1999 Changes to the Texas Trust Code

1999 Legislation:

1999 CHANGES TO THE TEXAS TRUST CODE
Amendments Made By the 76^th Texas Legislature (1999)
Explanation of Legislative Changes © 1999 by Glenn M. Karisch

SECTIONS WHICH WERE AMENDED

Sec. 113.018.  Employment of Agents.
Sec. 113.026.  Authority to Designate New Charitable Beneficiary. [NEW]
Sec. 113.060.  Authority to Delegate Investment Decisions. [NEW]
Sec. 113.1021.  Allocation of Principal and Income in Charitable Trusts. [NEW]
Sec. 114.032.  Liability for Written Agreements. [NEW]
Sec. 115.002.  Venue.

Sec. 113.018. EMPLOYMENT OF AGENTS.

A trustee may employ attorneys, accountants, agents, including investment agents, and brokers reasonably necessary in the administration of the trust estate.

Added by Acts 1983, 68th Leg., Ch. 567, Art. 2, Sec. 2, eff. Jan. 1, 1984. Amended by Acts 1999, 76th Leg., Ch. ___ [HB 1475], eff. Sept. 1, 1999.

Explanation of 1999 Amendment

HB 1475 added new Section 113.060 (see below) regarding the authority of a trustee to delegate investment decisions. This change to Section 113.018 was made to make it consistent with new Section 113.060 and to make clear that investment agents are permissible.

Sec. 113.026. AUTHORITY TO DESIGNATE NEW CHARITABLE BENEFICIARY.

(a) In this section:

(1) "Charitable entity" has the meaning assigned by Section 123.001.

(2) "Failed charitable beneficiary" means a charitable entity that is named as a beneficiary of a trust and that:

(A) does not exist at the time the charitable entity's interest in the trust becomes vested;

(B) ceases to exist during the term of the trust; or

(C) ceases to be a charitable entity during the term of the trust.

(b) This section applies only to an express written trust created by an individual with a charitable entity as a beneficiary. If the trust instrument provides a means for replacing a failed charitable beneficiary, the trust instrument governs the replacement of a failed charitable beneficiary, and this section does not apply.

(c) The trustee of a trust may select one or more replacement charitable beneficiaries for a failed charitable beneficiary in accordance with this section.

(d) Each replacement charitable beneficiary selected under this section by any person must:

(1) be a charitable entity and an entity described under Sections 170(b)(1)(A), 170(c), 2055(a), and 2522(a) of the Internal Revenue Code of 1986, as amended; and

(2) have the same or similar charitable purpose as the failed charitable beneficiary.

(e) If the settlor of the trust is living and not incapacitated at the time a trustee is selecting a replacement charitable beneficiary, the trustee shall consult with the settlor concerning the selection of one or more replacement charitable beneficiaries.

(f) If the trustee and the settlor agree on the selection of one or more replacement charitable beneficiaries, the trustee shall send notice of the selection to the attorney general. If the attorney general determines that one or more replacement charitable beneficiaries do not have the same or similar charitable purpose as the failed charitable beneficiary, not later than the 21st day after the date the attorney general receives notice of the selection, the attorney general shall request in writing that a district court in the county in which the trust was created review the selection. If the court agrees with the attorney general's determination, any remaining replacement charitable beneficiary agreed on by the trustee and the settlor is the replacement charitable beneficiary. If there is not a remaining replacement charitable beneficiary agreed on by the trustee and the settlor, the court shall select one or more replacement charitable beneficiaries. If the court finds that the attorney general's request for a review is unreasonable, the replacement charitable beneficiary is the charitable beneficiary agreed on by the trustee and the settlor, and the court may require the attorney general to pay all court costs of the parties involved. Not later than the 30th day after the date the selection is final, the trustee shall provide to each replacement charitable beneficiary selected notice of the selection by certified mail, return receipt requested.

(g) If the trustee and the settlor cannot agree on the selection of a replacement charitable beneficiary, the trustee shall send notice of that fact to the attorney general not later than the 21st day after the date the trustee determines that an agreement cannot be reached. The attorney general shall refer the matter to a district court in the county in which the trust was created. The trustee and the settlor may each recommend to the court one or more replacement charitable beneficiaries. The court shall select a replacement charitable beneficiary and, not later than the 30th day after the date of the selection, provide to each charitable beneficiary selected notice of the selection by certified mail, return receipt requested.

Added by Acts 1999, 76th Leg., Ch. ___ [HB 115], eff. Aug. 30, 1999.

Explanation of 1999 Amendment

HB 115 is the result of a disgruntled settlor who became so fed up with having the attorney general a party to a suit to name a new charity to replace a failed one that he tried twice (once, unsuccessfully, in 1997 and again, successfully, in 1999) to get the Legislature to pass a law changing the rules. Unfortunately, the problem is so obscure that it is unlikely that this new Section 113.060 will have much applicability.

If a trust names a charity as a beneficiary and that charity ceases to exist, something must be done to designate a new charity. In a well-drafted trust, the possibility of the failure of the named charity can be anticipated and a procedure for choosing a new charity can be included. (Usually the trust instrument provides for the trustee to choose a new beneficiary using whatever criteria the settlor cares to name.) If the trust is silent, however, under prior law a judicial proceeding was needed and the attorney general was a necessary party. The AG sought to assure that the new charity had the same or similar purpose as the old charity.

The new statute basically gives the attorney general notice and the opportunity to pass on triggering a judicial proceeding if the AG is satisfied with the entity picked by the trustee. It also provides that the trustee is to consult with the settlor if the settlor is still living. In a weird twist, the statute provides that the attorney general can be stuck with attorneys fees if the AG unnecessarily drags the trust through the courthouse.

The usefulness of HB 115 is further limited by its effective date provision - it applies only to trusts created on or after August 30, 1999, so it cannot be used with respect to old trusts.

Sec. 113.060. AUTHORITY TO DELEGATE INVESTMENT DECISIONS.

(a) In this section, "beneficiary" means:

(1) a person entitled to a distribution;

(2) a person who would be entitled to a distribution if the trust terminated; and

(3) a charitable entity as defined by Section 123.001 that has an interest in the trust.

(b) A trustee may employ and delegate investment decisions to an investment agent. Except as provided by Subsection (c), the trustee is responsible for the investment decisions of the agent.

(c) A trustee is not responsible for investment decisions made by an investment agent employed as provided by this section if:

(1) the trustee exercises the judgment and care under the circumstances then prevailing that a person of ordinary prudence, discretion, and intelligence would exercise in the management of the person's own funds in selecting the investment agent and in establishing the scope and terms of the delegation;

(2) the trustee investigates the credentials of the investment agent, including:

(A) reviewing the agent's experience, performance history, and financial stability;

(B) verifying the agent's professional license and registration, if any; and

(C) establishing that the agent is insured or bonded;

(3) the investment agent is subject to the jurisdiction of the courts of this state;

(4) under the terms of the delegation agreement, the investment agent:

(A) is subject to the standard of trust management and investment prescribed by Section 113.056; and

(B) assumes liability for the failure to follow that standard; and

(5) the trustee periodically reviews the investment decisions made by the investment agent to ensure compliance with the investment strategy prescribed by the trustee for the trust.

(d) Not later than the 30th day before the date a trustee enters into an agreement to delegate investment decisions to an investment agent under this section, the trustee shall send written notice to each beneficiary of the trust informing the beneficiary of the intended delegation and identifying the investment agent. If a beneficiary is a minor or is incapacitated, the notice required by this subsection must be provided to the beneficiary's legal guardian.

Added by Acts 1999, 76th Leg., Ch. ___ [HB 1475], eff. Sept. 1, 1999.

Explanation of 1999 Amendment

New section 113.060 is the result of compromise between the banking/trustee lobby and the probate lawyers' lobby. Like many compromises, one can look at it two ways - as the proverbial glass that is half empty or half full.

One the plus side, it permits trustees to delegate the authority to make investment decisions to an agent while providing protection for beneficiaries. Corporate trustees have been after the ability to do this for at least two sessions. They view the ability to delegate investment decisions as necessary in their competition with other disciplines in the financial services industry. Probate lawyers have resisted the move out of a fear that the beneficiary would be left with no one to sue if the investment decisions turned out to be poorly made. New section 113.060 makes it possible for investment decisions to be delegated but requires the trustee to stay on the hook for investment decisions or to follow a detailed procedure to assure that the beneficiary has recourse against the agent to whom the authority is delegated.

On the minus side, it is difficult to imagine many corporate trustees availing themselves of the mechanism in the statute for getting off the hook. These requirements are difficult to meet. For example, the investment agent must agree to subject itself to the jurisdiction of the courts of this state and subject itself to the standard of trust management and investment set forth in the Trust Code.

For this reason, it seems unlikely that the new section will come in to play very often.

Sec. 113.1021. ALLOCATION OF PRINCIPAL AND INCOME IN CHARITABLE TRUSTS.

(a) Unless otherwise provided by the trust instrument, an increase in the value of the following obligations over the value at the time the obligation was acquired by the trust is income:

(1) a deferred annuity before annuitization; and

(2) a life insurance contract before the death of the insured.

(b) For purposes of this section and unless otherwise provided by the trust instrument, the increase in value of an obligation described by Subsection (a) is available for distribution only when the trustee receives cash on account of the obligation. If the obligation is surrendered or partially liquidated, the cash received must be attributed first to the increase. Notwithstanding Section 113.103, the increase in the value of the obligation is available for distribution to the income beneficiary who is the income beneficiary when the cash is received and, if different, not to the income beneficiary who was the income beneficiary at the time the income accrued.

(c) Section 113.109 applies to the allocation of principal and income for a deferred annuity after annuitization.

Added by Acts 1999, 76th Leg., Ch. ___ [HB 1475], eff. Sept. 1, 1999.

Explanation of 1999 Amendment

This new section was pushed through by the insurance lobby to address a very narrow issue - permitting the trustees of poorly drafted net income makeup charitable remainder unitrusts ("NIMCRUTs") to take advantage of aggressive allocation strategies which have been targeted by the Internal Revenue Service as abusive but that, as of May 1999, has not been prohibited. Unfortunately, the insurance lobby had the clout to push through (over the objection of probate lawyers) a broadly applicable statute which may have unintended adverse consequences for other types of trusts.

Some planners advocate the use of NIMCRUTs as "spigot" trusts, where the trustee (usually the noncharitable beneficiary who set up the trust) can turn the income distributions to the noncharitable beneficiary (usually himself or herself) on and off as his or her income needs dictate. A NIMCRUT which invests in a deferred annuity is particularly attractive for this purpose, since no income is generated unless and until the trustee decides to pull income out. Drafters of NIMCRUTs can and should put provisions in the trust instrument permitting this type of allocation if this aggressive technique is desired. The insurance lobby wanted the aggressive approach to be the default rule for all trusts - including other charitable trusts and even noncharitable trusts. The Texas Academy of Probate and Trust Lawyers and I wanted to limit the rule to NIMCRUTS and to make it an opt-in rule rather than a default rule. The only compromise we were able to achieve was the inclusion of the word "Charitable" in the title to the section. It is clear that the legislative intent was to limit this rule to charitable trusts, and the section title makes it clear it was intended to be limited to charitable trusts, but note that the text of the section itself does not so limit the rule.

The insurance lobby also wanted this rule to apply to existing trusts so that this aggressive technique could be used even with respect to existing trusts. Therefore, the new rule applies to "principal and income subject to allocation" on or after September 1, 1999.

Sec. 114.032. LIABILITY FOR WRITTEN AGREEMENTS.

(a) A written agreement between a trustee and a beneficiary, including a release, consent, or other agreement relating to a trustee's duty, power, responsibility, restriction, or liability, is final and binding on the beneficiary and any person represented by a beneficiary as provided by this section if:

(1) the instrument is signed by the beneficiary;

(2) the beneficiary has legal capacity to sign the instrument; and

(3) the beneficiary has full knowledge of the circumstances surrounding the agreement.

(b) A written agreement signed by a beneficiary who has the power to revoke the trust or the power to appoint, including the power to appoint through a power of amendment, the income or principal of the trust to or for the benefit of the beneficiary, the beneficiary's creditors, the beneficiary's estate, or the creditors of the beneficiary's estate is final and binding on any person who takes under the power of appointment or who takes in default if the power of appointment is not executed.

(c) A written instrument is final and binding on a beneficiary who is a minor if:

(1) the minor's parent, including a parent who is also a trust beneficiary, signs the instrument on behalf of the minor;

(2) no conflict of interest exists; and

(3) no guardian, including a guardian ad litem, has been appointed to act on behalf of the minor.

(d) A written instrument is final and binding on an unborn or unascertained beneficiary if a beneficiary who has an interest substantially identical to the interest of the unborn or unascertained beneficiary signs the instrument. For purposes of this subsection, an unborn or unascertained beneficiary has a substantially identical interest only with a trust beneficiary from whom the unborn or unascertained beneficiary descends.

(e) This section does not apply to a written instrument that modifies or terminates a trust in whole or in part unless the instrument is otherwise permitted by law.

Added by Acts 1999, 76th Leg., Ch. ___ [HB 1475], eff. Sept. 1, 1999.

Explanation of 1999 Amendment

New Section 114.032 imports the "virtual representation" concept from the litigation context and makes it applicable in a contractual setting. Trustees occasionally find themselves wanted to agree with the beneficiaries of the trust (for example, to deviate slightly from the trust instrument or to excuse minor violations of the trust instrument). Under prior law, these agreements may be binding on the adult beneficiaries of the trust, but there was no way to make them binding on the minor, incapacitated or unborn future beneficiaries of the trust. New Section 114.032 permits adult beneficiaries to bind their minor children if no conflict of interest exists and to bind unborn and unascertained beneficiaries if their interests are "substantially identical."

This statute should be very useful if a trustee discovers a minor transgression, takes corrective action, discloses it to the beneficiary and wants to be assured that a minor or unborn beneficiary will not some day question the method in which the transgression was corrected. Because the statute expressly does not apply to trust modifications or terminations, it may not be helpful where major departures from the trust instrument are planned.

Note that a full disclosure of material facts is necessary for the new procedure to work.

The new statute applies to written agreements entered into on or after September 1, 1999, even if the trust instrument was executed before that date.

Sec. 115.002. VENUE.

(a) The venue of an action under Section 115.001 of this Act is determined according to this section.

(b) If there is a single, noncorporate trustee, an action shall be brought [venue is] in the county in which:

(1) the trustee resides or has resided at any time during the four-year period preceding the date the action is filed; or

(2) the situs of administration of the trust is maintained or has been maintained at any time during the four-year period preceding the date the action is filed [the trustee's residence is located].

(c) If there are multiple trustees or a corporate [any] trustee, an action shall be brought [is a corporation, venue is] in the county in which the situs of administration of the trust is maintained or has been maintained at any time during the four-year period preceding the date the action is filed, provided that an action against a corporate trustee as defendant may be brought in the county in which the corporate trustee maintains its principal office in this state [corporation's principal office is located, or, if two or more corporations are trustees of the trust, venue is in the county in which the principal office of any of the corporations is located].

(d) For just and reasonable cause, including the location of the records and the convenience of the parties and witnesses, the court may transfer an action from a county of proper venue under this section to another county of proper venue:

(1) on motion of a defendant or joined party, filed concurrently with or before the filing of the answer or other initial responsive pleading, and served in accordance with law; or

(2) on motion of an intervening party, filed not later than the 20th day after the court signs the order allowing the intervention, and served in accordance with law.

(e) Notwithstanding any other provision of this section, on agreement by all parties the court may transfer an action from a county of proper venue under this section to any other county.

(f) For the purposes of this section:

(1) "Corporate trustee" means an entity organized as a financial institution or a corporation with the authority to act in a fiduciary capacity.

(2) "Principal office" means an office of a corporate trustee in this state where the decision makers for the corporate trustee within this state conduct the daily affairs of the corporate trustee. The mere presence of an agent or representative of the corporate trustee does not establish a principal office. The principal office of the corporate trustee may also be but is not necessarily the same as the situs of administration of the trust.

(3) "Situs of administration" means the location in this state where the trustee maintains the office that is primarily responsible for dealing with the settlor and beneficiaries of the trust. The situs of administration may also be but is not necessarily the same as the principal office of a corporate trustee. [If there are two or more trustees, none of which is a corporation, venue is in the county in which the principal office of the trust is maintained.]

Added by Acts 1983, 68th Leg., Ch. 576, Sec. 2, eff. Jan. 1, 1984. Amended by Acts 1983, 68th Leg., Ch. 567, Art. 2, Sec. 2, eff. Jan. 1, 1984. Amended by Acts 1999, 76th Leg., Ch. ___ [HB 2317], eff. Sept. 1, 1999. Amended by Acts 1999, 76th Leg., Ch. ___ [HB 2066], eff. Sept. 1, 1999.

Explanation of 1999 Amendment

HB 2066 (the interstate banking bill) and HB 2317 (a standalone venue bill) made identical changes to the venue section of the Trust Code. The principal change is the introduction of the "situs of administration" issue in trust venue.

Under prior law, a corporate trustee had the right to insist on being sued in the county where its principal office was located. This rule made sense when banks were not permitted to have offices in more than one county. In today's banking environment, however, this meant that suits which arose far away from a bank's "principal office" might end up being tried in Dallas or Houston.

As part of the compromise needed to get the interstate banking bill through the Legislature, the bank and trust company lobby agreed to these new rules.

The key concept is "situs of administration." Although it remains to be seen precisely how this term will be interpreted, it is likely that venue will be placed in the county where the bank has a location and at which it met with the settlor or the beneficiary rather than in the county where it handles the electronic transfer aspects of trust administration.