North Carolina Adopts UTC
Chris Burti, Vice President and Legal Counsel

Session Law 2005-192 is an act to adopt a version of the Uniform Trust Code for North Carolina. Article 1 of Chapter 36A of the General Statutes dealing with investment of trust funds is recodified as Article 7 of Chapter 32. G.S. 36A-63, G.S. 36A-66.1, and Article 6 of Chapter 36A dealing with investments of corporate trustees are recodified in Article 14 of Chapter 53 of the General Statutes as G.S. 53-163.1 through G.S. 53-163.7. The remainder of Chapter 36A of the General Statutes is repealed and a new Chapter 36C, North Carolina Uniform Trust Code, is created.

It can be stated without hyperbole that this legislation creates far greater powers with respect to real property than existed under prior law. Of particular interest to real property practitioners will be the provisions setting forth the trustee’s powers. N.C.G.S. Section 36C-8-815 sets out the general powers of trustees. While incorporating the traditional common limitations on fiduciary authority, this is nonetheless a very broad statement of authority.

"(a) A trustee, without authorization by the court, may exercise:

(1) Powers conferred by the terms of the trust; or

(2) Except as limited by the terms of the trust:

a. All powers over the trust property that an unmarried competent owner has over individually owned property;

b. Any other powers appropriate to achieve the proper investment, management, administration, or distribution of the trust property; and

c. Any other powers conferred by this Chapter.

(b) The exercise of a power is subject to the fiduciary duties prescribed by this Article."

Unless the trust instrument reflects otherwise, N.C.G.S. Section 36C-8-816 provides the trustee with the authority to:

(2) Invest and reinvest trust property as the trustee considers advisable in accordance with the trust, and to acquire or sell property, for cash or on credit, at public or private sale;

(8) With respect to an interest in real property, construct, or make ordinary or extraordinary repairs to, alterations to, or improvements in, buildings or other structures, demolish improvements, raze existing party walls or buildings or erect new party walls or buildings, subdivide or develop land, dedicate land to public use or grant public or private easements, and make or vacate plats and adjust boundaries, make contracts, licenses, leases, conveyances, or grants of every nature and kind with respect to crops, gravel, sand, oil, gas, timber and forest products, other usufructs or natural resources, and other benefits or incidents of the real property;

(9) Enter into a lease for any purpose as lessor or lessee, including a lease or other arrangement for exploration and removal of natural resources, with or without the option to purchase or renew, for a period within or extending beyond the duration of the trust;

(10) Grant an option involving a sale, lease, or other disposition of trust property or acquire an option for the acquisition of property, including an option exercisable beyond the duration of the trust, and exercise an option so acquired;

(19) Pledge trust property to guarantee loans made by others to a beneficiary;

(19a) Guarantee loans made by others to a beneficiary;

(19b) Pledge trust property to guarantee loans made by others to a proprietorship, partnership, limited liability company, business trust, corporation, venture, agricultural operation, or other form of business or enterprise in which the trust has an ownership interest.

(19c) Guarantee loans made by others to a proprietorship, partnership, limited liability company, business trust, corporation, venture, agricultural operation, or other form of business or enterprise in which the trust has an ownership interest.

This seems to encompass authority for most normal transactions involving a closing attorney. In addition there is much clearer express authority to encumber real estate in the trust corpus for purposes that are not clearly trust purposes but might be considered implicit. If in doubt N.C.G.S. Section 36C-10-1009 makes provision for the beneficiary's consent, release, or ratification of an act of the trustee.

"(a) A trustee is not liable to a beneficiary for breach of trust if the beneficiary consented to the conduct constituting the breach, released the trustee from liability for the breach, or ratified the transaction constituting the breach, unless:

(1) The consent, release, or ratification of the beneficiary was induced by improper conduct of the trustee; or

(2) At the time of the consent, release, or ratification, the beneficiary did not have knowledge of the beneficiary's rights or of the material facts relating to the breach.

(b) No consideration is required for the consent, release, or ratification to be valid."

N.C.G.S. Section 36C-8-802 encompasses the conflict of interest provisions of the new Act. While far more comprehensive than the old Act and far clearer, it does not directly address the issue of self-dealing in inter vivos grantor trusts. That issue is addressed in N.C.G.S. Section 36C-8-808(a) which provides that while "a trust is revocable, the trustee may follow a direction of the settlor that is contrary to the terms of the trust, even if doing so (i) the trustee exceeds the authority granted to the trustee under the terms of the trust, or (ii) the trustee would otherwise violate a duty the trustee owes under the trust.

It is also, arguably, dealt with in N.C.G.S. Section 36C-6-603, which provides that

(a) While a trust is revocable, rights of the beneficiaries are subject to the control of, and the duties of the trustee are owed exclusively to, the settlor.

(b) If a revocable trust has more than one settlor, the duties of the trustee are owed to all of the settlors.

Note that N.C.G.S. Section 36C-8-802(i) makes a provision for the court to appoint a special fiduciary to make a decision with respect to any proposed transaction that might violate this section if entered into by the trustee. This is significant in that it will permit decisions beneficial to the trust to be made without resignation of the trustee even if they involve self-dealing and when the trust is irrevocable.

Subject matter jurisdiction over most trust issues is in the Clerk of Superior Court as provided by N.C.G.S. Section 36C-2-203. This broad grant of original and exclusive jurisdiction is limited by the following provisions of the Act.

"proceedings concerning the internal affairs of trusts shall not include, and, therefore, the clerk of superior court shall not have jurisdiction under subsection (a) of this section of the following:

(1) Actions to reform, terminate, or modify a trust as provided by G.S. 36C-4-410 through G.S. 36C-4-416;

(2) Actions by or against creditors or debtors of a trust;

(3) Actions involving claims for monetary damages, including claims for breach of fiduciary duty, fraud, and negligence;

(4) Actions to enforce a charitable trust under G.S. 36C-4-405A; and

(5) Actions to amend or reform a charitable trust under G.S. 36C-4A-1."

This article presents an entirely new codification of rules concerning representation. While these rules have the potential for greatly streamlining and expediting resolution of trust issues, the conflict of interest qualification is interpretive and the practical result may well end up nullifying any benefits. To illustrate the following portion of N.C.G.S. Section 36C-3-303 is set out.

"Representation by fiduciaries, parents, and other persons.

To the extent that there is no conflict of interest between the representative and the person represented or among those being represented with respect to a particular question or dispute:

(1) A general guardian or a guardian of the estate may represent and bind the estate that the guardian controls.

(2) A guardian of the person may represent and bind the ward if a general guardian or guardian of the estate of the ward's estate has not been appointed.

(3) An agent under a power of attorney having authority to act with respect to the particular question or dispute may represent and bind the principal.

(4) A trustee may represent and bind the beneficiaries of the trust.

(5) A personal representative of a decedent's estate may represent and bind persons interested in the estate.

(6) A parent may represent and bind the parent's minor child if a general guardian, guardian of the estate, or guardian of the person for the child has not been appointed. If a disagreement arises between parents seeking to represent the same minor child, the parent who is a beneficiary of the trust that is the subject of the representation is entitled to represent the minor child or, if no parent is a beneficiary of the trust that is the subject of the representation, a parent who is a lineal descendant of the settlor is entitled to represent the minor child, or if no parent is a lineal descendant of the settlor, a guardian ad litem shall be appointed to represent the minor child.

(7) A person may represent and bind that person's unborn issue."

Often real property practitioners find it difficult to establish trustees authority, or lack thereof, because the parties are unable or unwilling to provide the trust instrument. N.C.G.S. Section 36C-10-1013 creates authority for a Certification of Trust that ostensibly may be relied upon by a closing attorney. The provisions follow.

"(a) Instead of furnishing a copy of the trust instrument to a person other than a beneficiary, the trustee may furnish to the person a certification of trust containing the following information:

(1) The existence of the trust and the date the trust instrument was executed;

(2) The identity of the settlor, unless withheld under a provision in the trust instrument;

(3) The identity and address of the currently acting trustee;

(4) The powers of the trustee;

(5) The revocability or irrevocability of the trust and the identity of any person holding a power to revoke the trust;

(6) The authority of cotrustees to sign or otherwise authenticate and whether all or less than all are required in order to exercise powers of the trustee;

(7) The trust's taxpayer identification number; and

(8) The manner of taking title to trust property.

(b) Any trustee may sign or otherwise authenticate a certification of trust.

(c) A certification of trust must state that the trust has not been revoked, modified, or amended in any manner that would cause the representations contained in the certification of trust to be incorrect.

(d) A certification of trust need not contain the dispositive terms of a trust.

(e) A recipient of a certification of trust may require the trustee to furnish copies of those excerpts from the original trust instrument and later amendments that designate the trustee and confer upon the trustee the power to act in the pending transaction.

(f) A person who acts in reliance upon a certification of trust without knowledge that the representations contained in the certification are incorrect is not liable to any person for so acting and may assume without inquiry the existence of the facts contained in the certification. Knowledge of the terms of the trust may not be inferred solely from the fact that the person relying upon the certification holds a copy of all or part of the trust instrument.

(g) A person who in good faith enters into a transaction in reliance upon a certification of trust may enforce the transaction against the trust property as if the representations contained in the certification were correct.

(h) A person making a demand for the trust instrument in addition to a certification of trust or excerpts is liable for damages if the court determines that the person did not act in good faith in demanding the trust instrument.

(i) This section does not limit the right of a person to obtain a copy of the trust instrument in a judicial proceeding concerning the trust.

(j) In transactions involving real property, a person who acts in reliance upon a certification of trust may require that the certification of trust be executed and acknowledged in a manner that will permit its registration in the office of the register of deeds in the county where the real property is located. The certification of trust need not contain the trust's taxpayer identification number if that taxpayer identification number is also the social security number of a grantor. However, the trust's taxpayer identification number shall be certified by the trustee to the person acting in reliance upon the certification of trust in a manner reasonably satisfactory to that person."

The problem of real property being conveyed to a trust instead of a trustee is not specifically addressed in the Act. It may be argued that it is implicitly addressed in N.C.G.S. Section 36C-4-401 which specifies the methods of creating a trust.

"A trust may be created by:

1. Transfer of property by a settlor to a person as trustee during the settlor's lifetime or by will or other disposition taking effect upon the settlor's death…".

It is hard to argue that a conveyance to a trust creates a trust and where there is a separate trust agreement we still do not have an entity capable of taking title unless it is a statutory business trust. It may be that the best remedy when corrective deed is unavailable will be utilization of N.C.G.S. Section 36C-4-415. This is the section providing statutory authority for reformation in order to correct mistakes.

"The court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor's intention if it is proved by clear and convincing evidence that both the settlor's intent and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement. Jurisdiction of a proceeding brought under this section shall be as provided in G.S. 36C-2-203."

Section 1 through 5 of this act become effective January 1, 2006, and except as otherwise provided Section 2 of this act, applies to

1. all trusts created before, on, or after that date;
2. all judicial proceedings concerning trusts commenced on or after that date; and
3. judicial proceedings concerning trusts commenced before that date unless the court finds that application of a particular provision of Chapter 36C of the General Statutes would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of Chapter 36C of the General Statutes does not apply and the superseded law applies.

All rules of construction and presumptions will apply to trust instruments executed before its effective date unless there is a clear indication of a contrary intent in the terms of the trust or unless application of that rule of construction or presumption would impair substantial rights of a beneficiary or unless the Act provides otherwise. Any act done before the effective date is not affected by the Act’s adoption. If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute in effect prior to the effective date it continues to apply to the right even if it has been repealed or superseded.

The cumulative effect of the adoption of the NCUTC should be that it will be much easier for a closing attorney to secure affirmative coverage over authority issues for a lender when wishing to encumber trust assets without conveying the property out of the trust. In addition it will seldom require amending trusts for these purposes after the effective date. This is highly beneficial for the closing attorney who is not privy to the analysis that went into developing a particular estate plan the resulted in the trust in question. And it will lessen the risk of liability from an inadvertent modification of the estate plan having adverse tax consequences.