Mandatory Rules in the Law of Trusts

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The law of trusts consists overwhelmingly of default rules that the settlor who creates the trust may alter or negate. There are, however, some mandatory rules, which the settlor is forbidden to vary.1 In this Essay, I direct attention to important recent developments in American trust law that have clarified the mandatory rules, and I explore the rationale for these rules. I divide the mandatory rules into two groups: intent-defeating rules that restrict the settlor's autonomy, and intent-serving rules whose purpose is to discern and implement the settlor's true intent.

The intent-defeating rules, discussed in Part I of the Essay, serve an anti-dead-hand policy. They limit the power of a departed settlor to prescribe how the trustee must invest trust assets or how the beneficiaries are to order their lives or use the transferred wealth. I direct particular attention to the long-standing but recently reformulated rule that a trust must be for the benefit of its beneficiaries. I advance the view that in the future, the benefit-the-beneficiaries requirement will be especially consequential in the realm of trust-investment practice, where it will restrain the settlor from imposing value-impairing investment directions.

Part II of this Essay explains the prevailingly intent-implementing character of the other rules of mandatory law. These are rules that channel and facilitate, rather than defeat, the settlor's purpose. Included are the rule that prevents the settlor from dispensing with fiduciary obligations; the rule that prevents the settlor from dispensing with good faith in trust administration; the rule that limits the permitted scope of exculpation clauses; and the rule that requires that the existence and terms of the trust be disclosed to the beneficiary. Such terms, were they allowed, would authorize the trustee to loot the trust. The mandatory rules do not forbid the settlor from naming the trustee as a beneficiary, but they do force the settlor to articulate that intent with clarity. Accordingly, these rules are cautionary and protective in character, guarding the settlor (and the truly intended beneficiaries) against misunderstanding or imposition.

The Code. The mandatory rules have gained new prominence as the result of a pair of coordinated law revision projects, both quite recently concluded. The Uniform Trust Code of 20002 ("the Code") is the first comprehensive national codification of the American law of trusts. The Code contains a novel provision, section 105, which is the centerpiece of this Essay. It subjects trust law to the classificatory rubric of default and mandatory rules.3 section 105(a) provides that all trust law is default law, apart from the mandatory rules that are specially scheduled in section 105(b). section 105(b) lists the mandatory rules in numbered subsections, usually cross-referencing the relevant provisions elsewhere in the Code. section 105 is reproduced as an appendix to this article.

The Third Restatement. The other major development emphasized in this Essay is the refinement of the benefit-the-beneficiaries requirement in the Restatement (Third) of Trusts. section 27 requires that "a private trust, its terms, and its administration must be for the benefit of its beneficiaries ... ."4 The first volumes of the Third Restatement were published in final form in 2003,5 but circulated in draft for several years previously. The Code, which was prepared in close coordination with the drafting of the Third Restatement, absorbs this benefit-the-beneficiaries requirement.6

Rules of general application. Several of the mandatory rules rest on self-evident principles of legal process that are broadly shared with the rest of private law. The settlor may not, for example, interfere with the court's routine powers of judicial administration,7 nor may the settlor enlarge or diminish the rights of creditors or other third parties.8 I shall have nothing to say in this Essay about these familiar limits on private ordering. …