BP BHEAD INT S

AN ACT Relating to limiting the powers of a trustee; amending RCW 11.97.010; adding new sections to chapter 11.98 RCW; and adding new sections to chapter 11.95 RCW.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

Sec. 1. RCW 11.97.010 and 1985 c 30 s 38 are each amended to read as follows:

The trustor of a trust may by the provisions of the trust relieve the trustee from any or all of the duties, restrictions, and liabilities which would otherwise be imposed by chapters 11.95, 11.98, 11.100, and 11.104 RCW and RCW 11.106.020, or may alter or deny any or all of the privileges and powers conferred by those provisions; or may add duties, restrictions, liabilities, privileges, or powers to those imposed or granted by those provisions. If any specific provision of those chapters is in conflict with the provisions of a trust, the provisions of the trust control whether or not specific reference is made in the trust to any of those chapters, except as provided in sections 2 through 12 of this act. In no event may a trustee be relieved of the duty to act in good faith and with honest judgment.

NEW SECTION. Sec. 2. Due to the inherent conflict of interest that exists between a trustee and a beneficiary of a trust, unless the terms of a trust refer specifically to sections 2 through 6 of this act and provide expressly to the contrary, the powers conferred upon a trustee who is a beneficiary of the trust, other than the trustor as a trustee, and other than the decedent's spouse or the testator's spouse where the spouse is the trustee of a trust for which a marital deduction is or was otherwise allowed or allowable, whether or not an appropriate marital deduction election was in fact made, cannot be exercised by the trustee to make:

(1) Discretionary distributions of either principal or income to or for the benefit of the trustee, except to provide for the trustee's health, education, maintenance, or support as described under section 2041 or 2514 of the Internal Revenue Code and the applicable regulations adopted under that section;

(2) Discretionary allocations of receipts or expenses as between principal and income, unless the trustee acts in a fiduciary capacity whereby the trustee has no power to enlarge or shift a beneficial interest except as an incidental consequence of the discharge of the trustee's fiduciary duties; or

(3) Discretionary distributions of either principal or income to satisfy a legal support obligation of the trustee.

A proscribed power under this section that is conferred upon two or more trustees may be exercised by the trustees that are not disqualified under this section. If there is no trustee qualified to exercise a power proscribed under this section, a person described in RCW 11.96.070 who is entitled to seek judicial proceedings with respect to a trust may apply to a court of competent jurisdiction to appoint another trustee who would not be disqualified, and the power may be exercised by another trustee appointed by the court. Alternatively, another trustee who would not be disqualified may be appointed in accordance with the provisions of the trust instrument if the procedures are provided, or as set forth in RCW 11.98.039 as if the office of trustee were vacant, or by a nonjudicial dispute resolution agreement under RCW 11.96.170.

NEW SECTION. Sec. 3. If a trustee is a beneficiary of the trust and the trust instrument confers the power to make distributions of principal or income for the trustee's health, education, support, or maintenance as defined in section 2041 or 2514 of the Internal Revenue Code and the applicable regulations adopted under that section, then a trust provision purporting to confer "absolute," "sole," "complete," "conclusive," or a similar discretion relating to the exercise of such trustee powers shall be disregarded in the exercise of the power, and the power may then only be exercised reasonably and in accordance with the ascertainable standard as set forth in section 2 of this act and this section. A person who has the right to remove or to replace a trustee does not possess nor may the person be deemed to possess by virtue of having that right the powers of the trustee who is subject to removal or replacement.

NEW SECTION. Sec. 4. Sections 2 through 6 of this act do not raise any inference that the law of this state prior to the effective date of this act was different than under sections 2 through 6 of this act. Further, sections 2 through 6 of this act do not raise an inference that prior to the effective date of this act a trustee's exercise or failure to exercise a power described in sections 2 through 6 of this act was not subject to review by a court of competent jurisdiction for abuse of discretion or breach of fiduciary duty under chapter 11.96 RCW or other applicable law. Following the effective date of this act the power of judicial review continues to apply.

NEW SECTION. Sec. 5. Notwithstanding any provision of sections 2 through 6 of this act seemingly to the contrary, sections 2 through 6 of this act do not limit or restrict the distribution of income of a trust that qualifies or that otherwise could have qualified for the marital deduction under section 2056 or 2523 of the Internal Revenue Code, those Internal Revenue Code sections requiring that all income be distributed to the spouse of the decedent or of the trustor at least annually, whether or not an election was in fact made under section 2056(b)(7) or 2523(f) of the Internal Revenue Code. Further, sections 2 through 6 of this act do not limit or restrict the power of a spouse of the trustor or the spouse of the decedent to exercise a power of appointment described in section 2056(b)(5) or 2523(e) of the Internal Revenue Code with respect to that portion of the trust that could otherwise qualify for the marital deduction under either of those Internal Revenue Code sections.

NEW SECTION. Sec. 6. (1)(a)(i) Sections 2 and 3 of this act respectively apply to a trust established under a will, codicil, trust agreement, declaration of trust, deed, or other instrument executed after the effective date of this act, unless the instrument's terms refer specifically to section 2 or 3 of this act respectively and provide expressly to the contrary.

(ii) Notwithstanding (a)(i) of this subsection, for the purposes of this subsection a codicil to a will or an amendment to a trust does not cause that instrument to be executed after the aforementioned date unless the codicil or amendment clearly shows an intent to have section 2 or 3 of this act apply.

(b) Notwithstanding (a) of this subsection, sections 2 and 3 of this act respectively apply to a trust established under a will or codicil of a decedent dying on or after the effective date of this act, and to an inter vivos trust to which the trustor had on or after the effective date of this act the power to terminate, revoke, amend, or modify, unless:

(i) The terms of the instrument specifically refer to section 2 or 3 of this act respectively and provide expressly to the contrary; or

(ii) The decedent or the trustor was not competent, on the effective date of this act, to change the disposition of his or her property, or to terminate, revoke, amend, or modify the trust, and did not regain his or her competence to dispose, terminate, revoke, amend, or modify before the date of the decedent's death or before the trust could not otherwise be revoked, terminated, amended, or modified by the decedent or trustor.

(2) Section 2 of this act neither creates a new cause of action nor impairs an existing cause of action that, in either case, relates to a power proscribed under section 2 of this act that was exercised before the effective date of this act. Section 3 of this act neither creates a new cause of action nor impairs an existing cause of action that, in either case, relates to a power proscribed, limited, or qualified under section 3 of this act.

NEW SECTION. Sec. 7. If the standard governing the exercise of a lifetime or a testamentary power of appointment does not clearly indicate that a broader power of appointment is intended, the holder of the power of appointment may exercise it in his or her favor only for his or her health, education, support, or maintenance as defined in section 2041 or 2514 of the Internal Revenue Code and the applicable regulations adopted under the section.

NEW SECTION. Sec. 8. If the holder of a lifetime or testamentary power of appointment may exercise the power in his or her own favor only for his or her health, education, support, or maintenance as defined in section 2041 or 2514 of the Internal Revenue Code and the applicable regulations adopted under that section, then a provision of the instrument creating the power of appointment that purports to confer "absolute," "sole," "complete," "conclusive," or a similar discretion shall be disregarded in the exercise of that power in favor of the holder, and that power may then only be exercised reasonably and in accordance with the ascertainable standards set forth in section 7 of this act and this section. A person who has the right to remove or replace a trustee does not possess nor may the person be deemed to possess, by virtue of having that right, the power of the trustee who is subject to removal or to replacement.

NEW SECTION. Sec. 9. Notwithstanding any provision of sections 7 through 12 of this act seemingly to the contrary, sections 7 through 12 of this act do not limit or restrict the distribution of income of a trust that qualifies or that otherwise could have qualified for the marital deduction under section 2056 or 2523 of the Internal Revenue Code, those Internal Revenue Code sections requiring that all income be distributed to the spouse of the decedent or of the trustor at least annually, whether or not an election was in fact made under section 2056(b)(7) or 2523(f) of the Internal Revenue Code. Further, sections 7 through 12 of this act do not limit or restrict the power of a spouse of the trustor or the spouse of the decedent to exercise a power of appointment described in section 2056(b)(5) or 2523(e) of the Internal Revenue Code with respect to that portion of the trust that could otherwise qualify for the marital deduction under either of those Internal Revenue Code sections.

NEW SECTION. Sec. 10. Sections 7 through 12 of this act do not raise an inference that the law of this state prior to the effective date of this act was different than contained in sections 7 through 12 of this act.

NEW SECTION. Sec. 11. (1)(a) Sections 7 and 8 of this act respectively apply to a power of appointment created under a will, codicil, trust agreement, or declaration of trust, deed, or other instrument executed after the effective date of this act, unless the terms of the instrument refer specifically to section 7 or 8 of this act respectively and provide expressly to the contrary.

(b) Notwithstanding (a) of this subsection, for the purposes of this section a codicil to a will, an amendment to a trust, or an amendment to another instrument that created the power of appointment in question shall not be deemed to cause that instrument to be executed after the effective date of this act unless the codicil, amendment, or other instrument clearly shows an intent to have section 7 or 8 of this act apply.

(2) Notwithstanding subsection (1) of this section, sections 7 through 12 of this act shall apply to a power of appointment created under a will, codicil, trust agreement, or declaration of trust, deed, or other instrument executed prior to the effective date of this act, if the person who created the power of appointment had on the effective date of this act the power to revoke, amend, or modify the instrument creating the power of appointment, unless:

(a) The terms of the instrument specifically refer to section 7 or 8 of this act respectively and provide expressly to the contrary; or

(b) The person creating the power of appointment was not competent, on the effective date of this act, to revoke, amend, or modify the instrument creating the power of appointment and did not regain his or her competence to revoke, amend, or modify the instrument creating the power of appointment on or before his or her death or before the time at which the instrument could no longer be revoked, amended, or modified by the person.

NEW SECTION. Sec. 12. Sections 7 through 11 of this act neither create a new cause of action nor impair an existing cause of action that, in either case, relates to a power that was exercised before the effective date of this act. Sections 7 through 11 of this act neither create a new cause of action nor impair an existing cause of action that in either case relates to a power proscribed, limited, or qualified under sections 7 through 11 of this act.

NEW SECTION. Sec. 13. (1) Sections 2 through 6 of this act are each added to chapter 11.98 RCW.

(2) Sections 7 through 12 of this act are each added to chapter 11.95 RCW.

NEW SECTION. Sec. 14. If any provision of this act or its application to any person or circumstance is held invalid, the remainder of the act or the application of the provision to other persons or circumstances is not affected.