The non-modifiable Uniform Trust Code good faith standard, like the standard traditionally governing extended discretion under common law, is applied in a way to implement the settlor’s intent and to benefit the beneficiaries. As such, it implies the reasonable exercise of discretion. This mirrors the approach of the Restatement (Third):
- 50. Enforcement and Construction of Discretionary Interests
(1) A discretionary power conferred upon the trustee to determine the benefits of a trust beneficiary is subject to judicial control only to prevent misinterpretation or abuse of the discretion by the trustee.
(2) The benefits to which a beneficiary of a discretionary interest is entitled, and what may constitute an abuse of discretion by the trustee, depend on the terms of the discretion, including the proper construction of any accompanying standards, and on the settlor’s purposes in granting the discretionary power and in creating the trust.[1]
Thus, where under § 187 of the Restatement (Second) a trustee’s exercise or non-exercise of a discretionary power is only subject to review upon a showing of “abuse,” now under § 50 of the Restatement (Third), a trustee may be second guessed by a court if the trustee’s exercise of a discretionary power was grounded in a “misinterpretation” or the “abuse” of the discretion, and “abuse” is broadly defined. In either event, the standard governing trustee conduct, regardless of whether such trustee enjoyed extended discretion, was never simply that of good faith alone but good faith in reasonably implementing the settlor’s intent for the benefit of the beneficiary.[2]
Neither under the Uniform Trust Code, or at common law, is good faith used in the contract law sense. Although “good faith” forms an important role under the Uniform Trust Code, it is not a defined term and one would expect the courts to continue to use the extensive body of the common law of trusts for an understanding of its sense and definition.[3] Whether in the context of a non-modifiable baseline rule under Section 105(b)(3) or when defining the limits of absolute discretion under Section 814(a), good faith under the Uniform Trust Code should be understood in its traditional trust sense. It approximates the common law of trusts and, by wedding good faith to the settlor’s intent and the interests of the beneficiaries, it dances back to a general fiduciary duty that cannot be modified by the terms of the agreement: “[A] settlor may not so negate the responsibilities of the trustee that the trustee would no longer be acting in the fiduciary capacity.”[4]
Indeed, the standards regulating a trustee’s exercise of discretion as to beneficiary distributions is generally seen as the exercise of fiduciary duty:
“A trustee’s discretionary power with respect to trust benefits is to be distinguished from a power of appointment. The latter is not subject to fiduciary obligations and may be exercised arbitrarily within the scope of the power.”[5]
It is the fiduciary nature of the exercise of discretion that guarantees review and regulation by the Courts: “[N]o language, however strong, will entirely remove any power held in trust from the reach of a Court of Equity.”[6]
Historically, the common law of trusts and the principles of equity did not look to contract law when applying a good faith standard to trustees. Instead, courts have consistently applied a good faith standard within the context of a broad fiduciary duty of loyalty. The insurgent theory (advanced in academic debates and largely adopted by the new uniform partnership acts) to reduce fiduciary relationships to mere contract, to the morals of the market place, may be attractive to scholars of an economic bent, but it provides a poor substitute for the common law rules governing trustee conduct. Good faith under the law of contract is a concept devoid of the normative values that historically governed trustee conduct and those minimalistic standards should not be incorporated in the law of trusts.
The Uniform Trust Code fills a void: “[T]he trust law in many States is thin” and the uniform act “will provide the States with precise, comprehensive, and easily accessible guidance on trust law questions.”[7] To a large degree, the Uniform Trust Code “codifies the common law,” but also makes some significant changes.[8] The drafters of the uniform act, however, purposely employed a light touch: “[E]fforts to reduce rules to writing will result in excess rigidity and insufficient discretion vested in the courts to adopt to changing conditions. Even on issues the drafters have elected to codify, the UTC in many cases, does not specify every detail, the drafters preferring flexibility and brevity to greater precision.”[9] Also, of course, “the common law of trusts and principles of equity supplement” the Act.[10]
The Uniform Trust Code, by design, permits the traditional norms that governed the exercise of trustee discretion to continue to be enforced and refined by that common law – a process that earned the trust Maitland’s high tribute.[11]
[1] The Restatement (Third), § 50.[2] Critics of the approach adopted by the Restatement (Third) and the Uniform Trust Code perceived that there was a change from the common law of trusts and that this change exposed trust assets to heightened exposure to the claims of the beneficiaries’ creditors. Mark Merric & Steven J. Oshins, “Effect of the UTC on the Asset Protection of Spendthrift Trusts,” 31 Est. Plan. 375 (2004). This criticism has drawn pronounced refutation. Kevin D. Millard, “Rights of a Trust Beneficiaries Under the Uniform Trust Code,” 34 ACTEC J. 57, 63 (2008)(“[N]ote that the theory that a creditor could not reach the trust because the creditor stood in the shoes of the beneficiary and the beneficiary could not force distributions from the trust was flawed, because no matter how broadly worded the trustee’s discretion was, it was always subject to review by a court for abuse.”); Robert T. Danforth, “Article Five of the UTC and the Future of Creditors’ Rights in Trusts,” 27 Cardozo L. Rev. 2551, 2581 (2006)(“Implicit in the critics’ argument is the assertion that, by granting a trustee extended discretion, the trustee’s exercise of that discretion becomes essentially unreviewable. But this has never been true at common law. An essential principle of the common law of trusts is that a trustee’s exercise of discretion is always subject to judicial review, no matter how broadly the trustee’s discretion may be described…[T]hat will not be interpreted so as to relieve the trustee from an obligation to account for its discretionary judgments. Because a trustee is a fiduciary, it would be inconsistent with the concept of a trust to insulate a trustee’s exercise of discretion from all judicial review.”); Also see Alan Newman, “Spendthrift and Discretionary Trusts: Alive and Well Under the Uniform Trust Code,” 40 Real Prop., Prob. & Tr. J., 567, 601-618 (2005).
[3] Professor Langbein (one of the Uniform Trust Code drafters), however, suggests that one look to the body of law in contract discussing the meaning of “good faith.” John H. Langbein, “Mandatory Rules in the Law of Trusts,” 98 Nw. U. L. Rev. 1105, at note 96 (2004) (directing one to a treatise by Professor Robert S. Summers for “a succinct account of the nuances developed in contract law … emphasizing the core notion of honest dealing.”)[hereinafter Langbein, “Mandatory Rules”]. Professor Summers’ view of “good faith” as it has developed in contract law will be discussed below.
[4] Unif. Trust Code §105, cmt. Within limits, of course, section 105 permits modification of the basic fiduciary duties, including the duty of loyalty. Sections 105(b)(3) and 814(a) provide absolute backstops to the ability to modify such duties by prohibiting the elimination of the obligation to act in good faith and in accordance with the terms and purposes of the trust and in the interests of its beneficiaries. The “missing” piece of this litany, if you will, is the obligation to act in the “sole” interest of the beneficiaries. This opens the door to permitting trustees to engage in acts of self-interest as long as the activity is in the best interest of the trust beneficiaries. Langbein, “Questioning the Duty of Loyalty,” suprs note 17; Melanie B. Leslie, “In Defense of the No Further Inquiry Rule: A Response to Professor Langbein,” 47 Wm. & Mary L. Rev. 541 (2005). The benefit-the-beneficiaries rule is mandatory. Langbein, “Mandatory Rules,” supra note 45, at 1112(“A default rule is one that the settler can abridge, but only to the extent the settler’s term is ‘for the benefit of [the] beneficiaries.’ The requirement that there be benefit to the beneficiaries sets the outer limits on the settlor’s power to abridge the default law.”). Coupled with the modern portfolio theory of trust investing, the benefit-the-beneficiary rule may cause difficulties when a settlor wishes to have a trust hold a particular asset instead of a broad array of assets and asset classes. Jeffrey A. Cooper, “Empty Promises: Settlor’s Intent, the Uniform Trust Code, and the Future of Trust Investment Law,” 88 B. U. L. Rev. 1165, 1168 (2008)(“Under Professor Langbein’s formulation of the benefit-the-beneficiaries rule, the ‘benefit’ of a trust provision is determined by reference to objective notions of prudence and efficiency rather than the settlor’s subjective intent. Carried to its logical extreme, this emerging reading of the benefit-the beneficiary rule (the ’emerging rule’) could redefine the area of trust investment management. Trust documents frequently include specific investment management directives, such as a mandate that the trustee retain a certain portfolio investment or family business. Whereas trust law historically has honored such restrictions, the emerging rule seemingly would enforce only those which maximize economic value for the trust beneficiaries. If the settlor’s chosen restrictions fail this objective test of economic benefit, they simply can be cast aside.”); Benjamin H. Pruett, “Tales from the Dark Side: Drafting Issues from the Fiduciary’s Perspective,” 35 ACTEC 331, 352 (2009)(“These provisions (the benefit-the-beneficiary rules) leave open the possibility that any provision of a trust that deviates from normal fiduciary practice might be found to be ‘out of bounds’ on the grounds that such a provision violates the rule that the trust provisions must be ‘in the interest of’ and ‘for the benefit of’ the beneficiaries.”).
[5] Restatement (Third) § 50 cmt. a.
[6]Stix v. Comm., 152 F.2d 562, 563 (2nd Cir. 1945) (J. Learned Hand) (A case involving a trust providing the trustee with “sole and exclusive discretion.”). The modern fusion of equity and law courts supplies Professor Langbein with an additional support for his view that trusts should be treated as contracts. Langbein, “Contractarian,” supra note 6, at 649(“Scott was alarmed over the movement then underway to bring about the fusion of law and equity in American civil procedure and judicial administration. He was worried that the fusion might remove the law of trusts from the nurturing hand of the specialist equity bench, and indeed, that fusion might cause trust litigation to be subjected to jury trial. In England and most leading American jurisdictions, the law of trusts had been the province of separate equity courts or equity divisions… Two generations later, with the place of jury-free equitable jurisdiction over trusts now secure in our fused civil procedure, we can safely acknowledge the contractarian character of the modern trust.”).
[7] Unif. Trust Code, Prefatory notes.
[8] David M. English, “The Uniform Trust Code (2000): Significant Provision and Policy Issues,” 67 Mo. L. Rev. 143, 144 (2002).
[9] Id. At 212.
[10] Unif. Trust Code §106.
[11] Maitland, supra note 23, at 23 (Professor Maitland famously described the trust as “the most distinctive achievement of English lawyers. It seems to us almost essential to civilization.”). Conceptually, rules regulating complex human relationships, like those involved in trusts or, for that matter, partnerships, may be more perfectly developed by the evolutionary process of the common law as opposed to the attempting to create such rules from a universal theory of human relationships based, in this case, on contract: “What has been said (about the development of judge made law) will explain the failure of all theories which consider the law only from its formal side; whether they attempt to deduce a corpus from a priori postulates, or fall into the humbler error of supposing the science of the law to reside in the elegantia juris, or logical cohesion of part with part. The truth is, that the law always approaching, and never reaching, consistency. It is forever adapting new principles from life and at one end, and it always retains old ones from history at the other, which have not yet been absorbed or sloughed off. It will come entirely consistent only when it ceases to grow.” Oliver Wendell Holmes, Jr., “The Common Law, Lecture I-Early Forms of Liability” (Project Gutenberg 2000, www.gutenberg.org).
