HB0184

HOUSE BILL 184

52nd legislature - STATE OF NEW MEXICO - first session, 2015

INTRODUCED BY

Zachary J. Cook

AN ACT

RELATING TO TRUSTS; AMENDING SECTIONS OF THE UNIFORM TRUST CODE.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF NEW MEXICO:

SECTION 1. Section 46A-1-107 NMSA 1978 (being Laws 2003, Chapter 122, Section 1-107, as amended) is amended to read:

"46A-1-107. GOVERNING LAW.--The meaning and effect of the terms of a trust are determined by:

A. the law of the jurisdiction designated in the terms [unless the designation of that jurisdiction's law is contrary to a strong public policy of the jurisdiction having the most significant relationship to the matter at issue]; or

B. in the absence of a controlling designation in the terms of the trust, the law of the jurisdiction having the most significant relationship to the matter at issue."

SECTION 2. Section 46A-3-304 NMSA 1978 (being Laws 2003, Chapter 122, Section 3-304) is repealed and a new Section

46A-3-304 NMSA 1978 is enacted to read:

"46A-3-304. [NEW MATERIAL] REPRESENTATION BY PERSON HAVING SUBSTANTIALLY IDENTICAL INTEREST.--

A. Unless otherwise represented by counsel, a minor, incapacitated person, unborn person or persons whose identity or location is unknown and not reasonably ascertainable may be represented by another person who has a substantially similar interest with respect to the particular question or dispute.

B. A person may only be represented by another person pursuant to Subsection A of this section if there is no material conflict of interest between the person and the representative with respect to the question or dispute for which the person is being represented. If a person is represented pursuant to Subsection A of this section, the results of that representation in the question or dispute will be binding on that person.

C. A presumptive remainder beneficiary may represent and bind a beneficiary with a contingent remainder for the same purpose, in the same circumstance and to the same extent as an ascertainable beneficiary may bind a minor, incapacitated person, unborn person or person who cannot be ascertained.

D. If a trust has a minor or incapacitated beneficiary who may not be represented by another person pursuant to this section, the custodial parent or guardian of the estate of the minor or incapacitated beneficiary may represent the minor or incapacitated beneficiary in any judicial proceeding or nonjudicial matter pertaining to the trust. A minor or incapacitated beneficiary may only be represented by a parent or guardian if there is no material conflict of interest between the minor or incapacitated beneficiary and the parent or guardian with respect to the question or dispute. If a minor or incapacitated beneficiary is represented pursuant to this subsection, the results of that representation will be binding on the minor or incapacitated beneficiary. The representation of a minor or incapacitated beneficiary pursuant to this subsection is binding on an unborn person or a person who cannot be ascertained, if:

(1) the unborn person or a person who cannot be ascertained has an interest substantially similar to the minor or incapacitated person; and

(2) there is no material conflict of interest between the unborn person or the person who cannot be ascertained and the minor or incapacitated person with respect to the question or dispute.

E. As used in this section, "presumptive remainder beneficiary" means:

(1) a beneficiary who would receive income or principal of the trust if the trust were to be terminated as of that date, regardless of the exercise of a power of appointment; or

(2) a beneficiary who, if the trust does not provide for termination, would receive or be eligible to receive distributions of income or principal of the trust if all beneficiaries of the trust who were receiving or eligible to receive distributions were deceased."

SECTION 3. Section 46A-5-503 NMSA 1978 (being Laws 2003, Chapter 122, Section 5-503, as amended) is repealed and a new Section 46A-5-503 NMSA 1978 is enacted to read:

"46A-5-503. [NEW MATERIAL] EXCEPTIONS TO SPENDTHRIFT PROVISION.--

A. A spendthrift provision is unenforceable against:

(1) a judgment creditor who has provided services for the protection of a beneficiary's interest in the trust; and

(2) a claim of this state or the United States to the extent a statute of this state or federal law so provides.

B. A claimant against whom a spendthrift provision is unenforceable may obtain from a court an order attaching present or future distributions to or for the benefit of the beneficiary. The court may limit the award to such relief as is appropriate under the circumstances. The order attaching present or future distributions to or for the benefit of the beneficiary shall be the exclusive remedy available to a claimant against whom a spendthrift provision cannot be enforced."

SECTION 4. Section 46A-5-504 NMSA 1978 (being Laws 2003, Chapter 122, Section 5-504, as amended) is repealed and a new Section 46A-5-504 NMSA 1978 is enacted to read:

"46A-5-504. [NEW MATERIAL] DISCRETIONARY TRUSTS.--

A. As used in this section:

(1) "beneficial interest" means a distribution interest or a remainder interest. A beneficial interest specifically excludes a power of appointment or a reserved power;

(2) "beneficiary" means a person that has a present or future beneficial interest in a trust, vested or contingent. The holder of a power of appointment is not a beneficiary;

(3) "distribution beneficiary" means a beneficiary who is an eligible distributee or permissible distributee of trust income or principal;

(4) "distribution interest" means a distribution interest held by a distribution beneficiary. A distribution interest may be a current distribution interest or a future distribution interest. A distribution interest may be classified as a mandatory interest, a support interest or a discretionary interest;

(5) "power of appointment" means an inter-vivos or testamentary power to direct the disposition of trust property, other than a distribution decision by a trustee to a beneficiary. Powers of appointment are held by a person to whom a power has been given, not the settlor;

(6) "reach" means, with respect to a distribution interest or a power of appointment, to subject the distribution interest or power of appointment to a judgment, decree, garnishment, attachment, execution, levy, creditor's bill or other legal, equitable or administrative process, relief or control of any court, agency or other entity as provided by law;

(7) "remainder interest" means an interest where a trust beneficiary will receive the property outright at some time during the future; and

(8) "reserved power" means a power held solely by the settlor.

B. For purposes of this section, improper motive is demonstrated by actions including:

(1) a trustee refusing to make or limiting distributions to beneficiaries other than the trustee due to the trustee's self-interest when the trustee also holds a beneficial interest subject to a discretionary interest; or

(2) a trustee making a distribution in excess of an ascertainable standard to himself or herself as beneficiary when the trustee is restricted by an ascertainable standard in the trust.

C. A withdrawal power allows a beneficiary a right to withdraw a part of the trust income or principal. The holder of a power of withdrawal is not deemed to be the settlor of the trust by failing to exercise withdrawal power or letting a withdrawal power lapse.

D. Regardless of whether or not a trust contains a spendthrift provision:

(1) no beneficial interest, power of appointment or reserved power in a trust may be judicially foreclosed;

(2) no creditor may reach a power of appointment or a remainder interest at the trust level. The creditor shall wait until the funds are actually distributed to a beneficiary before the creditor may reach the funds; and

(3) no power of appointment is a property interest.

E. Although a remainder interest may be an enforceable right, where it is not absolutely certain based on the language of the trust that the remainder interest will be distributed within one year, it shall not be classified as a property interest.

F. A creditor may not reach a beneficial interest of a beneficiary or any other person who holds an unconditional or conditional removal or replacement power over a trustee. This power is personal to the beneficiary and may not be exercised by the beneficiary's creditors. A court shall not direct a beneficiary to exercise the power. A creditor may not reach a beneficial interest of a beneficiary who is also a trustee or a co-trustee, or otherwise compel a distribution because the beneficiary is then serving as a trustee or co-trustee. A court shall not foreclose against such an interest.

G. Trust income and principal is not subject to the personal obligations of the trustee, even if the trustee becomes insolvent or bankrupt.

H. A distribution interest or a remainder interest is the beneficiary's separate property. A distribution interest or a remainder interest is not relevant in the division of marital property and shall not be considered for purposes of spousal support or marital property division.

I. Unless otherwise provided in the trust, if the settlor's spouse is named as beneficiary, the settlor's spouse is still living and the trust is classified as a support trust, the trustee shall consider the resources of the settlor's spouse, including the settlor's obligation of support, prior to making a distribution. In all other cases, unless otherwise provided in the terms of a trust, the trustee need not consider the beneficiary's resources in determining whether a distribution should be made.

J. In the event that a party challenges a settlor or a beneficiary's influence over a trust, none of the following factors, alone or in combination, may be considered control over a trust:

(1) the settlor or a beneficiary serving as a trustee or a co-trustee as described in this section;

(2) the settlor or a beneficiary holds an unrestricted power to amend or replace any term of the trust;

(3) the settlor or a beneficiary is a trust administrator, a general partner of a partnership, a manager of a limited liability company, an officer of a corporation or any other managerial function of any other type of entity, and part or all of the trust property consists of an interest in the entity;

(4) a person related by blood or adoption to the settlor or a beneficiary is appointed as trustee;

(5) the settlor's or a beneficiary's agent, accountant, attorney, financial advisor or friend is appointed as trustee;

(6) a business associate is appointed as trustee;

(7) a beneficiary holds any power of appointment over any or all of the trust property;

(8) the settlor holds a power to substitute property of equivalent value;

(9) the trustee may loan trust property to the settlor for less than a full and adequate rate of interest or without adequate security;

(10) the distribution language provides any discretion;

(11) the trust has only one beneficiary eligible for current distributions; or

(12) the beneficiary serving as a trust advisor for investments.

K. Absent clear and convincing evidence, no settlor of an irrevocable trust may be deemed to be the alter ego of a trustee. The following factors by themselves or in combination are not sufficient evidence for a court to conclude that the settlor controls a trustee or is the alter ego of a trustee:

(1) any combination of the factors listed in Subsection J of this section;

(2) isolated occurrences where the settlor has signed checks, made disbursements, or executed other documents related to the trust as a trustee, when in fact the settlor was not a trustee;

(3) the settlor making any requests for distributions on behalf of beneficiaries; and

(4) the settlor making any requests to the trustee to hold, purchase or sell any trust property.

L. A settlor may provide in the terms of the trust that a beneficiary's beneficial interest in a trust's income, principal or both may not be voluntarily or involuntarily transferred before payment or delivery of the beneficial interest to the beneficiary by the trustee.

M. A declaration in the terms of a trust that the interest of a beneficiary shall be held subject to a spendthrift trust is sufficient to restrain voluntary or involuntary alienation of a beneficial interest by a beneficiary to the maximum extent provided by law. Regardless of whether a beneficiary has any outstanding creditor, a trustee of a spendthrift trust may directly pay any expense on behalf of such beneficiary and may exhaust the income and principal of the trust for the benefit of such beneficiary. A trustee is not liable to any creditor for directly paying the expenses of a beneficiary of a spendthrift trust.

N. A settlor's creditors may not satisfy claims from principal of the trust because of the existence of a discretionary power granted to the trustee by the terms of the trust creating the trust, or any other provisions of law, to pay directly to the taxing authorities or to reimburse the settlor for any tax on trust income or principal that is payable by the settlor under the law imposing such tax; or reimbursements made to the settlor or direct tax payments made to a taxing authority for the settlor's benefit for any tax or trust income or principal that is payable by the trustor under the law imposing the tax.

O. A spendthrift provision is a material provision of a trust.

P. A distribution interest may be classified as:

(1) a "mandatory interest", which is a distribution interest in which the timing of any distribution shall occur within one year from the date the right to the distribution arises, and the trustee has no discretion in determining whether a distribution shall be made or the amount of such distribution;

(2) a "support interest", which is not a mandatory interest but still contains mandatory language such as "shall make distribution" and is coupled with a standard capable of judicial interpretation; or

(3) a "discretionary interest", which is any interest where a trustee has any discretion to make or withhold a distribution. A discretionary interest may be evidenced by permissive language such as "may make distributions" or it may be evidenced by mandatory distribution language that is negated by the discretionary language of the trust, such as "the trustee shall make distributions in the trustee's sole and absolute discretion". An interest that includes mandatory distribution language such as "shall" but is subsequently qualified by discretionary distribution language shall be classified as a discretionary interest and not as a support or a mandatory interest. A discretionary interest is any interest that is not a mandatory or a support interest.

Q. If the terms of a trust containing the distribution language specifically provides that the trustee exercise discretion in a reasonable manner with regard to a discretionary interest, notwithstanding any other provision of Subsections P through V of this section, the distribution interest shall be classified as a support interest. A beneficiary's right to a distribution as well as a creditor's right regarding a beneficiary's support interest is governed by Subsection U of this section.

R. To the extent that the terms of a trust contain any combination of a mandatory provision and a support provision, the trust shall be bifurcated as follows:

(1) the trust shall be a mandatory interest only to the extent of the mandatory language;

(2) the trust shall be a support interest only to the extent of such support language;

(3) the remaining trust principal shall be held as a discretionary interest; and

(4) a support interest that includes mandatory language such as "shall" but is subsequently qualified by discretionary language, shall be classified as a discretionary interest and not as a support interest.

S. Although not the exclusive means to create a distribution interest, absent clear and convincing evidence to the contrary, the following language by itself results in the following classification of distribution interest:

(1) mandatory interest:

(a) "all of the net income shall be distributed to (named beneficiary)"; or

(b) "(specific dollar amount) a year shall be distributed to (named beneficiary)";

(2) support interest: "the trustee shall make distributions for health, education, maintenance and support to (named beneficiary)"; and

(3) discretionary interest:

(a) "the trustee, may, in the trustee's sole and absolute discretion, make distributions for health, education, maintenance and support";

(b) "the trustee, in the trustee's sole and absolute discretion, shall make distributions for health, education, maintenance and support";

(d) "the trustee shall make distributions for health, education, maintenance and support. The trustees may exclude any of the beneficiaries or may make unequal distributions among them"; or

(e) "the trustee may make distributions for health, education, maintenance, support, comfort and general welfare".

T. If the trust contains a spendthrift provision, a creditor may not reach present or future mandatory distributions from the trust at the trust level.

U. A beneficiary of a mandatory or a support interest has an enforceable right to a distribution pursuant to a court's review. A trustee's distribution decision may be reviewed for unreasonableness, dishonesty, improper motivation or failure, if under a duty to do so, to act. This does not, however, raise the beneficiary's support interest to the level of a property interest. If the trust contains a spendthrift provision, notwithstanding the beneficiary's right to force a distribution with regard to a mandatory or support interest, a creditor may not force a distribution with regard to a mandatory or support interest, and no creditor may force a distribution with regard to a mandatory or support interest. A creditor may not reach present or support distributions with regard to a mandatory or support interest. Regardless of whether a beneficiary has any outstanding creditor, a trustee of a mandatory or a support interest may directly pay any expense on behalf of such beneficiary. A trustee is not liable to a creditor for directly paying the expenses of a beneficiary of a mandatory or support interest.

V. The following provisions apply only to discretionary interests:

(1) a discretionary interest is neither a property interest nor an enforceable right. It is a mere expectancy;

(2) a creditor may not force a distribution with regard to a discretionary interest. A creditor may not require the trustee to exercise the trustee's discretion to make a distribution with regard to discretionary interest; and

(3) a court may review a trustee's distribution discretion only if the trustee:

(a) acts dishonestly;

(b) acts with an improper motive; or

W. A reasonableness standard may not be applied to the exercise of discretion by the trustee with regard to a discretionary interest. Other than the circumstances provided in Subsection V of this section, a court has no jurisdiction to review the trustee's discretion or to force a distribution. Absent express language in terms of a trust to the contrary, in the event that the distribution language in a discretionary interest permits unequal distributions between beneficiaries or distributions to the exclusion of other beneficiaries, the trustee may distribute all of the accumulated, accrued or undistributed income and principal to one beneficiary in the trustee's discretion. Regardless of whether a beneficiary has any outstanding creditor, a trustee of a discretionary interest may directly pay any expense on behalf of such beneficiary and may exhaust the income and principal of the trust for the benefit of such beneficiary. No trustee is liable to any creditor for directly paying the expenses of a beneficiary of a discretionary interest."

SECTION 5. EFFECTIVE DATE.--The effective date of the provisions of this act is July 1, 2015.

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