Chapter 478

2007 -- S 0748

Enacted 07/06/07

A N A C T

RELATING TO FIDUCIARIES -- QUALIFIED DISPOSITIONS IN TRUST

Introduced By: Senators Jabour, Connors, and McBurney

Date Introduced: February 15, 2007

It is enacted by the General Assembly as follows:

     SECTION 1. Sections 18-9.2-2, 18-9.2-3, 18-9.2-4, 18-9.2-5 and 18-9.2-6 of the General

Laws in Chapter 18-9.2 entitled "Qualified Dispositions in Trust" are hereby amended to read as

follows:

18-9.2-2. Definitions. -- As used in this chapter:

      (1) "Claim" means a right to payment, whether or not the right is reduced to judgment,

liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal

equitable, secured or unsecured.

      (2) "Creditor" means, with respect to a transferor, a person who has claim.

      (3) "Debt" means liability on a claim.

      (4) "Disposition" means a transfer, conveyance or assignment of property (including a

change in the legal ownership of property occurring upon the substitution of one trustee for

another or the addition of one or more new trustees), or the exercise of a power that so as to

causes a transfer of property, to a trustee or trustees, but shall not include the release or

relinquishment of an interest that theretofore was the subject of a qualified disposition.

      (5) "Property" includes real property, personal property, and interests in real or personal

property.

      (6) "Qualified disposition" means a disposition by or from a transferor to a trustee, with

or without consideration, by means of a trust instrument.

(7) "Spouse" and "former spouse" means only persons to whom the transferor was

married at, or before the time the qualified disposition is made.

(7) (8) "Transferor" means a natural person who, or entity which, as an owner of property

or as a holder of a general power of appointment, which authorizes the holder to appoint in favor

of the holder, the holder's creditors, the holder's estate or the creditors of the holder's estate, or as

a trustee, directly or indirectly, makes a disposition or causes a disposition to be made.

(8) (9) "Trustee Qualified trustee" means a person who:

      (i) In the case of natural person, is a resident of this state other than the transferor, or, in

all other cases, is authorized by the provisions of the general or public laws to act as a trustee, and

whose activities are subject to supervision by the department of business regulation, The Federal

Deposit Insurance Corporation, the Comptroller of the Currency, or the Office of Thrift

Supervision, or any successor to them; and

      (ii) Maintains or arranges for custody in this state of some or all of the property

transferred to the trustee that is the subject of the qualified disposition, maintains records for the

trust on an exclusive or nonexclusive basis, prepares or arranges for the preparation of fiduciary

income tax returns for the trust, or otherwise materially participates in the administration of the

trust.

(iii) For the purposes of this chapter, neither the transferor nor any other natural person

who is a nonresident of this state nor an entity that is not authorized by the law of this state to act

as a trustee or whose activities are not subject to supervision as provided in subparagraph (I) of

this subsection shall be considered a qualified trustee; however, nothing in this chapter shall

preclude a transferor from appointing one or more advisors, including, but not limited to:

(A) Advisors who have authority under the terms of the trust instrument to remove and

appoint qualified trustees or trust advisors; and

(B) Advisors who have authority under the terms of the trust instrument to direct, consent

to or disapprove distributions from the trust. For purposes of this section, the term "advisor"

includes a trust "protector" or any other person who, in addition to a qualified trustee, holds one

or more trust powers.

(iv) A person may serve as an advisor, notwithstanding that such person is the transferor

of the qualified disposition, but such a person may not otherwise serve as advisor of a trust that is

a qualified disposition except with respect to the retention of the veto right permitted by

subsection (10)(ii) of this section.

(v) In the event that a qualified trustee of a trust ceases to meet the requirements of

subparagraph (I) of this subsection, and there remains no trustee that meets such requirements,

such qualified trustee shall be deemed to have resigned as of the time of such cessation, and

thereupon the successor qualified trustee provided for in the trust instrument shall become a

qualified trustee of the trust, or in the absence of any successor qualified trustee provided for in

the trust amendment, the superior court shall, upon application of any interested party, appoint a

successor qualified trustee.

(vi) In the case of a disposition to more than one trustee, a disposition that is otherwise a

qualified disposition shall not be treated as other than a qualified disposition solely because not

all of the trustees are qualified trustees.

(9) (10) "Trust instrument" means an instrument appointing a qualified trustee or

qualified trustees for the property that is the subject of a disposition, which instrument:

      (i) Expressly incorporates the general or public laws of this state to govern the validity,

construction, and administration of the trust;

      (ii) Is irrevocable; provided, that a trust instrument shall not be deemed revocable due to

its inclusion in one or more of the following:

     (A) a transferor's power to veto a distribution from a the trust,;

     (B) a testamentary special power of appointment or similar power vested in the

transferor, or (other than a power to appoint to the transferor, the transferor's creditors, the

transferor's estate or the creditors of the transferor's estate) exercisable by will or other written

instrument of the transferor effective only upon the transferor's death;

     (C) the transferor's potential or actual receipt of a distribution of income, principal, or

both, in the sole discretion of a trustee who is neither the transferor nor a related or subordinate

party of the transferor within the meaning of 26 U.S.C. section 672(c); and including rights to

such income retained in the trust instrument;

(D) the transferor's potential or actual receipt of income or principal from a charitable

remainder unitrust or charitable remainder annuity trust as such terms are defined in section 664

of the Internal Revenue Code of 1986 [26 U.S.C. section 664] and any successor provision

thereto; and the transferor's right, at any time and from time to time by written instrument

delivered to the trustee, to release such transferor's retained interest in such a trust, in whole or in

part, in favor of a charitable organization that has or charitable organizations that have a

succeeding beneficial interest in such trust;

(E) the transferor's receipt each year of a percentage (not to exceed five percent (5%))

specified in the trust instrument of the initial value of the trust assets on their value determined

from time to time pursuant to the trust instrument or of a fixed amount that on an annual basis

does not exceed five percent (5%) of the initial value of the trust assets;

(F) the transferor's potential or actual receipt or use of principal if such potential or actual

receipt or use of principal would be the result of a qualified trustee's or qualified trustees' acting:

(1) in such qualified trustee's or qualified trustees' discretion;

(2) pursuant to a standard that governs the distribution of principal and does not confer

upon the transferor a substantially unfettered right to the receipt or use of the principal; or

(3) at the direction of an adviser described in subsection (9) (iii) of this section who is

acting:

(a) in such advisor's discretion; or

(b) pursuant to a standard that governs the distribution of principal and does not confer

upon the transferor a substantially unfettered right to the receipt of or use of principal. For

purposes of this subsection, a qualified trustee is presumed to have discretion with respect to the

distribution of principal unless such discretion is expressly denied to such trustee by the terms of

the trust instrument;

(G) the transferor's right to remove a trustee or advisor and to appoint a new trustee or

advisor (other than a person who is a related or subordinate party with respect to the transferor

within the meaning of section 672(c) of the Internal Revenue Code of 1986 [26 U.S.C. 672(c)]

and any successor provision thereto);

(H) the transferor's potential or actual use of real property held under a qualified personal

residence trust within the meaning of such term as described in section 2702(c) of the Internal

Revenue Code of 1986 [26 U.S.C. section 2702(c)] and any successor provision thereto or the

transferor's possession and enjoyment of a qualified annuity interest within the meaning of such

term as described in Treasury Regulation section 25.2702-5(c)(8) [26 C.F.R. section 25.2502-

5(c)(8)] and any successor provision thereto;

(I) the transferor's potential or actual receipt of income or principal to pay, in whole or in

part, income taxes due on income of the trust if such potential or actual receipt of income or

principal is pursuant to a provision in the trust instrument that expressly provides for the payment

of such taxes and if such potential or actual receipt of income or principal would be the result of a

qualified trustee's or qualified trustees' acting:

(1) in such qualified trustee's or qualified trustees' discretion; or

(2) at the direction of an advisor described in subsection (9) (iii) of this section who is

acting in such advisor's discretion. Distributions to pay income taxes made under discretion

included in a governing instrument pursuant to subparagraph (C), subparagraph (F) or this

subparagraph (I) of subsection (10)(ii) of this section may be made by direct payment to the

taxing authorities.

      (iii) Provides that the interest of a the transferor or other beneficiary in the trust property

or the income from it therefrom may not be transferred or , assigned, pledged or mortgaged,

whether voluntarily or involuntarily, before the qualified trustee or qualified trustees actually

distributes the property or income therefrom to the beneficiary. , and such provision of the trust

instrument shall be deemed to be a restriction on the transfer of the transferor's beneficial interest

in the trust that is enforceable under applicable nonbankruptcy law within the meaning of section

541(c)(2) of the Bankruptcy Code (11 U.S.C. section 541(c)(2)) or any successor provision

thereto; and

(iv) A disposition by a trustee that is not a qualified trustee to a trustee that is a qualified

trustee shall not be treated as other than a qualified disposition solely because the trust instrument

fails to meet the requirements of subparagraph (I) of this section.

18-9.2-3. No retained interest of transferor. -- A disposition which is otherwise

qualified but which requires a trustee to distribute all or any part of the trust's income or principal,

or both, to the transferor shall not be entitled to any rights or benefits arising under section 18-

9.2-4; but a disposition which is otherwise qualified shall be entitled to the rights and benefits

arising under section 18-9.2-4, notwithstanding that the trustee has discretion, exercisable without

regard to any ascertainable standard, to distribute trust income or principal, or both, to the

transferor if the trustee is neither the transferor nor a related party or subordinate party of the

transferor within the meaning of 26 U.S.C. section 672(c). A qualified disposition shall be

subject to section 4 of this chapter notwithstanding a transferor's retention of any or all of the

powers and rights described in subdivision 18-9.2-2(10)(ii) and the transferor's service as

investment advisor pursuant to subdivision 18-9.2-2(9)(iv). The transferor shall have only such

powers and rights as are conferred by the trust instrument. Except as permitted by subdivisions

18-9.2-2(9)(iv) and 18-9.2-2(10)(ii), a transferor shall have no rights or authority with respect to

the property that is the subject of a qualified disposition or the income therefrom, and any

agreement or understanding purporting to grant or permit the retention of any greater rights or

authority shall be void.

18-9.2-4. Avoidance of qualified dispositions. -- (a) Notwithstanding any other

provision of the general laws, no action of any kind, including, without limitation, an action to

enforce a judgment entered by a court or other body having adjudicative authority, shall be

brought at law or in equity for an attachment or other provisional remedy against property that is

the subject of a qualified disposition or for avoidance of a qualified disposition, unless the action

is brought pursuant to the provisions of section 6-16-7.

      (b) Notwithstanding the provisions of section 6-16-9, a creditor may not bring an action

under subsection (a) of this section if:

      (1) The creditor's claim against the transferor arose before the qualified disposition was

made, unless the action is brought within four (4) years after the qualified disposition is made or,

if later, within one year after the qualified disposition was or could reasonably have been

discovered by the creditor; or

      (2) The creditor's claim against the transferor arose subsequent to the qualified

disposition, unless the action is brought within four (4) years after the qualified disposition is

made.

In any action described in subsection (a) of this section, the burden to prove the matter by

clear and convincing evidence shall be upon the creditor.

(c) For purposes of this chapter, a qualified disposition that is made by means of a

disposition by a transferor who is a trustee shall be deemed to have been made as of the time the

property that is the subject of the qualified disposition was originally transferred to the transferor

(or any predecessor trustee) making the qualified disposition in a form that meets the

requirements of subdivisions 18-9.2-2(10)(ii) and (iii). If a trustee of an existing trust proposes to

make a qualified disposition pursuant to the provisions of this subsection (c) of this section but

the trust would not conform to the requirements of subparagraph 18-9.2-2(10)(ii)(B) as a result of

the original transferor's nonconforming powers of appointment, then, upon the trustee's delivery

to the qualified trustee of an irrevocable written election to have this subsection apply to the trust,

the nonconforming powers of appointment shall be deemed modified to the extent necessary to

conform with subparagraph 18-9.2-2(10)(ii)(B). For purposes of this chapter, the irrevocable

written election shall include a description of the original transferor's powers of appointment as

modified together with the original transferor's written consent thereto, but no such consent of the

original transferor shall be considered a disposition within the meaning of subsection 18-9.2-2(4).

(d) Notwithstanding any law to the contrary, a creditor, including a creditor whose claim

arose before or after a qualified disposition, or any other person shall have only such rights with

respect to a qualified disposition as are provided in this section and sections 18-9.2-5 and 18-9.2-

6, and no such creditor nor any other person shall have any claim or cause of action against the

trustee, or advisor described in subdivision 18-9.2-2(9)(iii), of a trust that is the subject of a

qualified disposition, or against any person involved in the counseling, drafting, preparation,

execution or funding of a trust that is the subject of a qualified disposition.

(e) Notwithstanding any other provision of law, no action of any kind, including, without

limitation, an action to enforce a judgment by a court or other body having adjudicative authority,

shall be brought at law or in equity against the trustee, or advisor described in subdivision 18-9.2-

2(9)(iii), of a trust that is the subject of the qualified disposition, or against any person involved in

the counseling, drafting, preparation, execution or funding of a trust that is the subject of a

qualified disposition, if, as of the date such action is brought, an action by a creditor with respect

to such qualified disposition would be barred under this section.

(f) In circumstances where more than one qualified disposition is made by means of the

same trust instrument, then:

(1) The making of a subsequent qualified disposition shall be disregarded in determining

whether a creditor's claim with respect to a prior qualified disposition is extinguished as provided

in subsection (b) of this section; and

(2) Any distribution to a beneficiary shall be deemed to have been made from the latest

such qualified disposition.

(g) If, in any action brought against a trustee of a trust that is the result of a qualified

disposition, a court takes any action whereby such court declines to apply the law of this state in

determining the validity, construction or administration of such trust, or the effect of a spendthrift

provision thereof, such trustee shall immediately upon such court's action and without the further

order of any court, cease in all respects to be a trustee of such trust and a successor trustee shall

thereupon succeed as trustee in accordance with the terms of the trust instrument or, if the trust

instrument does not provide for a successor trustee and the trust would otherwise be without a

trustee, the Superior Court, upon the application of any beneficiary of such trust, shall appoint a

successor trustee upon such terms and conditions as it determines to be consistent with the

purposes of such trust and this statute. Upon such trustee's ceasing to be trustee, such trustee shall

have no power or authority other than to convey the trust property to the successor trustee named

in the trust instrument or appointment by the Superior Court in accordance with this subsection.

18-9.2-5. Persons not subject to qualified dispositions. -- Notwithstanding the

provisions of section 18-9.2-4, this chapter shall not apply to defeat a claim brought by:

      (a) Any person to whom the transferor is indebted on or before the date of a qualified

disposition on account of an agreement or order of court for the payment of support or alimony in

favor of the transferor's spouse, former spouse or children, or for a division of or distribution of

property in favor of the transferor's spouse or former spouse, but only to the extent of the debt; or

      (b) To any person who suffers death, personal injury, or property damage on or before

the date of a qualified disposition by a transferor, which death, personal injury, or property

damage is at any time determined to have been caused in whole or in part by the tortuous act or

omission of either the transferor or by another person for whom the transferor is or was

vicariously liable but only to the extent of such claim against such transferor or other person for

whom such transferor is or was vicariously liable.

18-9.2-6. Effect of avoidance of qualified dispositions. -- (a) A qualified disposition

shall be avoided only to the extent necessary to satisfy the transferor's debt to the creditor at

whose instance the disposition had been avoided, together with any costs, including attorney's

fees, that the court may allow.

      (b) In the event any qualified disposition is avoided as provided in subsection (a) of this

section, then:

      (1) If the court is satisfied that the trustee has not acted in bad faith in accepting or

administering the property that is the subject of the qualified disposition:

      (i) The Such trustee shall have a first and paramount lien against the property that is the

subject of the qualified disposition in an amount equal to the entire cost, including attorney's fees,

properly incurred by the trustee in the defense of the action or proceedings to avoid the qualified

disposition; and

      (ii) The qualified disposition shall be avoided subject to the proper fees, costs,

preexisting rights, claims and interest of the trustee (and of any predecessor trustee that has not

acted in bad faith); and

(2)(iii) For purposes of subdivision (1) of this subsection, it shall be presumed that the

trustee did not act in bad faith merely by accepting the property; and

(c)(2) If the court is satisfied that a beneficiary of a trust has not acted in bad faith, the

avoidance of the qualified disposition shall be subject to the right of the beneficiary to retain any

distribution made upon the exercise of a trust power or discretion vested in the trustee of the trust,

which power or discretion was properly exercised prior to the creditor's commencement of an

action to avoid the qualified disposition. For purposes of this subdivision, it shall be presumed

that the beneficiary, including a beneficiary who is also a transferor of the trust, did not act in bad

faith merely by creating the trust or by accepting a distribution made in accordance with the terms

of the trust.

(c) A creditor shall have the burden of proving that a trustee or beneficiary acted in bad

faith as required under subsection (b) of this section by clear and convincing evidence except that,

in the case of a beneficiary who is also the transferor, the burden on the creditor shall be to prove

that the transferor-beneficiary acted in bad faith by a preponderance of the evidence. The

preceding sentence provides substantive nonprocedural rights under Rhode Island law.

(d) For purposes of this chapter, attachment, garnishment, sequestration, or other legal or

equitable process shall be permitted only in those circumstances permitted by the express terms of

this chapter.

     SECTION 2. This act shall take effect upon passage and shall apply to all trusts,

whenever created.

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LC01934

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