Castle Estate Planning: Trust Analysis
Choice of Law Options in Trusts
By: Russell Lombardy
Settlors/Testators have considerable flexibility in choosing the law to govern certain aspects of their trusts. However, a choice of law designation will not be respected if it violates public policy in the jurisdiction interpreting it. Matters of public policy are closely related to matters of trust validity and include:
- Provisions encouraging divorce;
- Attempts to defeat spousal rights;
- Attempts to avoid creditors;
- Attempts to avoid public assistance programs; and
- Perpetuity issues.
The choice of law analysis is typically broken down by four areas of trust law:
- Validity
- Construction
- Administration
- Meaning and Effect
Each of these areas of trust law is then applied to the specific type of trust in question: inter vivos funded with land; inter vivos funded with non-real property (“movables”); testamentary trusts funded with land; and testamentary trusts funded with movables.
In brief, the following choices of law may be made:
Validity:
With respect to matters of the validity of a trust, a settlor or testator may choose the law of a jurisdiction to govern the validity of a trust containing movables as long as the jurisdiction has a sufficient relationship to the trust (place of business or domicile of the trustee when the trust is established, the location of the trust assets, the domicile of the testator, or the domicile of the beneficiaries) and the application of such law will not offend public policy of the state with the closest connection to the trust. A settlor or testator has little ability to choose the law applicable to matters of validity of a trust funded with land.
Construction:
A settlor or testator may designate which jurisdiction’s laws will be used in questions involving construction of a trust funded with either land or movables.
Administration:
The settlor or testator may choose which jurisdiction’s law will apply to matters of administration of a trust containing land. Additionally, a settlor or testator may choose the laws of different jurisdictions to apply to different aspects of the administration of a trust containing movables.
Meaning and Effect:
Since these maters deal with the settlor’s / testator’s intentions, she is free to determine what law applies (including using a uniform act or uniform code to control this interpretation).
Following is a more detailed discussion of both:
- the law that will apply to each of these areas when either no choice of law is made or an invalid choice of law is made, and
- in which areas a settlor / testator may make a choice of law designation.
Validity; issues relating to:
- Spousal rights / Government Rights in the case of public benefits such as Medicaid
- Avoidance of Creditors
- Encouragement of Divorce
- Rule Against Perpetuities
Law that Will Apply Outside of a Choice of Law Designation (i.e., no choice of law made or an invalid choice of law made) How May a Settlor Choose the Law for This Type of Trust?
Inter Vivos and Testamentary Trusts Containing Land Typically the law of the location where the land is situated is used (although there have been cases that have found if the land is to be sold and the proceeds transferred to another jurisdiction, the law of the other jurisdiction may also be appropriate to determine the validity of the trust). A settlor has little ability to choose the law applicable to these trusts.
Testamentary Trusts Containing Movables The law of either the testator’s domicile or the law of the jurisdiction in which the trust is administered will control.
Caveat 1: The law at issue must not violate a public policy in the decedent’s domiciliary state.
Caveat 2: Questions involving the validity of the will itself (as opposed to the validity of the trusts created under it) will be decided under the law of the testators domicile.
The general rule is that the testator can choose the law of the jurisdiction to govern the validity of the trust as long as the chosen jurisdiction has a sufficient relationship to the trust (place of business or domicile of the trustee when the trust is established, the location of the trust assets, the domicile of the testator or the domicile of the beneficiaries).
Inter Vivos Trust Containing Movables The law of the state with which, as to the matter at issue, the trust has its most significant relationship will be used to determine validity. Such relationship may be found in the state in which: the settlor is domiciled; the beneficiaries are domiciled; the trust assets are located at the inception of the trust; and the trust is executed.
Caveat 1: There must be no violation of public policy of the state with which it is determined the trust has the most significant relationship if the law of a jurisdiction other than that of the settlor’s domicile is used. The general rule is that the settlor can choose the law of the jurisdiction to govern the validity of the trust as long as the chosen jurisdiction has a sufficient relationship to the trust (place of business or domicile of the trustee when the trust is established, the location of the trust assets, the domicile of the testator or the domicile of the beneficiaries).
NOTE: Courts will typically strive to uphold the validity of a trust or its provisions if reasons can be found to do so.
Construction
Law that Will Apply Outside of a Choice of Law Designation (i.e., no choice of law made or an invalid choice of law made). How May a Settlor Choose the Law for This Type of Trust?
Inter Vivos and Testamentary Trusts Containing Land The law of the location where the land is situated will typically control (there have been exceptions to this general rule in the case where a testamentary trust holds land—it has been determined that the law of the testator’s domicile may control). A settlor or testator may designate which jurisdiction’s laws will be used in questions involving construction.
Inter Vivos and Testamentary Trusts Containing Movables The law of the state in which the trust is administered will control.
Caveat 1: With respect to Testamentary Trusts Containing Movables, if the matter of construction deals with disposition (such as application of the pretermitted heir statute, definition of issue, etc.), the law of the state of the decedent’s domicile will control.
Caveat 2: With respect to Inter Vivos Trusts Containing Movables, if the matter of construction deals with disposition (such as application of the pretermitted heir statute, definition of issue, etc.), the law of the state which has the most significant relationship to the trust would apply. A settlor or testator may designate which jurisdiction’s laws will be used in questions involving construction.
Administration
Law that Will Apply Outside of a Choice of Law Designation (i.e., no choice of law made or an invalid choice of law made) How May a Settlor Choose the Law for This Type of Trust?
Inter Vivos and Testamentary Trusts Containing Land The law of the location where the land is situated will typically control. The settlor or testator may choose which jurisdiction’s law will apply to matters of administration.
Inter Vivos and Testamentary Trusts Containing Movables The law of the location where the trust is being administered would apply to:
- a jurisdiction’s power to impose and collect income taxes and to which court’s jurisdiction the trust will be subject, and
- matters involving questions of administration such as investment powers, fiduciary compensation, ability to terminate trusts, duties owed to beneficiaries and trustee liability for the breach thereof, removal and succession of trustees, etc.
The settlor or testator may choose which jurisdiction’s law will apply to matters of administration and may choose different jurisdictions to govern different areas of administration (such as different jurisdictions for one or more of: trustee powers; trust investments; compensation; indemnification; removal and appointment of successor trustees; termination of the trust; and determination of principal and income).
Meaning and Effect (what the settlor/testator intended)
Law that Will Apply Outside of a Choice of Law Designation (i.e., no choice of law made or an invalid choice of law made) How May a Settlor Choose the Law for This Type of Trust?
Inter Vivos and Testamentary Trusts Containing Land and/or Movables In all cases where the meaning and effect of terms of the trust are unclear, the law of the jurisdiction having the most significant relationship to the matter at issue will control.
Since these matters deal with the settlor’s/testator’s intentions, she is free to determine what law applies (both the law of a particular jurisdiction as well as the law of a uniform act or code whether or not enacted in a particular jurisdiction—such as the Uniform Principal and Trust Act or Uniform Trust Code).
Copyright 2005, Russell Lombardy, Longmont, Colorado