Savings Statute for Interested Trustees

Some easy to overlook statutes in the Tennessee Trust Code can save a poorly drafted trust with an interested trustee from inadvertent taxation and creditor exposure.

An interested trustee is a trustee who is also a beneficiary of the trust. If the trust instrument gives an interested trustee the power to make distributions to himself, that power should be limited to an “ascertainable standard,” typically health, support, maintenance, and education. Otherwise, the trustee will possess a general power of appointment. Likewise, an interested trustee will be deemed to have a general power of appointment if he can make distributions for the purpose of discharging a legal obligation. This is a problem because assets subject to a general power of appointment are includible in the powerholder’s estate for estate tax purposes and are reachable by creditors of the powerholder.

In order to avoid this result, the Tennessee Trust Code includes a saving statute. It states:

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;

In addition:

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.

 

Accordingly, the Tennessee Trust Code would prevent an interested trustee from distributing trust assets to himself pursuant to a “welfare,” “happiness,” “best interests,” or similar non-ascertainable standard set forth in the trust instrument. This is a good result from an estate tax and asset protection standpoint. Nonetheless, if this is not the intended result, the drafter must expressly waive the application of this statute.

Source: T.C.A. § 35-15-814(d); cf. T.C.A. § 35-50-124(a)

Posted by Joel D. Roettger, JD, LLM, EPLS

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