UTC will make it clear that a living trust (revocable or irrevocable) may be contested on the grounds of lack of capacity (UTC § 402(a)(1)), or fraud, duress, or undue influence (UTC § 406; see Restatement (Third) of Property (Wills and Other Donative Transfers § 8.3 (2001)), just as a will may be contested on those grounds.

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Capacity to create a testamentary trust. 1. The capacity necessary to create a testamentary trust is, of course, testamentary capacity. The Colorado Probate Code provides that: "An individual eighteen or more years of age who is of sound mind may make a will." C.R.S. § 1511-501. Testamentary capacity has been characterized as "the least amount of cognitive capability [necessary] to do a legal act." Gibbs and Hanson, Degree of Capacity Required to Create an Inter Vivos Trust, Trusts & Estates 14 (December 1993). Being "of sound mind," or having testamentary capacity, requires that the testator "understand . . . in a general way: (1) The nature and extent of his property, (2) The persons who are the natural objects of his bounty, and (3) The disposition which he is making of his property. He must also be capable of: (4) Appreciating these elements in relation to each other, and (5) Forming an orderly desire as to the disposition of his property." Atkinson, Law of Wills (1953) § 51; see Restatement (Third) of Property: Wills and Other Donative Transfers § 8.1(b) (2001). Similar formulations are found in the Colorado case law. Lehman v. Lindenmeyer, 48 Colo. 305, 109 P. 956 (1910); Cunningham v. Stender, 127 Colo. 293, 255 P.2d 977 (1953) (testamentary capacity requires that "(1) [testatrix] understood the nature of her act; (2) that she knew the extent of her property; (3) that she understood the proposed testamentary disposition; (4) that she knew the natural objects of her bounty; and (5) that the will represented her wishes."); Estate of Spicer H. Breeden, 992 P.2d 1167 at 1170. "In Colorado, a sound mind includes the presence of the Cunningham factors and the absence of insane delusions that materially affect the will." Id. at

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1172. See Instruction 34:9 of the Colorado Jury Instructions, quoted with approval in Breeden. 5. The UTC would not change existing Colorado law on testamentary capacity.

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Capacity to create an irrevocable living trust. 1. UTC does not address the capacity necessary to create an irrevocable living trust, because (according to the comment) little uncertainty exists in that regard. UTC § 601, cmt. The Restatement (Second) of Trusts provides that the capacity necessary to create an inter vivos trust is that necessary to transfer property inter vivos, but does not define what that means. Restatement (Second) of Trusts §§ 18 and 19 (1959). The Restatement (Third) of Property: Wills and Other Donative Transfers provides that: If the donative transfer is in the form of an irrevocable gift, the donor must have the mental capacity necessary to make or revoke a will and must also be capable of understanding the effect that the gift may have on the future financial security of the donor and of anyone who may be dependent on the donor. Restatement (Third) of Property: Wills and Other Donative Transfers § 8.1(c) (2001). This is similar to the capacity required to make a contract. Restatement (Third) of Property: Wills and Other Donative Transfers § 8.1 Reporter's Note 3 (2001). a. One rationale for requiring a higher standard of capacity for an inter vivos gift than for a will is that making a gift (including a gift to an irrevocable trust) is akin to transacting business, and that it takes greater acumen to deal with other self-interested persons than it does to make testamentary gifts to loved ones. Another rationale is that a lifetime gift, unlike a testamentary disposition, depletes resources that might yet be needed by the donor. Restatement (Third) of Property: Wills and Other Donative Transfers § 8.1 cmt. d (2001).

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On the other hand, some commentators argue that this reasoning is flawed and, if anything, the standard for testamentary capacity should be higher than the standard for contractual capacity, because a testamentary disposition is more likely to be ill-considered and does not involve a present parting with ownership or possession. Rein-Francovich, An Ounce of Prevention: Grounds for Upsetting Wills and Will Substitutes, 20 Gonzaga Law Review 1 at 20-21 (1984/85).

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The standards for capacity to create an irrevocable trust are summarized by Professor Halbach as follows: The standard of capacity for the creation of an irrevocable inter vivos trust should depend on whether the trust is purely donative, in which case a gift standard is appropriate, or whether it is part of a negotiated or adversary transaction, for which the higher contract standard would be appropriate. Trusts Third section 11(3), comment c, explains that the gift standard is the will standard plus an "ability to understand the effects the disposition may have on the future financial security" of the settlor and his or her dependents. For trusts created incident to divorce or a commercial transaction, for example, that comment incorporates the standard of capacity stated in Restatement (Second) of Contracts section 12. Edward C. Halbach, Jr., Symposium on Law in the Twentieth Century: Uniform Acts, Restatements, and Trends in American Trust Law at Century's End, 88 Calif. L. Rev. 1877, 1888 (2000) (footnotes omitted).

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Capacity to create a revocable living trust. 1. The UTC expressly addresses the capacity needed to create (or amend, revoke, or add property to, or to direct the actions of a trustee of) a revocable living trust, because of uncertainty in the case law and the importance of the issue in modern estate planning. UTC § 601, cmt. The UTC provides that the capacity required to create, amend, or revoke a revocable trust is the same as the capacity required to make a will. UTC § 601. This is consistent with Restatement (Third) of Property: Wills and Other Donative Transfers § 8.1, cmt. e (2001).

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Colorado case law on capacity to create a trust.

1.

Unfortunately, the Colorado case law on capacity to create a trust is confused. See Susan Fox Buchanan and James W. Buchanan III, Mental Competence and Legal Capacity Under Colorado Law: A Question of Consistency, 90 Colorado Lawyer 1813 at 1813-1814 (September 1990). "[C]apacity to create a trust" is an essential element of an express private trust. In re Baum, 22 F.3d 1014 (10th Cir. 1994); Estate of Brenner, 547 P.2d 938 (Colo. App. 1976). The Colorado Court of Appeals has stated that "a person has a capacity to create a trust by declaring himself trustee of property to the extent that he has capacity to transfer the property inter vivos," In re Estate of Granberry, 498 P.2d 960 at 963 (Colo. App. 1972), citing the Restatement (Second) of Trusts § 18, but without distinguishing between a revocable or irrevocable trust. In another case, the Colorado Court of Appeals stated that the standard of capacity to make an inter vivos gift is the same as the standard of testamentary capacity. Columbia Savings & Loan Association v. Carpenter, 33 Colo. App. 360, 521 P.2d 1299 (1974) ("Although we find no Colorado cases dealing with the issue of mental capacity to make an inter vivos gift, we believe that those cases defining testamentary capacity are applicable"), rev'd on other grounds sub nom. Judkins v. Carpenter, 189 Colo. 95, 537 P.2d 737 (1975). In Hanks v. McNeil Coal Corp.,168 P.2d 256 (Colo. 1946), dealing with capacity to contract, the Colorado Supreme Court stated that "Contractual capacity and testamentary capacity are the same." However the test enunciated by the court in Hanks for lack of contractual capacity was quite different from the normal formulation of the test for testamentary capacity: "The legal test . . . is whether `he was incapable of understanding and appreciating the extent and effect of business transactions in which he engaged.'" Id., citing Ellis v. Colorado Nat. Bank, 10 P.2d 336 (Colo. 1932). The Colorado Supreme Court recently had an opportunity to clarify this issue but, unfortunately, quoted Hanks with approval: "In Hanks, we noted that contractual capacity and testamentary capacity are the same." Estate of Spicer Breeden, 992 P.2d 1167 at 1170.

2.

3.

4.

5.

K.

The UTC would clarify that the same standard of capacity that applies to making a will also applies to creating, amending, or revoking a revocable living trust. This approach has the advantages of (1) clarifying a potentially uncertain area of the law, and (2) consistency, in that the same test of capacity would apply both to 15

wills and to a common will substitute in the form of the revocable living trust. However, because the UTC does not define the applicable standard of capacity, Colorado law will remain uncertain and confused on that issue. L. Revocation 1. Default rule that a trust is revocable. a. The UTC provides that a trust is revocable unless the trust expressly states that it is irrevocable. UTC § 602(a). This is contrary to the traditional common law rule, Restatement (Second) of Trusts § 330 (1959), but is similar to the position taken in Restatement (Third) of Trusts § 63 cmt. c (2001). There are no Colorado cases directly addressing whether a trust is revocable or irrevocable in the absence of an express provision as to revocation, but Brown v. International Trust Company, 278 P.2d 581(Colo. 1954) suggests that Colorado follows the common law rule that a trust is presumed to be irrevocable. "A settlor may revoke a valid trust where a power of revocation is validly reserved . . . ." 278 P.2d at 583. Emphasis added. Therefore, this provision would probably change Colorado law. However, the provision expressly does not apply to trusts executed prior to the effective date of the UTC. The advisable practice, of course, is to specify in the trust instrument whether the trust is revocable or irrevocable.

b.

c.

d.

2.

Manner of revocation a. Under current Colorado law, if the trust instrument specifies a method of revocation, the trust may be revoked only by strict compliance with the specified method. Brown v. International Trust Company, 278 P.2d 581 at 583 (Colo. 1954) ("if a particular method of revocation is specified, that procedure must be strictly followed in order to make the revocation effective"); Denver National Bank v. Von Brecht, 322 P.2d 667 at 670 (Colo. 1958) ("revocation of a trust agreement must be in accordance with the terms of the instrument and not otherwise"). See also Restatement (Second) of Trusts § 330, comment f.

16

b.

The UTC relaxes the rules concerning the methods by which a revocable trust may be revoked. (1) If the trust agreement specifies a method of revocation, the UTC requires only substantial, rather than strict, compliance with the specified method. If the trust terms do not specify a method of revocation, or if the specified method is not expressly made exclusive, the UTC allows revocation by a will or codicil that expressly refers to the trust or that specifically devises property that would otherwise have passed under the trust, or by any other method manifesting clear and convincing evidence of the settlor's intent. UTC § 602(c).

(2)

c.

The official Comment says that revocation by will is "mentioned . . . not to encourage the practice but to make clear that it is not precluded by omission." UTC § 602 cmt. The Comment also notes that a revocation by will ordinarily would become effective only upon probate of the will following the testator/settlor's death. This section is intended to effectuate the settlor's intent to the maximum extent possible, while at the same time protecting the trustee against liability. See UTC § 602(g). The Comment also points out that less formal methods of revocation should not be encouraged, because they provide less reliable indicia of the settlor's intent. The UTC provision would overturn Brown v. International Trust Company, 278 P.2d 581 (Colo. 1954), where the decedent had established a trust to which certain life insurance policies were made payable. The settlor reserved the right to revoke the trust by an instrument in writing signed by the settlor and delivered to the trustee. The settlor subsequently executed a will that purported to make a different disposition of the life insurance proceeds payable to the trust. The court held that the will did not revoke the trust, because it did not comply with the method of revocation provided for in the trust agreement. The UTC provision is consistent with the theory underlying the "harmless error" rule as to execution or revocation of a will. C.R.S. § 15-12-503. The Colorado UTC committee agreed with this concept, but was concerned with the language of the UTC on this issue. The official 17

d.

e.

f.

language does not appear to apply the clear and convincing evidence standard to revocation or amendment of a trust by a will or codicil. Consequently, the Colorado UTC committee recommended adoption of this provision with modifications to clarify that a revocable trust may be revoked by a will only if there is clear and convincing evidence of the testator/settlor's intent to revoke. 3. Revocation by an agent a. The UTC provides that an agent under a power of attorney may exercise the settlor's power to revoke only if expressly authorized by the terms of the trust or the terms of the power of attorney. UTC § 602(e). According to the official Comment, this is because the settlor usually intends that the trust, rather than the power of attorney, will be the primary property management device. Current Colorado law provides: An agent may not revoke or amend a trust that is revocable or amendable by the principal without specific authority and specific reference to the trust in the agency instrument. In addition, an agent may not require the trustee of any trust for the benefit of the principal to pay income or principal to the agent without specific authority and specific reference to the trust in the agency instrument. C.R.S. § 15-14-608(2). Emphasis added. c. The UTC provision allows an agent to exercise a power to revoke a trust if authorized in either the power of attorney or the trust instrument. The Colorado power of attorney statute requires that the authority to revoke be expressed in the power of attorney, and also requires that authority to exercise a power of withdrawal be expressed in the power of attorney. The Colorado UTC committee recommended that the UTC provision be adopted without change, and that the power of attorney statute be amended to provide that the authority to revoke may be expressed in either the power of attorney or the trust instrument.

b.

4.

Revocation by a conservator or guardian.

18

a.

The UTC allows a conservator or, if there is no conservator, a guardian, to exercise the settlor's powers with respect to revocation, amendment, or distributions from the trust, but only with the approval of the court supervising the conservatorship or guardianship. The official Comment makes the point that, because this is not a mandatory rule under Section 105, the settlor may provide in the trust instrument that a conservator or guardian will not have this power even with court approval. This subsection is consistent with Colorado's new guardianship and conservatorship law. Unless limited by the court, a conservator has certain powers that may be exercised without seeking prior court approval, C.R.S. § 15-14-425, but these do not include the power to amend or revoke a trust. The court has "all the powers over the estate and business affairs of the protected person that the person could exercise if the person were an adult, present, and not under conservatorship or other protective order," C.R.S. § 15-14410(1)(b), which clearly would include the power to amend or revoke a trust. The court may confer on the conservator any power that the court itself could exercise. C.R.S. § 15-14-410(1)(b).

b.

c.

5.

Protection of the trustee. The UTC addresses the possibility that a trust could be amended or revoked without the trustee's knowledge, by providing that the trustee is not liable for distributions made or other actions taken on the assumption that the trust has not been amended or revoked. UTC § 602(g).

IV.

Trust self-governance and representation A. Purpose of representation. 1. The UTC is similar to the Uniform Probate Code in not requiring intervention or supervision by the court unless the court's jurisdiction is invoked by someone having an interest in the trust. The trustee may perform certain acts after giving notice to, or with the consent of, the "qualified beneficiaries." "Qualified beneficiary," a very important term in the UTC, means a beneficiary who, on the date the qualified beneficiaries are being determined:

2.

19

a.

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 the preceding subparagraph terminated on that date; or would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date. UTC § 103(12).

b.

c.

3.

Examples of actions that may be taken after notice to, or with the consent of, the beneficiaries: a. A trustee may transfer the principal place of administration of the trust by giving written notice to the qualified beneficiaries, if no qualified beneficiary objects. UTC § 108. After notice to the qualified beneficiaries, the trustee may combine two or more trusts into one trust or divide a single trust into several trusts, if the result does not impair the rights of the beneficiaries or adversely affect achievement of the purposes of the trust. UTC § 417. A trustee may resign on 30 days' notice to the qualified beneficiaries and all cotrustees. UTC § 705(a)(1). A noncharitable irrevocable trust may be modified or terminated with the consent of the settlor and all beneficiaries. UTC § 411(a). (As discussed later in this outline, this provision arguably has negative tax implications and, in 2004, NCCUSL approved amendments to the UTC to deal with the tax issue.) A vacancy in the trusteeship that is required to be filled, and which is not filled by a person designated in the terms of the trust, may be filled by unanimous agreement of the qualified beneficiaries. UTC § 704.

b.

c.

d.

e.

4.

The UTC also encourages nonjudicial settlement of disputes. UTC § 111 and cmt. In many cases, a trust will have beneficiaries who are minors, incapacitated, or not yet born or otherwise identifiable. Unless notices can be given to, or consents obtained from, someone who can represent these

5.

20

legally incapacitated or unascertained beneficiaries, the kinds of actions listed above might require a court proceeding to obtain approval. The purpose of representation under the UTC is to allow notices to, and binding consents on behalf of, those beneficiaries, and thereby avoid a highly court-supervised system of trust administration. UTC § 301. B. Who may represent a beneficiary 1. The holder of a testamentary general power of appointment may represent and bind the permissible appointees and takers in default, if there is no conflict of interest. UTC § 302. (Query why the UTC requires that there be no conflict of interest in this situation?) Settlor of a revocable living trust or holder of a power of withdrawal. a. While the settlor of a revocable living trust is living and has capacity, the rights of the beneficiaries are subject to the settlor's control, and the trustee owes it duties solely to the settlor. UTC § 603(a). This is similar to Uniform Probate Code § 1-108 and C.R.S. § 15-10-108, which allow the holder of a presently exercisable general power of appointment to act for the beneficiaries. During the period that a power of withdrawal may be exercised, the holder of the power has the rights of a settlor of a revocable trust to the extent of the property subject to the power. UTC § 603(c). Therefore, notices may be given to and consents obtained from the competent settlor of a living trust or the holder of a power of withdrawal (such as, for example, the surviving spouse-beneficiary of a marital deduction trust under which the spouse has a right to withdraw the entire principal of the trust). This is not technically a matter of representation, but it has the same effect.

2.

b.

c.

d.

3.

Fiduciaries and parents. To the extent that there is no conflict of interest: a. A conservator may represent and bind the estate of the protected person. UTC § 303(1). A guardian may represent and bind the ward if a conservator has not been appointed. UTC § 303(2). 21

b.

c.

An agent having authority to act with respect to the particular question or dispute may represent and bind the principal. UTC § 303(3). A trustee may represent and bind the beneficiaries of the trust. UTC § 303(4). A personal representative of a decedent's estate may represent and bind persons interested in the estate. UTC § 303(5). A parent may represent and bind the parent's minor or unborn child if no conservator or guardian has been appointed for the child. UTC § 303(6).

d.

e.

f.

4.

Virtual representation. If a minor, incapacitated person, unborn person, or a person whose identity or location is not known and not reasonably ascertainable, is not otherwise represented, that person may be represented by a person having a substantially identical interest with respect to the matter in question, but only if there is no conflict of interest. UTC § 304. Court appointed representative. If the court determines that a person is not represented under other provisions, or that otherwise available representation might be inadequate, the court may appoint a representative to receive notice, give consent, or otherwise represent a legally incapacitated or unascertained person. UTC § 305.

5.

C.

Use in nonjudicial settlements 1. The UTC specifically authorizes binding nonjudicial settlement agreements with respect to any matter involving a trust. UTC § 111(b). The agreement may not violate a material purpose of the trust and may only include provisions that could be approved by the court under the UTC or other applicable law. UTC § 111(c). Representation under the UTC is particularly helpful in that it applies to nonjudicial settlement agreements. UTC Article 3, General Comment. Compare Uniform Probate Code § 1-403 and C.R.S. § 15-10-403, which allow representation, but apply only to formal judicial proceedings.

2.

3.

V.

Rights of creditors.

22

A.

Existing Colorado law, although thin, appears to be in the mainstream as to the creditor protection afforded by spendthrift and discretionary trusts. The fundamental principles are as follows. 1. Spendthrift trusts are valid and enforceable in Colorado. Snyder v. O'Conner, 102 Colo. 567, 81 P.2d 773 (1938); Newell v. Tubbs, 103 Colo. 224, 84 P.2d 820 (1938) (spendthrift provision would be enforceable, but language used was not sufficient to create a spendthrift trust); Brasser v. Hutchinson, 37 Colo. App. 528, 549 P.2d 801; In re Cohen, 8 P.3d 429 at 430 n. 1 (Colo. 1999). See Restatement (Third) of Trusts § 58 (2001); Restatement (Second) of Trusts §§ 152-153 (1959). The creditors of a beneficiary of a discretionary trust may not reach the trust assets because the creditor cannot compel the trustee to exercise its discretion. See Restatement (Second) of Trusts §§ 154 ("support" trusts) and 155 (discretionary trusts) (1959); Restatement (Third) of Trusts § 60 (2001) (abandoning the Restatement Second distinction between support and discretionary trusts, and providing that if a beneficiary may receive distributions in the trustee's discretion (and the trust does not contain a spendthrift provision), the beneficiary's creditors may reach only distributions that the trustee makes or is required to make in the exercise of its discretion). There are no Colorado cases directly on point, but the theory that a beneficiary's interest in a purely discretionary trust may not be reached by his or her creditors is indirectly supported by In re Marriage of Jones, 812 P.2d 1152 (Colo. 1991), holding that the increase in value, during the marriage, of a wife's interest in a discretionary trust that was created under the will of the wife's mother was not the wife's separate property for purposes of division of property under C.R.S. § 14-10-113. Compare In re Balanson, 25 P.3d 28 (Colo. 2001) (increase in value, during the marriage, of wife's vested remainder interest in a discretionary trust for the benefit of her father was "property" for purposes of property division in connection with dissolution of marriage). If the settlor is also a beneficiary of the trust, then a spendthrift provision is not effective against the settlor's creditors, and if the trust is discretionary, the settlor's creditors may reach the maximum amount that the trustee, in the exercise of its discretion, could distribute to the settlor. a. C.R.S. § 38-10-111 provides that "All deeds of gift, all conveyances, and all transfers or assignments, verbal [sic] or written, of goods, chattels, or things in action, or real property, made in trust for the use of the person making the same shall be

2.

3.

23

void as against the creditors existing of such person." Emphasis added. b. Because this statute literally applies only to creditors "existing" (presumably meaning creditors having claims at the time of creation of the trust), some argue that a trust may be created in Colorado for the benefit of the settlor and that future creditors of the settlor may not reach the trust property. See In re Baum, 22 F.3d 1014 (10th Cir. 1994); Joseph G. Hodges and Eugene P. Zuspann II, Can Some Colorado Trusts Provide Protection from Claims of Creditors?, 28 Colorado Lawyer 61 (August 1999). However, that interpretation was rejected by the Colorado Supreme Court (albeit in dictum) in In re Cohen, 8 P.3d 429 (Colo. 1999). The court stated that even if there were no creditors at the time the trust in question was established, the trust "could not and did not protect the settlor-beneficiary from future creditors," citing Restatement (Second) of Trusts § 156 and 2A William F. Fratcher, Scott on Trusts § 156. See also Kaladic v. Kaladic, 41 Colo. App. 419, 589 P.2d 502 (1978), in which the court held that an "irrevocable, discretionary spendthrift trust" created by the wife for her own benefit eleven months before filing a petition for dissolution of marriage was properly set aside by the trial court as illusory and fraudulent against the husband's rights, with the result that the trust assets were marital property subject to division in the dissolution action.

c.

B.

UTC includes the following provisions on the validity of spendthrift trusts. 1. A spendthrift provision will be valid only if it restrains both the voluntary and the involuntary transfer of a beneficiary's interest. UTC § 502(a). That is, the settlor may not prohibit a beneficiary's creditors from reaching the trust while allowing the beneficiary freedom to assign the interest. See Restatement (Third) of Trusts § 58 cmt. b(2) (2001); Restatement (Second) of Trusts §§ 152(2) (1959). Language indicating an intent to create a spendthrift trust, including simply stating that the trust is a spendthrift trust, will be sufficient. UTC § 502(b). a. The spendthrift provision in Snyder v. O'Conner, the leading Colorado case, read:

2.

24

During the continuation of this trust, no beneficiary of the trust estate shall have the right to anticipate, sell, assign, mortgage, pledge, or otherwise dispose of or encumber his or her share of the trust estate, or any part thereof, or any interest therein; or his or her share of the income arising therefrom, or any part thereof, or any interest therein; nor shall such share of the trust estate or of the income arising therefrom be liable for his or her debts or be subject to attachment, garnishment, execution, creditor's bill or other legal or equitable process. 102 Colo. 567 at 569, 81 P.2d at 774. b. The Restatement says that no particular form of words is necessary to make a trust a spendthrift trust. Restatement (Second) of Trusts § 152 cmt. c. However, in Newell v. Tubbs, the Colorado Supreme Court said that "it is only by the use of language similar in meaning and legal import to that contained in the document under consideration in the recent case of Snyder v. O'Connor, 102 Colo. 567, 81 P. (2d) 773, that [a spendthrift] trust may be established." 103 Colo. 224 at 227, 84 P.2d at 821. This, unfortunately, meant that the spendthrift provisions in most trusts drafted in Colorado followed the prolix example of the provision in Snyder v. O'Conner. See, for example the spendthrift provisions in section 9.4, Form 9, Marital Deduction Will, and section 15.4, Form 13, Revocable Marital Deduction Trust, Colorado Estate Planning Forms (CLE in Colorado, Inc., 2001 ed.). The UTC will confirm that a simple provision stating that the trust is a spendthrift trust, or that "the beneficiaries may not assign their interests and creditors of the beneficiaries may not reach the trust" will be sufficient.

c.

C.

Exceptions to spendthrift protection 1. It is clear that spendthrift provisions are not enforceable without limit, and that certain creditors, in certain circumstances, may reach a trust notwithstanding a spendthrift provision. Spendthrift trusts are justified on the ground that the property originated with the settlor of the trust, and that if the settlor intended to limit the extent of the beneficiary's interest, he or she ought to be able to do so. However, "the question is not merely one of the intention of the settlor; there is also the question of public policy." 25

William F. Fratcher, Scott on Trusts § 157.1 (4th ed., Aspen Publishers Inc. 2000). a. As a result, exceptions to spendthrift protection have long been recognized for claims by a spouse or ex-spouse, or a child, for support or alimony, for creditors who provided necessary services or supplies to the beneficiary, and for creditors who provided services or material that preserve or benefit the interest of the beneficiary. Restatement (Second) of Trusts § 157 (1959). In addition, there generally is an exception for at least some claims of the United States or of a State. Id. There is no Colorado case law addressing whether Colorado recognizes these exceptions. In the absence of controlling case law, it is reasonable to posit that the Colorado courts would, when presented with these issues, follow the Restatement positions. The Colorado appellate court have frequently cited and consistently followed the Restatement. Appendix C is a summary of all Colorado appellate cases citing the Restatement of Trusts (1935), the Restatement (Second) of Trusts (1959), or the Restatement (Third) of Trusts. In addition, the Colorado appellate courts frequently cite Scott on Trusts, and Scott also argues for these exceptions. (Professor Scott was the reporter for both the original Restatement of Trusts (1935) and the Restatement (Second) of Trusts (1959).)

b.

2.

The UTC provides that even though the trust contains a spendthrift provision, a child, spouse, or former spouse who has a court order or judgment against the beneficiary for support or maintenance may obtain an order attaching present or future distributions to the beneficiary. UTC § 503(b). This exception is consistent with the Restatements, federal bankruptcy law, and the weight of decided cases. Restatement (Third) of Trusts § 59(a) (2001); Restatement (Second) of Trusts §§ 157(a) (1959). See UTC § 503 cmt. and the cases cited in Restatement (Third) of Trusts § 59(a) (2001), Reporter's Notes on § 59 clause (a) and cmt. b. Similarly, a judgment creditor who has provided services for the protection of the beneficiary's interest may obtain an order attaching present or future distributions, notwithstanding the presence of a spendthrift provision. UTC § 503(b). This exception is also consistent with the Restatements (Restatement (Third) of Trusts § 59(b) (2001); Restatement (Second) of Trusts § 157(c) (1959)) and is intended to allow "a beneficiary of modest means to overcome an obstacle preventing the beneficiary's obtaining

3.

26

services [i.e., legal assistance] essential to the protection or enforcement of the beneficiary's rights under the trust." UTC § 503 cmt. 4. The UTC also provides that a spendthrift provision does not protect against a claim of the State or of the United States to the extent a State or federal statute so provides. UTC § 503(c). This merely states the obvious and again is consistent with the Restatements. Restatement (Third) of Trusts § 59 cmt. a (2001); Restatement (Second) of Trusts §§ 157(d) (1959). The UTC does not include an exception for tort claimants. a. An exception for tort claimants has been suggested by some commentators on the theory that a tort claimant, unlike a claimant who extends credit to a beneficiary in a commercial transaction, does not have the opportunity to investigate the creditworthiness of the beneficiary. See William F. Fratcher, Scott on Trusts § 157.5 (4th ed., Aspen Publishers Inc. 2000) ("there seems to be something rather shocking in the notion that a man should be allowed to continue in the enjoyment of property without satisfying the claims of persons whom he has injured. It may well be held that it is against public policy to permit the beneficiary of a spendthrift trust to enjoy an income under the trust without discharging his tort liabilities to others.") The idea of a tort exception has not been widely accepted, but the idea was recently publicized by the decision in Sligh v. First National Bank, 704 So. 2d 1020 (Miss. 1997), in which a trust beneficiary was convicted of feloniously driving under the influence of alcohol, resulting in severe injuries to the plaintiff, who then obtained a tort judgment against the beneficiary and sought to garnish the beneficiary's interest in the trust. The Mississippi Supreme Court, reversing the trial court's dismissal of the action for failure to state a claim upon which relief could be granted, held that a spendthrift trust was not immune from attachment by a tort creditor where the beneficiary's conduct was grossly negligent or intentional. The Restatement (Third) of Trusts § 59 cmt. a (2001) leaves open the possibility that The nature or a pattern of tortious conduct by a beneficiary, for example, may on policy grounds justify a court's refusal to allow spendthrift immunity to protect the trust interest and the 27

5.

b.

lifestyle of that beneficiary, especially one whose willful or fraudulent conduct or persistently reckless behavior causes serious harm to others. See Fox and Murphy, Are Spendthrift Trusts Vulnerable to a Beneficiary's Tort Creditors?, 137 Trusts & Estates 57 (1998). The reporter for the Restatement (Third) suggests that the Sligh case may prove influential elsewhere, but notes that the case is apparently overturned by Miss. Code Ann. § 91-9-503 (Family Trust Preservation Act of 1998). Restatement (Third) of Trusts § 59 Reporter's Notes on cmt. a (2001). c. Compare Sligh with Scheffel v. Krueger, 782 A.2d 410 (N.H. 2001), in which the trust beneficiary had been convicted of sexually assaulting the plaintiff's minor child, videotaping the act, and then broadcasting the videotape over the Internet. The plaintiff, on behalf of herself and her child, obtained a civil judgment against the beneficiary, and then sought to attach his interest in a trust that had been established by his grandmother. The New Hampshire Supreme Court affirmed the trial court's dismissal of the action. The New Hampshire spendthrift law is statutory, and the only exceptions in the statute are for self-settled trusts and fraudulent transfers. The court was unwilling to create a judicial exception for tort claimants.

D.

Discretionary trusts 1. The UTC codifies the creditor protection afforded by discretionary trusts by providing in general that, whether or not the trust contains a spendthrift provision, a creditor of a beneficiary may not compel a distribution that is subject to the trustee's discretion, even if the discretion is expressed in the form of a standard or even if the trustee has abused its discretion. UTC § 504(b). This section follows the Restatement in eliminating the distinction between discretionary and support trusts. Restatement (Third) of Trusts § 60 Reporter's Notes to cmt. a (2001). The UTC creates a very limited exception to the protection afforded by a discretionary trust by allowing the court to order a distribution to satisfy a judgment or court order against the beneficiary for support or maintenance of the beneficiary's child, spouse, or former spouse, but only if the trustee has not complied with a standard of distribution or has abused its discretion. UTC § 504(c). In those circumstances, the court may order the trustee to pay an amount that is "equitable under the circumstances but not

2.

28

more than the amount the trustee would have been required to distribute . . . had the trustee complied with the standard or not abused the discretion." Id. E. Self-settled trusts 1. Irrevocable trusts. a. The UTC provides that even if the trust contains a spendthrift provision, a creditor of the settlor of an irrevocable trust may reach the maximum amount that could be distributed to or for the benefit of the settlor. UTC § 505(a)(2). This is the traditional view (recently legislatively supplanted in those states that have adopted "self-settled asset protection" trust statutes), is supported by most of the case law, and is consistent with the Restatements. The leading case on the ability of creditors of the settlor-beneficiary to reach the assets of a self-settled discretionary trust is Ware v. Gulda, 117 N.E. 2d 137 (Mass. 1954). See Restatement (Third) of Trusts § 60 cmt. f (2001); Restatement (Second) of Trusts § 156(2) (1959).

b.

2.

Revocable trusts. The UTC provides that: a. During the settlor's lifetime, his or her creditors may reach the assets of a revocable trust, UTC § 505(a)(1); and After the death of the settlor of a revocable trust, the trust assets are subject to claims of the settlor's creditors, costs of administration of the settlor's estate, expenses of funeral and disposal of remains, and statutory allowances for the surviving spouse and children, to the extent that the probate estate is insufficient to satisfy those claims. UTC § 505(a)(3). See Uniform Probate Code § 6-102 Liability of Nonprobate Transferees for Creditor Claims and Statutory Allowances (added to the UPC in 1998 and not yet adopted in Colorado, which spells out the mechanism by which a creditor may reach the assets of the deceased settlors' revocable trust and other nonprobate transfers).

b.

F.

Holder of a power of withdrawal 1. If a beneficiary of a trust holds a power of withdrawal (for example a 5 x 5 power or a presently exercisable general power of appointment), the UTC 29

provides that, while the power is exercisable, the holder of the power is treated in the same manner as the settlor of a revocable trust (to the extent of the property subject to the power), because the power to withdraw is the functional equivalent of a settlor's power to revoke a revocable trust. UTC § 505(b)(1). This is consistent with the Restatement (Third) of Trusts § 56 cmt. b (2001); see Restatement (Second) of Trusts § 153 cmt. c., but would overturn University National Bank v. Rhoadarmer, 827 P.2d 561 (Colo. App. 1991), which held that a creditor of the holder of an unexercised 5 x 5 power could not reach the trust property subject to the power. 2. Because the holder of a power of withdrawal is treated as the functional equivalent of the settlor of a revocable trust, the rights of the power holder's creditors following a lapse, release, or waiver of the power are generally the same as the rights of the creditors of a settlor of a trust that has become irrevocable. That is, the creditor may generally reach the power holder's beneficial interest in the trust. However, the UTC includes an exception to this result for property that was subject to a typical "Crummey" withdrawal power or 5 x 5 power. Under this exception, the power holder is treated as the settlor of the trust only to the extent that the value of the property affected by the lapse, release, or waiver exceeded the greater of: a. The lapse protected amount under the tax rules relating to lapses of general powers of appointment (Internal Revenue Code of 1986, as amended, §§ 2041(b)(2) and 2514(e); the "lapse protected amount" is the greater of $5,000 or 5% of the value of the property out of which an exercise of the power of appointment could have been satisfied); or The federal gift tax annual exclusion. Internal Revenue Code of 1986, as amended, § 2503(b). The gift tax annual exclusion is $10,000, subject to future adjustments to reflect inflation.

b.

In other words, if the power to withdraw did not exceed these amounts, then creditors of the powerholder may not reach the trust after the power has lapsed, been released, or been waived. Query, however, whether a lapse, release, or waiver of a power of withdrawal might in some circumstances be treated as a fraudulent transfer. VI. Other rules for revocable trusts A. Statute of limitations on contest

30

1.

The UTC imposes a statute of limitations on a proceeding to contest a revocable trust after the settlor's death. A person wishing to contest the trust must commence the proceeding within the earlier of: a. b. Three years after the settlor's death (UTC § 604(a)(1)); or 120 days after the trustee sent the person a copy of the trust agreement and notice informing the person of the trust's existence, of the trustee's name and address, and of the time in which a proceeding to contest the trust must be commenced. UTC § 604(a)(2).

2.

3.

The UTC protects the trustee in making distributions in the absence of knowledge or notice of a contest, UTC § 604(b), but does not protect the distributees from potential liability for return of distributed property if a successful contest is later brought, UTC § 604(c), nor does it prevent the successful contestant from reaching property remaining in the trustee's hands.

B.

Rules of construction. 1. Consistent with the concept that a revocable living trust is the functional equivalent of a will, the UTC provides that rules of construction that apply to the interpretation of and disposition of property by will also apply "as appropriate" to the interpretation of the terms of a trust and the disposition of the trust property. UTC § 112. In earlier drafts of the UTC, this section was limited to revocable trusts, but in the final version of the Code, it was expanded to apply to all trusts. The provision is derived from Restatement (Third) of Trusts § 25(2) (2001) and Restatement (Third) of Property (Wills and Other Donative Transfers) § 7.2 (2001) but the Restatement provisions are limited to revocable trusts. As will substitutes have proliferated and become alternative means of passing property at death, legislatures and courts have sometimes been slow to expand the scope of these rules to transactions to which they should be fully applicable in policy. This Restatement (along with the Restatement Third, Trusts, the Revised Uniform Probate 31

2.

3.

Code, and the Uniform Trust Code) moves toward the policy of unifying the law of wills and will substitutes. Restatement (Third) of Property (Wills and Other Donative Transfers) § 7.2 cmt. a (2001). 4. The idea of applying rules of construction for wills to revocable trusts has been accomplished in some instances by case law. See Restatement (Third) of Trusts § 25, Reporter's Notes to cmts. d and e (2001). Applying "wills rules of construction" to trusts simply by a "crossreference" approach leaves it to case law to develop when doing so is appropriate. On the other hand, drafting specific separate rules of construction for trusts was considered to be outside the scope of the UTC.

5.

VII.

Trusteeship. The UTC will provide a number of useful default rules relating to the office of trustee. A. Cotrustees. 1. Under the UTC, cotrustees will act by majority, rather than unanimous, decision. UTC § 703(a). This is consistent with Restatement (Third) of Trusts § 39 (2001), and is a rejection of the common law rule that required trustees to act unanimously. See Restatement (Second) of Trusts § 194 (1959). Majority rule by default also seems to be consistent with common drafting practice. See, for example, The Orange Book: Colorado Estate Planning Forms (CLE in Colorado, Inc., 2001 ed. supplemented 2004), Form 9 (Marital Deduction Will) § 9.10 and Form 13 (Revocable Marital Deduction Trust) § 15.8. If there is a vacancy in the trusteeship, the remaining trustee(s) may act for the trust. UTC § 703(b). The remaining trustees may also act for the trust if a cotrustee is unavailable because of "absence, illness, disqualification under other law, or other temporary incapacity," and if prompt action is necessary to achieve the purposes of the trust or to avoid injury to the trust property. UTC § 703(d). A trustee who does not join an action of another trustee is generally not liable for the action. UTC § 703(f). A dissenting trustee who joins in an action at the direction of the majority of the trustees may generally avoid liability for the action by giving notice of the dissent to the other trustees.

2.

3.

4.

32

UTC § 703(h). However, even an abstaining trustee or a dissenting trustee who gives notice may be liable if the action of the majority was a serious breach of trust, id., because each trustee has a duty to exercise reasonable care to prevent a cotrustee from committing a serious breach of trust and to compel a cotrustee to redress a serious breach of trust. UTC § 703(g). B. Vacancy in the office of trustee. 1. A vacancy need not be filled if another trustee remains in office. UTC § 704(b). If a vacancy is required to be filled, it must be filled in the following order of priority (UTC § 704(c)): a. By a person designated in the terms of the trust to act as successor trustee; By a person appointed by unanimous agreement of the qualified beneficiaries; or By a person appointed by the court.

2.

b.

c. C.

Resignation of a trustee. The UTC gives statutory recognition to a trustee's right to resign. In addition to allowing resignation with the approval of the court (UTC § 705(a)(2)), the UTC allows a trustee to resign on at least 30 days' notice to the qualified beneficiaries and all cotrustees. UTC § 705(a)(1). The resignation does not avoid liability for acts or omissions committed by the trustee while in office. UTC § 705(c). Removal of a trustee. 1. The removal of a trustee may be sought by a beneficiary, a cotrustee, or by the settlor. UTC § 706(a). In addition, the court may remove a trustee on its own motion. Id. Allowing the settlor to petition for removal of a trustee is contrary to the common law. UTC § 706, cmt. The UTC specifies grounds for removal of a trustee: a. A trustee may be removed if "the trustee has committed a serious breach of trust." UTC § 706(b)(1). (1) The official Comment on this section explains that:

D.

2.

33

A serious breach of trust may consist of a single act that causes significant harm or involves flagrant misconduct. A serious breach of trust may also consist of a series of smaller breaches, none of which individually justify removal when considered alone, but which do so when considered together. A particularly appropriate circumstance justifying removal of the trustee is a serious breach of the trustee's duty to keep the beneficiaries reasonably informed of the administration of the trust or to comply with a beneficiary's request for information as required by Section 813. Failure to comply with this duty may make it impossible for the beneficiaries to protect their interests. It may also mask more serious violations by the trustee. UTC § 706, cmt. (2) The drafters of the UTC used the term "serious" as opposed to "material" because that term is more consistent with the language of the reported decisions. Informal conversation of the author of this outline with Prof. David English, Reporter for the UTC.

b.

A trustee may be removed if "lack of cooperation among cotrustees substantially impairs the administration of the trust." UTC § 706(b)(2). The official Comment notes that removal may be particularly appropriate if there is an even number of trustees and their failure to agree results in a deadlock requiring court resolution. UTC § 706, cmt. A trustee may be removed if, "because of unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively, the court determines that removal of the trustee best serves the interests of the beneficiaries." UTC § 706(b)(3). The official Comment notes that "[a] `persistent failure to administer the trust effectively' might include a long-term pattern of mediocre performance, such as consistently poor investment results when compared to comparable trusts." UTC § 706, cmt. Advocates of the

c.

34

rights of trust beneficiaries unsuccessfully sought a stronger provision for removal based on poor investment performance. d. A trustee may be removed if "there has been a substantial change of circumstances or removal is requested by all of the qualified beneficiaries, the court finds that removal of the trustee best serves the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust, and a suitable cotrustee or successor trustee is available." UTC § 706(b)(4). (1) The official Comment notes that traditionally, the settlor's choice of trustees is given considerable deference, making it more difficult to remove a trustee who was selected by the settlor than it is to remove a trustee who was appointed by the court. UTC § 706, cmt. However, this subsection recognizes that deference to the settlor's choice may no longer be appropriate if there has been a change of circumstances. This subsection also allows the qualified beneficiaries to request removal of a trustee. This is an application of the concept embodied in UTC § 411, which allows the beneficiaries to compel modification of a trust by unanimous agreement if the court concludes that the modification is not inconsistent with a material purpose of the trust.

(2)

VIII.

Powers and duties of trustees A. Delegation. The UTC adopts from the Uniform Prudent Investor Act the concept that trustees may delegate duties and powers to agents, so long as the trustee exercises reasonable care, skill, and caution in selecting the agent, establishing the scope and terms of the delegation, and periodically reviewing the agent's performance. UTC § 807. Powers to direct. 1. The UTC specifically allows the terms of the trust to confer on someone other than the trustee the power to direct certain actions of the trustee, and to confer on the trustee or another person a power to modify or terminate the trust. UTC § 808.

B.

35

2.

In the case of a power to direct the actions of the trustee, the trustee must act in accordance with an exercise of the power unless the attempted exercise is manifestly contrary to the terms of the trust, or the trustee knows that the attempted exercise would constitute a serious breach of a fiduciary duty owed by the holder of the power to the beneficiaries. UTC § 808(b). If the holder of a power to direct is not a beneficiary, he or she is presumptively a fiduciary and is required to act in good faith and with regard to the purposes of the trust and the interests of the beneficiaries, and is liable for any loss resulting from a breach of fiduciary duty. UTC § 808(d). The section effectively ratifies the use of trust protectors and advisors. Because this is not a mandatory rule, it may be modified by the terms of the trust instrument, for example, by requiring that the trustee accept a direction without question, or by providing that the holder of the power to direct will not be a fiduciary. UTC § 808, cmt. See Edward C. Halbach, Jr., Symposium on Law in the Twentieth Century: Uniform Acts, Restatements, and Trends in American Trust Law at Century's End, 88 Calif. L. Rev. 1877, 1916 (2000) ("The diverse types of protectors and the sheer variety of their uses and powers create serious difficulties in attempting to generalize about the nature of the protector's role and obligations.").

3.

4.

C.

Information and reporting to beneficiaries. 1. "A trustee's duty to provide information to beneficiaries on a reasonable basis has long been recognized as fundamental to the trust relationship. Nevertheless, practice, experience, and litigation in this country clearly demonstrate that there is considerable reluctance, and at least a fair amount of uncertainty, among fiduciaries concerning the applicability and performance of this general duty." Edward C. Halbach, Jr., Symposium on Law in the Twentieth Century: Uniform Acts, Restatements, and Trends in American Trust Law at Century's End, 88 Calif. L. Rev. 1877, 1914 (2000). General duties under the UTC. a. The trustee must keep the qualified beneficiaries "reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests." UTC § 813(a).

2.

36

b.

"Unless unreasonable under the circumstances, a trustee shall promptly respond to a beneficiary's request for information related to the administration of the trust." Id. Note that this duty is not limited to qualified beneficiaries.

3.

Specific duties under the UTC. a. If requested by a beneficiary, the trustee must promptly furnish to that beneficiary a copy of the trust instrument. UTC § 813(b)(1). Within 60 days after accepting a trusteeship, the trustee must notify the qualified beneficiaries of the acceptance and of the trustee's name, address, and telephone number. UTC § 813(b)(2). Within 60 days after the date the trustee acquires knowledge of the creation of an irrevocable trust, or that a formerly revocable trust has become irrevocable, the trustee must notify the qualified beneficiaries of the trust's existence, of the identity of the settlor(s), of the right to request a copy of the trust instrument, and of the right to a trustee's report. UTC § 813(b)(3). The trustee must notify the qualified beneficiaries in advance of any change in the method or rate of the trustee's compensation. UTC § 813(b)(4). Periodic reports (accountings) to the beneficiaries. UTC § 813(c). (1) The trustee must send reports to "the distributees or permissible distributees of trust income or principal, and to other qualified or nonqualified beneficiaries who request it." The Colorado UTC Committee recommended that the persons entitled to reports be limited to the distributees and permissible distributees, and other qualified beneficiaries who request it. The reports must be sent at least annually and at the termination of the trust. In addition, if there is a vacancy in the trusteeship and no cotrustee remains in office, the former trustee must send a report to the qualified beneficiaries. The report is to include the "trust property, liabilities, receipts, and disbursements, including the source and 37

b.

c.

d.

e.

(2)

(3)

amount of the trustee's compensation, a listing of the trust assets and, if feasible, their respective market values." 4. Default and mandatory aspects of the duty to inform and report. a. Official UTC provisions. (1) Only the duties (1) to inform the beneficiaries of the existence of the trust, (2) to provide a beneficiary upon request with those reports that the trustee may have prepared, and (3) to respond to a beneficiary's request for other information reasonably related to the trust's administration, may not be waived. UTC §§ 105(b)(8) and 105(b)(9). The settlor may, in the terms of the trust, waive the duty to provide a beneficiary upon request with a copy of the trust instrument, and the requirement that the trustee provide annual reports to the qualified beneficiaries. UTC § 105, cmt. The official Comment notes, however, that furnishing of a copy of the trust instrument and annual reports may be required in a particular case if that information is requested by a beneficiary and is reasonably related to the trust's administration. Id. Some settlors want young beneficiaries to be given little, or even no, information about the trust. In response to this concern, the UTC allows a settlor to provide that the trustee need not even inform beneficiaries under age 25 of the existence of the trust. UTC § 105(b)(8). However, if a beneficiary under that age learns of the trust and requests information, the trustee must respond. UTC § 105(b)(9) and cmt.

(2)

(3)

b.

The Colorado UTC Committee recommended that these provisions be modified to limit the duty to provide a copy of the trust instrument to a duty to provide the portions of the instrument that describe or affect the beneficiary's interest (this language is derived from C.R.S. § 15-16-303(3)), and to make that duty nonwaivable. As discussed later in this outline, the notice and reporting provisions of the UTC have proved to be somewhat controversial

c.

38

in jurisdictions considering enactment of the UTC. In response to the controversy, the 2004 amendments to the UTC bracket the portions of UTC § 105(b) that make certain of the notice and reporting provisions nonwaivable, to indicate that uniformity is not anticipated as to these issues. IX. Liability of trustees A. Statute of limitation. 1. Official UTC provision. a. "A beneficiary may not commence a proceeding against a trustee for breach of trust more than one year after the date the beneficiary or a representative of the beneficiary was sent a report that adequately disclosed the existence of a potential claim for breach of trust and informed the beneficiary of the time allowed for commencing a proceeding." UTC § 1005(a). A report adequately discloses the existence of a potential claim if it "provides sufficient information so that the beneficiary or representative knows of the potential claim or should have inquired into its existence." UTC § 1005(b). If the one-year statute does not apply to bar a claim, a judicial proceeding for breach of trust must be commenced within five years after the first to occur of: (1) the removal, resignation, or death of the trustee; (2) the termination of the beneficiary's interest in the trust; or (3) the termination of the trust.

b.

2.

The Colorado UTC Committee recommended the following changes in this provision: a. That the one-year limitation period following a report be reduced to six months (this is consistent with C.R.S. § 15-16-307); and That the five year self-executing limitation not be adopted in Colorado. As a result, if the six month bar does not apply, the general statute of limitations, C.R.S. § 13-80-101, would apply.

b.

B.

Exculpatory provisions. 1. Language relieving a trustee from liability for certain breaches of trust, or lowering the standard to be applied in determining whether a breach has 39

occurred, is sometimes added to a trust instrument at the request (sometimes insistence) of the trustee. The frequency of requests (and demands) from prospective trustees that certain language be added to trusts has increased during the last decade because "brokers and mutual fund organizations are falling all over themselves to get into the trust business and often are not interested in being constrained by rules of fiduciary duty." Joel C. Dobris, Changes in the Role and the Form of the Trust at the New Millennium, or, We Don't Have to Think of England Anymore, 62 Alb. L. Rev. 543, 558 (1998). 2. The UTC provides that an exculpatory provision is unenforceable to the extent that it: a. "relieves the trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries; or "was inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor." UTC § 1008(a).

b.

3.

If the exculpatory term was "drafted or caused to be drafted by the trustee," it is deemed to be invalid as an abuse of a fiduciary or confidential relationship unless the trustee proves that the provision is fair under the circumstances and "that its existence and contents were adequately communicated to the settlor." UTC § 1008(b).

X.

Modification and termination of trusts. A. Modification or termination by consent. 1. A trust may be modified or terminated with the consent of the settlor and all beneficiaries. UTC § 411(a). A trust may be modified or terminated under this provision even if the modification or termination is inconsistent with a material purpose of the trust. a. The UTC provision codifies the common law on this issue, albeit in somewhat different language than that used in the Restatements and some of the case law. See Restatement (Third) of Trusts § 65(2); Restatement (Second) of Trusts § 338; Scott on Trusts § 338. Colorado follows this common law rule. Green Valley Financial Holdings v. Green, 32 P.3d 643 (Colo. App. 2001).

b.

40

2.

A trust may be modified or terminated with the consent of all of the beneficiaries, and without the concurrence of the settlor, if the court concludes that modification is not inconsistent with a material purpose of the trust, or, in the case of a termination, that continuance of the trust is not necessary to achieve any material purpose of the trust. UTC § 411(b). These provisions are a codification of the "Claflin rule" enunciated in Claflin v. Claflin, 20 N.E. 454 (Mass. 1889). Two factors often prevent the modification or termination of a trust under these rules--an inability, as a practical matter, to obtain consent of all of the beneficiaries (some of whom are likely to be unascertained or unborn), and the possibility that the presence of a spendthrift provision in the trust instrument (which may have been inserted as a matter of course by the drafting attorney with little or no consultation with the client) will be construed to mean that continuation of the trust so as to afford spendthrift protection was a material purpose of the settlor. a. Although termination or modification with the consent of the beneficiaries will remain difficult, the UTC provisions on representation may facilitate the use of these provisions. The UTC originally dealt with the spendthrift issue by providing that the mere existence of a spendthrift provision in the trust will not be presumed to constitute a material purpose of the trust. UTC § 411(c). Because this provision proved to be controversial in some of the jurisdictions considering the UTC, it was bracketed (made a suggested but optional provision) in the 2004 amendments to the UTC.

3.

4.

b.

B.

Modification Because of Unanticipated Circumstances or Inability to Administer Trust Effectively. UTC § 412. 1. The UTC expands the court's ability to apply "equitable deviation" to modify or terminate a trust. The court may modify administrative or dispositive provisions, or may terminate the trust if, because of circumstances not anticipated by the settlor, the modification or termination will further the purposes of the trust. To the extent practicable, the modification must accord with the settlor's probable intention. UTC § 412(a).

2.

41

3.

The court may modify administrative provisions of the trust "if continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust's administration." UTC § 412(b). The standard for modification under this subsection is similar to the standard for applying cy pres to a charitable trust. UTC § 412, cmt.

C.

Cy Pres. UTC § 413. 1. 2. The UTC codifies and broadens somewhat the doctrine of cy pres. The UTC allows the court to apply cy pres not only if the settlor's charitable purpose becomes impossible or unlawful, but also if the purpose becomes impracticable or wasteful. The UTC provision modifies the common law doctrine by presuming that the settlor had a general charitable intent. See Restatement (Second) of Trusts § 399 (1959) (common law rule that settlor's general charitable intent had to be proved), and Restatement (Third) of Trusts § 67 (2001) (presumption of general charitable intent, as in the UTC).

3.

D.

Modification or termination of an uneconomic trust. UTC § 414. 1. The UTC codifies the authority of the trustee to terminate a small trust if the trustee determines that the value of the trust property is insufficient to justify continuing the trust. UTC § 414(a). The UTC suggests $50,000 as the threshold amount. The Colorado UTC Committee recommended that the threshold be changed to $100,000. The UTC also allows the court to deal with a small trust by modifying or terminating the trust, or by appointing a different trustee. UTC § 414(b).

2.

E.

Reformation to correct mistakes. UTC § 415. 1. The UTC authorizes the court to reform a trust to conform the trust terms to the settlor's intent. For this section to apply, it must be proved by clear and convincing evidence that both the settlor's intent and the terms of the trust were affected by a mistake of fact or law. This section may be applied even if the terms of the trust are unambiguous, and the UTC thus rejects the "plain meaning rule," on the theory that the objective of the plain meaning rule (avoiding giving effect

2.

3.

42

to mistaken or fraudulent testimony) is satisfied by applying the higher clear and convincing evidence standard of proof. See Restatement (Third) of Property (Wills and Other Donative Transfers) § 12.1 cmt. d (2001). 4. The UTC section applies whether the mistake was one of "expression or inducement." A mistake of expression is a misstatement in the instrument of the settlor's intention, the failure to include in the instrument a provision the settlor intended to include, or the inclusion in the instrument of a provision that the settlor intended to exclude. A mistake in the inducement is the inclusion of a provision that the settlor did intend to include, or the omission of a provision that the settlor did intend to exclude, where in either case the settlor's intention was based on a mistake of fact or law. See Restatement (Third) of Property (Wills and Other Donative Transfers) § 12.1 cmt. i (2001).

F.

Modification to achieve settlor's tax objectives. UTC § 416. 1. The UTC allows the court to modify a trust in order to achieve the settlor's tax objectives, but the modification may not be contrary to the settlor's probable intention. A modification made after the taxing event has occurred will generally not be binding on the Internal Revenue Service. Commissioner v. Bosch, 387 U.S. 456 (1967). However, if the modification is made before the taxing event occurs, the modification will be binding on the Internal Revenue Service. Rev. Rul. 73-142, 1973-1 C.B. 405.

2.

G.

Combination and division of trusts. UTC § 417. 1. The UTC allows the trustee, after notice to the qualified beneficiaries, to combine two or more trusts into a single trust or divide a trust into two or more separate trusts, if the result does not impair the rights of any beneficiary or adversely affect achievement of the purposes of the trust. This section would replace C.R.S. § 15-16-401, which allows trust combinations and divisions, but only with court approval.

2.

XI.

Provisions to facilitate commercial transactions A. Personal obligations of trustee. UTC 507. 1. The UTC provides that trust property is not subject to the trustee's personal obligations, "even if the trustee becomes insolvent or bankrupt." 43

2.

This provision addresses the underlying problem in Lagae v. Lackner, 996 P.2d 1281 (Colo. 2000), but in a broader manner than the recent amendments to C.R.S. § 38-30-108, 38-10-108.5, 38-30-109, and 38-30166, which deal only with how property may be titled in the name of a trust.

B.

Protection of persons dealing with trustees. UTC § 1012. 1. The UTC protects a third party who deals with a trustee if, unbeknownst to the third party, the trustee exceeds its authority or improperly exercises a power. A third party who deal with a trustee in good faith need not inquire into the trustee's powers. A person who delivers property to a trustee in good faith need not see that the trustee properly applies the property. A third party who in good faith assists a former trustee, or who in good faith and for value deals with a former trustee, not knowing that the trusteeship has terminated, is protected from liability.

2.

3.

4.

C.

Certification of trust. UTC § 1013. 1. The UTC allows a trustee to furnish to a third party a certification of the trust in lieu of providing a copy of the trust instrument. The certification must contain this information (UTC § 1013(a)): a. b. c. d. That the trust exists and the date the trust instrument was executed; The identity of the settlor; The identity and address of the currently acting trustee; The powers of the trustee (the Colorado UTC Committee recommended limiting this to the powers of the trustee in the pending transaction); The revocability or irrevocability of the trust and the identity of any person holding a power to revoke the trust;

2.

e.

44

f.

The authority of cotrustees to sign or otherwise authenticate and whether all or fewer than all are required in order to exercise powers of the trustee; The trust's taxpayer identification number (the Colorado UTC Committee recommended that this requirement be deleted); and The "manner of taking title to trust property." The Colorado UTC Committee recommended that this language be modified to read "the name in which title to trust property may be taken."

g.

h.

3.

The certification must also state that the trust has not been revoked, modified, or amended in any manner that would cause the representations contained in the certification to be incorrect. UTC § 1013(c). However, the certification need not disclose any of the dispositive terms of the trust. UTC § 1013(d). The recipient of the certification may require the trustee to furnish copies of excerpts from the trust instrument which designate the trustee and confer on the trustee the power to act in the pending transaction. UTC § 1013(e). A third party who acts in reliance on a certification without knowledge that the representations in the certification are incorrect is not liable to any person and may assume without inquiry the existence of the facts contained in the certification. UTC § 1013(f). In addition, a person who in good faith enters into a transaction in reliance on a certification may enforce the transaction against the trust property as if the representations contained in the certification were correct. UTC § 1013(g). A person who is provided with a certification and nevertheless demands a copy of the trust instrument, in addition to the certification, is liable for damages if the court determines that the person did not act in good faith in demanding the trust instrument. UTC § 1013(h). The Colorado UTC Committee recommended that sharper teeth be put into this subsection by making the person liable not only for damages but also for costs, expenses, and attorney fees. This is similar to the language of C.R.S. § 15-14-607(2), which imposes liability for costs, expenses, and reasonable attorney fees on a third party who arbitrarily or without reasonable cause fails to comply with a direction given by an agent under a duly notarized power of attorney.

4.

5.

6.

XII.

Effective date 45

A.

The UTC provides for an enacting state to specify an effective date. UTC § 1104. The Colorado UTC committee recommended that the effective date be delayed (for example, to January 1 of the year following the date of enactment), to allow time for lawyers to learn about the UTC. When enacted, the UTC will apply to: 1. 2. Trusts created before, on or after the effective date, UTC § 1106(a)(1); All judicial proceedings concerning trusts commenced on or after the effective date, UTC § 1106(a)(2); and Judicial proceedings concerning trusts commenced before the effective date unless the court finds that application of a particular provision of the UTC 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 UTC does not apply and the superseded law applies. UTC § 1106(a)(3).

B.

3.

XIII.

What's the fuss about? Controversial aspects of the UTC. A. Several aspects of the UTC have proved to be controversial as the various jurisdictions have studied the code and considered its application in light of the jurisdictions' existing law. In addition, a general opposition to the UTC has emerged, from certain lawyers whose primary concern seems to be asset protection. Notice and reporting to beneficiaries. 1. UTC § 813, Duty to Inform and Report, imposes these duties on a trustee: a. To keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests; Unless unreasonable under the circumstances, to promptly respond to a beneficiary's request for information related to the administration of the trust; Upon request of a beneficiary, to promptly furnish to the beneficiary a copy of the trust instrument;

B.

b.

c.

46

d.

To notify the qualified beneficiaries of the trustee's acceptance of the trust and of the trustee's name, address, and telephone, number within 60 days after accepting a trusteeship; To notify the qualified beneficiaries of the trust's existence, of the identity of the settlor or settlors, of the right to request a copy of the trust instrument, and of the right to a trustee's report, within 60 days after the date the trustee acquires knowledge of the creation of an irrevocable trust, or the date the trustee acquires knowledge that a formerly revocable trust has become irrevocable; To notify the qualified beneficiaries in advance of any change in the method or rate of the trustee's compensation; and To send to the distributees or permissible distributees of trust income or principal, and to other qualified or nonqualified beneficiaries who request it, at least annually and at the termination of the trust, a report of the trust property, liabilities, receipts, and disbursements, including the source and amount of the trustee's compensation, a listing of the trust assets and, if feasible, their respective market values.

e.

f.

g.

2.

As discussed earlier, most of the UTC is default rules. However, under UTC § 105(b) as originally adopted, the following aspects of the duty to inform and report are mandatory rules ­ that is, they may not be waived or modified in the trust agreement: a. The duty to notify qualified beneficiaries of an irrevocable trust who have attained 25 years of age of the existence of the trust, of the identity of the trustee, and of their right to request trustee's reports; and The duty to respond to the request of a beneficiary of an irrevocable trust for trustee's reports and other information reasonably related to the administration of a trust.

b.

3.

The extent and nature of the trustee's duty to inform and report to the beneficiaries has proved to be controversial in several states that have adopted the UTC, and some of those states have modified the UTC provisions. a. The concern seems to be based on the fact the some settlors legitimately worry about the effect that knowledge of the trust and 47

its administration might have on the beneficiaries. As a consequence, some lawyers advocate the ability to create a "quiet" trust or even a secret trust. b. It would seem that a complete waiver of any notice would destroy the trust relationship: a [trust] term that prevents the beneficiary from obtaining the information needed to enforce the trust entails the risk of making the trust unenforceable and hence illusory. The policy of mandatory disclosure is protective. Behind the [Uniform Trust] Code's prohibition on complete nondisclosure of the trust and its terms is the intuition that the settlor is not likely to have understood that the true effect of such a term resembles a transfer of the beneficial interest to the trustee, because the term places the trustee's misuse of the trust property effectively beyond remedy. John H. Langbein, Mandatory Rules in the Law of Trusts, 98 Nw. U. L. Rev. 1105, 1126 (Spring 2004). c. The District of Columbia dealt with this issue by adding the following to its version of UTC § 105: (c) The settlor, in the trust instrument or in another writing delivered to the trustee, may waive or modify the duties of a trustee . . . to give notice, information, and reports to beneficiaries by: (1) Waiving or modifying such duties during the lifetime of the settlor or the lifetime of the settlor's surviving souse; (2) Specifying a different age at which a beneficiary or class of beneficiaries must be notified . . . ; or (3) Designating a person or persons to act in good faith to protect the interests of beneficiaries, to receive any notice, information, or reports required . . . in lieu of providing such notice, information, or reports to the beneficiaries.

48

D.C. Code § 19-1301.05(c). Interestingly, the D.C. Code does not say whether the surrogate who may be designated to receive information on behalf of the beneficiaries is a fiduciary. If the surrogate is not a fiduciary, then it seems to me that a provision that allows notice to be given only to the surrogate raises the issue discussed by Professor Langbein as to whether the trust is unenforceable and therefore illusory. If the surrogate is a fiduciary, and probably even if the surrogate is not a fiduciary, other questions come to mind: (1) Does the surrogate have a duty to inform and report to the beneficiaries, and if so, how, when, and to what extent? (2) What is the extent of the surrogate's liability if he or she does not report to the beneficiaries? (3) Will the surrogate be compensated out of the trust? (4) Who would be willing to take on the role of surrogate in light of these unanswered questions? 4. In any event, because the notice provisions have been controversial, and because a number of states have made changes in the notice provisions in a nonuniform way, the 2004 amendments to the UTC bracket the subsections of UTC § 105 that make portions of the duty to inform and report mandatory provisions. According to preliminary comments to the modified § 105, the intent of the bracketing is to indicate that uniformity in these provisions is not expected, not that NCCUSL recommends deletion of the provisions. The final comments to the amended § 105 are expected to include additional discussion of the policy factors. In connection with analyzing the UTC notice provisions, one should keep in mind the current Colorado law on this issue. a. C.R.S. § 15-16-101 requires the trustee to register the trust, subject to limited exceptions (the exceptions are essentially for revocable trusts and trusts with assets of $500 or less). As discussed earlier, the UTC does not include a trust registration requirement, but the Colorado UTC committee recommended retaining the trust registration system. C.R.S. § 15-16-303 provides: 15-16-303. Duty to inform and account to beneficiaries. (1) The trustee shall keep the beneficiaries of the trust reasonably informed of the trust and its administration. (2) Within thirty days after registration, in accordance with the provisions of part 1 of this article, of a trust created on or after July 1, 1975, the trustee shall inform in writing the 49

5.

b.

current beneficiaries and, if possible, one or more persons who, under section 15-10-403, represent beneficiaries with future interests of the court in which the trust is registered and of his name and address. (3) Upon reasonable request, the trustee shall provide the beneficiary with a copy of the terms of the trust which describe or affect his interest and with relevant information about the assets of the trust and the particulars relating to the administration. (4) Upon reasonable request, a beneficiary is entitled to a statement of the accounts of the trust annually and on termination of the trust or change of the trustee. c. Note that the duties in C.R.S. § 15-16-303 run to the "beneficiaries." The term "beneficiary" is defined very broadly: "Beneficiary", as it relates to a trust beneficiary, includes a person who has any present or future interest, vested or contingent, and also includes the owner of an interest by assignment or other transfer; as it relates to a charitable trust, includes any person entitled to enforce the trust . . . . C.R.S. § C.R.S. § 15-10-201(5). d. Two points are noteworthy in considering these provisions of existing Colorado law in the context of possible adoption of the UTC: (1) The existing provisions express the trustee's duty in very broad and generalized language, and the duties run to all beneficiaries. The UTC would clarify and limit ­ not expand ­ the trustee's duty to inform and report to the beneficiaries. Those who, for whatever reason, believe that a secret trust or even a "quiet" trust is permissible under current Colorado law are mistaken.

(2)

6.

Rights of charities and of the attorney general with respect to charitable trusts. a. Some have objected to the fact that, under the UTC provisions on the trustee's duty to inform and report to beneficiaries, charities

50

that may be only remainder beneficiaries, and whose interests may be contingent, will be entitled to notice. UTC § 110(b). In addition, the UTC provides that the attorney general has the rights of a qualified beneficiary with respect to a charitable trust. UTC § 110(c). b. While this is true, the UTC notice provisions are, as discussed above, more certain and less restrictive than the notice provisions of current Colorado law. NCCUSL reacted to the concern about notice to charities and the attorney general by amending UTC § 110 to clarify that a charitable beneficiary has the rights of a qualified beneficiary only if it otherwise satisfies the definition of qualified beneficiary (that is, the charity is a current distributee or permissible distributee, or a presumptive remainder beneficiary), and by bracketing the provision that gives the attorney general the rights of a qualified beneficiary as to a charitable trust.

c.

C.

Creditors' rights. 1. As discussed earlier, the UTC codifies the validity and effectiveness of spendthrift and discretionary trusts to protect trust assets from creditors of the beneficiaries, but recognizes a few limited exceptions. Exceptions to spendthrift protection. Under UTC § 503, a spendthrift provision is not effective against: a. A beneficiary's child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance; A judgment creditor who has provided services for the protection of a beneficiary's interest in the trust; or A claim of the enacting State or the United States to the extent a statute of the State or federal law so provides.

2.

b.

c.

3.

Exceptions to the protection of a discretionary trust. The general rule under the UTC is that, whether or not a trust contains a spendthrift provision, a creditor of a beneficiary may not compel a distribution that is subject to the trustee's discretion, even if the discretion is expressed in the form of a standard of distribution, or the trustee has abused the discretion. 51

UTC § 504(b). However, § 504(c) provides that, to the extent a trustee has not complied with a standard of distribution or has abused a discretion: a. The court may order a distribution to satisfy a judgment or court order against the beneficiary for support or maintenance of the beneficiary's child, spouse, or former spouse. In this case, the court is to direct the trustee to pay to the child, spouse, or former spouse "such amount as is equitable under the circumstances but not more than the amount the trustee would have been required to distribute to or for the benefit of the beneficiary had the trustee complied with the standard or not abused the discretion."

b.

4.

These provisions represent, in my opinion, a conventional and fairly conservative approach by allowing creditors very limited access to trust assets. Nevertheless, some enacting jurisdictions have modified these provisions and others will likely do so as they consider these controversial issues. Some Colorado lawyers have expressed concern that adoption of UTC § 504(b) would effectively overrule In re Marriage of Jones, 812 P.2d 1152 (Colo. 1991), in which the Colorado Supreme Court held that the increase in value, during the marriage, of a wife's interest in a discretionary trust that was created under the will of the wife's mother was not the wife's separate property for purposes of division of property under C.R.S. § 1410-113. (Jones is summarized in Appendix C at ¶ 43.) This conclusion is, in my opinion, unwarranted, for several reasons. a. Jones dealt with the division of property in a divorce, not with the ability of an ex-spouse with a judgment for unpaid alimony or child support to reach the assets of a trust for the benefit of the other spouse. There are no Colorado cases on the latter point, and Jones doesn't address that issue. Jones did not hold that the wife's interest in the trust was not property as a matter of trust law. The court acknowledged that the beneficiary of a discretionary trust has an equitable interest in the subject matter of the trust. Rather, the Court in Jones held that the increase in value of the wife's interest in the trust was not property "for purposes of division of property under section 14-10-113," 812 P.2d at 1157 (emphasis added; footnote omitted), because the wife, as beneficiary could not force the trustee to make

5.

b.

52

distributions unless she could establish fraud or abuse of discretion on the trustee's part. The reference to a beneficiary's ability to force a distribution from a discretionary trust only on a showing of fraud or abuse of discretion is, it seems to me, entirely consistent with the exception in UTC § 504(b) where a trustee "has not complied with a standard of distribution or has abused a discretion." 6. The UTC, like the Restatement (Third) of Trusts, eliminates the distinction between support trusts and discretionary trusts. Not only is the supposed distinction between support and discretionary trusts arbitrary and artificial, but the lines are also difficult--and costly--to attempt to draw. Attempting to do so tends to produce dubious categorizations and almost inevitably different results (based on fortuitous differences in wording or maybe a "fireside" sense of equity) from case to case for beneficiaries who appear, realistically, to be similarly situated as objects of similar settlor intentions. ... The fact of the matter is that there is a continuum of discretionary trusts, with the terms of distributive powers ranging from the most objective (or "ascertainable," IRC § 2041) of standards (pure "support") to the most open ended (e.g., "happiness") or vague ("benefit") of standards, or even with no standards manifested at all (for which a court will probably apply a "general standard of reasonableness"). And these trusts use an unlimited variety of combinations of such terms or standards, with any standard or combination about as likely as another to be accompanied by language of extended discretion (such as "absolute" or "sole and uncontrolled") or by a requirement that other resources of the beneficiary must, or must not (or that they may but need not) be considered by the trustee in exercising its discretion. All of these possibilities are subject to the same general principle that courts will interfere only to prevent abuse. Restatement (Third) of Trusts § 60, reporter's notes on cmt. a (2001). 7. Asset protection lawyers bemoan the elimination of the distinction between support and discretionary trusts, arguing, unpersuasively in my view, that the distinction is essential to maintain the creditor protection historically offered by discretionary trusts, and that the Restatement (Third) and the UTC make it easier for a beneficiary to question a trustee's 53

decisions as to discretionary distributions, thereby, they say, exposing the trust to claims of the beneficiary's creditors. Mark Merric and Steven J. Oshins, How Will Asset Protection of Spendthrift Trusts Be Affected by the UTC?, 31 Estate Planning 478 (October 2004). 8. Some lawyers apparently believe that C.R.S. § 38-10-111, which says that a transfer in trust "for the use of the person making the same shall be void as against the creditors existing of such person" (emphasis added) means, by negative implication, that a self-settled trust is effective as against future creditors of the settlor. a. Adoption of the UTC in Colorado would eliminate this argument, because UTC § 505(a)(2) expressly makes self-settled trusts subject to claims of the settlor's creditors. People who espouse the view the C.R.S. § 38-10-111 authorizes self-settled spendthrift trusts usually cite In re Baum, 22 F.3d 1014 (10th Cir. 1994), a bankruptcy case in which the court refused to hold a trust void under C.R.S. § 38-10-111 because the plaintiff was not an existing creditor when the trust was created. That view of the statute has been debunked by the Colorado Supreme Court (albeit in dictum): Cohen assumes that section 38-10-111 only applies to creditors of the settlor-beneficiary at the time the trust is created. See In re Baum, 22 F.3d 1014, 1017 (10th Cir. 1994) (construing section 38-10-111 to apply only to creditors existing at time trust was created). The complainant makes the same assumption, but concludes that while the trust may not be valid as to creditors, it is not thereby void. But even if there were no creditors at the time the trust was settled, the oral irrevocable spendthrift trust could not and did not protect the settlor-beneficiary from future creditors. See Restatement (Second) of Trusts 156; IIA Scott on Trusts, supra, 156, at 164-67. In re Cohen, 8 P.3d 429 (Colo. 1999). Emphasis added. The cited sections of the Restatement and Scott on Trusts take the conventional approach that creditors of the settlor-beneficiary of a self-settled irrevocable trust may reach the maximum amount that the trustee could distribute to the settlor. Cohen is summarized in Appendix C at ¶ 51. 54

b.

c.

9.

The UTC provides that the creditors of the settlor of a revocable trust may reach the trust assets, both during the settlor's life and, to the extent that the probate estate is insufficient to satisfy claims, after the settlor's death. UTC § 505(a). Those who cling to the archaic idea (totally unwarranted on public policy grounds) that the settlor's creditors may not reach the assets of a revocable trust after the settlor's death may object to this provision. The UTC treats the holder of a power of withdrawal like the settlor of a revocable trust, to the extent of the property subject to the power. UTC § 505(b). Consequently, the creditors of a beneficiary who has a power of withdrawal may reach the trust assets subject to the power. This would overrule University National Bank v. Rhoadarmer, 827 P.2d 561 (Colo. App. 1991), and that appears to upset some lawyers, although it is difficult to see how a rule protecting property that is subject to an unqualified right of withdrawal could be justified on policy grounds. Beneficiary/trustee issue. a. Work on the Restatement (Third) of Trusts began before, and continued after, the drafting of the UTC. There was coordination between the two works, and the official comments to the UTC frequently cite not only the Restatement (Second) of Trusts but the Restatement (Third) of Trusts (including tentative drafts of those portions that were not finalized before the UTC was finished). One area where the UTC now differs from the Restatement (Third) of Trusts has to do with the rights of the creditors of a beneficiarytrustee of the trust. Restatement (Third) of Trusts § 60, cmt. g., takes the position that creditors of a beneficiary who is the sole trustee of a discretionary trust may reach the maximum amount that the beneficiary-trustee can distribute to himself, regardless of whether the trust includes a spendthrift provision. There is some case authority, but not a great deal, to support this position. The Restatement position has caused considerable concern, especially in the context of a typical "bypass" trust in which the surviving spouse is often both a beneficiary and the sole trustee. Section 60 of the Restatement (Third) of Trusts was approved in 2001, after the UTC was approved (in 2000). The UTC as originally approved said nothing about this issue. After approval of Restatement (Third) of Trusts § 60, there was concern that, because the UTC did not address this issue, and because the UTC provides that the common law of trusts supplements the Code, UTC § 106, 55

10.

11.

b.

c.

the Restatement position might be used to fill in the gap in a UTC state. Indeed, the official comment to UTC § 106 says that the UTC "is supplemented by the common law of trusts, including principles of equity, particularly as articulated in the Restatement of Trusts, Restatement (Third) of Property: Wills and Other Donative Transfers, and the Restatement of Restitution." d. NCCUSL responded to this in the 2004 amendments to the UTC by providing that a creditor may not reach the interest of a beneficiary who is also a trustee, or otherwise compel a distribution, if the trustee's discretion to make distributions for the trustee-beneficiary's own benefit is limited by an ascertainable standard (defined by reference to the ascertainable standard provisions of IRC §§ 2041(b)(1)(A) and 2514(c)(1)). UTC §§ 103(2) and 504(e).

D.

Modification or termination of a trust. A tax issue related to UTC § 411 has arisen in light of the Tax Court opinion concerning the family limited partnership that was involved in Estate of Strangi v. Commissioner, T.C. Memo 2003-145. 1. 2. The tax issue is a legitimate concern, but is not really a UTC issue at all. The problem is that, in her opinion in Strangi, Judge Cohen used very broad language to the effect that the decedent's power, acting together with the other partners, to revoke the partnership agreement was a retained power under Internal Revenue Code § 2036(a)(2). UTC § 411(a) says that a noncharitable irrevocable trust may be modified or terminated upon consent of the settlor and all the beneficiaries. Under the broad language of Strangi, this might cause an irrevocable trust to be included in the settlor's gross estate. However, the UTC provision codifies the common law on this issue, albeit in somewhat different language than that used in the Restatements and some of the case law. See Restatement (Third) of Trusts § 65(2); Restatement (Second) of Trusts § 338; Scott on Trusts § 338. Colorado follows this common law rule. Green Valley Financial Holdings v. Green, 32 P.3d 643 (Colo. App. 2001). (The Green Valley case is summarized in Appendix C at ¶ 53.) Thus, the §2036 issue raised by Strangi is not limited to a UTC jurisdiction ­ if the broad language of Strangi is correct, then every irrevocable trust is potentially included in the settlor's gross estate,

3.

4.

56

regardless of whether the jurisdiction has adopted the UTC or follows the common law rule. 5. At its recently concluded 2004 annual meeting, the National Conference of Commissioners on Uniform State Laws adopted an amendment to UTC § 411(a) to deal with this issue. The amendment offers an alternative first sentence to the section, which would require court approval for an agreement to terminate or modify the trust. The 2004 amendments also address a related tax issue that arises because of the interplay between the power of the settlor and all beneficiaries under § 411(a) to terminate a trust, and the representation provisions of UTC article 3. a. In general, UTC § 303 allows for representation of a beneficiary by a fiduciary for or parent of a minor or incapacitated beneficiary. The interplay between § 303 and § 411(a) raises the question, for example, where a parent creates a trust for the benefit of the parent's child, with remainder to the child's estate, whether the parent, as settlor, and as representative of the child, as sole beneficiary, may terminate the trust under UTC § 411(a). The 2004 amendments to the UTC eliminate this possibility by providing that a settlor may not represent a beneficiary with respect to the termination or modification of the trust under § 411(a). UTC § 301(d).

6.

b.

c.

E.

Termination or modification of a trust by the beneficiaries without the settlor's consent. 1. UTC § 411(b) provides that a noncharitable irrevocable trust may be terminated upon consent of all of the beneficiaries, without the consent of the settlor or if the settlor is deceased, if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust. In addition, a noncharitable irrevocable trust may be modified upon consent of all of the beneficiaries if the court concludes that the modification is not inconsistent with a material purpose of the trust. This is not new law. Rather, it follows the so-called "Claflin" rule of Claflin v. Claflin, 20 N.E. 454 (Mass. 1889). However, the presence of a spendthrift provision in the trust has sometimes been held to constitute a material purpose of the trust, without inquiry into the settor's actual 57

2.

purpose in creating the trust, even though the spendthrift provision may have been inserted by the drafting lawyer as a routine matter without any discussion with the settlor. 3. UTC § 411(c) says that a spendthrift provision is not presumed to constitute a material purpose. This provision has proved to be somewhat controversial in enacting jurisdictions, and in response, the 2004 amendments to the UTC bracket this provision.

4.

F.

Effect of incapacity on the settlor's powers over a revocable trust. 1. UTC § 603(a) says that while a trust is revocable and the settlor has capacity to revoke the trust, rights of the beneficiaries are subject to the control of, and the duties of the trustee are owed exclusively to, the settlor. This means that, if the settlor becomes incapacitated, the trustee begins owing duties to the other trust beneficiaries. This provision has been criticized because it may be unclear whether and when the settlor has become incapacitated, and on the ground that the rule for a revocable trust should be the same as the rule for a will, and devisees under a will have no right to know about the terms of the will until the testator dies, regardless of whether the testator is incapacitated. In response to these criticisms, the 2004 amendments to the UTC bracket the language in § 603 concerning the settlor's incapacity, indicating that states may opt not to include that language.

2.

3.

4.

G.

Effective date. 1. When enacted, the UTC applies, with a few specific exceptions, to preexisting trusts as well as to trusts created after the date of enactment. Some have objected to applying a new code to previously created trusts that were drafted without knowledge of the code. The response is that, to the extent that the UTC codifies the common law of trusts, it is not really a change in the law, and to the extent that prior law differed frm the UTC or was uncertain, it is useful to have clear rules that apply to all trusts. The fact that, in Colorado, the UTC would largely codify the common law is demonstrated by the frequency and consistency

2.

3.

58

with which the Colorado appellate courts cite and follow the Restatements of Trusts. See Appendix C. 4. It should be expected that some states will modify the effective date provision when they enact the UTC. Wyoming, for example, made the UTC prospective only. The recently proposed version of the UTC for Colorado would be uniform and apply the code retroactively, but that provision could be reconsidered as the UTC moves forward in Colorado.

59

*****

60

Appendix A ­ UTC Text With Changes Recommended for Colorado Additions recommended by the Colorado UTC committee are in bold. Deletions recommended by the Colorado UTC committee are in strikeout.

ARTICLE 1 GENERAL PROVISIONS AND DEFINITIONS SECTION 101. SHORT TITLE. This [Act] may be cited as the Colorado Uniform Trust Code. SECTION 102. SCOPE. This [Code] 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. This Code does not apply to a trust that is used primarily for business, employment, investment, or commercial transactions, such as a business trust, land trust, voting trust, common trust fund, security arrangement, liquidation trusts, trust created by a deposit arrangement in a financial institution, trust created for paying debts, dividends, interest, salaries, wages, profits, pensions, or employee benefits of any kind, or any arrangement under which a person is a nominee or escrowee for another. SECTION 103. DEFINITIONS. In this [Code]: (1) "Action," with respect to an act of a trustee, includes a failure to act. (2) "Beneficiary" means a person that: (A) has a present or future beneficial interest in a trust, vested or contingent; or (B) in a capacity other than that of trustee, holds a power of appointment over trust property. (3) "Charitable trust" means a trust, or portion of a trust, created for a charitable purpose described in Section 405(a). (4) "[Conservator]" means a person appointed by the a court to administer the estate of a minor or adult individual. (5) "Environmental law" means a federal, state, or local law, rule, regulation, or ordinance relating to protection of the environment. (6) "[Guardian]" means a person appointed by the a court [, a parent, or a spouse] to make decisions regarding the support, care, education, health, and welfare of a minor or adult individual. The term does not include a guardian ad litem. (7) "Interests of the beneficiaries" means the beneficial interests provided in the terms of the trust. (8) "Jurisdiction," with respect to a geographic area, includes a State or country.

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(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) "Power of withdrawal" means a presently exercisable general power of appointment other than a power exercisable only upon consent of the trustee or a person holding an adverse interest. (11) "Property" means anything that may be the subject of ownership, whether real or personal, legal or equitable, or any interest therein. (12) "Qualified beneficiary" means a beneficiary who, on the date the beneficiary's qualification is determined: (A) is a distributee or permissible distributee of trust income or principal; (B) would be a distributee or permissible distributee of trust income or principal if the interests of the distributees described in subparagraph (A) terminated on that date; or (C) would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date. (13) "Revocable," as applied to a trust, means revocable by the settlor without the consent of the trustee or a person holding an adverse interest. (14) "Settlor" means a person, including a testator, who creates, or contributes property to, a trust. If more than one 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. (15) "Spendthrift provision" means a term of a trust which restrains both voluntary and involuntary transfer of a beneficiary's interest. (16) "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. (17) "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. (18) "Trust instrument" means an instrument executed by the settlor that contains terms of the trust, including any amendments thereto. (19) "Trustee" includes an original, additional, and successor trustee, and a cotrustee. SECTION 104. KNOWLEDGE. (a) Subject to subsection (b), a person has knowledge of a fact if the person: (1) has actual knowledge of it; (2) has received a notice or notification of it; or (3) from all the facts and circumstances known to the person at the time in question, has reason to know it. (b) An organization that conducts activities through employees has notice or knowledge of a fact involving a trust only from the time the information was received by an employee having responsibility to act for the trust, or would have been brought to the employee's attention A2

if the organization had exercised reasonable diligence. An organization exercises reasonable diligence if it maintains reasonable routines for communicating significant information to the employee having responsibility to act for the trust and there is reasonable compliance with the routines. Reasonable diligence does not require an employee of the organization to communicate information unless the communication is part of the individual's regular duties or the individual knows a matter involving the trust would be materially affected by the information. SECTION 105. DEFAULT AND MANDATORY RULES. (a) Except as otherwise provided in the terms of the trust, this [Code] governs the duties and powers of a trustee, relations among trustees, and the rights and interests of a beneficiary. (b) The terms of a trust prevail over any provision of this [Code] except: (1) the requirements for creating a trust; (2) the duty of a trustee to act in good faith and in accordance with the purposes of the trust; (3) the requirement that a trust and its terms be for the benefit of its beneficiaries, and that the trust have a purpose that is lawful, not contrary to public policy, and possible to achieve; (4) the power of the court to modify or terminate a trust under Sections 410 through 416; (5) the effect of a spendthrift provision and the rights of certain creditors and assignees to reach a trust as provided in [Article] 5; (6) the power of the court under Section 702 to require, dispense with, or modify or terminate a bond; (7) the power of the court under Section 708(b) to adjust a trustee's compensation specified in the terms of the trust which is unreasonably low or high; (8) with respect to the qualified beneficiaries of an irrevocable trust who have attained 25 years of age, the duty under section 813(b)(2)(-(3) to notify them of the existence of the trust, of the identity of the trustee, and of their right to request trustee's reports; (9) the duty duties under Sections 813(a) and 813(b)(1) to respond to the request of a beneficiary of an irrevocable trust for trustee's reports and other information reasonably related to the administration of a trust; (10) the effect of an exculpatory term under Section 1008; (11) the rights under Sections 1010 through 1013 of a person other than a trustee or beneficiary; (12) periods of limitation for commencing a judicial proceeding; [and] (13) the power of the court to take such action and exercise such jurisdiction as may be necessary in the interests of justice [; and (14) the subject-matter jurisdiction of the court and venue for commencing a proceeding as provided in Sections 203 and 204].

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SECTION 106. COMMON LAW OF TRUSTS; PRINCIPLES OF EQUITY. The common law of trusts and principles of equity supplement this [Code], except to the extent modified by this [Code] or another statute of this State. SECTION 107. GOVERNING LAW. The meaning and effect of the terms of a trust are determined by: (1) the law of the jurisdiction designated in the terms unless the designation of that jurisdiction's law is contrary to a strong public policy of the jurisdiction having the most significant relationship to the matter at issue; or (2) in the absence of a controlling designation in the terms of the trust, the law of the jurisdiction having the most significant relationship to the matter at issue. SECTION 108. PRINCIPAL PLACE OF ADMINISTRATION. (a) Without precluding other means for establishing a sufficient connection with the designated jurisdiction, terms of a trust designating the principal place of administration are valid and controlling if: (1) a trustee's principal place of business is located in or a trustee is a resident of the designated jurisdiction; or (2) all or part of the administration occurs in the designated jurisdiction. (b) A trustee is under a continuing duty to administer the trust at a place appropriate to its purposes, its administration, and the interests of the beneficiaries. (c) Without precluding the right of the court to order, approve, or disapprove a transfer, the trustee, in furtherance of the duty prescribed by subsection (b), may transfer the trust's principal place of administration to another State or to a jurisdiction outside of the United States. (d) The trustee shall notify the qualified beneficiaries of a proposed transfer of a trust's principal place of administration not less than 60 days before initiating the transfer. The notice of proposed transfer must include: (1) the name of the jurisdiction to which the principal place of administration is to be transferred; (2) the address and telephone number at the new location at which the trustee can be contacted; (3) an explanation of the reasons for the proposed transfer; (4) the date on which the proposed transfer is anticipated to occur; and (5) the date, not less than 60 days after the giving of the notice, by which the qualified beneficiary must notify the trustee of an objection to the proposed transfer. (e) The authority of a trustee under this section to transfer a trust's principal place of administration terminates if a qualified beneficiary notifies the trustee of an objection to the proposed transfer on or before the date specified in the notice. (f) In connection with a transfer of the trust's principal place of administration, the trustee may transfer some or all of the trust property to a successor trustee designated in the terms of the trust or appointed pursuant to Section 704.

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SECTION 109. METHODS AND WAIVER OF NOTICE. (a) Notice to a person under this [Code] or the sending of a document to a person under this [Code] must be accomplished in a manner reasonably suitable under the circumstances and likely to result in receipt of the notice or document. Permissible methods of notice or for sending a document include first-class mail, personal delivery, delivery to the person's last known place of residence or place of business, or a properly directed electronic message. (b) Notice otherwise required under this [Code] or a document otherwise required to be sent under this [Code] need not be provided to a person whose identity or location is unknown to and not reasonably ascertainable by the trustee. (c)(b) Notice under this [Code] or the sending of a document under this [Code] may be waived by the person to be notified or sent the document. (d)(c) Notice of a judicial proceeding must be given as provided in the applicable rules of civil procedure. SECTION 110. OTHERS TREATED AS QUALIFIED BENEFICIARIES. (a) Whenever notice to qualified beneficiaries of a trust is required under this [Code] , the trustee must also give notice to any other beneficiary who has sent the trustee a request for notice. (b) A charitable organization expressly mandated to receive distributions under the terms of a charitable trust or a person appointed to enforce a trust created for the care of an animal or another noncharitable purpose as provided in Section 408 or 409 has the rights of a qualified beneficiary under this [Code]. (c) The [attorney general of this State] has the rights of a qualified beneficiary with respect to a charitable trust having its principal place of administration in this State. SECTION 111. NONJUDICIAL SETTLEMENT AGREEMENTS. (a) For purposes of this section, "interested persons" means persons whose consent would be required in order to achieve a binding settlement were the settlement to be approved by the court. (b) Except as otherwise provided in subsection (c), interested persons may enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust. (c) A nonjudicial settlement agreement is valid only to the extent it does not violate a material purpose of the trust and includes terms and conditions that could be properly approved by the court under this [Code] or other applicable law. (d) Matters that may be resolved by a nonjudicial settlement agreement include: (1) the interpretation or construction of the terms of the trust; (2) the approval of a trustee's report or accounting; (3) direction to a trustee to refrain from performing a particular act or the grant to a trustee of any necessary or desirable power; (4) the resignation or appointment of a trustee and the determination of a trustee's compensation; (5) transfer of a trust's principal place of administration; and (6) liability of a trustee for an action relating to the trust. A5

(e) Any interested person may request the court to approve a nonjudicial settlement agreement, to determine whether the representation as provided in [Article] 3 was adequate, and to determine whether the agreement contains terms and conditions the court could have properly approved. [SECTION 112. RULES OF CONSTRUCTION. The rules of construction that apply in this State to the interpretation of and disposition of property by will or other Governing Instrument (as defined in the Colorado Probate Code) also apply as appropriate to the interpretation of the terms of a trust and the disposition of the trust property.] ARTICLE 2 JUDICIAL PROCEEDINGS SECTION 201. ROLE OF COURT IN ADMINISTRATION OF TRUST. (a) The court may intervene in the administration of a trust to the extent its jurisdiction is invoked by an interested person or as provided by law. (b) A trust is not subject to continuing judicial supervision unless ordered by the court. (c) A judicial proceeding involving a trust may relate to any matter involving the trust's administration, including a request for instructions and an action to declare rights. SECTION 202. JURISDICTION OVER TRUSTEE AND BENEFICIARY. (a) By accepting the trusteeship of a trust having its principal place of administration in this State, or by registering the trust in this State, or by moving the principal place of administration to this State, the trustee submits personally to the jurisdiction of the courts of this State regarding any matter involving the trust. (b) With respect to their interests in the trust, the beneficiaries of a trust having its principal place of administration in this State or which is properly registered in this State are subject to the jurisdiction of the courts of this State regarding any matter involving the trust. By accepting a distribution from such a trust, the recipient submits personally to the jurisdiction of the courts of this State regarding any matter involving the trust. (c) This section does not preclude other methods of obtaining jurisdiction over a trustee, beneficiary, or other person receiving property from the trust. [SECTION 203. SUBJECT-MATTER JURISDICTION. (a) The [designate] court has exclusive jurisdiction of proceedings in this State brought by a trustee or beneficiary concerning the administration of a trust. (b) The [designate] court has concurrent jurisdiction with other courts of this State of other proceedings involving a trust.] (c) This section does not preclude judicial or non-judicial alternative dispute resolution.

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[SECTION 204. VENUE. (a) Except as otherwise provided in subsection (b), venue for A judicial proceeding concerning a trust may be commenced in the [county] in which the trust is registered. If the trust is not registered, a judicial proceeding involving a trust is concerning a trust may be commenced in the [county] of this State in which the trust's principal place of administration is or will is to be located and, if the trust is created by will and the estate is not yet closed, in the [county] in which the decedent's estate is being administered. (b) If a trust has no trustee, venue for a judicial proceeding for the appointment of a trustee must be commenced in the [county] in which the trust is registered, or if the trust is not registered, is [sic] in a [county] of this State in which a beneficiary resides, in a [county] in which any trust property the trust property, or some portion of the trust property, is located, and if the trust is created by will, in the [county] in which the decedent's estate was or is being administered.] (c) A judicial proceeding other than one described in subsection (a) or (b) must be commenced in accordance with the rules of venue applicable to civil actions. ARTICLE 3 REPRESENTATION SECTION 301. REPRESENTATION: BASIC EFFECT. (a) Notice to a person who may represent and bind another person under this [article] has the same effect as if notice were given directly to the other person. (b) The consent of a person who may represent and bind another person under this [article] is binding on the person represented unless the person represented objects to the representation before the consent would otherwise have become effective. (c) Except as otherwise provided in Sections 411 and 602, a person who under this [article] may represent a settlor who lacks capacity may receive notice and give a binding consent on the settlor's behalf. SECTION 302. REPRESENTATION BY HOLDER OF GENERAL TESTAMENTARY POWER OF APPOINTMENT. To the extent there is no conflict of interest between the holder of a general testamentary power of appointment and the persons represented with respect to the particular question or dispute, the holder may represent and bind persons whose interests, as permissible appointees, takers in default, or otherwise, are subject to the power. SECTION 303. REPRESENTATION BY FIDUCIARIES AND PARENTS. To the extent there is no conflict of interest between the representative and the person represented or among those being represented with respect to a particular question or dispute: (1) a [conservator] may represent and bind the protected person whose estate that the [conservator] controls; (2) a [guardian] may represent and bind the ward if a [conservator] of the ward's estate has not been appointed; A7

(3) an agent having authority to act with respect to the particular question or dispute may represent and bind the principal; (4) a trustee may represent and bind the beneficiaries of the trust; (5) a personal representative of a decedent's estate may represent and bind persons interested in the estate; and (6) a parent may represent and bind the parent's minor or unborn child if a [conservator] or [guardian] for the child has not been appointed. SECTION 304. REPRESENTATION BY PERSON HAVING SUBSTANTIALLY IDENTICAL INTEREST. Unless otherwise represented, a minor, incapacitated, or unborn individual, or a person whose identity or location is unknown and not reasonably ascertainable, may be represented by and bound by another having a substantially identical interest with respect to the particular question or dispute, but only to the extent there is no conflict of interest between the representative and the person represented. SECTION 305. APPOINTMENT OF REPRESENTATIVE. (a) If the court determines that an interest is not represented under this [article], or that the otherwise available representation might be inadequate, the court may appoint a [representative] to receive notice, give consent, and otherwise represent, bind, and act on behalf of a minor, incapacitated, protected person, or unborn individual, or a person whose identity or location is unknown. A [representative] may be appointed to represent several persons or interests. (b) A [representative] may act on behalf of the individual represented with respect to any matter arising under this [Code], whether or not a judicial proceeding concerning the trust is pending. (c) In making decisions, a [representative] may consider general benefit accruing to the living members of the individual's family. SECTION 306. JUDICIALLY APPROVED SETTLEMENT. (a) A settlement of any controversy as to the administration of a trust, the construction, validity, or effect of any trust, the rights or interests of the beneficiaries or persons having claims against the trust, if approved in a formal proceeding in the court for that purpose is binding on all parties thereto including any unborn, unascertained, or who could not be located. An approved settlement does not impair the rights of creditors or taxing authorities who are not parties to it. (b) Notice of a judicially approved settlement must be given to every interested person or to one who can bind an interested person as provided in [article] 3. For purposes of this section, interested person means the trustee and any beneficiary whose interest in the trust might be affected by the settlement. (c) The procedure for securing court approval or a settlement is as follows: (1) The terms of the settlement shall be set forth in an agreement in writing which shall be executed by all competent persons and parents of any minor child having a beneficial interest or having claims which will or may be affected by the

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settlement. Execution is not required by any person whose identity cannot be ascertained or whose whereabouts is unknown and cannot be ascertained. (2) Any interested person, including a trustee, then may submit the settlement to the court for its approval and for execution by the trustee, the trustee of every affected testamentary trust, other fiduciaries and representatives. (3) After notice to all interested persons or their representative, the court, if it finds that the contest or controversy is in good faith and that the effect of the settlement upon the interests of the persons represented by the fiduciaries or representatives is just and reasonable, shall make an order approving the settlement and directing all fiduciaries under its supervision to execute the agreement. A minor child represented only by his parents may be bound, only if there is not conflict or interest between the parent and child. Upon the making of the order and the execution of the settlement, all further disposition of trust property affected by the settlement shall be in accordance with the terms of the settlement. (d) Notice to a person who may be represented and bound under [article] 3 of an agreement to be approved by the court must be given: (1) directly to the person or to one who may bind the person if the person may be represented and bound under Section 302 or 303; or (2) in the case of a person who may be represented and bound under §304 and who is unborn or whose identity or location is unknown and not reasonably ascertainable, to all person whose interests in the judicial proceedings are substantially identical and whose identities and locations are known. (3) in the case of other persons who may be represented and bound under §304, directly to the person. ARTICLE 4 CREATION, VALIDITY, MODIFICATION, AND TERMINATION OF TRUST SECTION 401. METHODS OF CREATING TRUST. A trust may be created by: (1) transfer of property to another person as trustee during the settlor's lifetime or by will or other disposition taking effect upon the settlor's death; (2) declaration by the owner of property that the owner holds identifiable property as trustee; or (3) exercise of a power of appointment in favor of a trustee. SECTION 402. REQUIREMENTS FOR CREATION. (a) A trust is created only if: (1) the settlor has capacity to create a trust; (2) the settlor indicates an intention to create the trust or a statute, judgment or decree authorizes the creation of a trust; (3) the trust has a definite beneficiary or is: (A) a charitable trust; A9

(B) a trust for the care of an animal, as provided in Section 408 § 15-11-901 C.R.S.; or (C) a trust for a noncharitable purpose, as provided in Section 409 § 15-11901 C.R.S.; (4) the trustee has duties to perform; and (5) the same person is not the sole trustee and sole beneficiary. (b) A beneficiary is definite if the beneficiary can be ascertained now or in the future, subject to any applicable rule against perpetuities. (c) A power in a trustee to select a beneficiary from an indefinite class is valid. If the power is not exercised within a reasonable time, the power fails and the property subject to the power passes to the persons who would have taken the property had the power not been conferred. SECTION 403. TRUSTS CREATED IN OTHER JURISDICTIONS. A trust not created by will is validly created if its creation complies with the law of the jurisdiction in which the trust instrument was executed, or the law of the jurisdiction in which, at the time of creation: (1) the settlor was domiciled, had a place of abode, or was a national; (2) a trustee was domiciled or had a place of business; or (3) any trust property was located. SECTION 404. TRUST PURPOSES. A trust may be created only to the extent its purposes are lawful, not contrary to public policy, and possible to achieve. A trust and its terms must be for the benefit of its beneficiaries. SECTION 405. CHARITABLE PURPOSES; ENFORCEMENT. (a) A charitable trust may be created for the relief of poverty, the advancement of education or religion, the promotion of health, governmental or municipal purposes, or other purposes the achievement of which is beneficial to the community. (b) If the terms of a charitable trust do not indicate a particular charitable purpose or beneficiary, the trustee if authorized by the terms of the trust, or if not, the court may select one or more charitable purposes or beneficiaries. The selection must be consistent with the settlor's intention to the extent it can be ascertained. (c) The settlor of a charitable trust, among others, may maintain a proceeding to enforce the trust. SECTION 406. CREATION OF TRUST INDUCED BY FRAUD, DURESS, OR UNDUE INFLUENCE. A trust is void to the extent its creation was induced by fraud, duress, or undue influence. SECTION 407. EVIDENCE OF ORAL TRUST. Except as required by a statute other than this [Code], a trust need not be evidenced by a trust instrument, but the creation of an oral trust and its terms may be established only by clear and convincing evidence.

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SECTION 408. TRUST FOR CARE OF ANIMAL. (a) A trust may be created to provide for the care of an animal alive during the settlor's lifetime. The trust terminates upon the death of the animal or, if the trust was created to provide for the care of more than one animal alive during the settlor's lifetime, upon the death of the last surviving animal. (b) A trust authorized by this section may be enforced by a person appointed in the terms of the trust or, if no person is so appointed, by a person appointed by the court. A person having an interest in the welfare of the animal may request the court to appoint a person to enforce the trust or to remove a person appointed. (c) Property of a trust authorized by this section may be applied only to its intended use, except to the extent the court determines that the value of the trust property exceeds the amount required for the intended use. Except as otherwise provided in the terms of the trust, property not required for the intended use must be distributed to the settlor, if then living, otherwise to the settlor's successors in interest. SECTION 409. NONCHARITABLE TRUST WITHOUT ASCERTAINABLE BENEFICIARY. Except as otherwise provided in Section 408 or by another statute, the following rules apply: (1) A trust may be created for a noncharitable purpose without a definite or definitely ascertainable beneficiary or for a noncharitable but otherwise valid purpose to be selected by the trustee. The trust may not be enforced for more than [21] years. (2) A trust authorized by this section may be enforced by a person appointed in the terms of the trust or, if no person is so appointed, by a person appointed by the court. (3) Property of a trust authorized by this section may be applied only to its intended use, except to the extent the court determines that the value of the trust property exceeds the amount required for the intended use. Except as otherwise provided in the terms of the trust, property not required for the intended use must be distributed to the settlor, if then living, otherwise to the settlor's successors in interest. SECTION 410. MODIFICATION OR TERMINATION OF TRUST; PROCEEDINGS FOR APPROVAL OR DISAPPROVAL. (a) In addition to the methods of termination prescribed by Sections 411 through 414, a trust terminates to the extent the trust is revoked or expires pursuant to its terms, no purpose of the trust remains to be achieved, or the purposes of the trust have become unlawful, contrary to public policy, or impossible to achieve. (b) A proceeding to approve or disapprove a proposed modification or termination under Sections 411 through 416, or trust combination or division under Section 417, may be commenced by a trustee or beneficiary, and a proceeding to approve or disapprove a proposed modification or termination under Section 411 may be commenced by the settlor. The settlor of a charitable trust may maintain a proceeding to modify the trust under Section 413.

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SECTION 411. MODIFICATION OR TERMINATION OF NONCHARITABLE IRREVOCABLE TRUST BY CONSENT. (a) A noncharitable irrevocable trust may be modified or terminated upon consent of the settlor and all beneficiaries, even if the modification or termination is inconsistent with a material purpose of the trust. A settlor's power to consent to a trust's termination may be exercised by an agent under a power of attorney only to the extent expressly authorized by the power of attorney or the terms of the trust; by the settlor's [conservator] with the approval of the court supervising the [conservatorship] if an agent is not so authorized; or by the settlor's [guardian] with the approval of the court supervising the [guardianship] if an agent is not so authorized and a conservator has not been appointed. (b) A noncharitable irrevocable trust may be terminated upon consent of all of the beneficiaries if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust. A noncharitable irrevocable trust may be modified upon consent of all of the beneficiaries if the court concludes that modification is not inconsistent with a material purpose of the trust. (c) A spendthrift provision in the terms of the trust is not presumed to constitute a material purpose of the trust. (d) Upon termination of a trust under subsection (a) or (b), the trustee shall distribute the trust property as agreed by the beneficiaries. (e) If not all of the beneficiaries consent to a proposed modification or termination of the trust under subsection (a) or (b), the modification or termination may be approved by the court if the court is satisfied that: (1) if all of the beneficiaries had consented, the trust could have been modified or terminated under this section; and (2) the interests of a beneficiary who does not consent will be adequately protected. SECTION 412. MODIFICATION OR TERMINATION BECAUSE OF UNANTICIPATED CIRCUMSTANCES OR INABILITY TO ADMINISTER TRUST EFFECTIVELY. (a) The court may modify the administrative or dispositive terms of a trust or terminate the trust if, because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust. To the extent practicable, the modification must be made in accordance with the settlor's probable intention. (b) The court may modify the administrative terms of a trust if continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust's administration. (c) Upon termination of a trust under this section, the trustee shall distribute the trust property in a manner consistent with the purposes of the trust. SECTION 413. CY PRES. (a) Except as otherwise provided in subsection (b), if a particular charitable purpose becomes unlawful, impracticable, impossible to achieve, or wasteful: (1) the trust does not fail, in whole or in part;

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(2) the trust property does not revert to the settlor or the settlor's successors in interest; and (3) the court may apply cy pres to modify or terminate the trust by directing that the trust property be applied or distributed, in whole or in part, in a manner consistent with the settlor's charitable purposes. (b) A provision in the terms of a charitable trust that would result in distribution of the trust property to a noncharitable beneficiary prevails over the power of the court under subsection (a) to apply cy pres to modify or terminate the trust only if, when the provision takes effect: (1) the trust property is to revert to the settlor and the settlor is still living; or (2) fewer than 21 years have elapsed since the date of the trust's creation. SECTION 414. MODIFICATION OR TERMINATION OF UNECONOMIC TRUST. (a) After notice to the qualified beneficiaries, the trustee of a trust consisting of trust property having a total value less than [$50,000] $100,000 may terminate the trust if the trustee concludes that the value of the trust property is insufficient to justify the cost of administration. (b) The court may modify or terminate a trust or remove the trustee and appoint a different trustee if it determines that the value of the trust property is insufficient to justify the cost of administration. (c) Upon termination of a trust under this section, the trustee shall distribute the trust property in a manner consistent with the purposes of the trust. (d) This section does not apply to an easement for conservation or preservation. SECTION 415. REFORMATION TO CORRECT MISTAKES. The court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor's intention if it is proved by clear and convincing evidence that both the settlor's intent and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement. SECTION 416. MODIFICATION TO ACHIEVE SETTLOR'S TAX OBJECTIVES. To achieve the settlor's tax objectives, the court may modify the terms of a trust in a manner that is not contrary to the settlor's probable intention. The court may provide that the modification has retroactive effect. SECTION 417. COMBINATION AND DIVISION OF TRUSTS. After notice to the qualified beneficiaries, a trustee may combine two or more trusts into a single trust or divide a trust into two or more separate trusts, if the result does not impair the rights of any beneficiary or adversely affect achievement of the purposes of the trust. ARTICLE 5 CREDITOR'S CLAIMS; SPENDTHRIFT AND DISCRETIONARY TRUSTS SECTION 501. RIGHTS OF BENEFICIARY'S CREDITOR OR ASSIGNEE. To the extent a beneficiary's interest is not protected by a spendthrift provision, the court may authorize A 13

a creditor or assignee of the beneficiary to reach the beneficiary's interest by attachment of present or future distributions to or for the benefit of the beneficiary or other means. The court may limit the award to such relief as is appropriate under the circumstances. SECTION 502. SPENDTHRIFT PROVISION. (a) A spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary's interest. (b) A term of a trust providing that the interest of a beneficiary is held subject to a "spendthrift trust," or words of similar import, is sufficient to restrain both voluntary and involuntary transfer of the beneficiary's interest. (c) A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision and, except as otherwise provided in this [article], a creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before its receipt by the beneficiary. SECTION 503. EXCEPTIONS TO SPENDTHRIFT PROVISION. (a) In this section, "child" includes any person for whom an order or judgment for child support has been entered in this or another State. (b) Even if a trust contains a spendthrift provision, a beneficiary's child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance, or a judgment creditor who has provided services for the protection of a beneficiary's interest in the trust, may obtain from a court an order attaching present or future distributions to or for the benefit of the beneficiary. (c) A spendthrift provision is unenforceable against a claim of this State or the United States to the extent a statute of this State or federal law so provides. SECTION 504. DISCRETIONARY TRUSTS; EFFECT OF STANDARD. (a) In this section, "child" includes any person for whom an order or judgment for child support has been entered in this or another State. (b) Except as otherwise provided in subsection (c), whether or not a trust contains a spendthrift provision, a creditor of a beneficiary may not compel a distribution that is subject to the trustee's discretion, even if: (1) the discretion is expressed in the form of a standard of distribution; or (2) the trustee has abused the discretion. (c) To the extent a trustee has not complied with a standard of distribution or has abused a discretion: (1) a distribution may be ordered by the court to satisfy a judgment or court order against the beneficiary for support or maintenance of the beneficiary's child, spouse, or former spouse; and (2) the court shall direct the trustee to pay to the child, spouse, or former spouse such amount as is equitable under the circumstances but not more than the amount the trustee would have been required to distribute to or for the benefit of the beneficiary had the trustee complied with the standard or not abused the discretion. A 14

(d) This section does not limit the right of a beneficiary to maintain a judicial proceeding against a trustee for an abuse of discretion or failure to comply with a standard for of distribution. SECTION 505. CREDITOR'S CLAIM AGAINST SETTLOR. (a) Whether or not the terms of a trust contain a spendthrift provision, the following rules apply: (1) During the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor's creditors. (2) With respect to an irrevocable trust, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor's benefit. If a trust has more than one settlor, the amount the creditor or assignee of a particular settlor may reach may not exceed the settlor's interest in the portion of the trust attributable to that settlor's contribution. (3) After the death of a settlor, and subject to the settlor's right to direct the source from which liabilities will be paid, and, except as otherwise provided by §13-54-102 C.R.S. or other applicable statutes, the property of a trust that was revocable at the settlor's death is subject to claims of the settlor's creditors, costs of administration of the settlor's estate, the expenses of the settlor's funeral and disposal of remains, and [statutory allowances] to a surviving spouse and children to the extent the settlor's probate estate is inadequate to satisfy those claims, costs, expenses, and [allowances]. (b) For purposes of this section: (1) during the period the power may be exercised, the holder of a power of withdrawal is treated in the same manner as the settlor of a revocable trust to the extent of the property subject to the power; and (2) upon the lapse, release, or waiver of the power, the holder is treated as the settlor of the trust only to the extent the value of the property affected by the lapse, release, or waiver exceeds the greater of the amount specified in Section 2041(b)(2) or 2514(e) of the Internal Revenue Code of 1986, or Section 2503(b) of the Internal Revenue Code of 1986, in each either case as in effect on [the effective date of this [Code]] [, or as later amended]. SECTION 506. OVERDUE DISTRIBUTION. Whether or not a trust contains a spendthrift provision, a creditor or assignee of a beneficiary may reach a mandatory distribution of income or principal, including a distribution upon termination of the trust, if the trustee has not made the distribution to the beneficiary within a reasonable time after the mandated distribution date. SECTION 507. PERSONAL OBLIGATIONS OF TRUSTEE. Trust property is not subject to personal obligations of the trustee, even if the trustee becomes insolvent or bankrupt.

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ARTICLE 6 REVOCABLE TRUSTS SECTION 601. CAPACITY OF SETTLOR OF REVOCABLE TRUST. The capacity required to create, amend, revoke, or add property to a revocable trust, or to direct the actions of the trustee of a revocable trust, is the same as that required to make a will. SECTION 602. REVOCATION OR AMENDMENT OF REVOCABLE TRUST. (a) Unless the terms of a trust expressly provide that the trust is irrevocable, the settlor may revoke or amend the trust. This subsection does not apply to a trust created under an instrument executed before [the effective date of this [Code]]. (b) If a revocable trust is created or funded by more than one settlor: (1) to the extent the trust consists of community property, the trust may be revoked by either spouse acting alone but may be amended only by joint action of both spouses; and (2) to the extent the trust consists of property other than community property, each settlor may revoke or amend the trust with regard to the portion of the trust property attributable to that settlor's contribution. (c) The settlor may revoke or amend a revocable trust: (1) by substantial compliance with a method provided in the terms of the trust; or (2) if the terms of the trust do not provide a method or the method provided in the terms is not expressly made exclusive, by: by any other method manifesting clear and convincing evidence of the settlor's intent, which may include a later will or codicil that expressly refers to the trust or specifically devises property that would otherwise have passed according to the terms of the trust. (A) a later will or codicil that expressly refers to the trust or specifically devises property that would otherwise have passed according to the terms of the trust; or (B) any other method manifesting clear and convincing evidence of the settlor's intent. (d) Upon revocation of a revocable trust, the trustee shall deliver the trust property as the settlor directs. (e) A settlor's powers with respect to revocation, amendment, or distribution of trust property may be exercised by an agent under a power of attorney only to the extent expressly authorized by the terms of the trust or the power. (f) A [conservator] of the settlor or, if no [conservator] has been appointed, a [guardian] of the settlor may exercise a settlor's powers with respect to revocation, amendment, or distribution of trust property only with the approval of the court supervising the [conservatorship] or [guardianship]. (g) A trustee who does not know that a trust has been revoked or amended is not liable to the settlor or settlor's successors in interest for distributions made and other actions taken on the assumption that the trust had not been amended or revoked.

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SECTION 603. SETTLOR'S POWERS; POWERS OF WITHDRAWAL. (a) While a trust is revocable and the settlor has capacity to revoke the trust, rights of the beneficiaries are subject to the control of, and the duties of the trustee are owed exclusively to, the settlor. (b) If a revocable trust has more than one settlor, the duties of the trustee are owed to all of the settlors having capacity to revoke the trust. (c) During the period the power may be exercised, the holder of a power of withdrawal has the rights of a settlor of a revocable trust under this section to the extent of the property subject to the power. SECTION 604. LIMITATION ON ACTION CONTESTING VALIDITY OF REVOCABLE TRUST; DISTRIBUTION OF TRUST PROPERTY. (a) A person may must commence a judicial proceeding to contest the validity of a trust that was revocable at the settlor's death within the earlier of: (1) [three] years after the settlor's death; or (2) [120] days after the trustee sent the person a copy of the trust instrument and a notice informing the person of the trust's existence, of the trustee's name and address, and of the time allowed for commencing a proceeding. The time limit in this subsection [604(a)] is an absolute bar that may not be waived or tolled. (b) Upon the death of the settlor of a trust that was revocable at the settlor's death, the trustee may proceed to distribute the trust property in accordance with the terms of the trust. The trustee is not subject to liability for doing so unless: (1) the trustee knows of a pending judicial proceeding contesting the validity of the trust; or (2) a potential contestant has notified the trustee of a possible judicial proceeding to contest the trust and a judicial proceeding is commenced within 60 days after the contestant sent the notification. (c) A beneficiary of a trust that is determined to have been invalid is liable to return any distribution received. ARTICLE 7 OFFICE OF TRUSTEE SECTION 701. ACCEPTING OR DECLINING TRUSTEESHIP. (a) Except as otherwise provided in subsection (c), a person designated as trustee accepts the trusteeship: (1) by substantially complying with a method of acceptance provided in the terms of the trust; or (2) if the terms of the trust do not provide a method or the method provided in the terms is not expressly made exclusive, by accepting delivery of the trust property, exercising powers or performing duties as trustee, or otherwise indicating acceptance of the trusteeship.

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(b) A person designated as trustee who has not yet accepted the trusteeship may reject the trusteeship. A designated trustee who does not accept the trusteeship within a reasonable time after knowing of the designation is deemed to have rejected the trusteeship. (c) A person designated as trustee, without accepting the trusteeship, may: (1) act to preserve the trust property if, within a reasonable time after acting, the person sends a rejection of the trusteeship to the settlor or, if the settlor is dead or lacks capacity, to a qualified beneficiary; and (2) inspect or investigate trust property to determine potential liability under environmental or other law or for any other purpose. SECTION 702. TRUSTEE'S BOND. (a) A trustee shall give bond to secure performance of the trustee's duties only if the court finds that a bond is needed to protect the interests of the beneficiaries or is required by the terms of the trust and the court has not dispensed with the requirement. (b) The court may specify the amount of a bond, its liabilities, and whether sureties are necessary. The court may modify or terminate a bond at any time. [(c) Unless otherwise directed by the court, the cost of a bond is charged to the trust. A regulated financial-service institution qualified to do trust business in this State need not give bond, even if required by the terms of the trust.] SECTION 703. COTRUSTEES. (a) Cotrustees who are unable to reach a unanimous decision may act by majority decision. (b) If a vacancy occurs in a cotrusteeship, the remaining cotrustees may act for the trust. (c) A cotrustee must participate in the performance of a trustee's function unless the cotrustee is unavailable to perform the function because of absence, illness, disqualification under other law, or other temporary incapacity or the cotrustee has properly delegated the performance of the function to another trustee. (d) If a cotrustee is unavailable to perform duties because of absence, illness, disqualification under other law, or other temporary incapacity, and prompt action is necessary to achieve the purposes of the trust or to avoid injury to the trust property, the remaining cotrustee or a majority of the remaining cotrustees may act for the trust. (e) A trustee may not delegate to a cotrustee the performance of a function the settlor reasonably expected the trustees to perform jointly. Unless a delegation was irrevocable, a trustee may revoke a delegation previously made. (f) Except as otherwise provided in subsection (g), a trustee who does not join in an action of another trustee is not liable for the action. (g) Each trustee shall exercise reasonable care to: (1) prevent a cotrustee from committing a serious breach of trust; and (2) compel a cotrustee to redress a serious breach of trust. (h) A dissenting trustee who joins in an action at the direction of the majority of the trustees and who notified any cotrustee of the dissent at or before the time of the action is not liable for the action unless the action is a serious breach of trust.

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SECTION 704. VACANCY IN TRUSTEESHIP; APPOINTMENT OF SUCCESSOR. (a) A vacancy in a trusteeship occurs if: (1) a person designated as trustee rejects the trusteeship; (2) a person designated as trustee cannot be identified or does not exist; (3) a trustee resigns; (4) a trustee is disqualified or removed; (5) a trustee dies; or (6) a [guardian] or [conservator] is appointed for an individual serving as trustee. (b) If one or more cotrustees remain in office, a vacancy in a trusteeship need not be filled. A vacancy in a trusteeship must be filled if the trust has no remaining trustee. (c) A vacancy in a trusteeship of a noncharitable trust that is required to be filled must be filled in the following order of priority: (1) by a person designated in the terms of the trust to act as successor trustee; (2) by a person appointed by unanimous agreement of the qualified beneficiaries; or (3) by a person appointed by the court. (d) A vacancy in a trusteeship of a charitable trust that is required to be filled must be filled in the following order of priority: (1) by a person designated in the terms of the trust to act as successor trustee; (2) by a person selected by the charitable organizations expressly designated to receive distributions under the terms of the trust if the [attorney general] concurs in the selection; or (3) by a person appointed by the court. (e) Whether or not a vacancy in a trusteeship exists or is required to be filled, the court may appoint an additional trustee or special fiduciary whenever the court considers the appointment necessary for the administration of the trust. SECTION 705. RESIGNATION OF TRUSTEE. (a) A trustee may resign: (1) upon at least 30 days' notice to the qualified beneficiaries, the settlor, if living, and all cotrustees; or (2) with the approval of the court. (b) In approving a resignation, the court may issue orders and impose conditions reasonably necessary for the protection of the trust property. (c) Any liability of a resigning trustee or of any sureties on the trustee's bond for acts or omissions of the trustee is not discharged or affected by the trustee's resignation. SECTION 706. REMOVAL OF TRUSTEE. (a) The settlor, a cotrustee, or a beneficiary may request the court to remove a trustee, or a trustee may be removed by the court on its own initiative. (b) The court may remove a trustee if: (1) the trustee has committed a serious breach of trust; (2) lack of cooperation among cotrustees substantially impairs the administration of the trust; A 19

(3) because of unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively, the court determines that removal of the trustee best serves the interests of the beneficiaries; or (4) there has been a substantial change of circumstances or removal is requested by all of the qualified beneficiaries, the court finds that removal of the trustee best serves the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust, and a suitable cotrustee or successor trustee is available. (c) Pending a final decision on a request to remove a trustee, or in lieu of or in addition to removing a trustee, the court may order such appropriate relief under Section 1001(b) as may be necessary to protect the trust property or the interests of the beneficiaries. SECTION 707. DELIVERY OF PROPERTY BY FORMER TRUSTEE. (a) Unless a cotrustee remains in office or the court otherwise orders, and until the trust property is delivered to a successor trustee or other person entitled to it, a trustee who has resigned or been removed has the duties of a trustee and the powers necessary to protect the trust property. (b) A trustee who has resigned or been removed shall proceed expeditiously to deliver the trust property within the trustee's possession to the cotrustee, successor trustee, or other person entitled to it. SECTION 708. COMPENSATION OF TRUSTEE. (a) If the terms of a trust do not specify the trustee's compensation, a trustee is entitled to compensation that is reasonable under the circumstances. (b) If the terms of a trust specify the trustee's compensation, the trustee is entitled to be compensated as specified, but the court may allow more or less compensation if: (1) the duties of the trustee are substantially different from those contemplated when the trust was created; or (2) the compensation specified by the terms of the trust would be unreasonably low or high. SECTION 709. REIMBURSEMENT OF EXPENSES. (a) A trustee is entitled to be reimbursed out of the trust property, with interest as appropriate, for: (1) expenses that were properly incurred in the administration of the trust; and (2) to the extent necessary to prevent unjust enrichment of the trust, expenses that were not properly incurred in the administration of the trust. (b) An advance by the trustee of money for the protection of the trust gives rise to a lien against trust property to secure reimbursement with reasonable interest.

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ARTICLE 8 DUTIES AND POWERS OF TRUSTEE SECTION 801. DUTY TO ADMINISTER TRUST. Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries, and in accordance with this [Code]. SECTION 802. DUTY OF LOYALTY. (a) A trustee shall administer the trust solely in the interests of the beneficiaries. (b) Subject to the rights of persons dealing with or assisting the trustee as provided in Section 1012, a sale, encumbrance, or other transaction involving the investment or management of trust property entered into by the trustee for the trustee's own personal account or which is otherwise affected by a conflict between the trustee's fiduciary and personal interests is voidable by a beneficiary affected by the transaction unless: (1) the transaction was authorized by the terms of the trust; (2) the transaction was approved by the court; (3) the beneficiary did not commence a judicial proceeding within the time allowed by Section 1005; (4) the beneficiary consented to the trustee's conduct, ratified the transaction, or released the trustee in compliance with Section 1009; or (5) the transaction involves a contract entered into or claim acquired by the trustee before the person became or contemplated becoming trustee. (c) A sale, encumbrance, or other transaction involving the investment or management of trust property is presumed to be affected by a conflict between personal and fiduciary interests if it is entered into by the trustee with: (1) the trustee's spouse; (2) the trustee's descendants, siblings, parents, or their spouses; (3) an agent or attorney of the trustee; or (4) a corporation or other person or enterprise in which the trustee, or a person that owns a significant interest in the trustee, has an interest that might affect the trustee's best judgment. (d) A transaction between a trustee and a beneficiary that does not concern trust property but that occurs during the existence of the trust or while the trustee retains significant influence over the beneficiary and from which the trustee obtains an advantage is voidable by the beneficiary unless the trustee establishes that the transaction was fair to the beneficiary. (e) A transaction not concerning trust property in which the trustee engages in the trustee's individual capacity involves a conflict between personal and fiduciary interests if the transaction concerns an opportunity properly belonging to the trust. (f) An investment by a trustee in securities of an investment company or investment trust to which the trustee, or its affiliate, provides services in a capacity other than as trustee is not presumed to be affected by a conflict between personal and fiduciary interests if the investment complies with the prudent investor rule of [Article] 9 Colorado Uniform Prudent Investor Act. The trustee may be compensated by the investment company or investment trust for providing A 21

those services out of fees charged to the trust if the trustee at least annually notifies the persons entitled under Section 813 to receive a copy of the trustee's annual report of the rate and method by which the compensation was determined. (g) In voting shares of stock or in exercising powers of control over similar interests in other forms of enterprise, the trustee shall act in the best interests of the beneficiaries. If the trust is the sole owner of a corporation or other form of enterprise, the trustee shall elect or appoint directors or other managers who will manage the corporation or enterprise in the best interests of the beneficiaries. (h) This section does not preclude the following transactions, if fair to the beneficiaries: (1) an agreement between a trustee and a beneficiary relating to the appointment or compensation of the trustee; (2) payment of reasonable compensation to the trustee; (3) a transaction between a trust and another trust, decedent's estate, or [conservatorship] [guardianship] (sic) of which the trustee is a fiduciary or in which a beneficiary has an interest; (4) a deposit of trust money in a regulated financial-service institution operated by the trustee; or (5) an advance by the trustee of money for the protection of the trust. (i) The court may appoint a special fiduciary to make a decision with respect to any proposed transaction that might violate this section if entered into by the trustee. SECTION 803. IMPARTIALITY. If a trust has two or more beneficiaries, the trustee shall act impartially in investing, managing, and distributing the trust property, giving due regard to the beneficiaries' respective interests. SECTION 804. PRUDENT ADMINISTRATION. A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution. SECTION 805. COSTS OF ADMINISTRATION. In administering a trust, the trustee may incur only costs that are reasonable in relation to the trust property, the purposes of the trust, and the skills of the trustee. SECTION 806. TRUSTEE'S SKILLS. 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, shall use those special skills or expertise. SECTION 807. DELEGATION BY TRUSTEE. (a) A trustee may delegate duties and powers 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; A 22

(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. (b) 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. (c) A trustee who complies with subsection (a) is not liable to the beneficiaries or to the trust for an action of the agent to whom the function was delegated. (d) By accepting a delegation of powers or duties 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. SECTION 808. POWERS TO DIRECT. (a) While a trust is revocable, the trustee may follow a direction of the settlor that is contrary to the terms of the trust. (b) If the terms of a trust confer upon a person other than the settlor of a revocable trust power to direct certain actions of the trustee, the trustee shall act in accordance with an exercise of the power unless the attempted exercise is manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would constitute a serious breach of a fiduciary duty that the person holding the power owes to the beneficiaries of the trust. (c) The terms of a trust may confer upon a trustee or other person a power to direct the modification or termination of the trust. (d) A person, other than a beneficiary, who holds a power to direct is presumptively a fiduciary who, as such, is required to act in good faith with regard to the purposes of the trust and the interests of the beneficiaries. The holder of a power to direct is liable for any loss that results from breach of a fiduciary duty. SECTION 809. CONTROL AND PROTECTION OF TRUST PROPERTY. A trustee shall take reasonable steps to take control of and protect the trust property. SECTION 810. RECORDKEEPING AND IDENTIFICATION OF TRUST PROPERTY. (a) A trustee shall keep adequate records of the administration of the trust. (b) A trustee shall keep trust property separate from the trustee's own property. (c) Except as otherwise provided in subsection (d), a trustee shall cause the trust property to be designated so that the interest of the trust, to the extent feasible, appears in records maintained by a party other than a trustee or beneficiary. (d) If the trustee maintains records clearly indicating the respective interests, a trustee may invest as a whole the property of two or more separate trusts. SECTION 811. ENFORCEMENT AND DEFENSE OF CLAIMS. A trustee shall take reasonable steps to enforce claims of the trust and to defend claims against the trust.

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SECTION 812. COLLECTING TRUST PROPERTY. A trustee shall take reasonable steps to compel a former trustee or other person to deliver trust property to the trustee, and to redress a breach of trust known to the trustee to have been committed by a former trustee. SECTION 813. DUTY TO INFORM AND REPORT. (a) A trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. Unless unreasonable under the circumstances, a trustee shall promptly respond to a beneficiary's request for information related to the administration of the trust. (b) A trustee: (1) upon request of a beneficiary, shall promptly furnish to the beneficiary a copy of the portions of the trust instrument which describe of affect the beneficiary's interest; (2) within 60 days after accepting a trusteeship, shall notify the qualified beneficiaries of the acceptance and of the trustee's name, address, and telephone number; (3) within 60 days after the date the trustee acquires knowledge of the creation of an irrevocable trust, or the date the trustee acquires knowledge that a formerly revocable trust has become irrevocable, whether by the death of the settlor or otherwise, shall notify the qualified beneficiaries of the trust's existence, of the identity of the settlor or settlors, of the right to request a copy of the trust instrument, and of the right to a trustee's report as provided in subsection (c); and (4) shall notify the qualified beneficiaries in advance of any change in the method or rate of the trustee's compensation. (c) A trustee shall send to the distributees or permissible distributees of trust income or principal, and to other qualified or nonqualified beneficiaries who request it, at least annually and at the termination of the trust, a report of the trust property, liabilities, receipts, and disbursements, including the source and amount of the trustee's compensation, a listing of the trust assets and, if feasible, their respective market values. Upon a vacancy in a trusteeship, unless a cotrustee remains in office, a report must be sent to the qualified beneficiaries by the former trustee. A personal representative, [conservator], or [guardian] may send the qualified beneficiaries a report on behalf of a deceased or incapacitated trustee. (d) A beneficiary may waive the right to a trustee's report or other information otherwise required to be furnished under this section. A beneficiary, with respect to future reports and other information, may withdraw a waiver previously given. SECTION 814. DISCRETIONARY POWERS; TAX SAVINGS. (a) Notwithstanding the breadth of discretion granted to a trustee in the terms of the trust, including the use of such terms as "absolute", "sole", or "uncontrolled", the trustee shall exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries. (b) Subject to subsection (d), and unless the terms of the trust expressly indicate that a rule in this subsection does not apply: (1) a person other than a settlor who is a beneficiary and trustee of a trust that confers on the trustee a power to make discretionary distributions to or for the trustee's personal A 24

benefit may exercise the power only in accordance with an ascertainable standard relating to the trustee's individual health, education, support, or maintenance within the meaning of Section 2041(b)(1)(A) or 2514(c)(1) of the Internal Revenue Code of 1986, as in effect on [the effective date of this [Code]] [, or as later amended]; and (2) a trustee may not exercise a power to make discretionary distributions to satisfy a legal obligation of support that the trustee personally owes another person. (c) A power whose exercise is limited or prohibited by subsection (b) may be exercised by a majority of the remaining trustees whose exercise of the power is not so limited or prohibited. If the power of all trustees is so limited or prohibited, the court may appoint a special fiduciary with authority to exercise the power. (d) Subsection (b) does not apply to: (1) a power held by the settlor's spouse who is the trustee of a trust for which a marital deduction, as defined in Section 2056(b)(5) or 2523(e) of the Internal Revenue Code of 1986, as in effect on [the effective date of this [Code]] [, or as later amended], was previously allowed; (2) any trust during any period that the trust may be revoked or amended by its settlor; or (3) a trust if contributions to the trust qualify for the annual exclusion under Section 2503(c) of the Internal Revenue Code of 1986, as in effect on [the effective date of this [Code]] [, or as later amended]. SECTION 815. GENERAL POWERS OF TRUSTEE. (a) A trustee, without authorization by the court, may exercise: (1) powers conferred by the terms of the trust; or (2) except as limited by the terms of the trust: (A) all powers over the trust property which an unmarried competent owner has over individually owned property; (B) any other powers appropriate to achieve the proper investment, management, and distribution of the trust property; and (C) any other powers conferred by this [Code]. (b) The exercise of a power is subject to the fiduciary duties prescribed by this [article]. SECTION 816. SPECIFIC POWERS OF TRUSTEE. Without limiting the authority conferred by Section 815 and in addition to section 15-1-804 (sic), a trustee may: (1) collect trust property and accept or reject additions to the trust property from a settlor or any other person; (2) acquire or sell property, for cash or on credit, at public or private sale; (3) exchange, partition, or otherwise change the character of trust property; (4) deposit trust money in an account in a regulated financial-service institution; (5) borrow money, with or without security, and mortgage or pledge trust property for a period within or extending beyond the duration of the trust; (6) with respect to an interest in a proprietorship, partnership, limited liability company, business trust, corporation, or other form of business or enterprise, continue the business or other A 25

enterprise and take any action that may be taken by shareholders, members, or property owners, including merging, dissolving, or otherwise changing the form of business organization or contributing additional capital; (7) with respect to stocks or other securities, exercise the rights of an absolute owner, including the right to: (A) vote, or give proxies to vote, with or without power of substitution, or enter into or continue a voting trust agreement; (B) hold a security in the name of a nominee or in other form without disclosure of the trust so that title may pass by delivery; (C) pay calls, assessments, and other sums chargeable or accruing against the securities, and sell or exercise stock subscription or conversion rights; and (D) deposit the securities with a depositary or other regulated financial-service institution; (8) with respect to an interest in real property, construct, or make ordinary or extraordinary repairs to, alterations to, or improvements in, buildings or other structures, demolish improvements, raze existing or erect new party walls or buildings, subdivide or develop land, dedicate land to public use or grant public or private easements, and make or vacate plats and adjust boundaries; (9) enter into a lease for any purpose as lessor or lessee, including a lease or other arrangement for exploration and removal of natural resources, with or without the option to purchase or renew, for a period within or extending beyond the duration of the trust; (10) grant an option involving a sale, lease, or other disposition of trust property or acquire an option for the acquisition of property, including an option exercisable beyond the duration of the trust, and exercise an option so acquired; (11) insure the property of the trust against damage or loss and insure the trustee, the trustee's agents, and beneficiaries against liability arising from the administration of the trust; (12) abandon or decline to administer property of no value or of insufficient value to justify its collection or continued administration; (13) with respect to possible liability for violation of environmental law: (A) inspect or investigate property the trustee holds or has been asked to hold, or property owned or operated by an organization in which the trustee holds or has been asked to hold an interest, for the purpose of determining the application of environmental law with respect to the property; (B) take action to prevent, abate, or otherwise remedy any actual or potential violation of any environmental law affecting property held directly or indirectly by the trustee, whether taken before or after the assertion of a claim or the initiation of governmental enforcement; (C) decline to accept property into trust or disclaim any power with respect to property that is or may be burdened with liability for violation of environmental law; (D) compromise claims against the trust which may be asserted for an alleged violation of environmental law; and (E) pay the expense of any inspection, review, abatement, or remedial action to comply with environmental law;

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(14) pay or contest any claim, settle a claim by or against the trust, and release, in whole or in part, a claim belonging to the trust; (15) pay taxes, assessments, compensation of the trustee and of employees and agents of the trust, and other expenses incurred in the administration of the trust; (16) exercise elections with respect to federal, state, and local taxes; (17) select a mode of payment under any employee benefit or retirement plan, annuity, or life insurance payable to the trustee, exercise rights thereunder, including exercise of the right to indemnification for expenses and against liabilities, and take appropriate action to collect the proceeds; (18) make loans out of trust property, including loans to a beneficiary on terms and conditions the trustee considers to be fair and reasonable under the circumstances, and the trustee has a lien on future distributions for repayment of those loans; (19) pledge trust property to guarantee loans made by others to the beneficiary; (20) appoint a trustee to act in another jurisdiction with respect to trust property located in the other jurisdiction, confer upon the appointed trustee all of the powers and duties of the appointing trustee, require that the appointed trustee furnish security, and remove any trustee so appointed; (21) pay an amount distributable to a beneficiary who is under a legal disability or who the trustee reasonably believes is incapacitated, by paying it directly to the beneficiary or applying it for the beneficiary's benefit, or by: (A) paying it to the beneficiary's [conservator] or, if the beneficiary does not have a [conservator], the beneficiary's [guardian]; (B) paying it to the beneficiary's custodian under [the Uniform Transfers to Minors Act] or custodial trustee under [the Uniform Custodial Trust Act], and, for that purpose, creating a custodianship or custodial trust; (C) if the trustee does not know of a [conservator], [guardian], custodian, or custodial trustee, paying it to an adult relative or other person having legal or physical care or custody of the beneficiary, to be expended on the beneficiary's behalf; or (D) managing it as a separate fund on the beneficiary's behalf, subject to the beneficiary's continuing right to withdraw the distribution; (22) on distribution of trust property or the division or termination of a trust, make distributions in divided or undivided interests, allocate particular assets in proportionate or disproportionate shares, value the trust property for those purposes, and adjust for resulting differences in valuation; (23) resolve a dispute concerning the interpretation of the trust or its administration by mediation, arbitration, or other procedure for alternative dispute resolution; (24) prosecute or defend an action, claim, or judicial proceeding in any jurisdiction to protect trust property and the trustee in the performance of the trustee's duties; (25) sign and deliver contracts and other instruments that are useful to achieve or facilitate the exercise of the trustee's powers; and (26) on termination of the trust, exercise the powers appropriate to wind up the administration of the trust and distribute the trust property to the persons entitled to it.

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SECTION 817. DISTRIBUTION UPON TERMINATION. (a) Upon termination or partial termination of a trust, the trustee may send to the beneficiaries a proposal for distribution. The right of any beneficiary to object to the proposed distribution terminates if the beneficiary does not notify the trustee of an objection within 30 days after the proposal was sent but only if the proposal informed the beneficiary of the right to object and of the time allowed for objection. (b) Upon the occurrence of an event terminating or partially terminating a trust, the trustee shall proceed expeditiously to distribute the trust property to the persons entitled to it, subject to the right of the trustee to retain a reasonable reserve for the payment of debts, expenses, and taxes. (c) A release by a beneficiary of a trustee from liability for breach of trust is invalid to the extent: (1) it was induced by improper conduct of the trustee; or (2) the beneficiary, at the time of the release, did not know of the beneficiary's rights or of the material facts relating to the breach. ARTICLE 9 UNIFORM PRUDENT INVESTOR ACT ARTICLE 10 LIABILITY OF TRUSTEES AND RIGHTS OF PERSONS DEALING WITH TRUSTEE SECTION 1001. REMEDIES FOR BREACH OF TRUST. (a) A violation by a trustee of a duty the trustee owes to a beneficiary is a breach of trust. (b) To remedy a breach of trust that has occurred or may occur, the court may: (1) compel the trustee to perform the trustee's duties; (2) enjoin the trustee from committing a breach of trust; (3) compel the trustee to redress a breach of trust by paying money, restoring property, or other means; (4) order a trustee to account; (5) appoint a special fiduciary to take possession of the trust property and administer the trust; (6) suspend the trustee; (7) remove the trustee as provided in Section 706; (8) reduce or deny compensation to the trustee; (9) subject to Section 1012, void an act of the trustee, impose a lien or a constructive trust on trust property, or trace trust property wrongfully disposed of and recover the property or its proceeds; or (10) order any other appropriate relief.

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SECTION 1002. DAMAGES FOR BREACH OF TRUST. (a) A trustee who commits a breach of trust is liable to the beneficiaries affected for the greater of: (1) the amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred; or (2) the profit the trustee made by reason of the breach. (b) Except as otherwise provided in this subsection, if more than one trustee is liable to the beneficiaries for a breach of trust, a trustee is entitled to contribution from the other trustee or trustees. A trustee is not entitled to contribution if the trustee was substantially more at fault than another trustee or if the trustee committed the breach of trust in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries. A trustee who received a benefit from the breach of trust is not entitled to contribution from another trustee to the extent of the benefit received. SECTION 1003. DAMAGES IN ABSENCE OF BREACH. (a) A trustee is accountable to an affected beneficiary for any profit made by the trustee arising from the administration of the trust, even absent a breach of trust. (b) Absent a breach of trust, a trustee is not liable to a beneficiary for a loss or depreciation in the value of trust property or for not having made a profit. SECTION 1004. ATTORNEY'S FEES AND COSTS. (a) In a judicial proceeding involving the administration of a trust, the court, as justice and equity may require, may award costs and expenses, including reasonable attorney's fees, to any party, to be paid by another party or from the trust that is the subject of the controversy. (1) Except as provided in paragraph (3) of this section, if any trustee, person nominated as trustee, or court appointed fiduciary, defends or prosecutes any proceeding in good faith, whether successful or not, he or she is entitled to receive from the trust his or her necessary expenses and disbursements including reasonable attorney fees and costs incurred. Except as limited by court order or by the terms of the trust, compensation may be paid and expenses reimbursed without court order. (2) If not otherwise compensated for services rendered, any lawyer for a trustee, any lawyer whose services resulted in an order beneficial to the trust, and any person appointed by the court as fiduciary, is entitled to reimbursement for costs and reasonable compensation from the trust. (3) Any trustee, person nominated as trustee, or court appointed trustee who is unsuccessful in defending the propriety of his or her actions for breach of fiduciary duty action, shall not be entitled to recover their expenses, including attorney fees and costs, under this section to the extent of any matter in which breaches of fiduciary duty is found. (4) If any trustee, person nominated as fiduciary, or court appointed trustee, any lawyer for the above, or any lawyer whose services resulted in an order beneficial to the trust, is required to defend his or her fees or costs, the court shall conduct a fee review at the end of such proceedings and shall consider and may award the fees and expenses A 29

incurred by such parties in the review of their fees and costs, including but not limited to their attorney fees and costs, as the court deems equitable. An award of fees and costs to the fiduciary, lawyer or beneficiary may be ordered paid from, and may be allocated from the trust, or from the person, party or organization that required the trustee to defend his or her fees or costs, as the court deems just. (5) If the Court determines that any pleadings under this section were not substantially warranted or were brought in bad faith, the court may award fees and costs incurred by the trustee, or affected parties, in responding to the pleadings. Nothing in this section is intended to limit any other remedy as provided by law. (b) Factors to be considered as guides in determining the reasonableness of any fee referred to in this section, include the following: (1) The time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the services properly; (2) The likelihood, if apparent, that the acceptance of the particular employment will preclude the person employed from other employment; (3) The fee customarily charged in the locality for similar services; (4) The amount involved and the results obtained; (5) The time limitations imposed by the circumstances; (6) The experience, reputation, and ability of the person performing the services. SECTION 1005. LIMITATION OF ACTION AGAINST TRUSTEE. (a) A beneficiary may not commence a proceeding against a trustee for breach of trust more than one year six months after the date that the beneficiary or a representative of person who may represent and bind the beneficiary, as provided in Article 3, was sent a report that adequately disclosed the existence of a potential claim for breach of trust and informed the beneficiary of the time allowed for commencing a proceeding. (b) A report adequately discloses the existence of a potential claim for breach of trust if it provides sufficient information so that the beneficiary or representative knows of the potential claim or should have inquired into its existence. (c) If subsection (a) does not apply, a judicial proceeding by a beneficiary against a trustee for breach of trust must be commenced within five years after the first to occur of: (1) the removal, resignation, or death of the trustee; (2) the termination of the beneficiary's interest in the trust; or (3) the termination of the trust. For purposes of subsection (a), a beneficiary is deemed to have been sent a report if: (1) in the case of a beneficiary having capacity, it is sent to the beneficiary; or (2) in the case of a beneficiary who under Article 3 may be represented and bound by another person, it is sent to the other person. (e) This section does not preclude an action to recover for fraud or misrepresentation related to the report.

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SECTION 1006. RELIANCE ON TRUST INSTRUMENT. A trustee who acts in reasonable reliance on the terms of the trust as expressed in the trust instrument is not liable to a beneficiary for a breach of trust to the extent the breach resulted from the reliance. SECTION 1007. EVENT AFFECTING ADMINISTRATION OR DISTRIBUTION. If the happening of an event, including marriage, divorce, performance of educational requirements, or death, affects the administration or distribution of a trust, a trustee who has exercised reasonable care to ascertain the happening of the event is not liable for a loss resulting from the trustee's lack of knowledge. SECTION 1008. EXCULPATION OF TRUSTEE. (a) A term of a trust relieving a trustee of liability for breach of trust is unenforceable to the extent that it: (1) relieves the trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries; or (2) was inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor. (b) An exculpatory term drafted or caused to be drafted by the trustee is invalid as an abuse of a fiduciary or confidential relationship unless the trustee proves that the exculpatory term is fair under the circumstances and that its existence and contents were adequately communicated to the settlor. SECTION 1009. BENEFICIARY'S CONSENT, RELEASE, OR RATIFICATION. A trustee is not liable to a beneficiary for breach of trust if the beneficiary consented to the conduct constituting the breach, released the trustee from liability for the breach, or ratified the transaction constituting the breach, unless: (1) the consent, release, or ratification of the beneficiary was induced by improper conduct of the trustee; or (2) at the time of the consent, release, or ratification, the beneficiary did not know of the beneficiary's rights or of the material facts relating to the breach. SECTION 1010. LIMITATION ON PERSONAL LIABILITY OF TRUSTEE. (a) Except as otherwise provided in the contract, a trustee is not personally liable on a contract properly entered into in the trustee's fiduciary capacity in the course of administering the trust if the trustee in the contract disclosed the fiduciary capacity. (b) A trustee is personally liable for torts committed in the course of administering a trust, or for obligations arising from ownership or control of trust property, including liability for violation of environmental law, only if the trustee is personally at fault. (c) A claim based on a contract entered into by a trustee in the trustee's fiduciary capacity, on an obligation arising from ownership or control of trust property, or on a tort committed in the course of administering a trust, may be asserted in a judicial proceeding against the trustee in the trustee's fiduciary capacity, whether or not the trustee is personally liable for the claim.

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[SECTION 1011. INTEREST AS GENERAL PARTNER. (a) Except as otherwise provided in subsection (c) or unless personal liability is imposed in the contract, a trustee who holds an interest as a general partner in a general or limited partnership is not personally liable on a contract entered into by the partnership after the trust's acquisition of the interest if the fiduciary capacity was disclosed in the contract or in a statement previously filed pursuant to the [Colorado Uniform Partnership Act (1997) or Colorado Uniform Limited Partnership Act of 1981]. (b) Except as otherwise provided in subsection (c), a trustee who holds an interest as a general partner is not personally liable for torts committed by the partnership or for obligations arising from ownership or control of the interest unless the trustee is personally at fault. (c) The immunity provided by this section does not apply if an interest in the partnership is held by the trustee in a capacity other than that of trustee or is held by the trustee's spouse or one or more of the trustee's descendants, siblings, or parents, or the spouse of any of them. (d) If the trustee of a revocable trust holds an interest as a general partner, the settlor is personally liable for contracts and other obligations of the partnership as if the settlor were a general partner.] SECTION 1012. PROTECTION OF PERSON DEALING WITH TRUSTEE. (a) A person other than a beneficiary who in good faith assists a trustee, or who in good faith and for value deals with a trustee, without knowledge that the trustee is exceeding or improperly exercising the trustee's powers is protected from liability as if the trustee properly exercised the power. (b) A person other than a beneficiary who in good faith deals with a trustee is not required to inquire into the extent of the trustee's powers or the propriety of their exercise. (c) A person who in good faith delivers assets to a trustee need not ensure their proper application. (d) A person other than a beneficiary who in good faith assists a former trustee, or who in good faith and for value deals with a former trustee, without knowledge that the trusteeship has terminated is protected from liability as if the former trustee were still a trustee. (e) Comparable protective provisions of other laws relating to commercial transactions or transfer of securities by fiduciaries prevail over the protection provided by this section. SECTION 1013. CERTIFICATION OF TRUST. (a) Instead of furnishing a copy of the trust instrument to a person other than a beneficiary, the trustee may furnish to the person a certification of trust containing the following information: (1) that the trust exists and the date the trust instrument was executed; (2) the identity of the settlor; (3) the identity and address of the currently acting trustee; (4) the powers of the trustee in the pending transaction; (5) the revocability or irrevocability of the trust and the identity of any person holding a power to revoke the trust; (6) the authority of cotrustees to sign or otherwise authenticate and whether all or less than all are required in order to exercise powers of the trustee; and A 32

(7) the trust's taxpayer identification number; and (8)(7) the manner of taking name in which title to trust property may be taken. (b) A certification of trust may be signed or otherwise authenticated by any trustee. (c) A certification of trust must state that the trust has not been revoked, modified, or amended in any manner that would cause the representations contained in the certification of trust to be incorrect. (d) A certification of trust need not contain the dispositive terms of a trust. (e) A recipient of a certification of trust may require the trustee to furnish copies of those excerpts from the original trust instrument and later amendments which designate the trustee and confer upon the trustee the power to act in the pending transaction. (f) A person who acts in reliance upon a certification of trust without knowledge that the representations contained therein are incorrect is not liable to any person for so acting and may assume without inquiry the existence of the facts contained in the certification. Knowledge of the terms of the trust may not be inferred solely from the fact that a copy of all or part of the trust instrument is held by the person relying upon the certification. (g) A person who in good faith enters into a transaction in reliance upon a certification of trust may enforce the transaction against the trust property as if the representations contained in the certification were correct. (h) A person making a demand for the trust instrument in addition to a certification of trust or excerpts is liable for costs, expenses, attorney fees and damages if the court determines that the person did not act in good faith in demanding the trust instrument. (i) This section does not limit the right of a person to obtain a copy of the trust instrument in a judicial proceeding concerning the trust. ARTICLE 11 MISCELLANEOUS PROVISIONS SECTION 1101. UNIFORMITY OF APPLICATION AND CONSTRUCTION. In applying and construing this Uniform Act , consideration must be given to the need to promote uniformity of the law with respect to its subject matter among States that enact it. SECTION 1102. ELECTRONIC RECORDS AND SIGNATURES. The provisions of this [Code] governing the legal effect, validity, or enforceability of electronic records or electronic signatures, and of contracts formed or performed with the use of such records or signatures, conform to the requirements of Section 102 of the Electronic Signatures in Global and National Commerce Act (15 U.S.C. § 7002) and supersede, modify, and limit the requirements of the Electronic Signatures in Global and National Commerce Act. SECTION 1103. SEVERABILITY CLAUSE. If any provision of this [Code] or its application to any person or circumstances is held invalid, the invalidity does not affect other provisions or applications of this [Code] which can be given effect without the invalid provision or application, and to this end the provisions of this [Code] are severable.

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SECTION 1104. EFFECTIVE DATE. This [Code] takes effect on ______________. SECTION 1105. REPEALS. The following Acts are repealed: (1) Uniform Trustee Powers Act ; (2) Parts 2, 3, and 4 of the Uniform Probate Code, Article VII, are repealed.; (3) Uniform Trusts Act (1937); and (4) Uniform Prudent Investor Act. SECTION 1106. APPLICATION TO EXISTING RELATIONSHIPS. (a) Except as otherwise provided in this [Code], on [the effective date of this [Code]]: (1) this [Code] applies to all trusts created before, on, or after [its effective date]; (2) this [Code] applies to all judicial proceedings concerning trusts commenced on or after [its effective date]; (3) this [Code] applies to judicial proceedings concerning trusts commenced before [its effective date] unless the court finds that application of a particular provision of this [Code] 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 this [Code] does not apply and the superseded law applies; (4) any rule of construction or presumption provided in this [Code] applies to trust instruments executed before [the effective date of the [Code]] unless there is a clear indication of a contrary intent in the terms of the trust; and (5) an act done before [the effective date of the [Code]] is not affected by this [Code]. (b) If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before [the effective date of the [Code]], that statute continues to apply to the right even if it has been repealed or superseded.

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Appendix B ­ 2004 UTC Amendments

AMENDMENTS TO THE UNIFORM TRUST CODE (2000)*

NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS

MEETING IN ITS ONE-HUNDRED-AND-THIRTEENTH YEAR PORTLAND, OREGON JULY 30 - AUGUST 6, 2004

AMENDMENTS TO THE UNIFORM TRUST CODE (2000)

WITHOUT PREFATORY NOTE OR COMMENTS

Copyright © 2004 By National Conference of Commissioners on Uniform State Laws

*

The following text is subject to revision by the Committee on Style of the National Conference of Commissioners on Uniform State Laws.

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DRAFTING COMMITTEE TO AMEND UNIFORM TRUST CODE (2000) MAURICE A. HARTNETT, III, Delaware Supreme Court, 144 Cooper Road, Dover, DE 19901, Chair FRANK W. DAYKIN, 4745 Giles Way, Carson City, NV 89704, Committee Member and Committee on Style Liaison E. EDWIN ECK, II, University of Montana, School of Law, Missoula, MT 59812 JOHN H. LANGBEIN, Yale Law School, P.O. Box 208215, New Haven, CT 06520 GLEE S. SMITH, P.O. Box 360, 111 E. 8th, Larned, KS 67550 NATHANIEL STERLING, Law Revision Commission, Suite D-1, 4000 Middlefield Road, Palo Alto, CA 94303 RICHARD V. WELLMAN, University of Georgia, School of Law, Athens, GA 30602 DAVID M. ENGLISH, University of Missouri School of Law, Missouri and Conley Avenues, Columbia, MO 65211, Reporter EX OFFICIO FRED H. MILLER, University of Oklahoma, College of Law, 300 Timberdell Rd., Room 3056, Norman, OK 73019, President REX BLACKBURN, 1673 West Shoreline Dr., Suite 200, P.O. Box 7808, Boise, ID 83702, Division Chair AMERICAN BAR ASSOCIATION ADVISOR JOSEPH KARTIGANER, 812 Fifth Ave., New York, NY 10021, American Bar Association Advisor EXECUTIVE DIRECTOR WILLIAM H. HENNING, University of Alabama School of Law, Box 870382, Tuscaloosa, AL 35487-0382, Executive Director WILLIAM J. PIERCE, 1505 Roxbury Rd., Ann Arbor, MI 48104, Executive Director Emeritus

Copies of this Code may be obtained from: NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS 211 E. Ontario Street, Suite 1300 Chicago, Illinois 60611 312/915-0195 www.nccusl.org

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AMENDMENTS TO THE UNIFORM TRUST CODE (2000) SECTION 103. DEFINITIONS. In this [Code]: (1) "Action," with respect to an act of a trustee, includes a failure to act. (2) "Ascertainable standard" means a standard relating to an individual's health, education, support, or maintenance within the meaning of Section 2041(b)(1)(A) or 2514(c)(1) of the Internal Revenue Code of 1986, as in effect on [the effective date of this [Code]] [, or as later amended]. (2) (3) "Beneficiary" means a person that: (A) has a present or future beneficial interest in a trust, vested or contingent; or (B) in a capacity other than that of trustee, holds a power of appointment over trust property. (3) (4) "Charitable trust" means a trust, or portion of a trust, created for a charitable purpose described in Section 405(a). (4) (5) "[Conservator]" means a person appointed by the court to administer the estate of a minor or adult individual. (5) (6) "Environmental law" means a federal, state, or local law, rule, regulation, or ordinance relating to protection of the environment. (6) (7) "[Guardian]" means a person appointed by the court [, a parent, or a spouse] to make decisions regarding the support, care, education, health, and welfare of a minor or adult individual. The term does not include a guardian ad litem. (7) (8) "Interests of the beneficiaries" means the beneficial interests provided in the terms of the trust. (8) (9) "Jurisdiction," with respect to a geographic area, includes a State or country. (9) (10) "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) (11) "Power of withdrawal" means a presently exercisable general power of appointment other than a power exercisable by a trustee which is limited by an ascertainable standard, or which is exercisable by another person only upon consent of the trustee or a person holding an adverse interest. (11) (12) "Property" means anything that may be the subject of ownership, whether real or personal, legal or equitable, or any interest therein. (12) (13) "Qualified beneficiary" means a living beneficiary who, on the date the beneficiary's qualification is determined: (A) is a distributee or permissible distributee of trust income or principal; (B) would be a distributee or permissible distributee of trust income or principal if the interests of the distributees described in subparagraph (A) terminated on that date, but the termination of those interests would not cause the trust to terminate; or (C) would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date. B3

(13) (14) "Revocable," as applied to a trust, means revocable by the settlor without the consent of the trustee or a person holding an adverse interest. (14) (15) "Settlor" means a person, including a testator, who creates, or contributes property to, a trust. If more than one 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. (15) (16) "Spendthrift provision" means a term of a trust which restrains both voluntary and involuntary transfer of a beneficiary's interest. (16) (17) "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. (17) (18) "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. (18) (19) "Trust instrument" means an instrument executed by the settlor that contains terms of the trust, including any amendments thereto. (19) (20) "Trustee" includes an original, additional, and successor trustee, and a cotrustee. SECTION 105. DEFAULT AND MANDATORY RULES. (a) Except as otherwise provided in the terms of the trust, this [Code] governs the duties and powers of a trustee, relations among trustees, and the rights and interests of a beneficiary. (b) The terms of a trust prevail over any provision of this [Code] except: (1) the requirements for creating a trust; (2) the duty of a trustee to act in good faith and in accordance with the purposes of the trust; (3) the requirement that a trust and its terms be for the benefit of its beneficiaries, and that the trust have a purpose that is lawful, not contrary to public policy, and possible to achieve; (4) the power of the court to modify or terminate a trust under Sections 410 through 416; (5) the effect of a spendthrift provision and the rights of certain creditors and assignees to reach a trust as provided in [Article] 5; (6) the power of the court under Section 702 to require, dispense with, or modify or terminate a bond; (7) the power of the court under Section 708(b) to adjust a trustee's compensation specified in the terms of the trust which is unreasonably low or high; [(8) the duty under Section 813(b)(2) and (3) to notify qualified beneficiaries of an irrevocable trust who have attained 25 years of age of the existence of the trust, of the identity of the trustee, and of their right to request trustee's reports;] [(9) the duty under Section 813(a) to respond to the request of a [qualified] beneficiary of an irrevocable trust for trustee's reports and other information reasonably related to the administration of a trust;] B4

(10) the effect of an exculpatory term under Section 1008; (11) the rights under Sections 1010 through 1013 of a person other than a trustee or beneficiary; (12) periods of limitation for commencing a judicial proceeding; [and] (13) the power of the court to take such action and exercise such jurisdiction as may be necessary in the interests of justice [; and (14) the subject-matter jurisdiction of the court and venue for commencing a proceeding as provided in Sections 203 and 204]. SECTION 110. OTHERS TREATED AS QUALIFIED BENEFICIARIES. (a) Whenever notice to qualified beneficiaries of a trust is required under this [Code] , the trustee must also give notice to any other beneficiary who has sent the trustee a request for notice. (b) A charitable organization expressly designated to receive distributions under the terms of a charitable trust has the rights of a qualified beneficiary under this [Code] if the charitable organization, on the date the charitable organization's qualification is being determined: (A) is a distributee or permissible distributee of trust income or principal; (B) would be a distributee or permissible distributee of trust income or principal upon the termination of the interests of other distributees or permissible distributees then receiving or eligible to receive distributions; or (C) would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date. or a (c) A person appointed to enforce a trust created for the care of an animal or another noncharitable purpose as provided in Section 408 or 409 has the rights of a qualified beneficiary under this [Code]. (c) [(d) The [attorney general of this State] has the rights of a qualified beneficiary with respect to a charitable trust having its principal place of administration in this State.] SECTION 301. REPRESENTATION: BASIC EFFECT. (a) Notice to a person who may represent and bind another person under this [article] has the same effect as if notice were given directly to the other person. (b) The consent of a person who may represent and bind another person under this [article] is binding on the person represented unless the person represented objects to the representation before the consent would otherwise have become effective. (c) Except as otherwise provided in Sections [411 and] 602, a person who under this [article] may represent a settlor who lacks capacity may receive notice and give a binding consent on the settlor's behalf. [(d) A settlor may not represent and bind a beneficiary under this article with respect to the termination or modification of a trust under Section 411(a).]

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SECTION 410. MODIFICATION OR TERMINATION OF TRUST; PROCEEDINGS FOR APPROVAL OR DISAPPROVAL. (a) In addition to the methods of termination prescribed by Sections 411 through 414, a trust terminates to the extent the trust is revoked or expires pursuant to its terms, no purpose of the trust remains to be achieved, or the purposes of the trust have become unlawful, contrary to public policy, or impossible to achieve. (b) A proceeding to approve or disapprove a proposed modification or termination under Sections 411 through 416, or trust combination or division under Section 417, may be commenced by a trustee or beneficiary, [and a proceeding to approve or disapprove a proposed modification or termination under Section 411 may be commenced by the settlor]. The settlor of a charitable trust may maintain a proceeding to modify the trust under Section 413. SECTION 411. MODIFICATION OR TERMINATION OF NONCHARITABLE IRREVOCABLE TRUST BY CONSENT. [(a) [A noncharitable irrevocable trust may be modified or terminated upon consent of the settlor and all beneficiaries, even if the modification or termination is inconsistent with a material purpose of the trust.] [If upon petition the court finds that the settlor and all beneficiaries consent to the modification or termination of an irrevocable trust, the court shall enter an order approving the modification or termination even if the modification or termination is inconsistent with a material purpose of the trust.] A settlor's power to consent to a trust's modification or termination may be exercised by an agent under a power of attorney only to the extent expressly authorized by the power of attorney or the terms of the trust; by the settlor's [conservator] with the approval of the court supervising the [conservatorship] if an agent is not so authorized; or by the settlor's [guardian] with the approval of the court supervising the [guardianship] if an agent is not so authorized and a conservator has not been appointed. [This subsection applies only to irrevocable trusts created on or after [the effective date of this [Code]], and to revocable trusts which become irrevocable on or after [the effective date of this [Code]].]] (b) A noncharitable irrevocable trust may be terminated upon consent of all of the beneficiaries if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust. A noncharitable irrevocable trust may be modified upon consent of all of the beneficiaries if the court concludes that modification is not inconsistent with a material purpose of the trust. [(c) A spendthrift provision in the terms of the trust is not presumed to constitute a material purpose of the trust.] (d) Upon termination of a trust under subsection (a) or (b), the trustee shall distribute the trust property as agreed by the beneficiaries. (e) (d) If not all of the beneficiaries consent to a proposed modification or termination of the trust under subsection (a) or (b), the modification or termination may be approved by the court if the court is satisfied that: (1) if all of the beneficiaries had consented, the trust could have been modified or terminated under this section; and (2) the interests of a beneficiary who does not consent will be adequately protected.

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SECTION 504. DISCRETIONARY TRUSTS; EFFECT OF STANDARD. (a) In this section, "child" includes any person for whom an order or judgment for child support has been entered in this or another State. (b) Except as otherwise provided in subsection (c), whether or not a trust contains a spendthrift provision, a creditor of a beneficiary may not compel a distribution that is subject to the trustee's discretion, even if: (1) the discretion is expressed in the form of a standard of distribution; or (2) the trustee has abused the discretion. (c) To the extent a trustee has not complied with a standard of distribution or has abused a discretion: (1) a distribution may be ordered by the court to satisfy a judgment or court order against the beneficiary for support or maintenance of the beneficiary's child, spouse, or former spouse; and (2) the court shall direct the trustee to pay to the child, spouse, or former spouse such amount as is equitable under the circumstances but not more than the amount the trustee would have been required to distribute to or for the benefit of the beneficiary had the trustee complied with the standard or not abused the discretion. (d) This section does not limit the right of a beneficiary to maintain a judicial proceeding against a trustee for an abuse of discretion or failure to comply with a standard for distribution. (e) A creditor may not reach the interest of a beneficiary who is also a trustee or cotrustee, or otherwise compel a distribution, if the trustee's discretion to make distributions for the trustee's own benefit is limited by an ascertainable standard. SECTION 603. SETTLOR'S POWERS; POWERS OF WITHDRAWAL. (a) While a trust is revocable [and the settlor has capacity to revoke the trust], rights of the beneficiaries are subject to the control of, and the duties of the trustee are owed exclusively to, the settlor. (b) During the period the power may be exercised, the holder of a power of withdrawal has the rights of a settlor of a revocable trust under this section to the extent of the property subject to the power. SECTION 704. VACANCY IN TRUSTEESHIP; APPOINTMENT OF SUCCESSOR. (a) A vacancy in a trusteeship occurs if: (1) a person designated as trustee rejects the trusteeship; (2) a person designated as trustee cannot be identified or does not exist; (3) a trustee resigns; (4) a trustee is disqualified or removed; (5) a trustee dies; or (6) a [guardian] or [conservator] is appointed for an individual serving as trustee. (b) If one or more cotrustees remain in office, a vacancy in a trusteeship need not be filled. A vacancy in a trusteeship must be filled if the trust has no remaining trustee. (c) A vacancy in a trusteeship of a noncharitable trust that is required to be filled must be filled in the following order of priority: B7

(1) by a person designated in the terms of the trust to act as successor trustee; (2) by a person appointed by unanimous agreement of the qualified beneficiaries; or (3) by a person appointed by the court. (d) A vacancy in a trusteeship of a charitable trust that is required to be filled must be filled in the following order of priority: (1) by a person designated in the terms of the trust to act as successor trustee; (2) by a person selected by the charitable organizations expressly designated to receive distributions under the terms of the trust [if the [attorney general] concurs in the selection]; or (3) by a person appointed by the court. (e) Whether or not a vacancy in a trusteeship exists or is required to be filled, the court may appoint an additional trustee or special fiduciary whenever the court considers the appointment necessary for the administration of the trust. SECTION 802. DUTY OF LOYALTY. (a) A trustee shall administer the trust solely in the interests of the beneficiaries. (b) Subject to the rights of persons dealing with or assisting the trustee as provided in Section 1012, a sale, encumbrance, or other transaction involving the investment or management of trust property entered into by the trustee for the trustee's own personal account or which is otherwise affected by a conflict between the trustee's fiduciary and personal interests is voidable by a beneficiary affected by the transaction unless: (1) the transaction was authorized by the terms of the trust; (2) the transaction was approved by the court; (3) the beneficiary did not commence a judicial proceeding within the time allowed by Section 1005; (4) the beneficiary consented to the trustee's conduct, ratified the transaction, or released the trustee in compliance with Section 1009; or (5) the transaction involves a contract entered into or claim acquired by the trustee before the person became or contemplated becoming trustee. (c) A sale, encumbrance, or other transaction involving the investment or management of trust property is presumed to be affected by a conflict between personal and fiduciary interests if it is entered into by the trustee with: (1) the trustee's spouse; (2) the trustee's descendants, siblings, parents, or their spouses; (3) an agent or attorney of the trustee; or (4) a corporation or other person or enterprise in which the trustee, or a person that owns a significant interest in the trustee, has an interest that might affect the trustee's best judgment. (d) A transaction between a trustee and a beneficiary that does not concern trust property but that occurs during the existence of the trust or while the trustee retains significant influence over the beneficiary and from which the trustee obtains an advantage is voidable by the beneficiary unless the trustee establishes that the transaction was fair to the beneficiary.

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(e) A transaction not concerning trust property in which the trustee engages in the trustee's individual capacity involves a conflict between personal and fiduciary interests if the transaction concerns an opportunity properly belonging to the trust. (f) An investment by a trustee in securities of an investment company or investment trust to which the trustee, or its affiliate, provides services in a capacity other than as trustee is not presumed to be affected by a conflict between personal and fiduciary interests if the investment otherwise complies with the prudent investor rule of [Article] 9. In addition to its compensation for acting as trustee, the trustee may be compensated by the investment company or investment trust for providing those services out of fees charged to the trust. If the trustee receives compensation from the investment company or investment trust for providing investment advisory or investment management services, the trustee must at least annually notify the persons entitled under Section 813 to receive a copy of the trustee's annual report of the rate and method by which that compensation was determined. (g) In voting shares of stock or in exercising powers of control over similar interests in other forms of enterprise, the trustee shall act in the best interests of the beneficiaries. If the trust is the sole owner of a corporation or other form of enterprise, the trustee shall elect or appoint directors or other managers who will manage the corporation or enterprise in the best interests of the beneficiaries. (h) This section does not preclude the following transactions, if fair to the beneficiaries: (1) an agreement between a trustee and a beneficiary relating to the appointment or compensation of the trustee; (2) payment of reasonable compensation to the trustee; (3) a transaction between a trust and another trust, decedent's estate, or [conservatorship] of which the trustee is a fiduciary or in which a beneficiary has an interest; (4) a deposit of trust money in a regulated financial-service institution operated by the trustee; or (5) an advance by the trustee of money for the protection of the trust. (i) The court may appoint a special fiduciary to make a decision with respect to any proposed transaction that might violate this section if entered into by the trustee. SECTION 813. DUTY TO INFORM AND REPORT. (a) A trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. Unless unreasonable under the circumstances, a trustee shall promptly respond to a beneficiary's request for information related to the administration of the trust. (b) A trustee: (1) upon request of a beneficiary, shall promptly furnish to the beneficiary a copy of the trust instrument; (2) within 60 days after accepting a trusteeship, shall notify the qualified beneficiaries of the acceptance and of the trustee's name, address, and telephone number; (3) within 60 days after the date the trustee acquires knowledge of the creation of an irrevocable trust, or the date the trustee acquires knowledge that a formerly revocable trust has become irrevocable, whether by the death of the settlor or otherwise, shall notify the qualified B9

beneficiaries of the trust's existence, of the identity of the settlor or settlors, of the right to request a copy of the trust instrument, and of the right to a trustee's report as provided in subsection (c); and (4) shall notify the qualified beneficiaries in advance of any change in the method or rate of the trustee's compensation. (c) A trustee shall send to the distributees or permissible distributees of trust income or principal, and to other qualified or nonqualified beneficiaries who request it, at least annually and at the termination of the trust, a report of the trust property, liabilities, receipts, and disbursements, including the source and amount of the trustee's compensation, a listing of the trust assets and, if feasible, their respective market values. Upon a vacancy in a trusteeship, unless a cotrustee remains in office, a report must be sent to the qualified beneficiaries by the former trustee. A personal representative, [conservator], or [guardian] may send the qualified beneficiaries a report on behalf of a deceased or incapacitated trustee. (d) A beneficiary may waive the right to a trustee's report or other information otherwise required to be furnished under this section. A beneficiary, with respect to future reports and other information, may withdraw a waiver previously given. (e) Subsections (b)(2) and (b)(3) of this section apply only to a trustee who accepts a trusteeship on or after [the effective date of this [Code]], to an irrevocable trust created on or after [the effective date of this [Code]], and to a revocable trust which become irrevocable on or after [the effective date of this [Code]]. SECTION 814. DISCRETIONARY POWERS; TAX SAVINGS. (a) Notwithstanding the breadth of discretion granted to a trustee in the terms of the trust, including the use of such terms as "absolute", "sole", or "uncontrolled", the trustee shall exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries. (b) Subject to subsection (d), and unless the terms of the trust expressly indicate that a rule in this subsection does not apply: (1) a person other than a settlor who is a beneficiary and trustee of a trust that confers on the trustee a power to make discretionary distributions to or for the trustee's personal benefit may exercise the power only in accordance with an ascertainable standard relating to the trustee's individual health, education, support, or maintenance within the meaning of Section 2041(b)(1)(A) or 2514(c)(1) of the Internal Revenue Code of 1986, as in effect on [the effective date of this [Code]] [, or as later amended]; and (2) a trustee may not exercise a power to make discretionary distributions to satisfy a legal obligation of support that the trustee personally owes another person. (c) A power whose exercise is limited or prohibited by subsection (b) may be exercised by a majority of the remaining trustees whose exercise of the power is not so limited or prohibited. If the power of all trustees is so limited or prohibited, the court may appoint a special fiduciary with authority to exercise the power. (d) Subsection (b) does not apply to: (1) a power held by the settlor's spouse who is the trustee of a trust for which a marital deduction, as defined in Section 2056(b)(5) or 2523(e) of the Internal Revenue Code of B 10

1986, as in effect on [the effective date of this [Code]] [, or as later amended], was previously allowed; (2) any trust during any period that the trust may be revoked or amended by its settlor; or (3) a trust if contributions to the trust qualify for the annual exclusion under Section 2503(c) of the Internal Revenue Code of 1986, as in effect on [the effective date of this [Code]] [, or as later amended].

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Appendix C ­ Colorado Cases Citing the Restatements of Trusts Contents Cases Citing Restatement of Trusts (1935) 1. Fisher V. Minshall, 78 P.2d 363 (Colo. 1938). 2. California Service, Inc. v. People ex Rel. Cochrane, 88 P.2d 569 (Colorado 1939). 3. Tarabino Real Estate Company, Inc. v. Tarabino, 126 P.2d 859 (Colo. 1942). 4. Estate of Nicholson v. City and County of Denver, 93 P.2d 880 (Colo. 1939). 5. Champion v. Champion, 132 P.2d 185 (Colo. 1942). 6. Burden v. Colorado National Bank, 179 P.2d 267 (Colo. 1947). 7. Smith v. United States National Bank of Denver, 207 P.2d 1194 (Colo. 1949). 8. Brown v. International Trust Company, 278 P.2d 581 (Colo. 1954). 9. Brisnehan v. Central Bank and Trust Company, 299 P.2d 113 (Colo. 1956). 10. Denver National Bank v. Von Brecht, 322 P.2d 667 (Colo. 1958). 11. Gruenwald v. Mason, 335 P.2d 879 (Colo. 1959). 12. Leyden v. Citicorp Industrial Bank, 782 P.2d 6 (Colo. 1989). Cases Citing Restatement (Second) of Trusts (1959) 13. Hudson v. American Founders Life Insurance Company of Denver, 377 P.2d 391 (Colo. 1962). 14. Lefferdink v. Baker, 399 P.2d 935 (Colo. 1965). 15. Fleming and Pattridge v. Singer, 450 P.2d 635 (Colo. 1969). 16. Dunbar v. Trustees of Clayton College, 461 P.2d 28 (Colo. 1969). 17. In re Estate of Hall, 491 P.2d 614 (Colo. App. 1971). 18. In re Estate of Granberry, 498 P.2d 960 (Colo. App. 1972). 19. Montague v. Montague, 510 P.2d 901 (Colo. App. 1973). 20. In re Estate of Brenner, 547 P.2d 938 (Colo. App. 1976). 21. Brasser v. Hutchison, 549 P.2d 801 (Colo. App. 1976). 22. Exchange National Bank of Colorado Springs v. Sparkman, 554 P.2d 1090 (Colo. 1976). 23. Weeks v. Esch, 568 P.2d 494 (Colo. App. 1977). 24. Wright v. Bayly Corp., 587 P.2d 799 (Colo. App. 1978). 25. Colorado Division of Wildlife v. Benjamin, 587 P.2d 1207 (Colo. App. 1978). 26. Page v. Clark, 592 P.2d 792 (Colo. 1979). 27. In re Estate of Malone, 597 P.2d 1049 (Colo. App. 1979). 28. In re Gerald H. Lewis Trust, 652 P.2d 1106 (Colo. App. 1982). 29. Kaitz v. District Court, Second Judicial District, 650 P.2d 553 (Colo. 1982). 30. In re Estate of Daniels, 665 P.2d 594 (Colo. 1983). 31. In re Marriage of Flohr, 672 P.2d 1024 (Colo. App. 1983). 32. Adams v. Paine, Webber, Jackson & Curtis, Inc., 686 P.2d 797 (Colo. App. 1983). 33. Holter v. Moore and Company, 681 P.2d 962 (Col. App. 1983). C1

34. Rupert v. Clayton Brokerage Company of St. Louis, Inc., 705 P.2d 988 (Colo. App. 1985). 35. In re Trust under the Will of Killin, 703 P.2d 1323 (Colo. App. 1985). 36. Kenyon v. Poehlmann, 718 P.2d 264 (Colo. App. 1986). 37. Colorado State Hospital v. First Interstate Bank of Denver, N.A., 743 P.2d 449 (Colo. App. 1987). 38. Buder v. Sartore, 774 P.2d 1383 (Colo. 1989), affirming 759 P.2d 785 (Colo. App. 1988). 39. Destefano v. Grabrian, 763 P.2d 275 (Colo. 1988). 40. In re First Interstate Bank of Denver, N.A., 767 P.2d 792 (Colo. App. 1988). 41. First National Bank of Meeker v. Theos, 794 P.2d 1055 (Colo. App. 1990). 42. Marshall v. Grauberger, 796 P.2d 34 (Colo. App. 1990). 43. In re Marriage of Jones, 812 P.2d 1152 (Colo. 1991). 44. Haskins v. Garrett, 820 P.2d 350 (Colo. App. 1991). 45. Mancuso v. United Bank of Pueblo, 818 P.2d 732 (Colo. 1991). 46. Beyer v. First National Bank of Colorado Springs, 843 P.2d 53 (Colo. App. 1992). 47. In re Life Insurance Trust Agreement of Seeman, 841 P.2d 403 (Colo. App. 1992). 48. DeBose v. Bear Valley Church of Christ, 890 P.2d 214 (Colo. App. 1994). 49. In re Estate of Damon, 915 P.2d 1301 (Colo. 1996). 50. In re Trust of Franzen, 955 P.2d 1018 (Colo. 1998). 51. In re Cohen, 8 P.3d 429 (Colo. 1999). 52. In re Estate of Moring, 24 P.3d 642 (Colo. App. 2001). 53. In re Green Valley Financial Holdings, 32 P.3d 643 (Col. App. 2001). 54. Hawes v. Colorado Division of Insurance, 65 P.3d 1008 (Colo. 2003). 55. Hawes v. Colorado Division of Insurance, 65 P.3d 1008 (Colo. 2003). 56. Peterson v. McMahon, ___ P.3d ___ (Colo. No. 03SC685, October 18, 2004). Cases Citing Restatement (Third) of Trusts 57. Buder v. Sartore, 774 P.2d 1383 (Colo. 1989), affirming 759 P.2d 785 (Colo. App. 1988). 58. In re Estate of Heyn, 47 P.3d 724 (Colo. App. 2002). 59. In re Estate of Klarner, 2003 Colo. App. LEXIS 1784 (Colo. App. 2003). * * *

Summaries Cases Citing Restatement of Trusts (1935) 1. Fisher V. Minshall, 78 P.2d 363 (Colo. 1938). The estate assets were insufficient to carry out the charitable trust provided for in decedent's will. The court declined to apply cy pres because decedent did not have general charitable intent, with the result that the residue passed to the heirs. The court cited Restatement of Trusts § 413 (1935) for the proposition that there was a "contingent remainder" in the heirs. 78 P.2 at 366.

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2. California Service, Inc. v. People ex Rel. Cochrane, 88 P.2d 569 (Colorado 1939). A fund created pursuant to a contract that referred to the fund both as an "escrow" and as a "trust" was determined not to be a trust, with the result that the fund could be reached by the general creditors of the insurance company that held the fund. The court cited Restatement of Trusts § 12 (1935) for the proposition that the payment of interest on the fund was an indication that the fund was not a trust. 88 P.2d at 572. 3. Tarabino Real Estate Company, Inc. v. Tarabino, 126 P.2d 859 (Colo. 1942). Action for an accounting and a determination that certain property held pursuant to a contract was held in trust. The court cited Restatement of Trusts § 12g (1935) for the proposition that the payment of interest on the property was an indication that no trust was created. 126 P.2d at 862. 4. Estate of Nicholson v. City and County of Denver, 93 P.2d 880 (Colo. 1939). Decedent's will created a trust for the benefit of certain family members, with the remainder to pass one-half to a hospital and one-half to the City and County of Denver. All of the beneficiaries entered into a contract to terminate the trust, and sought court approval of the contract. The trustee resisted the termination. The Colorado Supreme Court affirmed the trial court's approval of the contract, and cited (a) Restatement of Trusts § 197(2) (1935) for the proposition that if the settlor manifests an intention that an intended charitable trust will not arise or will not continue unless a specified person acts as trustee, the trust fails unless that person acts as trustee, 93 P.2d at 888; and (b) Restatement of Trusts § 337 (1935) for the proposition that if all beneficiaries consent and none of them is incapacitated, they may terminate the trust unless continuance of the trust is necessary to carry out a material purpose of the trust. 93 P.2d at 888-89. 5. Champion v. Champion, 132 P.2d 185 (Colo. 1942). Father conveyed real estate to his daughter by warranty deed "absolute in form and beneficial in effect," and later took the position that the daughter held the property as resulting trustee for the father. The daughter disagreed. The Colorado Supreme Court affirmed the trial court's determination that no resulting trust arose, and cited Restatement of Trusts § 405 (1935) for the proposition that when a property owner transfers it without declaring any trust, the transferee does not hold the property upon resulting trust although the transfer is gratuitous. 132 P.2d at 186. 6. Burden v. Colorado National Bank, 179 P.2d 267 (Colo. 1947). The life beneficiary of a trust disputed the trustee's characterization of stock dividends as principal rather than income. The life beneficiary and her children, the presumptive remainder beneficiaries, entered into an agreement in which they all agreed that the stock dividends should be treated as income. The trustee refused to comply with the agreement, and the life beneficiary brought suit to compel the trustee to comply. The trial court appointed a guardian ad litem to represent the interests of unborn and unascertained contingent remainder beneficiaries. The trial court refused to compel the trustee to comply with the agreement, and the Colorado Supreme Court affirmed. The court cited Restatement of Trusts §84 (1935) for the proposition that the unborn and unascertained contingent beneficiaries had interests in the trust, so that the trial court was C3

correct in appointing the guardian ad litem. 179 P.2d at 270. The court also noted that "it was urged" that Restatement of Trusts §236 (1935) adopted an apportionment approach to characterizing stock dividends as principal or income, depending on whether the divided was paid from surplus that was accumulated prior to or during the life of the trust. 179 P.2d at 271. The court did not, however, decide this issue, because it held that the trust agreement gave the trustee discretion to determine whether the stock divided was income or principal. 7. Smith v. United States National Bank of Denver, 207 P.2d 1194 (Colo. 1949). The Colorado Supreme Court upheld a testamentary trust against arguments that the trust was not a valid charitable trust or, if it was a charitable trust, that it violated the Rule against Perpetuities. The court cited Restatement of Trusts §401, illustration i (1935), which says that a devise in trust to permit a non-charitable corporation to occupy the land so long as it exists, and if it should cease to exist, the land is to be held in trust for charitable purposes, violates the Rule. 207 P.2d at 1202. The court distinguished the case before it, where title vested immediately, from the illustration in the Restatement, and said that the Restatement illustration shows why the trust in Smith did not violate the Rule. 8. Brown v. International Trust Company, 278 P.2d 581 (Colo. 1954). The decedent had created a revocable life insurance trust, to which certain polices were made payable. The decedent later executed a will that purported to leave the life insurance to a named devisee. The court cited Restatement of Trusts §330 (1935) for the proposition that if a settlor reserves a power to revoke a trust by an inter vivos transaction, he cannot revoke the trust by will. 278 P.2d at 583. 9. Brisnehan v. Central Bank and Trust Company, 299 P.2d 113 (Colo. 1956). The City and County of Denver established a retirement plan for its employees, which required current employees to sign certain documentation within 60 days after the plan became effective. Some employees were allowed to sign the documentation after the 60 day period expired. When the plan was later terminated, the trustee questioned whether those employees who signed up late were entitled to share in the distribution of the plan assets. The Colorado Supreme Court affirmed the trial court's conclusion that those who did not sign up within the 60 day period were excluded as participants and were entitled only to return of their own contributions, with the City's contributions to be returned to the City's general fund. The court cited Restatement of Trusts §177 (1935) for the proposition that a trustee has the duty and power to institute actions to protect the trust estate and enforce claims and rights of the trust. 299 P.2d at 51-52. 10. Denver National Bank v. Von Brecht, 322 P.2d 667 (Colo. 1958). The Colorado Supreme Court reversed the trial court's determination that a revocable living trust was testamentary in nature and therefor void because it was not executed in compliance with the Wills Act. The court cited Restatement of Trusts §57 (1935) for the proposition that a trust is not testamentary merely because the settlor reserves the power to direct the trustee as to trust

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investments or as to the exercise of other powers or to appoint a substitute trustee. 322 P.2d at 674. 11. Gruenwald v. Mason, 335 P.2d 879 (Colo. 1959). The plaintiff and her former husband owned a piece of real estate. The plaintiff signed and recorded a quit claim deed naming her former husband as grantee, and then mailed the deed to him. The plaintiff later claimed that the purpose of the deed was to facilitate a sale of the land by the ex-husband for the benefit of both the plaintiff and the ex-husband. The plaintiff brought an action for partition and argued that the husband held the property in a resulting or constructive trust. The Colorado Supreme Court reversed the trial court's order for partition, and cited Restatement of Trusts §44 (1935) for the proposition that where an owner of land transfers it inter vivos to another in trust, but no memorandum evidencing the intention to create a trust is signed, and the trustee refuses to perform the trust, the transferee holds the property in constructive trust only if the transfer was procured by fraud, duress, undue influence, or mistake, or if the transferee was in a confidential relationship to the transferor, or the transfer was made as security for an indebtedness of the transferor. 335 P.2d at 882-83. The Supreme Court said that the plaintiff had failed to prove any of the grounds for establishment of a constructive trust. 12. Leyden v. Citicorp Industrial Bank, 782 P.2d 6 (Colo. 1989). In connection with a divorce, the trial court found that the couple's residence was owned by the couple and the husband's mother, as joint tenants. The court determined that the wife's interest in the residence was worth $10,000, and ordered the wife to quitclaim her one-third interest in the residence to the husband and his mother, and ordered the husband to execute a promissory note to the wife in the amount of $10,000. The court did not provide for the note to be secured, but the wife recorded the dissolution decree in the real estate records. The husband and his mother then borrowed against the house, then defaulted, and the lender foreclosed and then sold the property to third parties. The wife brought an action to impose an equitable lien against the property. The trial court held that the wife had an equitable lien, the Colorado Court of Appeals reserved, and the Colorado Supreme Court reversed the Court of Appeals, agreeing with the trial court that the wife was entitled to an equitable lien. The Colorado Supreme Court quoted Restatement of Restitution § 173 cmt. k (1937), which in turns cites Restatement of Trusts § 309 (1935) for the proposition that, if property is held by a person subject to a constructive trust, and is sold on execution of a judgment or at a judicial sale, and the purchaser pays the purchase price without notice of the constructive trust, he is a bona fide purchaser. 782 P.2d at 16 n.12. The court concluded that the same concept applies to an equitable lien, and that the lender and third party purchasers of the residence were not bona fide purchasers because they had notice of the wife's claim. Cases Citing Restatement (Second) of Trusts (1959) 13. Hudson v. American Founders Life Insurance Company of Denver, 377 P.2d 391 (Colo. 1962). The plaintiff corporation sued its former president and director for breach of trust in causing the company to issue stock in exchange for other stock of nominal value and in C5

violation of an underwriting agreement. The Colorado Supreme Court affirmed a judgment in favor of the corporation, and cited Restatement (Second) of Trusts §205 (1959) for the proposition that the measure of damages for breach of trust is (a) any loss or depreciation in value of the trust estate resulting from the breach, or (b) any profit made by the trustee resulting from the breach, or (c) any profit that would have accrued to the trust estate if there had been no breach. 377 P.2d at 395. 14. Lefferdink v. Baker, 399 P.2d 935 (Colo. 1965). Former employees of companies that had created a retirement plan sued the remaining trustee of the plan. The Colorado Supreme Court held that under the express terms of the plan the terminated employees were entitled only to the return of their contributions plus specified interest, and that any excess money remaining in the trust belonged to the employers. The court cited Restatement (Second) of Trusts §201 (1959) for the proposition that where an express trust is created, every asset of the trust that is not disposed of in due performance of the trust reverts to the creators of the trust if the trust ceases to function. 399 P.2d at 938. 15. Fleming and Pattridge v. Singer, 450 P.2d 635 (Colo. 1969). A law firm entered into a contingent fee agreement to represent a woman who claimed she was the child of a decedent and therefore entitled to a share of the estate. The woman later changed lawyers and the first law firm released her from the contingent fee agreement in exchange for reimbursement of certain expenses plus the right to receive $3,700 from the woman out of any recovery she might get from the estate, and $3,700 from the new lawyer out of any fees he might receive in representing the woman. The woman eventually recovered $200,000 from the estate, and she paid the first law firm the $3,700 agreed to. The second lawyer died without having paid the $3,700 he was to pay out of his fee, and the first law firm filed a claim against the lawyer's estate. The claim was allowed, but the lawyer's estate was apparently insolvent and the issue was whether the claim was of the first class (a claim for property held by the decedent as a fiduciary or trustee) or of the fifth class. The Court held that there was no trust relationship, citing Restatement (Second) of Trusts §16 (1959) for the proposition that a partial assignment of a chose in action does not make the assignor a trustee for the assignee, 450 P.2d at 637, and upheld the trial court's determination that the claim was a fifth class claim. 16. Dunbar v. Trustees of Clayton College, 461 P.2d 28 (Colo. 1969). George W. Clayton died in 1899 and his will provided for the creation of Clayton College, which provided institutional care for orphans. The will restricted eligibility for admission to poor, white, male orphans between the ages of 6 and 10, with an orphan being defined as one whose father is dead. The Colorado Supreme Court affirmed the Denver Probate Court's order applying the doctrine of cy pres to revise the admission policy to allow the college to admit children regardless of color between the ages of 6 and 18 who have been deprived of parental care and/or support by reason of the death of either parent, or who are otherwise in need of the care and training provided by Clayton College because the parents cannot or are unwilling to provide the care and training. There was no dispute that the racial restriction in the admission policy was unconstitutional. The issue was whether cy pres could be applied to revise the other aspects C6

of the admissions policy in light of changed circumstances. The Colorado Supreme Court adopted the statement of the doctrine of cy pres as set out in Restatement (Second) of Trusts §399 (1959), 461 P.2d at 30, and cited Restatement (Second) of Trusts §399, cmt. q (1959), for the proposition that a trust purpose becomes impracticable when the application of the trust property to the designated purpose would fail to accomplish the settlor's general charitable intention. Id. 17. In re Estate of Hall, 491 P.2d 614 (Colo. App. 1971). The Colorado Court of Appeals upheld a "Totten Trust" savings account against attack on the ground that the grantor retained too much control so that the account was testamentary. The court cited Restatement (Second) of Trusts § 58 (1959) as part of the "great weight of modern authority" that upholds Totten Trusts. 491 P.2d at 616. 18. In re Estate of Granberry, 498 P.2d 960 (Colo. App. 1972). Claimant asserted a claim against a decedent's estate alleging that the decedent had held certain real estate in trust and, at the time of his death, was holding proceeds from the sale of the real estate in trust. There was no formal trust agreement, but there was a written memorandum and extrinsic evidence concerning the beneficial ownership of the property The Colorado Court of Appeals upheld the trial court's determination that there was a valid trust, relying heavily on the Restatement (Second) of Trusts (1959). The court cited (a) Restatement (Second) of Trusts §§ 17 et seq. (1959) for the elements of an express private trust, 498 P.2d at 963; (b) Restatement (Second) of Trusts § 18 (1959) for the degree of capacity needed to create a trust, Id.; (c) Restatement (Second) of Trusts § 17(a) (1959) for the proposition that a trust may be created by the owner of property declaring that he holds it in trust for another, 498 P.2d at 964; and (d) Restatement (Second) of Trusts § 24(2), cmt. b (1959) for the proposition that the use of the word "trust" is not necessary to manifest the intention to create a trust. Id. 19. Montague v. Montague, 510 P.2d 901 (Colo. App. 1973). In a divorce action, the trial court ordered the creation of a trust to provide for the college education of the couple's children. The court named the husband trustee of the trust, and provided that any money remaining in the trust after the children finished college would revert to the husband. On appeal, the wife argued that the husband should not have been named trustee of the trust because his beneficial interest in the trust created a conflict of interest. The Colorado Court of Appeals rejected this argument, citing Restatement (Second) of Trusts § 99 (1959) for the proposition that the trustee of a trust may be a beneficiary. 510 P.2d at 903. 20. In re Estate of Brenner, 547 P.2d 938 (Colo. App. 1976). Husband died leaving a will that left his probate estate of $35,000 to his wife, and a revocable living trust funded with property worth $200,000, which named as beneficiaries husband's children from his prior marriage and his niece. The surviving wife argued that the trust was invalid, but the trial court upheld the trust and the Colorado Court of Appeals affirmed. The trust agreement provided that it was initially funded with real estate that the husband did not own at the time the trust agreement was signed, but which was conveyed to him as trustee five days later. The C7

court cited Restatement (Second) of Trusts § 26(e) (1959) for the proposition that where the settlor manifests an intention to create a trust of property to be acquired in the future, and confirms his intent by taking steps necessary to transfer the property to the trust, the property becomes subject to the trust. 547 P.2d at 941. The court also cited Restatement (Second) of Trusts § 57 cmt. h (1959) for the proposition that a trust is not testamentary because the settlor reserves a beneficial interest in the trust, a power to revoke or amend the trust, and as trustee controls the administration of the trust. 547 P.2d at 941. 21. Brasser v. Hutchison, 549 P.2d 801 (Colo. App. 1976). A judgment creditor attempted to garnish the debtor's interest in a martial deduction trust, and argued that the provision for mandatory income distributions was inconsistent with the spendthrift provision in the trust. The Colorado Court of Appeals rejected this argument, saying that spendthrift provisions are legal and enforceable in Colorado and insure that the income will be paid directly to the beneficiary and to no one else, citing Restatement (Second) of Trusts § 152 cmt. h (1959), which provides that a spendthrift trust protects income that has been received by the trustee but has not yet been paid to the beneficiary. 549 P.2d at 802. 22. Exchange National Bank of Colorado Springs v. Sparkman, 554 P.2d 1090 (Colo. 1976). An heir of decedent challenged the validity of a revocable living trust that the decedent had created arguing, among other grounds, that the trust was an attempted testamentary disposition. The Colorado Supreme Court rejected this argument saying it is well established that a settlor may reserve extensive powers of control over the administration of the trust, and that the settlor's retention of a power to revoke and a veto power over substantial investments by the trustee did not eliminate the substantial duties of the trustee. In support of its conclusion, the court cited Restatement (Second) of Trusts § 57 (1959). 554 P.2d at 1092. 23. Weeks v. Esch, 568 P.2d 494 (Colo. App. 1977). Motivated by a desire to avoid probate, a mother titled certain real estate in the name of herself and one of her children as joint tenants, and also made the child a party to her bank accounts. She did not change her will, which provided for an equal division among her three children. A few days before the mother's death, the child withdrew the money from the joint accounts and deposited it in her own account. When the mother died, the child who was surviving joint tenant refused to divide the real estate and the money from the bank accounts with the other children, and they sued for imposition of a constructive trust. The trial court found that the child who was named joint tenant had been in a confidential relationship with the mother and imposed a constructive trust. The Colorado Court of Appeals affirmed, citing Restatement (Second) of Trusts § 45 (1959) for the elements necessary to impose a constructive trust. The court said "[w]e find this Restatement approach to be persuasive and we follow it." 568 P.2d at 495. 24. Wright v. Bayly Corp., 587 P.2d 799 (Colo. App. 1978). Plaintiffs owned stock in defendant corporation. The stock was not registered under the Securities Act of 1933 and bore a restriction saying that the stock could not be sold in the absence of an effective registration statement or an opinion of counsel, satisfactory to the company, that registration was not C8

required. Plaintiffs, wishing to sell the stock, sent the corporation an opinion of counsel that a sale of the stock could be made pursuant to SEC Rule 144, and asked the corporation to approve the sale. The corporation did not respond, and the plaintiffs sued to recover the decline in value of the stock between the time they requested consent to sell and the time they brought suit. The trial court granted summary judgment for the company, concluding that the defendant corporation owned no duty to the plaintiffs. The Colorado Court of Appeals reversed, holding that the corporation owed a fiduciary duty to it stockholders, and cited Restatement (Second) of Trusts § 2 (1959) for the proposition that one who stands in a fiduciary relationship to another is under a duty to act for the benefit of the other and may not profit at the expense of the other. 587 P.2d at 801. The Court of Appeals remanded to the trial court for a determination of whether the facts supported the plaintiffs' arguments that the defendant corporation had breached its fiduciary duty. 25. Colorado Division of Wildlife v. Benjamin, 587 P.2d 1207 (Colo. App. 1978). Benjamin had a contract with the Division of Wildlife to sell hunting and fishing licenses at his sporting goods store. Rather than segregating the proceeds from the sale of licenses, as he was required to do by statute, Benjamin commingled the proceeds with other funds and used them to pay personal and business expenses and to buy inventory for the store. When he failed to remit $18,975.82 in license fees to the Division, the Division sued and instituted prejudgment attachment proceedings that resulted in seizure of the store's inventory. Benjamin's bank intervened, seeking $8,617.97 due it under a note that was secured by Benjamin's inventory and fixtures. The trial court awarded judgment to both the Division of Wildfire and the bank, but gave the bank's claim priority. The inventory was sold for $10,120.74. On appeal, the Division argued that, because Benjamin used the embezzled money to buy inventory for the store, the proceeds of that inventory could be traced into successive inventories and ultimately to the proceeds from the sheriff's sale, which should be subject to a constructive trust. The Colorado Court of Appeals rejected this argument on the ground that the Division could not prove the tracing. The court also said that even if it were to assume that the Division could trace the funds, the Division's rights were cut off by the bank as a bona fide purchaser for value without notice of a prior claim, citing Restatement (Second) of Trusts § 284 (1959). 587 P.2d at 1209. 26. Page v. Clark, 592 P.2d 792 (Colo. 1979). Plaintiff had acquired title to real estate by warranty deed, and brought an action for unlawful detainer against the grantors, who in their answer alleged that there was an oral promise that the plaintiff would reconvey the property as constructive trustee. The Colorado Supreme Court cited Restatement (Second) of Trusts § 44 cmt. a (1959) for the proposition that if the defendants could establish the elements of a constructive trust, then the plaintiff's promise to reconvey would be enforceable notwithstanding the statute of frauds. 592 P.2d at 797. The court remanded the case for a determination of whether the defendants had met the burden of proof to establish a constructive trust.

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27. In re Estate of Malone, 597 P.2d 1049 (Colo. App. 1979). A co-trustee who had been removed by the District Court on the basis of irreconcilable conflict with the other co-trustees argued on appeal that the District Court erred in removing him without first considering the strength of his position in the underlying dispute. The Colorado Court of Appeals affirmed the removal, and cited Restatement (Second) of Trusts § 107 cmts. a and c (1959) for the proposition that grounds for removal of a trustee include the existence of hostility and friction between the trustee and the beneficiaries, or between the trustee and his co-trustees, which causes interference with the proper administration of the trust. The court concluded that the concern was only with the level of hostility and its results, not with the merits of the underlying dispute. 597 P.2d at 1050. 28. In re Gerald H. Lewis Trust, 652 P.2d 1106 (Colo. App. 1982). A widow sued to have a provision in a trust that her income interest would terminate on her remarriage declared invalid as against public policy. The Colorado Court of Appeals affirmed the Denver Probate Court's decision upholding the provision, citing Restatement (Second) of Trusts § 62 cmt. h (1959). 652 P.2d at 1107. 29. Kaitz v. District Court, Second Judicial District, 650 P.2d 553 (Colo. 1982). The beneficiaries of guardianship estates sued the guardian alleging that it was negligent in investing the estate funds and failed to diversify investments. The petitioners sought a jury trial and exemplary damages. The trial court granted the guardian's motion to strike the request for a jury trial and claim for exemplary damages. In an original proceeding under C.A.R. 21, the Colorado Supreme Court made the rule absolute (agreed with the trial court) on the ground that the petitioner's claims were equitable in nature and there is no right to a jury trial in an equitable action, nor may exemplary damages be awarded in an equitable action. The court cited Restatement (Second) of Trusts § 197 (1959) for the proposition that actions by a beneficiary or ward against a trustee or guardian are usually equitable in nature, 650 P.2d at 555, and § 198 for limited situations where the action is one at law. Id. The court concluded that the action before it was not one of the situations where the remedy was at law. 30. In re Estate of Daniels, 665 P.2d 594 (Colo. 1983). Helen Daniels signed a trust agreement that named a number of individual residuary beneficiaries, and on the same day signed a pour over will that left the residue of her estate to the trust but provided that "if the trust created by said agreement is not in effect at my death, I give all the rest of my property to" one of the individual beneficiaries. She did not fill out the property schedule attached to the trust agreement, never asked the named co-trustee to sign the agreement, and never funded the trust. The Colorado Supreme Court upheld the trial court's determination that the residue of the estate passed to the individual devisee rather than to the trust, because the trial court's finding that the decedent never intended to create a trust was supported by the evidence. The court cited Restatement (Second) of Trusts §§ 23 and 24 (1959) for the proposition that the settlor's words and conduct are relevant to the issue of intent to create a trust. 665 P.2d at 597.

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31. In re Marriage of Flohr, 672 P.2d 1024 (Colo. App. 1983). A judgment debtor sought to enforce his judgment by garnishing a "Totten Trust" savings account in which the debtor was the settlor and trustee, with the debtor's son named as beneficiary. The bank responded that the funds were not subject to garnishment and the creditor traversed this response. Before trial, the bank allowed the debtor to withdraw all of the funds from the account. The trial court held that the bank was liable to the creditor for the amount that had been in the account when the writ of garnishment was served. The Colorado Court of Appeals affirmed, citing Restatement (Second) of Trusts § 58 cmt. d (1959) for the proposition that a Totten Trust is subject to claims of the settlor-trustee's creditors. 672 P.2d at 1025. 32. Adams v. Paine, Webber, Jackson & Curtis, Inc., 686 P.2d 797 (Colo. App. 1983). In an action against a stockbroker for breach of fiduciary duty through excessive and unsuitable trading, the Colorado Court of Appeals cited Restatement (Second) of Trusts § 205 (1959) for the proposition that lost profits are a proper element of damages in a breach of trust action. 686 P.2d at 801. 33. Holter v. Moore and Company, 681 P.2d 962 (Col. App. 1983). Plaintiffs sued their real estate agent for breach of fiduciary duty in connection with the sale of their home. They sought compensatory and exemplary damages and demanded a jury trial. The trial court struck the demand for a jury trial and granted the defendant partial summary judgment on the claim for exemplary damages on the ground that the claim was equitable, and that there is no right to a jury trial, and exemplary damages are not available, where the claim in is equity. The trial court relied on Kaitz v. District Court, Second Judicial District, 650 P.2d 553 (Colo. 1982), discussed in ¶ 29, above. The Colorado Court of Appeals reversed, holding that the plaintiff's claim was at law rather than in equity. The court distinguished the remedies of principals against agents, which are generally at law, from the remedies of trust beneficiaries against trustees, which are generally equitable. The court cited Restatement (Second) of Trusts § 197 (1959) for the latter proposition. 681 P.2d at 966. 34. Rupert v. Clayton Brokerage Company of St. Louis, Inc., 705 P.2d 988 (Colo. App. 1985). A carpenter with a modest net worth was awarded $20,000 for injuries he suffered in an automobile accident. He placed almost all of this money in a discretionary account with a stockbroker who invested the money in commodities future. The brokerage firm violated its own internal rules as to suitability in opening the account. When almost all of the money was lost, the carpenter sued the broker for breach of fiduciary duty. The trial court found for the carpenter. The Colorado Court of Appeals reversed and held that, while the broker became a fiduciary for its customer when it accepted the account, there was no fiduciary relationship until that point in time, and there was no showing of improper conduct after the account was opened. In dissent, Judge Tursi cited Restatement (Second) of Trusts § 205 (1959) for the proposition that when a fiduciary commits a breach of duty, the beneficiary may recover any loss flowing from the breach. 705 P.2d at 992. The Colorado Supreme court agreed with Judge Tursi, and reversed the Court of Appeals, 737 P.2d 1106 (Colo. 1987), but without citing the Restatement. C 11

35. In re Trust under the Will of Killin, 703 P.2d 1323 (Colo. App. 1985). Decedent's will left the residue of his estate, including a 2,332 acre ranch, in trust, and directed that the ranch not be sold during the administration of the trust. The value of the ranch increased from $88,274 at the time of decedent's death to $2,332,000 at the time of trial. At the time of trial, the ranch was generating net income of only $5,000 per year, or less than 0.025 percent of the value of the ranch. The income beneficiaries petitioned the court to permit the trustee to deviate from the provision of the will that prohibited sale of the ranch. The Colorado Court of Appeals affirmed the trial court's decision denying the petition, relying on Restatement (Second) of Trusts § 167, cmt. b, illus. 14 (1959). 703 P.2d at 1324. Section 167 of the Restatement provides that the court will permit deviation from a term of the trust if, owing to circumstances not known to the settlor and not anticipated by him, compliance with the term would defeat or substantially impair the accomplishment of the purposes of the trust. However, comment b provides that deviation is not permitted merely because it would be more advantageous to the beneficiaries. In illustration 14, A devises Blackacre to B in trust to pay the income to C and on C's death to convey Blackacre to D. B receives an advantageous offer to buy Blackacre. The illustration says that the court will not permit or direct B to sell Blackacre. 36. Kenyon v. Poehlmann, 718 P.2d 264 (Colo. App. 1986). In 1977, a mother conveyed certain property one-half to her son and one-half to her daughter and the daughter's husband. When the daughter and her husband later experienced financial problems, they and the son conveyed the property, by warranty deed absolute on its face, to the mother and to the son in one-half shares as tenants in common. After the financial problems of the daughter and her husband were resolved favorably, they sought reconveyance of the property, and the mother and brother refused. The daughter and her husband then sued seeking imposition of a constructive trust, arguing that the brother had orally promised to reconvey the property. The Colorado Court of Appeals cited Restatement (Second) of Trusts § 44 (1959), which provides that a constructive trust generally may be imposed to prevent unjust enrichment if there has been a conveyance of an interest in real property in reliance on an oral promise by the grantee to reconvey the property, and the grantee was in a confidential relationship to the grantor at the time of the conveyance.718 P.2d at 266. However, the trial court had determined that the portion of the property at issue was the one-half interest that the daughter and her husband had reconveyed to the mother (the brother's one-half interest was unchanged by the reconveyance), and there was no evidence that the mother had promised to reconvey. Therefore, the Court of Appeals affirmed the trial court's denial of a constructive trust. 37. Colorado State Hospital v. First Interstate Bank of Denver, N.A., 743 P.2d 449 (Colo. App. 1987). Colorado State Hospital sued the bank, as trustee of a testamentary trust, to recover the cost of care of the mentally ill trust beneficiary. The trust provided that the trustee was to distribute or apply income or principal for the beneficiary in the trustee's "sound discretion" to "properly care for my said daughter." The trust also contained a spendthrift provision. The hospital had requested financial information from both the beneficiary and the bank C 12

concerning the beneficiary's ability to pay for her care. Neither responded. Based on the failure to provide the requested information, the hospital determined, as allowed by the applicable statute, that the beneficiary had the ability to pay the full cost of her care. The trial court granted summary judgment to the hospital. The Colorado Court of Appeals reversed, and held that the hospital had not validly assessed the costs as required by the statute. The court noted that a trustee has a duty to keep the beneficiaries reasonably informed of the trust and to account to the beneficiary, pursuant to C.R.S. 15-16-303. However, the trustee has no duty to account to a creditor of a beneficiary unless the creditor acquires a lien on or interest in the beneficiary's property. The court cited Restatement (Second) of Trusts § 147 (1959) for the proposition that a creditor of a beneficiary can reach his interest in the trust by levying on the subject matter of the trust or by garnishing the trustee. 743 P.2d at 452-53. The court did not discuss the fact that Section 147 of the Restatement is subject to the rules of sections 149 - 162, concerning spendthrift and discretionary trusts, and the court did not reach the issues of whether, had the hospital made a valid assessment, the spendthrift and discretionary provisions of the trust would have prevented the hospital from reaching the trust. 38. Buder v. Sartore, 774 P.2d 1383 (Colo. 1989), affirming 759 P.2d 785 (Colo. App. 1988). A grandfather made gifts to his son, as custodian for the son's children under the Colorado Uniform Gifts to Minors Act and later the Colorado Uniform Transfers to Minors Act. The son, as custodian, invested some of the funds in blue chip stocks but invested almost half of the funds in penny stocks, which declined significantly in value. After the son and his wife divorced, the ex-wife sued the son, on behalf of their children, for breach of fiduciary duty and for an accounting. The trial court awarded judgment against the son and ordered him to pay damages equal to the amounts he had invested in penny stocks, plus lost profits and interest, and attorneys fees and costs. The Colorado Court of Appeals affirmed. The Court of Appeals concluded that the fiduciary duty owed by a trustee under general trust law, and the duty of a custodian under UGMA or UTMA, was the same, and cited Restatement (Second) of Trusts § 227(a) cmt. f(1) and (2) (1959), which prohibits a trustee from investing for the purpose of speculation. 759 P.2d at 787. The Colorado Supreme Court affirmed, 774 P.2d 1383 (Colo. 1989) (although it differed somewhat with the Court of Appeals as to the standard to apply, it reached the same result), and cited Restatement (Second) of Trusts § 205 cmt. i (1959) as authority for awarding lost profits as damages, 774 P.2d at 1390, and § 207 cmt. c concerning a trustee's liability for interest. Id. 39. Destefano v. Grabrian, 763 P.2d 275 (Colo. 1988). A husband and wife went to their parish priest for marriage counseling. During the course of the counseling, the priest developed a sexual relationship with the wife. After the couple divorced, the husband sued the priest, the diocese, and his ex-wife, and the ex-wife cross-claimed against the priest. The trial court granted the priest's and diocese's motion to dismiss, on the grounds that the issues raised were inextricably linked to religious issues, and that the claims were prohibited by the "heart balm" statute, C.R.S. § 13-20-201, which abolished actions for breach of promise to marry, alienation of affections, criminal conversion, and seduction. The Colorado Court of Appeals affirmed. The Colorado Supreme Court affirmed in part and reversed in part, holding that C 13

some of the claims were properly dismissed, but that the claims against the priest for breach of fiduciary duty and against the diocese for negligent supervision should not have been dismissed. In connection with the breach of fiduciary duty claims, the court cited Restatement (Second) of Trusts (1959) for the propositions that a fiduciary's obligations to the beneficiary include the duty of loyalty, § 170, a duty to exercise reasonable care and skill, § 174, and a duty to deal impartially with beneficiaries, § 183. 763 P.2d at 284. 40. In re First Interstate Bank of Denver, N.A., 767 P.2d 792 (Colo. App. 1988). A nursing home was sold and the sale was financed by the issuance by Adams County of $9,000,000 of series A bonds, which were sold to the public, and $3,000,000 of subordinated series B bonds, which were taken back by the seller as part of the purchase price. The buyer defaulted and proposed a refinancing plan insured by the Department of Housing and Urban Development, which required that all security held by the trustee be released and the bonds canceled. The refinancing would generate sufficient funds to pay off the series A bonds but not the series B bonds. The trustee petitioned the Denver Probate Court for instructions, and the court approved the refinancing. The seller and holder of the series B bonds appealed. The Colorado Court of Appeals affirmed, and cited Restatement (Second) of Trusts § 186(b) (1959) for the proposition that a trustee may exercise powers not specifically conferred or forbidden by the trust as necessary or appropriate to carry out the purposes of the trust, and Restatement (Second) of Trusts § 174 (1959) for the proposition that a trustee has a duty to exercise such care and skill as a person of ordinary prudence would exercise in dealing with his own property. 767 P. 2d at 795. 41. First National Bank of Meeker v. Theos, 794 P.2d 1055 (Colo. App. 1990). A bank sought judicial foreclosure of a lien allegedly created by a deed of trust given by a borrower. The borrower contested the amount due and counterclaimed against the bank and a bank officer, alleging numerous claims, including breach of fiduciary duty. The trial court awarded damages to the borrower, and the Colorado Court of Appeals reversed. In connection with the breach of fiduciary duty claim, the court discussed confidential relationships, and cited Restatement (Second) of Trusts § 2 cmt. b (1959) for the proposition that a confidential relationship may arise if one person has gained the confidence of the other and purports to act or advise with the other's interest in mind. 794 P.2d at 1061. 42. Marshall v. Grauberger, 796 P.2d 34 (Colo. App. 1990). The property settlement in connection with a couple's divorce provided that the husband was to transfer 500,000 shares of his controlled corporation to the wife within five years after the divorce. The husband could sell the stock within the five year period, in which case he was to pay the after-tax proceeds to the wife. Within the five year period, the husband sold all of his other stock in the company for a substantial profit, but not the 500,000 shares he was to transfer to his wife. Those 500,000 shares declined in value, and the wife sued for breach of fiduciary duty. The trial court awarded judgment to the wife, and the Colorado Court of Appeals affirmed. In connection with whether the trial court properly determined that the husband breached his fiduciary duty, the Court of Appeals cited Restatement (Second) of Trusts § 187 (1959) for C 14

the proposition that the husband's motives and his personal interest as a shareholder in the company were relevant circumstances for the trial court to consider. 796 P.2d at 37. 43. In re Marriage of Jones, 812 P.2d 1152 (Colo. 1991). The Colorado Supreme Court held that the increase in value, during the marriage, of a wife's interest in a discretionary trust that was created under the will of the wife's mother was not the wife's separate property for purposes of division of property under C.R.S. § 14-10-113, that income from the trust paid to the wife during the marriage was not marital property, and that the wife's interest in the trust was an economic circumstance to be considered in connection with the property division. Justice Quinn dissented in part, and argued that the wife's interest in the trust should be viewed as a vested interest in the trust, the increase in value of which during the marriage was marital property. Justice Quinn cited Restatement (Second) of Trusts § 74 cmt. a (1959) for the proposition that the creation of a trust results in the creation in the beneficiary of an interest in the subject matter of the trust. 812 P.2d at 1159. It should be noted, however, that the majority did not hold that the wife's interest in the trust was not property as a matter of trust law. In fact, the majority acknowledged that the beneficiary of a discretionary trust has an equitable interest in the subject matter of the trust, citing 2 A. Scott on Trusts § 130 (4th ed. 1987), which is in accord with Restatement (Second) of Trusts § 130 (1959). 812 P.2d at 1156. Rather, the Court in Jones, held that the increase in value of the wife's interest in the trust was not property "for purposes of division of property under section 14-10-113", 812 P.2d at 1157 (emphasis added; footnote omitted), because the wife, as beneficiary could not force the trustee to make distributions unless she could establish fraud or abuse of discretion on the trustee's part. For this proposition, the court cited 2 A. Scott on Trusts § 128.3, which is in accord with Restatement (Second) of Trusts § 128 cmt. d and § 187 (1959). 44. Haskins v. Garrett, 820 P.2d 350 (Colo. App. 1991). Decedent's will left $50,000 in trust for the benefit of her brother for life, with the then remaining trust assets to be distributed to the plaintiff. Another section of the will provided that if "any beneficiary of my estate as set forth herein shall predecease me, such beneficiary's share shall go to his or her issue . . . ." The decedent's brother predeceased her and left no children. The personal representative argued that the trust proceeds became part of the residue of the estate. However, the Colorado Court of Appeals affirmed the trial court's determination that the trust assets passed to the plaintiff as remainder beneficiary of the trust. The court cited Restatement (Second) of Trusts § 412 (1959) for the proposition that if the life beneficiary of a trust predeceases the author of the will, the remainder beneficiary takes as if the provision for the life estate was not made. 820 P.2d at 351. 45. Mancuso v. United Bank of Pueblo, 818 P.2d 732 (Colo. 1991). The plaintiff opened accounts and CDs with the defendant bank. She asked a "personal banker" for advice about what type of account to open so that her son would be able to withdraw money on her behalf when she was traveling or in a emergency. On the banker's advice, she opened the accounts as joint accounts and purchased the CDs payable to herself or her son. The son later borrowed money from the same bank on behalf of his controlled corporation and listed the joint C 15

accounts on his individual financial statement. When the son defaulted on his loan, the bank exercised its statutory right to set off against the funds in the joint account and CDs. See C.R.S. § 11-6-105 (1990 Supp.) The plaintiff then sued the bank, alleging that the funds were either special deposits or were subject to a resulting or constructive trust, and therefore were not subject to the statutory right of set off. The trial court granted the bank's motion for summary judgment and the Colorado Court of Appeals affirmed. The Colorado Supreme Court reversed, holding that summary judgment was improperly granted as to the constructive trust and resulting trust claims. The Supreme Court's majority opinion cites the Restatement (Second) of Trusts (1959) nine times, for the propositions that: (1) a resulting trust is a trust implied by law when the circumstances surrounding the transfer of property raise the inference that the parties intended to create a trust, Restatement (Second) of Trusts § 404 (1959) cited at 818 P.2d at 738-39; (2) as a general rule, a resulting trust arises when the purchase price is paid by one person and the property is transferred to another, Restatement (Second) of Trusts § 440 (1959) cited at 818 P.2d at 739; (3) there is an exception to this general rule when the transferee is the child of the person by whom the purchase price is paid, in which case the presumption is that the transfer was a gift and the one claiming a constructive trust has the burden of proving that the person who paid the purchase price did not intend a gift, Restatement (Second) of Trusts § 442 (1959) cited at 818 P.2d at 739; (4) parol evidence is admissible to show the existence of a resulting trust, Restatement (Second) of Trusts § 443 cmt. a (1959) cited at 818 P.2d at 739 n. 5; (5) a trustee of a resulting trust is in a fiduciary relationship with the beneficiary of the trust, Restatement (Second) of Trusts ch. 12, intro. note at 326 (1959) cited at 818 P.2d at 740; (6) a trustee may be in breach of trust whether he performed in bad faith, negligence, or under mistake of fact or law, Restatement (Second) of Trusts § 201 cmt. a (1959) cited at 818 P.2d at 740 n. 7; (7) a transferee with notice of a breach of trust does not hold the property free of trust, Restatement (Second) of Trusts § 288 (1959) cited at 818 P.2d at 741; (8) a person has notice of a breach of trust if he knows or should know of the breach of trust, Restatement (Second) of Trusts § 297(a) (1959) cited at 818 P.2d at 741; and (9) if the trustee in breach of trust transfers trust property to a person who takes with notice of the breach, the transferee does not hold the property free of trust, although he paid value for the transfer, Restatement (Second) of Trusts § 288 (1959) cited at 818 P.2d at 741. Justice Erickson, specially concurring in part and dissenting in part, cited the Restatement twice, for two of the same prepositions for which it was cited by the majority (propositions (2) and (3) above), for which Justice Erickson cited Restatement (Second) of Trusts § 322-26 and 442 (1959). 46. Beyer v. First National Bank of Colorado Springs, 843 P.2d 53 (Colo. App. 1992). Plaintiffs, beneficiaries and parents of minor beneficiaries of a trust, sued the trustee and former trustee for breach of fiduciary duty, negligence, and bad faith in the investments they had made. The investments in question had been made with the written consent of the adult beneficiaries on behalf of themselves and their minor children. The trust included a provision that specifically authorized the person having custody of a minor beneficiary to act for the beneficiary with respect to trust administrative matters. The trial court entered judgment for the defendant trustees, and the Colorado Court of Appeals affirmed, relying principally on Restatement C 16

(Second) of Trusts § 216, and especially cmt. k to that section (1959), concerning the circumstances in which a beneficiary's consent precludes the beneficiary from holding the trustee liable for a breach of trust. 843 P. 2d at 58, 59, 60, and 61. The court also cited Restatement (Second) of Trusts § 2 (1959) for the fundamental proposition that a trust is a fiduciary relationship with respect to property. 843 P.2d at 58. 47. In re Life Insurance Trust Agreement of Seeman, 841 P.2d 403 (Colo. App. 1992). The Denver Probate court awarded compensation to one of three co-trustees of a trust and to the attorney who represented both the trust and the settlor's estate, but the court reduced the requested compensation so that it represented compensation only for services for the sole benefit of the trust and denied fees attributable to ancillary litigation. The Colorado Court of Appeals affirmed. One of the arguments made by the other co-trustees and beneficiaries was that the Probate Court erred in finding that the trustee to whom the court awarded compensation, as the only active trustee, was entitled to make lone decisions and that the cotrustees' silence constituted consent, citing Restatement (Second) of Trusts § 194 (1959), which provides that co-trustees must act jointly unless otherwise provided by the trust agreement. The Court of Appeals rejected this argument, saying that the Probate Court had made no such finding, that the co-trustees did not specify which actions were allegedly taken without their consent, that the co-trustees voluntarily took no active part in the administration of the trust despite the active trustee's requests that they do so, and that it would be inequitable to deprive the active trustee of compensation for services which the Probate Court determined directly benefitted the trust and its beneficiaries when the co-trustees failed to act in accordance with their duties. 841 P.2d at 406. 48. DeBose v. Bear Valley Church of Christ, 890 P.2d 214 (Colo. App. 1994). A mother and her son sued a church and its pastor for breach of fiduciary duty and outrageous conduct based on alleged improper touching of the son by the pastor during counseling sessions. The Colorado Court of Appeals reversed judgments for the plaintiffs based on improper jury instructions and erroneously admitted expert testimony. Justice Davidson, dissenting, cited Restatement (Second) of Trusts § 171 cmt. a (1959) for the proposition that the duty required by a fiduciary is an external standard of a person of ordinary prudence in dealing with his own interests. 890 P.2d at 238. 49. In re Estate of Damon, 915 P.2d 1301 (Colo. 1996). Edith Damon was accused of murder for the death of her husband by gunshot wound. She was found not guilty by reason of insanity and committed to the Colorado State Hospital. Her husband had been a participant in a postretirement medical plan maintained by Unisys, and Edith Damon was a beneficiary of the plan. The plan paid for Damon's care at the state hospital for a period of time, and then, after a unilaterally-initiated review of her care, terminated her benefits on the ground that the care had become custodial or maintenance in nature and was not medically necessary. Damon's son, as her conservator, requested review and reconsideration, which the plan denied. After the hospital also requested reconsideration and was denied, the hospital field a claim against the conservatorship estate. The conservator denied the claim and then sought and received the C 17

trial court's permission to file a third party complaint against Unisys alleging that it breached its contractual duties under the plan in violation of ERISA. The Colorado Supreme Court affirmed the Court of Appeals' and the trial court's decisions that Unisys acted arbitrarily and capriciously in discontinuing the benefits. The Supreme Court discussed the standard for review and cited Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 109 (1989), which said that the interpretation of a plan's terms by a plan administrator must be reviewed by the deferential arbitrary and capricious standard if the plan grants the administrator discretionary authority to make the interpretation. The Colorado Supreme Court said that Bruch suggests that whether a plan administrator has acted arbitrarily or capriciously is to be determined by application of an abuse of discretion standard and, referring to principles of trust law, the Court in Bruch observed that when a trustee exercises discretionary powers, courts should only interfere to prevent an abuse of that discretion, citing Restatement (Second) of Trusts § 187 (1959). 915 P.2d at 1307-08. The Colorado Supreme Court concluded that the "arbitrary and capricious"and "abuse of discretion" standards as discussed in Bruch are coextensive. 50. In re Trust of Franzen, 955 P.2d 1018 (Colo. 1998). Mr. Franzen created a trust for the benefit of himself and his wife. After Mr. Franzen's death, the trust was revocable by Mrs. Franzen. Mrs. Franzen's brother purported to revoke the trust, acting pursuant to a power of attorney that granted him, as agent, the power to act on behalf of Mrs. Franzen with respect to any property, "including the funding, creation, and/or revocation of trusts." The power of attorney had been signed before C.R.S. § 15-14-608(2) was amended to provide that an agent may not revoke a trust unless the power of attorney includes "specific authority and specific reference to the trust." The bank trustee petitioned the Denver Probate Court for instructions, and that court held that the trust was not revoked. The Colorado Court of Appeals reversed, and the Colorado Supreme Court affirmed, holding that the language in the power of attorney was sufficient to authorize the brother, as agent, to revoke the trust. The Supreme Court also affirmed the Court of Appeals' decision that the bank trustee was not liable for litigation expenses associated with challenging the agent's authority to dissolve the trust. The court cited Restatement (Second) of Trusts §§ 226 cmt. b and 201 cmt. b (1959) for the proposition that the reason why good faith reliance on the advice of counsel is not a defense to liability for a breach of duty is that a trustee has the option of seeking instruction from a court rather than depending on the potentially erroneous advice of a lawyer. 955 P.2d at 1022. 51. In re Cohen, 8 P.3d 429 (Colo. 1999). Attorney Cohen represented Thomas Mars and Mars's corporation. Mars's son, Zane, was seriously injured in a motorcycle accident, and Cohen represented the son in successfully defending a criminal action and in securing a $750,000 settlement in a civil action. The settlement was received in March 1989. Zane, his parents, and Cohen discussed the settlement proceeds. A written trust agreement was entered into on August 28, 1989, effective "as of March 30, 1989." Between receipt of the settlement proceeds in March and execution of the trust agreement in August, Cohen loaned a total of $200,000 out of the settlement proceeds to Thomas Mars's corporation, which was not repaid because the business failed. Attorney Regulation counsel charged Cohen with violation of several disciplinary rules for representing conflicting interests. The complaint asserted that a C 18

trust had come into existence in March 1989. Cohen argued that no trust arose until the written trust agreement was signed in August, and that during the time when the loans were made he was acting as Zane Mars's agent, not as trustee, and was simply carrying out Zane Mars's directions to make the loans. The hearing board determined that "an oral irrevocable trust was established on or about March 30, 1989," that Cohen had violated the rules prohibiting conflicts of interest, and recommended that Cohen be suspended for thirty days. A hearing panel of the Supreme Court grievance committee approved the findings of the hearing board but modified the recommendation of a thirty day suspension to ninety days. The Colorado Supreme court sua sponte ordered the parties to brief the issues of (1) whether the trust violated C.R.S. § 38-10-111 (which provides that a trust for the use of the grantor is void as against "creditors existing" of the grantor) and/or public policy, (2) if the trust violated the statute and/or public policy, the effect of the violation on the validity of the trust, and (3) if the trust is invalid, the effect of the invalidity on the findings and recommendations of the hearing board. However, in its opinion, the Colorado Supreme court determined that whether the trust was void was immaterial for disciplinary purposes, and expressly did not reach the question. Nevertheless, the Court discussed the effectiveness of a trust as against the creditors of the settlor, and cited Restatement (Second) of Trusts (1959) for the propositions that (1) except as otherwise provided by statute, an enforceable trust can be created without a writing, Restatement (Second) of Trusts § 39 (1959), cited at 8 P.3d at 432 n. 3; and (2) where a person creates a spendthrift trust for his own benefit, his transferee or creditors can reach his interest, and where a person creates a support or discretionary trust for his own benefit, his transferee or creditors can reach the maximum amount which the trustee could pay to him or apply for his benefit, Restatement (Second) of Trusts § 156 (1959), cited at 8 P.3d at 432-33. The Supreme court ordered that Cohen be suspended for ninety days and pay the costs of the proceeding. 52. In re Estate of Moring, 24 P.3d 642 (Colo. App. 2001). The Colorado Department of Health Care Policy and Financing objected to the payment of trustee's fees and attorney's fees upon the termination of an income trust established under C.R.S. §§ 15-14-409.5 and 26-4-506.5. The Colorado Court of Appeals affirmed the trial court's allowance of the fees because the regulation on which the Department relied was retrospective in violation of the Colorado Constitution. The court cited Restatement (Second) of Trusts (1959) for the propositions that a trustee has a duty to make a final accounting, § 345; a trustee continues to be trustee until the trust is finally wound up, § 344; and a trustee is entitled to compensation, unless otherwise provided by the terms of the trust, and is also entitled to reimbursement for expenses incurred. §§ 242 and 244. 24 P.3d at 647. 53. In re Green Valley Financial Holdings, 32 P.3d 643 (Col. App. 2001). On the advice of their son, parents transferred a major portion of their assets to an irrevocable trust for their own benefit, with the son as trustee. When the parents determined that the trust was depriving them of current support and would not provide any estate tax savings, the parents petitioned for termination of the trust. The Colorado Court of Appeals affirmed the trial court's order terminating the trust, relying on Restatement (Second) of Trusts § 338(1) (1959), which says C 19

that if the settlor and all of the beneficiaries consent and none of them is incapacitated, they can compel termination of the trust even though the purposes of the trust have not been accomplished. 32 P.3d at 646. 54. Brotman v. East Lake Creek Ranch, L.L.P., 31 P.3d 886 (Colo. 2001). The State Board of Land Commissioners holds real estate that was granted to Colorado by the federal government in connection with Colorado's admission to the Union, pursuant to the Colorado Enabling Act. The land is to be held "for the support of the common schools." Part of this land was a section in Eagle county which, because it was landlocked, provided only minimal revenue from a grazing lease. In 1996, the Land Board entered into an agreement with Brotman that provided that the Land Board would deposit the land, and Brotman would deposit cash, in escrow, and the escrow agent would use the funds to purchase replacement properties as directed by the Land Board. East Lake Creek Ranch, an adjoining landowner, sued to prevent the agreement from being carried out, on the ground that the agreement violated procedures for sale of Land Board properties that are mandated by the Colorado Constitution. East Lake Creek Ranch alleged several bases for its standing to sue, including that the land held by the Land Board was held in trust for the benefit of the public, and that it therefore had standing as a beneficiary of the trust. The Colorado Supreme Court held that the Colorado Enabling Act did create a trust, but that the beneficiaries of the trust are the public schools, not the public at large. The court cited Restatement (Second) of Trusts § 24 cmt. b, illus. 1 (1959) for the proposition that absent indications to the contrary, a conveyance "for the use of"or "for the benefit of" demonstrates the intent to create a trust, 31 P.3d 886 at 894; Restatement (Second) of Trusts § 170 (1959) for the proposition that a trustee has a duty to administer the trust solely in the interest of the trust beneficiary, 31 P.3d 886 at 894; and Restatement (Second) of Trusts § 200 (1959) for the proposition that only a beneficiary or one suing on his or her behalf may sue the trustee to enforce the trust. 31 P.3d 886 at 894-95. Therefore, the court concluded that the Ranch did not have standing the sue the Land Board to enforce the trust. 55. Hawes v. Colorado Division of Insurance, 65 P.3d 1008 (Colo. 2003). In connection with the conversion of Blue Cross Blue Shield of Colorado from a nonprofit health insurer to a for profit corporation, certain intervenors in the conversion proceedings petitioned the Commissioner of Insurance for an award of attorneys' fees under the common fund doctrine on the ground that they had enhanced the value of the charitable trust that was created pursuant to the conversion. The Commissioner determined that he lacked authority to award attorneys' fees. The petitioners appealed this decision to the Colorado Court of Appeals, which affirmed. The Colorado Supreme Court reversed, holding that the Commissioner, in an equitable quasi-judicial administrative proceeding, in which he effectively serves as fiduciary, has implied and incidental authority to award attorneys' fees when public interest intervenors are necessary to effectuate the express mandate of the proceeding. The court held that, in performing the conversion, the Commissioner effectively acted as a fiduciary, and cited Restatement (Second) of Trusts § 348 (1959) for the definition of a charitable trust. 65 P.3d at 1022. C 20

56. Peterson v. McMahon, ___ P.3d ___ (Colo. No. 03SC685, October 18, 2004). Patric LeHouillier, an attorney, obtained a settlement for Edward Sklar following a head injury. The settlement proceeds were placed in a supplemental care trust for Sklar, and the trust named Ronald Peterson, another attorney and a friend of LeHouillier as trustee. Peterson made numerous loans from the trust to LeHouillier on favorable terms, and LeHouillier defaulted on the loans. Sklar died in 1995 and Peterson not only did not wind up the trust, he continued to make loans to LeHouillier. Afer enquiries by the magistrate for the El Paso County District Court, Peterson "withdrew" as trustee and the court appointed Jane McMahon as successor trustee. McMahon sued Peterson for breach of fiduciary duty and negligence and was awarded $316,631.53 in compensatory damages. The court also awarded $100,000 in exemplary damages. Peterson appealed the award of exemplary damages alleging that Kaitz v. District Court, Second Judicial District, 650 P.2d 553 (Colo. 1982) (summarized in ¶ 29 above) precluded exemplary damages because the action was equitable. Both the Colorado Court of Appeals and the Colorado Supreme court upheld the award of exemplary damages. The Supreme Court cited Restatement (Second) of Trusts § 198 (1959) for the proposition that where a trustee is under a duty to pay money immediately and unconditionally to the beneficiary, an action against the trustee may be maintained at law, and quoted comment d. to that section, which says that if a trustee who has misappropriated money from the trust is removed and a new trustee is appointed, the new trustee may maintain an action at law against the removed trustee to recover the amount misappropriated. Therefore, because the action was at law and not in equity, exemplary damages could be awarded. Cases Citing Restatement (Third) of Trusts 57. Buder v. Sartore, 774 P.2d 1383 (Colo. 1989), affirming 759 P.2d 785 (Colo. App. 1988). This case is discussed in ¶ 38, above. In addition to citing the Restatement (Second) of Trusts (1959), as discussed in ¶ 38, the Colorado Supreme Court cited Restatement (Third) of Trusts (Prudent Investor Rule) § 227 (Tent. Draft No. 1 1988). 774 P.2d at 1387 n.6. The court described this section as a proposal to address the standard of care owed when managing the funds of another. That section was finalized as Restatement (Third) of Trusts (Prudent Investor Rule) § 227 (1990). 58. In re Estate of Heyn, 47 P.3d 724 (Colo. App. 2002). The decedent's daughter predeceased him and was survived by two children ­ grandchildren of the decedent. The decedent was trustee of a testamentary trust for the grandchildren. One of the trust assets was a condominium where the decedent had lived with his daughter prior to the daughter's death. The decedent continued to live in the condominium and paid no rent to the trust. When the decedent died, the grandchildren filed a claim against his estate for breach of fiduciary duty. The Denver Probate Court allowed the claim, and the Colorado Court of Appeals affirmed. The court said that a plaintiff asserting a breach of fiduciary duty need only demonstrate a fiduciary relationship and a transfer or use of trust property by the fiduciary in order to raise a rebuttable presumption and establish a prima facie case. The burden of going forward then C 21

shifts to the fiduciary to present evidence to rebut the presumption. In support of this proposition, the court cited Restatement (Third) of Trusts § 170 (1990). 47 P.3d at 726. 59. In re Estate of Klarner, 2003 Colo. App. LEXIS 1784 (Colo. App. 2003). Albert and Marian Klarner each had two children from a prior marriage. In 1979, Albert signed a revocable living trust that provided for the creation at his death of a marital trust and a family trust. In 1982, Albert amended the trust to split the marital trust into a general power of appointment trust and a QTIP trust. Subject to Marian's power of appointment over the general power of appointment marital trust, all three trusts provided that, at Marian's death, the remaining assets would be distributed equally among all four children. Albert died in 1982. Marian renounced her interest in the family trust, and it was distributed among all four children. Marian withdrew all of the assets of the general power of appointment marital trust and placed them in her own revocable trust. Sometime prior to her death, Marian also removed Albert's children as beneficiaries of her revocable trust, and she appointed her two children along with the law firm of Katz, Look & Moison, P.C. as trustees of Marian's trust and of the QTIP trust. Marian died in March 2000. There was a dispute between the trustees (Marian's children and the law firm) and Albert's children as to the allocation of the burden of the death taxes and administration expenses. Albert's daughters argued in the Court of Appeals that the Probate Court had erred in not holding that the law firm had an inherent conflict of interest in acting as trustee of the trusts. The Court of Appeals said that the law firm did have a conflict of interest and remanded the case to the Probate Court to conduct an evidentiary hearing and fashion an appropriate remedy. With respect to possible remedies, the Court of Appeals said that it would not address the removal of the trustee because Albert's daughters had not raised that issue in the Probate Court, but the court noted that hostility and friction between the trustee and the beneficiaries are proper grounds for removal of a trustee even if misconduct is not proved, citing Restatement (Third) of Trusts § 37 cmt. f(1). 2003 Colo. App. LEXIS 1784 at 15.

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