Now more than ever, the situs and principal place of administration of a trust has become a fluid concept. Trustees change, move, or open and close offices. As situs changes, the question often becomes “what law governs the meaning and effect of terms of the trust?” Fortunately, the Colorado Uniform Trust Code (CUTC) provides a clear answer to this question — “it depends.”
Under the CUTC, “the meaning and effect of the terms of a trust” are determined by either (1) the law designated in the trust “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) if the trust is silent, “the law of the jurisdiction having the most significant relationship to the matter at issue.” Colo. Rev. Stat. § 15-5-107.
Unfortunately, applying this general standard to the facts of an actual trust with beneficiaries scattered across the country can be difficult. Fortunately, comments to the draft Uniform Trust Code include “[f]actors to consider” such as “the place of the trust’s creation, the location of the trust property, and the domicile of the settlor, the trustee, and the beneficiaries.” Further, “more general factors that may be pertinent in particular cases include the relevant policies of the forum, the relevant policies of other interested jurisdictions and degree of their interest, the protection of justified expectations and certainty, and predictability and uniformity of result.” UTC § 107, Cmt.
However, even with these factors in mind, what law should govern a dispute between a trustee and a beneficiary living in two different states can become a hard question to answer. Or, for another example, what law should govern a dispute between a beneficiary and their creditors when the settlor has chosen the governing law of a state with strong creditor protections? This question has come up in at least one reported decision from Washington (applying similar law but not the UTC) where the settlor designated Alaska law – which authorized asset protection trusts – as the governing law for a trust that was administered by a corporate co-trustee in Alaska and the settlor/co-trustee who was in Washington – a state that does not authorize asset protection trusts. In re Huber, 493 B.R. 798 (Bankr. W.D. Wash. 2013). However, as the bankruptcy court pointed out:
[I]t is undisputed that at the time the Trust was created, the settlor was not domiciled in Alaska, the assets were not located in Alaska, and the beneficiaries were not domiciled in Alaska. The only relation to Alaska was that it was the location in which the Trust was to be administered and the location of one of the trustees…
[I]t is undisputed that at the time the Trust was created, the Debtor resided in Washington; all of the property placed into the Trust, except a $10,000 certificate of deposit, was transferred to the Trust from Washington; the creditors of the Debtor were located in Washington; the Trust beneficiaries were Washington residents; and the attorney who prepared the Trust documents and transferred the assets into the Trust was located in Washington. Accordingly, while Alaska had only a minimal relation to the Trust, […], Washington had a substantial relation to the Trust when the Trust was created.
In re Huber, 493 B.R. 798, 808 (Bankr. W.D. Wash. 2013). The court when on to note Washington’s strong public policy against self-settled asset protection trusts before concluding that Washington law would govern despite the settlor’s designation to the contrary.
What does all this mean for trustees, settlors, and beneficiaries? Take a close look at your trust agreements and determine whether any material provisions rely upon any state’s unique law. And if so, take care to ensure that you maintain an “significant” relationship with that state.