Tennessee Gov. Bill Lee approved Public Chapter No. 695 on April 11, 2024, as passed by the Tennessee General Assembly (Trust Bill). The new law became effective on July 1, 2024, and it made several important changes to Tennessee's trust laws, as well as an important change to Tennessee general partnership statute. All of the changes became effective July 1, 2024.
Family Partnerships
The Trust Bill makes changes to the Tennessee Revised Uniform Partnership Act, which may enable interests in a family-owned general partnership to qualify for applicable valuation discounts under federal estate and gift tax rules. Under prior law, the statutory default rule for a general partnership was that any partner had the right to withdraw from the partnership and cause the partnership to liquidate or at the very least receive fair value for his or her interest in the partnership. The right to fair value generally entitles partners to an immediate payment of the value of their pro-rata portion of the partnership's underlying assets or business.
For many reasons, a typical partnership agreement does not allow a withdrawing partner to cause the partnership to liquidate or receive full pro-rata value. The agreement would typically contain provisions that 1) reduce the amount or extend the time for payment for a withdrawing partner, 2) include damages for a "wrongful" withdrawal of a partner and/or 3) treat the withdrawing partner's interest as an "transferee" financial interest with no immediate payout or redemption. These restrictions on the financial consequences of a withdrawal would generally reduce the fair market value of the partner's interest to an amount less than the pro-rata value of the underlying assets – for example, significant discounts for lack of control and lack of marketability of the partner's interest, given that the partner is unable to receive fair value at any time.
Although such restrictions do impair the actual fair market value of a partner's interest, in the context of a partnership that is owned 50 percent or more by members of one family, Code Section 2704(b) provides that an "applicable restriction," which includes a restriction on the liquidation of all or part of a partnership, should generally be disregarded in valuing a partnership interest for estate and gift tax purposes. An exception to this rule, however, is for a restriction imposed by state law. Before enactment of the Trust Bill, this exception, in Code Section 2704(b)(3), would not apply because the applicable state law did not restrict the liquidation of a partner's interest or the ability of a partner to cause the whole partnership to liquidate. As a result, an interest in a family-controlled general partnership would typically not be subject to significant valuation discounts for federal estate and gift tax purposes.
With the Trust Bill now in effect, any family-controlled partnership created under a written partnership agreement (whether new or subsequently amended) would be subject to a new statutory default rule. The new rule provides that a partner in a family partnership does not have the right to receive payment for his or her partnership interest upon withdrawal, and the partner's withdrawal will not cause the partnership to liquidate. Instead, if a partner in a family partnership withdraws, the withdrawing partner will be treated as merely a transferee of financial rights. As a transferee of financial rights, the withdrawing partner would be entitled to receive distributions only if and when they are made to other partners.
Because Tennessee law will now generally restrict the ability of a partner in a family general partnership to withdraw and receive their pro-rata value, it would appear that the Code Section 2704(b)(3) exception for restrictions imposed by state law could apply to a Tennessee general partnership. Accordingly, valuation discounts may also apply to a Tennessee general partnership for federal estate and gift tax purposes. This may make general partnerships more attractive for family wealth and business planning, given that general partnerships are also generally excluded from the application of the Corporate Transparency Act's beneficial ownership information federal reporting requirements and are not normally subject to Tennessee franchise and excise taxes. The major trade-off, of course, is that partners of a general partnership are jointly and severally liable for the debts of the partnership.
Power to Appoint Trustees Deemed to Be a Power to Implement a Directed Trust Structure
In 2023, Tennessee added a provision to the state's trust laws that allowed a person having the power to remove and appoint trustees for a trust to also appoint multiple trustees who have different duties – essentially allowing the person with the power to appoint trustees to divide the trustee duties and create a directed trust structure where co-trustees are not liable for actions by other co-trustees relating to duties allocated to the other co-trustees.
The Trust Bill includes a change to the 2023 statute allowing trustee duties to be allocated to trust "advisors" or "protectors," who are also fiduciaries of the trust but do not have the title of "trustee." This statute does not allow for changes in the dispositive terms of the trust or expansion of overall trustee powers, but rather allows for the division of the overall trustee duties and powers among multiple fiduciaries, whether co-trustees, trust advisors or protectors.
Clarifying Applicable Law Relating to Rule Against Perpetuities
Tennessee law currently allows Tennessee trusts to last up to 360 years. The Trust Bill clarifies that for trusts created in other jurisdictions that may have been subject to a rule allowing for longer duration trusts when created (such as 1,000 years or perpetual), the law of the other jurisdiction will apply to the trust's duration so that the maximum term of the trust does not decrease by reason of moving the trust to Tennessee. The new provision, however, would not allow a trust to extend its maximum duration.
Virtual Representation by the Holder of a Non-General Power of Appointment
The Trust Bill expands the authority of a holder of non-general power of appointment in a trust where a "Disinterested Trustee" is currently serving as a trustee or co-trustee. A disinterested trustee is defined under T.C.A. Section 35-13-103 as a "trustee that is not a related or subordinate party, as defined in 26 U.S.C. § 672(c), with respect to the grantor or qualified beneficiary if the qualified beneficiary were the grantor for purposes of 26 U.S.C. 672(c)."
The current provisions of the Tennessee Uniform Trust Code state that a holder of a general power of appointment is authorized to represent and bind persons who are subject to the power, including other permissible appointees of the power or those who would take the appointive property in the event there was a nonexercise of the power, even when there is a material conflict of interest between the powerholder and the aforementioned class of individuals. The underlying rationale behind this existing authority could be that for powerholders who could appoint the property to themselves, their estate or their creditors, such an implied conflict of interest was already contemplated and acknowledged by the individual granting the general power of appointment.
Under the updated version of the statute in the Trust Bill, if a disinterested trustee is then-serving as a trustee or co-trustee of a trust, a holder of a power of appointment may represent and bind persons who are subject to the power, including other permissible appointees of the power or those who would take the appointive property in the event there was a nonexercise of the power, even if there is a material conflict of interest between the powerholder and those subject to the power of appointment, regardless of whether the holder has a general power of appointment or non-general power of appointment. The underlying rationale behind this new rule could be that the presence of a disinterested trustee serves as sufficient safeguard for the permissible appointees or beneficiaries of the trust.
Virtual Representation of Minor or Incapacitated Persons
The Trust Bill also clarifies and expands certain provisions of the Tennessee Trust Code with respect to a representation of minor or unborn beneficiaries of a trust. The language of the revised statute clarifies the ability of a guardian or conservator of a minor or incapacitated person to represent and bind the ward by recognizing that the terms "guardian" and "conservator" may have different legal implications for a beneficiary who is not located in Tennessee.
The revision also expands the group of individuals that may represent and bind an incapacitated adult beneficiary of a trust where a disinterested trustee is serving as trustee or co-trustee of the trust. Under the existing statute, the parent or spouse of an incapacitated adult beneficiary may represent and bind an incapacitated adult beneficiary if 1) no conservator or guardian has been appointed and no agent has authority to act on the behalf of the incapacitated adult beneficiary and 2) the parent or spouse has assumed responsibility for the incapacitated adult beneficiary.
Under the updated version of the law, if a trust has a then-serving disinterested trustee, then, in addition to the parent or spouse, the grandparent or sibling of an incapacitated adult beneficiary may also represent and bind an incapacitated adult beneficiary if 1) no conservator or guardian has been appointed and no agent has authority to act on the behalf of the incapacitated adult beneficiary and 2) the spouse, parent, grandparent or sibling has assumed responsibility for the incapacitated adult beneficiary as determined by, and in the discretion of, the disinterested trustee.
For additional information, please contact the authors or another member of Holland & Knight's Private Wealth Services Group.