Friday, 25 June 2021 16:09

New Legislation Maintains Tennessee’s Status as a Leading Trust-Friendly State

 On May 12, 2021, the Governor of Tennessee signed into law HB1186/SB0896—a bill containing several revisions to Tennessee’s Trust Code.

Tennessee continues to distinguish itself as a desirable state for trust administration, and this recently enacted legislation seeks to maintain this advantage.

The Tennessee Bankers Association Legislative Committee meets annually to review Tennessee’s trust laws and determine what updates are needed for Tennessee to remain a leading trust jurisdiction and to enable trust administrators to better serve their clients. Runcie Clements, Chief Legal Officer & General Counsel and Leslie Malkiewicz, Vice President & Director, Legal, Senior Fiduciary Counsel at Cumberland Trust are active members of this collaborative committee.

“I and other members of our legal team have been fortunate to be a part of the Legislative Committee,” said Clements.  “The Legislative Committee is made up of some of the top legal minds and trust company professionals from across the State of Tennessee.  The committee’s collective knowledge of the Tennessee Trust Code is tremendous as is its understanding of how our day-to-day practices are shaped by these laws,” said Clements.

 

Clements added, “as Cumberland Trust administers trusts for our clients, we maintain a consistent focus on the governing law. As we encounter unique challenges in trust administration each year, we take note of how Tennessee’s trust code may be made more internally consistent or better tailored to address various responsibilities of trust administration. We also note positive aspects of other state’s trust laws that can be incorporated into Tennessee’s trust laws to keep Tennessee at the forefront of the best state jurisdictions.”

The recent legislation adds flexibility to the Tennessee Trust Code in numerous ways. One subtle but significant improvement impacts directed trusts specifically. A directed trust is a growing, but still relatively new concept in some jurisdictions where the creator of a trust separates the trust administration function from the investment management function by appointing an investment advisor to manage the trust assets and removing that responsibility from the trustee.  This is a critical factor for many trust grantors and beneficiaries since most have longstanding relationships with their financial advisors and wish to retain these services for their trusts and their heirs.  However, many older trusts predate the enactment of Tennessee’s directed trustee statutes and therefore do not set up a directed trustee framework.  TCA 35-15-1201 et. seq. dictates how a directed trust can be established in Tennessee.  Tennessee law was already unique among the various state laws allowing directed trusts because it contained a reference to an agreement of the qualified beneficiaries as a method to establish a directed trust, but it gave no further guidance.   This latest bill clarifies that a non-judicial settlement agreement as defined in section 35-15-111 can be used to establish a directed trust. 

The bill made other notable improvements to Tennessee’s decanting statute.  Decanting is a process often used in lieu of judicially modifying a trust. It allows a trustee that has discretion to encroach trust assets to a beneficiary to use that discretion to encroach trust assets to a new trust with more desirable terms.  There are certain rules that a trustee must follow in exercising this discretion, but this new legislation made two significant changes to the decanting rules in Tennessee.  First, in some situations, assets can now be encroached out of a trust that requires income to be distributed to a beneficiary into a new trust that eliminates this mandatory income distribution requirement.  A mandatory income distribution requirement can disqualify certain beneficiaries from federal benefits and are also unnecessary for wealthy beneficiaries who would rather preserve the trust for their children.  Secondly, an existing trust can now be decanted into a new trust that accelerates the interests of a remainder beneficiary to a current beneficiary.  This is especially useful when remainder beneficiaries have certain needs that could not be met by the original trust but can be addressed by the new trust. 

“These relevant and timely updates to Tennessee’s Trust Code will not only allow for more flexibility in administering trusts, but also create more opportunities for Cumberland Trust and our clients and their advisors to work together to accomplish their goals,” said Malkiewicz.

These latest revisions to the Tennessee Trust Code include several additional improvements—from enhanced creditor protection for beneficiaries, and extension of maximum duration of special purpose trusts from 90 years to 360 years, etc. The legislation also enhances Tennessee’s silent trust provisions, including with respect to directed trusts where a trust protector or advisor has been designated to receive reports on behalf of beneficiaries. Additionally, the bill improves the laws governing self-settled asset protection trusts, known in Tennessee as a Tennessee Investment Services Trust (“TIST”) by removing the affidavit requirement for future contributions and shortening the limitations period from 2 years to 1.5 years.


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