New Jersey Enacts the Uniform Trust Code
On January 19, 2016, the New Jersey legislature passed the New Jersey Uniform Trust Code (NJUTC), which becomes effective on July 17, 2016. The Uniform Trust Code (UTC) is a body of trust laws created to provide consistency and similarity between the trust laws of all states. It is common in today’s mobile society for an individual to create a trust in one state, and then move to another state, which could have a completely different set of trust laws. The UTC creates uniformity between states to ease the transfer and interpretation of trusts between states. Adoption of the UTC is not mandatory on the states, but currently, 32 states and the District of Columbia have passed some form of the UTC. New Jersey’s neighbor, Pennsylvania, adopted the Uniform Trust Act (UTA) ten years earlier, in 2006. Moreover, a state need not adopt the UTC word-for-word, but may, and usually does, tailor the UTC to codify state specific well-settled trust common law or to create a clear set of laws where the common law is subject to several interpretations. The UTC includes uniform laws on how a valid trust is created, how it is modified and terminated, sets forth duties of the trustee and how a trustee may be removed and replaced, and the rights of creditors to reach trust property.
As a general overview, a trust is a document that contains specific terms on how assets are to be administered for the benefit of an individual. The settlor, or creator of the trust, funds the trust with monies, which the trustee then continues to manage and invest. The trustee maintains legal title to the property. The individual who receives distributions from the trust is known as the beneficiary, and has the beneficial interest in the trust. Individuals typically create trusts as a money management tool for minors and spouses or to preserve public benefits for individuals with special needs. Federal estate tax savings and probate avoidance also drive the creation of trusts.
The New Jersey legislature chose to adopt much of the UTC, but did retain some laws specific to New Jersey. The NJUTC sets forth several default and mandatory rules, which may not be overridden by trust terms, including but not limited to, the requirements for creating a trust, the duty of the trustee to act in good faith and in accordance with the purposes of the trust, the power of the court to modify or terminate a trust according to N.J.S. 3B:31-26 through N.J.S. 3B:31-33, the effect of a spendthrift provision and the rights of creditors to reach a trust. Of great significance is the ability to use nonjudicial settlement agreements with respect to any matter involving a trust, which agreements permit changes to a trust without the necessity of a court proceeding. However, the agreement may not violate a material purpose of the trust and may not be used to produce a result that is contrary to another section of the UTC, especially in regard to modifying or terminating a trust.
In a departure from the UTC, New Jersey has retained its own law governing the removal of trustees. The NJUTC provides that a trustee may be removed for cause, such as the trustee’s neglect or refusal to file a court ordered accounting, neglect or refusal to follow a court order, where the trustee has embezzled or wasted trust assets, is mentally incapacitated, or a co-trustee hinders the administration of the trust. By contrast, the UTC provides for two additional removal reasons: 1) where the trustee fails to administer the trust effectively, and removal is in the best interests of the beneficiaries, and 2) if there has been a substantial change of circumstances or removal is requested by all of the qualified beneficiaries and the court finds that removal of the trustee is in the best interests of the beneficiaries.
The modification and termination section of the NJUTC is also notable. The NJUTC provides that a noncharitable irrevocable trust may be modified or terminated by consent of the trustee and beneficiaries if the modification is not inconsistent with a material purpose of the trust. The same type of trust may be terminated by consent of all beneficiaries if the court concludes that the continuance of the trust is not necessary to achieve a material purpose of the trust. Likewise, if all beneficiaries consent to the modification of the trust, the court may modify the trust so long as it is not inconsistent with a material purpose of the trust. While a material purpose of a trust is not specifically defined in the UTC, it does note that a spendthrift provision is not presumed to be a material purpose. This section is remarkable, as it does not provide for a means of modifying or terminating a trust if such modification or termination violates a material purpose of the trust. Pennsylvania, for instance, permits the settlor and beneficiaries to terminate or modify a trust even if a material purpose of the trust would be violated by such action. It is also important to note that the NJUTC requires court approval of modifications and terminations of noncharitable irrevocable trusts, which is similar to the UTC but different than the Pennsylvania UTA.
In an important addition in the special needs planning area, the NJUTC clarifies the ability of creditors to attach assets of a New Jersey special needs trust. Article 4 states that creditors of a protected person (defined under the statute as an individual with disabilities, among persons) may not compel distributions or reach or attach the assets of a special needs trust to satisfy a claim. Moreover, the statute states that government assistance need not be repaid by the trust unless the assistance was provided on the basis that the trust would repay the aid when the protected person dies, or the special needs trust terminates before the protected person’s death and the trust requires such a repayment. This section essentially codifies the common law third-party funded special needs trust, as it excludes application of this law to self-funded special needs trusts established under 42 U.S.C. §1396p(d)(4) .
In sum, the New Jersey Uniform Trust Code establishes a body of law that is similar to the trust laws of other states, and centralizes the location of the laws regarding trust administration. Settlors, trustees, and beneficiaries should benefit from this set of laws by ensuring that trusts are treated similarly regardless of the geographic location of said individuals. Should you have any questions regarding the application of the New Jersey Uniform Trust Code, please contact McAndrews Law Offices at 610-648-9300.
 N.J.S. 3B:31-5.
 N.J.S. 3B:31-11b.
 N.J.S. 3B:31-11c., f.
 N.J.S. 3B:31-51.
 UTC §706.
 N.J.S. 3B:31-27a.
 N.J.S. 3B:31-27b.
 N.J.S. 3B:31-27b.
 N.J.S. 3B:31-27c.
 20 P.A.C.S. §7740.1(a)
 See UTC §111 and 20 P.A.C.S. §7710.1(d)(11)
 N.J.S. 3B:31-37b.(2)
 N.J.S. 3B:31-37c.