The New Jersey Uniform Trust Code – Part Four: Creation of Trusts, Including Whether a Valid Trust Exists
CREATION OF TRUSTS, INCLUDING WHETHER A VALID TRUST EXISTS
This section will address the requirements to create a valid trust. Given the fundamental nature of this topic, the survey will include at times national standards and New Jersey common law, along with the NJ UTC.
- Basic Requirements to Create a Trust
- Basic Requirements to Create a Trust: National Standards
Under the Restatement (Third) of Trusts, the requirements for the creation of a trust vary depending upon whether the trust is inter vivos or testamentary. To create an inter vivos trust, a person need only manifest the intention to create a trust relationship. Restatement (Third) Of Trusts § 13 (2003). The manifestation of intent need not take any special form and, indeed, the settlor need not even understand that he is creating a trust per se. Id. at § 13 cmt. b. Rather, he must merely express an intention that certain property be transferred to a person(s) as trustee for the benefit of another person(s). Id. The manifestation must be external, as opposed to undisclosed, id. at § 13 cmt. a, but nothing more formal is required. Id. The external manifestation of intent need not necessarily take the form of communication to a third person; conduct or some other clear indication could be enough. Id. at § 13 cmt. c.
The intent required to create a trust is that property be held by a trustee as fiduciary for the beneficiary. Id. at §§ 2, 13. The trustee, beneficiary and settlor need not all be different people; rather, the settlor can transfer property to a trustee for the benefit of himself as beneficiary, or for several beneficiaries including himself. Id. at § 10 cmts. a, d. However, when legal and equitable titles merge entirely in the same person, the trust relationship may not exist. Id. at § 69.
Though the Restatement (Third) requires no particular words or formalities for the manifestation of intent, no trust is created where property is transferred to a person without a clear directive that he is to hold such property for another. Id. at § 13 cmt. d. A transfer of $1000 from S to T, for example, accompanied by a “request that the money help pay for B’s education” might not create a trust because it might merely express S’s hope for T’s use of the gift, but not serve as a binding directive that the money must be used for B. If, however, the same transfer is accompanied by the direction that the money is “to be used for B’s education” a trust is more likely to have been created, as the language is imperative, rather than merely precatory. Id. at §13 cmt. c, illus. 5-10. It is crucial, therefore, to determine “[w]hether a transferor intended to impose the obligations essential to a trust, or merely intended to explain the motivation for a bequest or to express a nonbinding wish or recommendation[.]” Id. In the case of the latter, no trust would exist. In close cases, the Restatement (Third) leaves the question open, but provides factors for determining whether a trust has been created by such language. Factors include, among others, “the specific terms and overall tenor of the words used,” the relationship of the parties involved, and the ease of ascertaining possible trust purposes. Id. at § 13 cmt. d.
In addition to the intent to create the trust relationship, some identifiable property – the res – must be transferred to the trustee. Id. at § 10; see also id. at § 13 cmts. a, d. The res may consist of tangible or intangible property, choses in action, executory interests in property, remainder interests in property, or any other property right, whether vested or contingent. Id. There is essentially no limit on the type of property adequate to fund a trust. Id. No trust is created, however, where intent is manifested but no res is concurrently transferred to a trustee, id. at § 13 cmt. a; § 10 cmt. g., but a future transfer of property to a trustee, considered along with a present or past manifestation of intent to create a trust, may suffice depending upon the circumstances. Id. at § 13 cmt. a; § 16. Where the settlor has transferred property to a person but has failed to manifest his intent to create a trust, whether such failure is due to the use of precatory language or otherwise, a court of equity might impose a constructive trust upon the transferee. Indeed, the same result might occur where intent is manifested, but transfer of the res to a trustee or beneficiary is never effected.
Lastly, an inter vivos trust may not be valid where the beneficiary is not readily identifiable. Restatement (Third) of Trusts §§ 10, 13 (2003). The intent to create a trust for some unidentified class of persons is insufficient. Id. at § 46. A transfer of property to T for the benefit of “all of my friends” would be invalid as too indefinite to enforce. Id. at § 46 cmt. a. A settlor may, however, validly create a trust by directing the trustee to choose a beneficiary or beneficiaries from among a definite or indefinite class. Id. at § 46 cmt. d.
A testamentary trust is generally one created in a will (or potentially where an inter vivos trust is funded by dispositions of a pour-over will). Id. at §§ 17, 19. In addition to the requirements discussed above, a trust created by will is only valid if the will itself is valid. Id. at § 17. The manifestation of intent to create the trust may be ascertained from the will itself, from a document incorporated by reference, or by facts referred to in the will which have significance independent of will dispositions. Id. Similarly, where a pour-over disposition funds an inter vivos trust, the transfer of property to the trust is valid to the extent provided by state law, validated by the doctrines of incorporation by reference or facts of independent significance, or where the trust, together with the will, satisfy a harmless error or substantial compliance rule or otherwise satisfy the purposes of the applicable state wills act. Id. at § 19. Because testamentary trusts are made by will, no transfer of the res need take place during the settlor’s life, rather, the transfer may happen through the provisions of the will. Id. at § 17 cmt. a.
The Uniform Trust Code in most respects follows the Restatement (Third). Indeed, the Restatement is cited by the commentary to almost every UTC provision. See, e.g. Unif. Trust Code §§ 401, 402 (amended 2005) (discussing the relation of the UTC to the Restatement, and citing the Restatement provisions applicable to the creation of a valid trust including intent, parties, property and transfer). The Prefatory Note to the UTC provides that the code was created “in close coordination with the writing of the Restatement Third” while the General Comment to Article 1 provides that the code is to be supplemented by the common law of trusts.
- Basic Requirements to Create a Trust: New Jersey Common Law
New Jersey follows the Restatement with respect to the requirements for the creation of a trust. See Wolf v. Wolf, 136 N.J. Eq. 403 (Ch. 1945) (finding a valid trust created where a purported settlor “on several occasions . . . told witnesses that she had set up … a trust fund for the minor for his college education [and where] similar proofs, all uncontradicted, show[ed] that the decedent by her written or by her spoken words or by her conduct gave outward manifestation of her intention to create a trust” (citing Restatement (Second) of Trusts § 23) (internal citations and quotation marks omitted)). While the Restatement approach to precatory language requires interpretation to determine whether an instrument conveys an imperative command that property be held in trust, New Jersey courts have adopted a rule that precatory language will be given effect as imposing imperative trust duties. Thus, where a will disposes of property to a person with a wish or request that such property be used for the benefit of a third person, a court need not analyze the nature and tone of the settlor’s language; rather, it presumes that a trust has been created. Deacon v. Cobson, 83 N.J. Eq. 122, 125 (N.J. Ch. 1914).
Further, in New Jersey, the general rule is that, unless power of revocation is reserved, an irrevocable trust is created. Fid. Union Trust Co. v. Parfner, 135 N.J. Eq. 133, 136, 37 A.2d 675, 677 (Ch. 1944); Thebaud v. Morristown Trust Co., 8 N.J. Super. 540, 543 (Ch. Div. 1950). As set forth below, this rule is now changed by the NJ UTC: N.J.S.A. § 3B:31-43(a) presumes that a trust created after the effective date of the act is revocable.
- Basic Requirements to Create a Trust: NJ UTC
Article 3 of the NJ UTC governs the creation of trusts and related issues. See N.J.S.A. § 3B:31-18 et seq.
The NJ UTC is identical in most respects to the standard UTC. The NJ UTC provides that all declarations of trust are to be in writing for an enforceable trust to be created. N.J.S.A. § 3B:31-18.
N.J.S.A. § 3B:31-19 spells out the specific requirements to create a trust.
Finally, N.J.S.A. § 3B:31-20 governs the validity of trusts created in jurisdictions other than New Jersey.
- Capacity to Create a Trust
Although a settlor may appear to comply with all the applicable steps required to create a trust, no valid trust has been created where the settlor did not have the mental capacity to understand his actions.
Under the Restatement (Third) of Trusts, the mental capacity required for a settlor to create a valid trust depends upon the type of trust created. For a settlor to create a testamentary trust or a revocable inter vivos trust, he need only have the testamentary capacity required to make a will. Restatement (Third) of Trusts § 11 (2003). To create a valid irrevocable inter vivos trust, however, the Restatement requires the settlor to have the mental capacity to make a gift. Id.
Again, the UTC is identical to the Restatement in most respects. Section 601 of the UTC has been adopted as N.J.S.A. § 3B:31-42, and provides that the capacity to create, amend, revoke or add property to a revocable trust requires the capacity to make a will. Unif. Trust Code § 601 (amended 2005). Though the comments to Section 601 of the UTC discuss the capacity required for other types of trusts, only revocable trusts are discussed in the text of the provision itself. This is so “because of the uncertainty in the case law and the importance of the issue in modern estate planning. No such uncertainty exists with respect to the capacity standard for other types of trusts,” and thus no UTC provision was needed to settle those questions. Id. at § 601 cmt. Indeed, according to the comments, it is very well-settled that a testamentary trust requires the capacity to make a will and that an irrevocable trust requires the capacity to transfer the property free of trust. Id.
- Fraud, Duress and Undue Influence in Trust Creation
Under the Restatement, the standards applicable to voiding a trust or part thereof on grounds of fraud, duress or undue influence depend upon the trust’s status as revocable, irrevocable or testamentary. See Restatement (Third) of Trusts § 12, cmt. a (2003). The Restatement does not attempt to set forth its own standards for establishing fraud, duress or undue influence but, rather, the comments expressly refer to the Restatement (Third) of Property: Wills and Other Donative Transfers §§ 12.1, 12(2) (2003) for the standards applicable to establishing fraud, duress and undue influence for revocable and testamentary trusts, and to the Restatement (Second) of Property: Donative Transfers § 34.7 (1983) for the standards applicable to irrevocable trusts.
The model UTC is “a specific application of Restatement (Third) of Trusts § 12.” Unif. Trust Code § 406 cmt (amended 2005). Accordingly, the standards for fraud, duress or undue influence under the UTC depend upon the type of trust at issue and will be determined in reference to the standards relevant to wills or gifts.
The NJ UTC incorporates these same standards and states simply, “A trust is void to the extent its creation was induced by fraud, duress, or undue influence.” N.J.S.A. § 3B:31-23.
The New Jersey case law is scant with regard to the standards applicable to establishing fraud, duress or undue influence in the trust context. The main case to address the issue of undue influence stated that trusts are governed by the same undue influence analysis applicable to wills. In re Probate of Last Will & Testament of Catelli, 361 N.J. Super. 478, 486 (App. Div. 2003). The case did not distinguish between types of trusts, but rather, seemed to state that the wills standard for establishing undue influence is applicable to all trusts. See id. That proposition is given credence by the New Jersey Supreme Court’s discussion in In re Niles, 176 N.J. 282, 299 (2003), in which the Court made reference to the undue influence analysis applicable to wills and referred to undue influence as “a species of fraud.” See also Zelozoskei v. Mason, 64 N.J. Eq. 327 (Prerog. Ct. 1903); Stackhouse v. Horton, 15 N.J. Eq. 202 (Prerog. Ct. 1854). Thus, the analytical framework for analyzing fraud, duress or undue influence in the context of any type of trust in New Jersey appears to mirror the standards applicable to wills, but the law is not entirely clear.
- Deadlines to Contest the Validity of a Trust
Before the NJ UTC, New Jersey had a dearth of case law on the question of when a challenge to a trust may be brought. The main case on point is Clark v. Judge, 84 N.J. Super. 35 (Ch. Div. 1964) aff’d., 44 N.J. 550, (1965), in which the settlor of an inter vivos trust was able to challenge the validity of certain trust amendments, even though he failed to bring his challenge until more than 15 years after the amendments were made, where there was no showing of prejudice because of such delay. Id. at 812.
Under the NJ UTC, a revocable trust may be challenged within the earlier of three years after the settlor’s death or four months, in the case of residents, or six months, in the case of nonresidents, after the trustee has sent sufficient notice. N.J.S.A. § 3B:31-45. Irrevocable trusts are not addressed in the NJ UTC provision.
While the Restatement and the common law generally provide no guidance as to a statute of limitations for challenging the validity of a trust, the model UTC does. Pursuant to Section 604, where a settlor has retained the power to revoke a trust, a challenge to the trust’s validity may only be brought within the earlier of three years after the settlor’s death or “120 days after the trustee sent the person a copy of the trust instrument and a notice informing the person of the trust’s existence, of the trustee’s name and address, and of the time allowed for commencing a proceeding.” Unif. Trust Code § 604 (amended 2005). The UTC provides no guidance, however, on the time limits for contesting an irrevocable trust.