“A house divided against itself, cannot stand” – Abraham Lincoln
The Tenth Amendment to the United States Constitution is part of our Bill of Rights. It was ratified on December 15, 1791 and expresses the principals of federalism and of states’ rights. The Amendment lays out simply “…the powers not delegated to the United States by the Constitution, or prohibited by it to the States, are reserved to the States respectively, or to the people.”
By law, the federal government has only the powers specifically delegated to it by the Constitution. Everything else belongs to the States. This is in line with Article II of the Constitution which states, “Each state retains its sovereignty, freedom, and independence, and every power, jurisdiction, and right, which is not by this Confederation expressly delegated to the United States…”
Why is this important to us in trust and fiduciary services? State laws have evolved in sometimes dramatically different directions. Harmonizing state law is important because of the prevalence of commercial transactions that extend beyond one state.
The United States is not a single legal system, it is united by state’s laws, and the majority of law falls under state control. There are in fact 50 separate systems of tort, family, criminal, property and contract law in this country. Trusts fall under property and contract law as virtually all trusts are made in written form. Therefore, State law applies to trusts.
Those of us with children, from large families, or with access to a television remote control in a room with more than one person, discover that getting two people to agree on anything is a challenge, but to get representatives of 50 states to agree on something specific? Well, I think you understand the challenge.
Not long after the Constitution was ratified it became evident that variations of laws between states were creating confusion especially when legal jurisdiction crossed state lines. In 1889, almost one hundred years after the Bill of Rights was signed, the New York Bar Association appointed a special committee “to examine certain subjects of national importance that seemed to show conflict among the laws of the several commonwealths.” New York was looking for a means to bring uniformity to the laws of multiple states and territories. What was driving this desire? Commerce between states.
In 1892 the first session of a new organization took place. The organization would evolve into the Uniform Law Commission we know today. By 1912 every state of the union, and the territory of Puerto Rico, was participating in the Commission. The last to join was the United States Virgin Islands, which became a partner in 1988.
It took almost half a century more, but by 1952 the Commission had successfully created the Uniform Commercial Code or UCC. The UCC achieved substantial uniformity in national commercial law. The goal of the UCC was to modernize contract law and allow flexibility in contracts between merchants.
The UCC is the longest and most elaborate of the uniform acts. Since inception, the Uniform Law Commission has drafted more than 300 uniform laws on numerous subjects and various fields of law. The objective is always the same: to established patterns of legal uniformity across the county.
UNIFORM PRUDENT INVESTOR ACT
The Uniform Prudent Investor Act, also known as UPIA, was completed by the Uniform Law Commission in 1994. UPIA revamped the rules that govern the investment activities of trustees. The Act reflects a significant philosophical change in investment practices known as “Modern Portfolio Theory” that began to occur in late 1960s. It sets the stage and makes room for the “Total Return” approach to fiduciary investment that we know today. This was a departure and expansion of the Prudent Person Rule, which is the theoretical backbone of our industry. Today, trustees are required to pursue an investment strategy that considers total investment risk and reward, not necessarily each investment.
The UPIA has been adopted by 43 states, the District of Columbia and the U.S. Virgin Islands.
Uniform Principal and Income Act
The Uniform Principal and Income Act, also known as UPAIA, was created in an attempt to harmonize the allocation of principal and income laws in all fifty states. The Act was completed in 1997, and amended in 2000 – and once again under further review and subject to further amendments.
Like the Uniform Prudent Investor Act, the Principal and Income Act was created to harmonize the laws of US States and territories. The aim to ensure that the intention of the trust creator is carried out, regardless of domicile and ensure fairness in the distribution of assets to trust beneficiaries, who might reside in another state. In addition to guidance on uniform procedures that support the intention of the trust, the Act also provides directions for trustees allocating receipts and payments to principal and income.
Both of these Acts present the characteristics of national best practice. These include the trustee power to adjust, appropriate handling of insubstantial allocations, and specific direction to the allocation to income and principal of mineral, water, oil, gas, and timber interests, for both receipts and disbursements.
Why is this important to understand? Even our allocation of income and principal may vary, in practice, from state to state. To mitigate risk and reduce unanticipated liabilities, it is essential that we understand industry best practice and the legal nuances between states.
For more information and to participate in a webinar on this subject, see Pohl Consulting’s Introduction to Fiduciary Practices webinar series.
