“For some strange reason it had to be/He guided me to Tennessee.”
“Tennessee” by Arrested Development

 

“No matter where I make my bed/I long for you/Tennessee.”
“Tennessee” by Drew Holcomb & The Neighbors

Tennessee Trusts for Tennesseans and Others

Clients in Tennessee have many incentives to create Tennessee trusts (beneficiaries not ready to control inheritance, strong divorce and creditor protection, income tax planning, estate tax planning, etc.). In addition, clients in other states have situations that highlight potential advantages of Tennessee law. Lawyers around the country have long looked to Alaska, Delaware, Nevada, Wyoming and South Dakota as the best jurisdictions in which to establish trusts because of those states’ favorable trust law. As Tennessee has modified its trust law over the last two decades to embrace many desirable features, professionals in other states have begun to take notice.¹

Potential advantages of Tennessee law over the trust law of other jurisdictions include the availability of directed trusts, “TBE-plus” trusts and elective community property trusts, as well as great flexibility in crafting and revising trusts.²

Directed Trusts

A trustee may delegate a function that historically belonged to the trustee, such as investment authority, but many trustees will conclude that delegation does not provide enough legal protection because it includes ongoing duties to supervise the delegee.³ Tennessee law offers better protection through the “directed trust” model.⁴

Suppose a settlor creates a trust naming a corporate trustee but requires the trustee to follow the directions of an individual or professional “financial manager” regarding all investment decisions and the directions of a trusted individual regarding distributions. Tenn. Code Ann. § 35-15-710 provides that a trustee who acts pursuant to such directions is treated as an “excluded fiduciary,” defined as “any trustee, trust advisor, or trust protector to the extent that, under the terms of a trust, an agreement of the qualified beneficiaries . . . or court order: (A) [t]he trustee, trust advisor, or trust protector is excluded from exercising a power, or is relieved of a duty; and (B) [t]he power or duty is granted or reserved to another person[.]⁵ Pursuant to Tenn. Code Ann. § 35-15-1204 and -1205, an excluded fiduciary has no duty to review the actions of the person or entity to which the power is given and “is not liable, either individually or as a fiduciary,” for any loss resulting from the actions, inactions, and directions of an individual or entity to whom responsibility is assigned.⁶

The 2024 Tennessee Court of Appeals case Williams v. Hardison fully embraced the directed trust/excluded fiduciary model.⁷ The court noted “the General Assembly’s clear intention broadly to relieve excluded fiduciaries from liability for actions assigned to trust advisors of directed trusts” and held that the trustee “would have no liability concerning such matters.”⁸

Among the potential benefits of directed trusts, corporate trustees often reduce their fee to reflect reduced responsibilities.

‘TBE-Plus’ Trusts

Tennessee law provides that a married couple may transfer property they own as tenants by the entirety (TBE) to a trust, with the assets in trust retaining the same protection from creditors of one spouse as tenancy by the entirety provides.⁹ In addition, after one spouse dies, so long as the surviving spouse does not have a nonfiduciary power to vest trust assets in herself, the surviving spouse’s creditors cannot get to trust assets, a form of “TBE-plus” asset protection.¹⁰

Community Property Trusts

Although Tennessee is a separate property state, Tennessee law allows a married couple to create an elective community property trust (CPT).¹¹ A CPT provides a full income tax basis step-up at the first spouse’s death for appreciated capital gain property (contrasted with a half basis step-up for assets owned jointly or as TBE), which reduces capital gain upon sale or resets a depreciation schedule.

Alas, one trust cannot be both a TBE-plus trust and a CPT, but clients can create both trusts, transferring highly appreciated assets to the CPT and other assets to the TBE-plus trust.

Flexibility in Changing Irrevocable Trusts

After a client has created an irrevocable trust (no reserved power to amend), what can you do if the settlor’s wishes change, beneficiaries’ evolving needs or tax rule changes call for different trust terms, or you simply wish something had been included in the trust instrument? Tennessee law provides four primary ways to alter an irrevocable trust.¹²

1. Judicial Approval. In addition to other bases for court actions, Tenn. Code Ann. § 35-15-410 provides that a trustee may commence a proceeding to approve or disapprove a proposed course. Seeking court approval often is the safest route for the trustee but can be costly, slow and public, and usually requires the inclusion of all necessary parties.¹³

2. Nonjudicial Settlement Agreement. A “nonjudicial settlement agreement” (NJSA) pursuant to Tenn. Code Ann. § 35-15-111 allows the trustee and all “qualified beneficiaries” to agree on a wide range of trust matters, so long as the NJSA “does not violate a material purpose of the trust.¹⁴ Section 35-15-111 includes a non-exhaustive list of matters appropriate for an NJSA, none of which involves significant revisions to the terms of the trust. Perhaps because there is a specific provision addressing modifying the terms of the trust (see immediately following), an NJSA might be inappropriate for modifying trust terms.

3. Nonjudicial Modification. A nonjudicial modification pursuant to Tenn. Code Ann. § 35-15-411 allows the trustee and all qualified beneficiaries to agree to modify trust terms.¹⁵ Section 35-15-411 sometimes requires more than § 35-15-111, however. During the settlor’s lifetime, the settlor must be given at least 60 days to object to the proposed modification or termination. Following the settlor’s death, a court must conclude that continuance of the trust is not necessary to achieve any material purpose of the trust, unless the trustee agrees that such modification does not violate a material purpose of the trust. The fact that there is a provision specific to modifying a trust might imply that an NJSA is inappropriate when trust terms are being changed, but, regardless, the trustee and qualified beneficiaries can agree to change the terms of the trust.

4. Decanting. Unlike an NJSA or § 35-15-411 modification, the trustee alone (no qualified beneficiary consent required) can “decant” trust assets to “another” trust pursuant to Tenn. Code Ann. § 35-15-818, which states

[u]nless the terms of the instrument expressly provide otherwise . . . [a] trustee who has authority . . . to invade the principal of a trust to make distributions to, or for the benefit of, one (1) or more proper objects of the exercise of the power, may instead exercise that authority by appointing all or part of the principal of the trust in favor of a trustee of a second trust if the exercise of that authority . . . [i]s in favor of the proper objects of the exercise of the power [].¹⁶

The rationale for decanting is that a trustee who has discretion to distribute outright among one or more beneficiaries should also be allowed to distribute in trust among the same beneficiaries. The second trust can omit beneficiaries but may not add beneficiaries and may be a modified or restated version of the original trust. The section places some limits on a trustee who is a beneficiary of the original trust.

A Note About Tennessee’s Move to Allow More Actions Without Court Involvement

NJSAs, nonjudical modifications and decanting all can be implemented without a court order, and decanting can be implemented without the participation of qualified beneficiaries. In some situations that is quite helpful, but query when a trustee should require the shield of court order? The old saying “just because you can doesn’t mean you should” can apply to trust actions that can be accomplished without court or qualified beneficiary involvement if the trustee participates.

For example, suppose the trustee participates in an NJSA or a § 35-15-411 modification (without a court order) and several years later a disgruntled beneficiary initiates litigation, arguing that the NJSA or modification and resulting actions were void because the NJSA or modification violated a material purpose of the trust? Or suppose a trustee agrees unilaterally to decant trust assets to a different trust but one of the original beneficiaries sues years later to challenge that action? What potential liability exposure might the trustee have? Often a trustee would be wise at least to obtain an NJSA before decanting and sometimes would be wise to require a court order before participating in an action that a statute says can be accomplished outside court.¹⁷

Conclusion

Mountains, hiking, blues, Americana, country music and Dolly Parton are all reasons for Tennesseans to take pride in their state. Lawyers around the country are starting to understand that Tennessee trusts should be added to the list. |||

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EDDY SMITH practices with Kennerly Montgomery in Knoxville. He focuses on planning, administration and litigation related to trusts, estates, businesses and nonprofits. Smith is a fellow of The American College of Trust and Estate Counsel and served as chair of the TBA Estate Planning and Probate Section.

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NOTES
1. Although this article focuses on potential Tennessee trust law advantages over the law in other states, individuals in other countries are creating Tennessee trusts, too. The good news is that the bar is low for Tennessee trust law to govern a trust. See Tenn. Code Ann. §§ 35-15-107, -108.
2. Tennessee’s efforts to be seen as a top trust jurisdiction have been noted previously in the Journal, and some of the discussion here is a recap of previous treatment. See Holbrook, Dan, “3 Developments Enhance Tennessee’s Drive to Be a Top Trust Situs,” Tennessee Bar Journal, August 2019; Smith, Eddy, “If You Build It, They Will Come: Tennessee Pursues Trust Preeminence,” Tennessee Bar Journal, September/October 2021.
3. Tenn. Code Ann. § 35-15-807 provides that the trustee is not liable to the trust beneficiaries or the trust for following the written directions of an agent to whom the function was delegated, but only if the trustee exercised reasonable care, skill, and caution in (1) selecting the agent, (2) establishing the scope and terms of the delegation … and (3) periodically reviewing the agent’s actions to monitor the agent’s performance and compliance with the terms of the delegation.
4. See Holbrook, Dan and Amy Morris Hess, “The Rise of Directed Trusts and Why It Matters,” Tennessee Bar Journal, September/October 2021.
5. Tenn. Code Ann. § 35-15-103(13).
6. Tenn. Code Ann. § 35-15-1204(a):
“[E]xcept to the extent that the terms of the trust, the agreement of the qualified beneficiaries, or the court order provide otherwise, the excluded fiduciary shall have no duty to:
(1) Review, evaluate, perform investment reviews, suitability reviews, inquiries, or investigations, or in any other way monitor the conduct of the trustee, trust advisor, or trust protector;
(2) Make recommendations or evaluations or in any way provide advice to the trustee, trust advisor, or trust protector or consult with the trustee, trust advisor, or trust protector; or
(3) Communicate with or warn or apprise any beneficiary or third party concerning instances in which the excluded fiduciary would or might have exercised the excluded fiduciary’s own discretion in a manner different from the manner directed by the trustee, trust advisor, or trust protector.”
7. Williams v. Hardison, No. M2022-01596-COA-R3-CV (Aug. 6, 2024). See Smith, Eddy, “Same as It Ever Was: More Trusts and Estates Developments,” Tennessee Bar Journal, January/February 2025, for a summary of the case.
8. Williams, Id., at 17, 19.
9. Tenn. Code Ann. § 35-15-510.
10. See Smith, Eddy, “New Tennessee Trusts MAP Route to Better Estate Planning for Married Clients,” Tennessee Bar Journal, August 2014, for an introduction to the statute when it was enacted.
11. Tenn. Code Ann. §§ 35-17-101 et seq. See Smith, Eddy, “In Praise of the Joint Revocable Trust,” Tennessee Bar Journal, September/October 2022, for a discussion of CPTs.
12. The three nonjudicial options are discussed in more detail in Smith, Eddy, “Look, Full Disclosure, I Am Currently Having a Panic Attack.” or “Can I ‘Fix’ My Irrevocable Trust?”, Tennessee Bar Journal, May/June 2025.
13. The burden of including necessary parties can be reduced through Tennessee trust law’s “virtual representation” provisions. Tenn. Code Ann. §§ 35-15-301 et seq. Among other permitted representatives, to the extent there is no material conflict of interest, a person may represent their minor or unborn descendants, a person designated by settlor in the trust or another writing may represent designated beneficiaries, and a person may represent another having a substantially identical interest.
14. Tenn. Code Ann. § 35-15-103(25) defines “[q]ualified beneficiary.” Virtual representation can cause qualified beneficiaries to be deemed to have participated or consented.
15. Again, virtual representation can help meet the requirement of participation or consent from qualified beneficiaries.
16. Tenn. Code Ann. § 35-15-818 (emphasis added). For a discussion of the decanting power, see “If You Build It . . .”, supra note 1.
17. If the proposed action involves partial or full termination of the trust or a trustee’s removal or resignation, the trustee can send a notice pursuant to Tenn. Code Ann. § 35-15-817 and significantly shorten the time a beneficiary has to object.