LIMITATIONS ON EXERCISE OF TRUSTEE POWERS AND POWERS OF BENEFICIARIES TO APPOINT TRUSTEES

Sec.

7501. Legislative intent.

7502. Definitions.

7503. Application of chapter.

7504. Certain trustee powers not exercisable.

7505. Joint powers and appointment of nondisqualified substituted trustees.

7506. Certain powers of beneficiaries not exercisable.

§ 7501. Legislative intent.

This chapter is enacted to codify, clarify and confirm certain existing common law principles of fiduciary and trust law relating to conflicts of interest on the part of trustees.

§ 7502. Definitions.

The following words and phrases when used in this chapter shall have the meanings given to them in this section unless the context clearly indicates otherwise:

"Interested party." Each trustee then serving and each person having an interest in income or principal whom it would be necessary to join as a party in a proceeding for the judicial settlement of a trustee's account. The term "interested party" does not include a person who has not attained majority or is otherwise incapacitated unless a court has appointed a guardian for the person for some purpose other than acting under section 7503 (relating to application of chapter) or an agent has been appointed under a durable power of attorney that is sufficient to grant authority to act under section 7503.

(a) General rule. - This chapter shall apply to:

(1) Any trust created under a governing instrument executed on or after March 21, 1999, unless the governing instrument expressly provides that this chapter does not apply.

(2) Any trust created under a governing instrument executed before March 21, 1999, unless all interested parties affirmatively elect on or before December 21, 2001, by a written declaration signed by or on behalf of each interested party and delivered to the trustee, not to be subject to the application of this chapter. In the case of a testamentary trust, the declarations shall be filed with the register in the county in which the will was admitted to probate.

(b) Exclusion. - This chapter shall not apply to:

(2) A spouse of a decedent or settlor where the spouse is the trustee of a testamentary or inter vivos trust for which a marital deduction has been allowed.

(3) A trustee who possesses in his individual capacity an unlimited right to withdraw the entire principal of the trust or has a general testamentary power of appointment over the entire principal of the trust.

(4) A trust under a governing instrument that by specific reference expressly rejects the application of this chapter.

(5) A trust created under a governing instrument executed on or before March 21, 1999, if no part of the principal of the trust would be included in the gross estate of the trustee for Federal estate tax purposes if the trustee had died on March 21, 1999, without having exercised the power under the governing instrument to make discretionary distributions of principal or income to or for the benefit of the trustee, the trustee's estate or the creditors of either.

(a) General rule. - The following powers conferred by a governing instrument upon a trustee in his or her capacity as a trustee shall not be exercised by that trustee:

(1) The power to make discretionary distributions of either principal or income to or for the benefit of the trustee, the trustee's estate or the creditors of either unless the power is either:

(i) limited by an ascertainable standard relating to the trustee's health, education, support or maintenance within the meaning of 26 U.S.C. §§ 2041 (relating to powers of appointment) and 2514 (relating to powers of appointment); or

(ii) exercisable by the trustee only in conjunction with another person having a substantial interest in the property subject to the power which is adverse to the interest of the trustee within the meaning of 26 U.S.C. § 2041(b)(1)(C)(ii).

(2) The power to make discretionary distributions of either principal or income to satisfy any of the trustee's personal legal obligations for support or other purposes.

(3) The power to make discretionary allocations in the trustee's personal favor of receipts or expenses as between income and principal unless the trustee has no power to enlarge or shift any beneficial interest except as an incidental consequence of the discharge of the trustee's fiduciary duties.

(4) The power to exercise any of the powers proscribed in this subsection with regard to an individual other than the trustee to the extent that the individual could exercise a similar prohibited power in connection with a trust that benefits the trustee.

(b) Limited exercise of prohibited power. -

(1) If a trustee is prohibited by subsection (a)(1) from exercising a power conferred upon the trustee, the trustee nevertheless may exercise that power but shall be limited to distributions for the trustee's health. education, support or maintenance to the extent otherwise permitted by the terms of the trust.

(2) Unless otherwise prohibited by the provisions of this section, a trustee may exercise a power described herein in favor of someone other than the trustee, the trustee's estate or the creditors of either.

If a governing instrument contains a power proscribed under section 7504 (relating to certain trustee powers not exercisable), the following shall apply:

(1) If the power is conferred on two or more trustees, it may be exercised by the trustee or trustees who are not so prohibited as if they were the only trustee or trustees.

(2) If there is no trustee in office who can exercise the power as provided in paragraph (1), the court, upon petition and hearing after such notice as it may direct, shall appoint a trustee who is not disqualified and whose term in office shall be as the court directs for the sole purpose of exercising the powers that the other trustees cannot exercise.

(a) General rule. - No beneficiary of a trust in an individual, trustee or other capacity may appoint or remove and appoint a trustee who is related or subordinate to the beneficiary within the meaning of 26 U.S.C. § 672(c) (relating to definitions and rules) unless:

(1) the trustee's discretionary power to make distributions to or for the beneficiary is limited by an ascertainable standard relating to the beneficiary's health, education, support or maintenance within the meaning of 26 U.S.C. §§ 2041 (relating to powers of appointment) and 2514 (relating to powers of appointment);

(2) the trustee's discretionary power may not be exercised to satisfy any of the beneficiary's legal obligations for support or other purposes; and

(3) the trustee's discretionary power may not be exercised to grant to the beneficiary a general power to appoint property of the trust to the beneficiary the beneficiary's estate or the creditors thereof within the meaning of 26 U.S.C. § 2041.

(b) Exception. - This section shall not apply if the appointment of the trustee by the beneficiary may be made only in conjunction with another person having a substantial interest in the property of the trust subject to the power which is adverse to the exercise of the power in favor of the beneficiary within the meaning of 26 U.S.C. § 2041(b)(1)(C)(ii) or the appointment is in conformity with a procedure governing appointments approved by the court before December 21, 1998.