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MEMORANDUM
TO: Richard Wilson - Chief, Tax and Finance Section
FROM: Neo Moneri - Intern
DATE: April 2, 2015
RE: Exchange of Title between Predecessor Trustee and Successor Trustee
Issue #1
Is a change to reflect the legal title from a predecessor trustee to a successor trustee in the
same trust estate, pursuant to a single trust instrument, a “transfer” of the legal title in the corpus
(property) of the trust?
Short Answer #1
Yes. Provided that there is no contrary language within the trust instrument itself or that
there is no contrary language in an applicable statute, a change reflecting the exchange of legal
title from a predecessor trustee to a successor trustee is a transfer.
Issue # 2
Can a successor trustee sufficiently assert a claim against a predecessor trustee for an
injury to the estate that occurred before the successor trustee acquired legal title of the estate?
Short Answer # 2
Probably yes. There is nothing that prevents a successor trustee, presently administering a
trust estate, from sufficiently stating a claim against a predecessor trustee for breach of trust,
suggesting that injuries generally occurring before a successor trustee’s acquisition of legal title
can sufficiently be claimed by the successor trustee.
Issue #3
Is an exchange of title from a predecessor trustee to a successor trustee, pursuant to a
single trust instrument, exempt from taxation under the D.C. Code?
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Short Answer #3
Yes. The transfer of title between a predecessor trustee and a successor trustee is
“supplemental” under the D.C. Code and thus triggers a tax exemption for such a transfer.
GENERAL LAW
1. Creation of Trusts
The settlor is the creator of a trust (D.C. Code § 19-1301.03); (RESTATEMENT
(SECOND) OF TRUSTS § 3) (“RESTATEMENT”), and the trust itself is created "when the
settlor manifests an intent to place trust property in the hands of the trustee for the benefit of
another." In Re Estate of Reilly, 933 A.2d 830, 839 (D.C. 2007). The settlor may fulfill her desire
to create the trust by way of a deed, an instrument defined in Black’s Law Dictionary as "[a]
conveyance of realty . . . whereby title to realty is transferred from one to another." BLACK’S
LAW DICTIONARY 414 (6th ed. 1990) (“BLACK’S”). Section 17 of the Restatement (Second) of
Trusts, in Comment (d) and Illustration 2, provides an exposition into how a deed creates an
estate. RESTATEMENT § 17 ("A, the owner of Blackacre, executes, acknowledges and records
a deed conveying Blackacre to A as trustee for a designated beneficiary. A is trustee of
Blackacre for the beneficiary."); ("If a person has a power of appointment and makes an
appointment to another person as a trustee, a trust is created, provided that the power is properly
exercised.”).
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2. Legal and Equitable Interests Created by the Formation of a Trust
Declaring a trust transfers legal title to the trustee and equitable title to the beneficiaries
of the trust. Ackerman v. Abbot, 978 A.2d 1250, 1256 (D.C. 2009) (quoting Barker v. Aiello, 581
A.2d 462, 465 (Md. Ct. Spec. App. 1990)) ("The declaration of a trust transfers legal title to the
trustee.”); Id. (quoting II SCOTT ON TRUSTS § 130, at 409 (4th ed. 1987)) ("[I]t seems clear
that the beneficiary of a trust . . . has an equitable interest in the subject matter of the trust.”).
3. Appointing Trustees
The settlor, in declaring the trust, can name as many trustees as she desires, including any
successor trustees. RESTATEMENT § 108 ("If a trust is created and . . . if the trustee . . . ceases
for any reason to be trustee, a new trustee can be appointed . . . by the person, if any, who by the
terms of the trust is authorized to appoint a trustee.”). Comment (g) of § 108 further illustrates
the power to designate successor trustees: "In the instrument creating the trust the settlor may
designate who shall become trustee if the original trustee designated by him should cease to be
trustee; or may provide for an additional trustee." Id.
4. Power of the Trustee
The creation of the trust creates powers of the trustee that are not personal to him but are
inherent to the office of the trustee.1
Within that office, the trustee is limited to the powers
demarcated by the deed. In re Estate of Cavin, 728 A.2d 92, 93 (D.C. 1999) (“A court’s initial
focus must be on the terms of the trust. . . . [I]t is the intent of the testator which controls the
1
"Unless it is otherwise provided by the trust instrument, or an amendment thereof, or by court order, all powers of
a trustee shall be attached to the office and shall not be personal." RESTATEMENT (SECOND) OF TRUSTS, §
196.
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disposition of her estate.”). Under common law, these powers can include the power to convey
title. See e.g. Haw v. Brown, 1 MacArt, 189, 193 (D.C. 1873) ("[A] trustee . . . can convey no
property except by virtue of the instrument.”).
5. Actionable Claims Brought by a Successor Trustee for Injuries under the Administration
of a Predecessor Trustee
In Rearden v. Riggs National Bank, 677 A.2d 1032 (D.C. 1996) (“Rearden”), a case of
first impression, a personal representative “occup[ying] a position analogous to a successor
trustee” filed a complaint against a predecessor for failure to properly administer the relevant
trust instrument.2
Rearden, at 1033. Through this likening, the court expressed a general
principle: “A successor trustee has a duty to proceed against the predecessor for any breach of
trust committed by the predecessor of which the successor has knowledge.” Id. Though the two
trustees in Rearden, predecessor and successor, occupied one office, the court did not prevent the
suit brought by the successor trustee against the predecessor. The court went so far as to say that
a successor has a “duty” to bring such a suit against a predecessor, notwithstanding the
perpetuity of the office itself. The successor filed a claim, asserting an injury to the office,
namely the “breach of trust committed by the predecessor.” Id. The court’s allowance of the
claim and the court’s silence as to any conflict in the successor proceeding with the suit both
suggest that an alleged injury against the office of trustee must not necessarily be asserted by the
same trustee that administered during the time of the alleged injury, and that a successor trustee
2
“[T]he agreement provided that . . . accountings would be delivered at least annually to Mrs. King [the testator]
and/or any designated agent. Furthermore, ‘upon the termination of the trust, the Trustees shall prepare a final
account and shall deliver the same to the Grantor's agents and to the Personal Representatives of the Grantor's
estate.’" Rearden v. Riggs Nat'l Bank, 677 A.2d 1032, 1034 (D.C. 1996).
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may assert a claim alleging injuries that occurred prior to the successor trustee’s present
administration of office.
6. Interchangeability of "Transfer" and "Convey"
A diligent exploration into case law will only confirm what is apparent on the surface; the
terms "convey" and "transfer" are interchangeable, if not virtually synonymous. Naturally,
Black’s Law Dictionary all but marries the two terms in both definition and scope:
1. Convey. To transfer or deliver to another. . . To transfer property or the title to property
by deed, bill of sale or instrument under seal.
2. Conveyance. [T]ransfer of title to land from one person, or class of persons, to another
by deed. Generally, every instrument in writing by which an estate or interest in the realty
is created.
BLACK’S, at 333 (emphasis added).
Black’s Law Dictionary’s definition for "transfer" unsurprisingly mirrors the definitions for
"convey”:
1. Transfer, v. To convey or remove from one place, person, etc., to another.
2. Transfer, n. An act of the parties, or of the law, by which the title to property is conveyed
from one person to another;
3. The assignment or conveyance of property, including an instrument or document, that
vests in the transferee such rights as the transferor had therein. . . . Transfer is the all-
encompassing term by the Uniform Commercial Code to describe the act which passes an
interest in an instrument to another.
BLACK’S, at 1497 (quoting in part U.C.C. §§ 3-201(1) and 7-504(1)) (emphases added).
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Therefore, through no strained inference, any ordinary construction of the word
"convey," as may be found in the sentence, "[A] trustee . . . can convey no property except by
virtue of the instrument," encompasses the meaning of a "transfer," and any ordinary
construction of the word "transfer" encompasses the meaning of a "conveyance." There is no
case law to suggest that the two terms have any meaningful legal distinction. This consistency in
meaning and scope holds true for describing the exchange of title between a predecessor trustee
and a successor trustee.
The privity in the exchange of title between a predecessor trustee and a successor trustee,
within the same office of trustee, is in fact often characterized as a transfer. See e.g. Leslie v.
Laprade, 726 A.2d 1228, 1231 (D.C. 1999) ("Privity is a functional concept entailing 'mutual or
successive relationships to the same right of property'. . . Such identification exists as to property
transferred in trust from one owner or trustee to a successor.”) (emphasis added).
Indeed, the same capability of "transfer" between a predecessor trustee and a successor
trustee is reflected in the language of the Restatement (Second) of Trusts, § 111: "An interest
held by a trustee as [a trustee] may be transferred by him to a successor trustee." (emphasis
added).
7. At Common-Law, Exchange of Title between Trustee and Successor Trustee Is Not
Necessarily a Transfer
Established, at this point, is that the exchange of title between trustee and successor
trustee can be characterized as a transfer. Indeed, the exchange is often characterized as such.
Important to note, however, is that common law does not require the exchange of title between a
predecessor trustee and a successor trustee to be characterized as a transfer. In other words,
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although common law does not recognize a legal distinction between a "transfer" and a
"conveyance" in exchanging legal title between a predecessor trustee and a successor trustee,
common law does allow for the avoidance of a transfer of title between an original trustee and a
successor trustee. This allowance in common law is reflected in § 110 of the Restatement
(Second) of Trusts.3
However, the last clause of § 110 conditions this allowed avoidance of a
"transfer"; either the terms of the trust itself or a statute must provide that the exchange of title
shall not be a transfer. If this condition is not met, then the law presumptively treats the exchange
of title as a transfer. RESTATEMENT § 110.
Comment (a) to § 110 expounds upon a permitted sequence where legal title successively
exchanges from an original predecessor trustee, to a person or court conferred with the power to
appoint a new trustee, and finally to a new trustee, in which title vests, but with neither
conveyance nor transfer. Id.
STATUTORY LAW
8. For Taxation Purposes, the D.C. Code Supersedes Common Law - All Ultimate
Vestments are Transfers
Nevertheless, with regard to the taxation of real property, sections 47-901 (9), (10), and
(11) of the D.C. Code offer expansive definitions of the terms "transfer," "transferor," and
"transferee," whereby an interest that ultimately will vest in a person is an interest that
necessarily transfers.4
Encompassed in each of the three definitions is an interest that either
3
"If a new trustee is appointed by the exercise of a power conferred by the terms of the trust, the title to the trust
property will vest in the new trustee without a transfer to him by the old trustee or other holder of the title to the
trust property, if it is so provided by the terms of the trust, or the court is empowered by statute or otherwise to vest
the title in the trustee so appointed and does so." RESTATEMENT § 110.
4
(9) The word “transfer” means the process whereby any real property in the District, or any interest therein, is
conveyed, vested, granted, bargained, sold, transferred, or assigned from 1 person to another. D.C. Code § 47-901
(emphasis added).
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"vests" or is "vested." Id. Therefore, with regard to the taxation of real property, the avoidance
of a "transfer" or a "conveyance" permissible under common law is not recognized in
Washington, D.C.
9. Tax Implications - Transfers from Trustees to Successor Trustees, Pursuant to One Trust
Instrument, Are Exempt from Taxation
In the District of Columbia, deeds are generally taxed (D.C. Code § 42-1103(a)(1)(A)),
and transfers are generally taxed (D.C. Code § 47-903(a)(1)). For deeds, a tax rate of 1.1% is
applied to the consideration for the deed,5
and a tax rate of 1.1% is applied to the consideration
paid for each transfer.6
The same sections, however, provide that the tax rate of 1.1% shall be
applied only to the fair market value of the real property covered by the interest transferred,
where there is no consideration for a transfer. Id.
10. Exchanges of Legal Title between Trustee and Successor Trustee, although "Transfers,"
Are Without Consideration and Are Therefore Exempt from Taxation
(10) The word “transferor” means the person who conveys, vests, grants, bargains, sells, transfers, or assigns any
real property or any interest therein in the District, or causes the same through his or her authorized agent. Id.
(emphasis added).
(11) The word “transferee” means the person to whom any real property in the District, or any interest therein, is
conveyed, vested, granted, bargained, sold, transferred, or assigned. Id. (emphasis added).
5
A deed that conveys title to real property in the District shall be taxed at a rate of 1.1% . . . due at time of
recording. . . applied to the consideration for the deed; provided, that if there is no consideration for a transfer . . .,
the rate shall be applied to the fair market value of the real property, as determined by the Mayor. D.C. Code § 42-
1103(a)(1)(A).
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There is imposed . . . for each transfer at the time the deed is submitted to the Mayor for recordation a tax at a rate
of 1.1% of the consideration paid for the transfer; provided that . . . [i]f there is no consideration for a transfer . . .,
the rate shall be applied to the fair market value of the real property covered by the interest transferred as determined
by the Mayor. D.C. Code § 47-903(a)(1)(B).
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Trust law has long established that, through the formation of a trust, a trustee receives
only legal title to property. This mere legal title is otherwise known as "bare" legal title or
"naked" title, which, under any name, is described in the following way:
"Courts of equity have from time immemorial recognized that the estate of the trustee is a
naked legal title without any beneficial interest whatever, further than the compensation
provided for the execution of the trust, consideration of which is not allowed to enter into the
question of the extent of the estate conveyed . . ."
Wright v. Pitts, 66 F.2d 197, 200 (D.C. 1933) (emphases added).
Restated, the creation and execution of a deed of trust results in the conveyance of an
entire trust estate, though the conveyance is composed of two distinct legal and equitable
interests. To the extent that the conveyance is a transfer of legal title, the title transfers to the
trustee with no “price or amount actually paid,” even though the entire conveyance has a
complementary equitable component. D.C. Code § 47-901(5).The equitable component of the
conveyance alone measures the valuable consideration for the entire estate conveyed, and the
applicable tax – imposed “on the fair market value of the real property covered by the interest
transferred” (D.C. § 47-903(a)(1)(B) – covers the equitable interest transferred. This bifurcation
aptly illustrates why the trustee’s interest is indeed recognized by law as a “naked legal title.”
Wright, at 200. Consequently, to the extent that any subsequent conveyance of the trust estate
from a predecessor trustee to a successor trustee necessarily involves the transfer of legal title,
there is no “price or amount actually paid” for the transfer of that legal title, and any tax imposed
would similarly be applied only to the underlying equitable interest – the “fair market value” –
transferred alongside that legal title.
Notwithstanding the generally applicable tax imposed on transfers, the D.C. Code
exempts from taxation those transfers which “without additional consideration, confirm, correct,
modify, or supplement a transfer previously recorded.” D.C. Code § 47-902(8) (emphasis added).
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Therefore, if legal title ultimately transfers – without consideration, as explicated above – to a
successor trustee pursuant to a single trust instrument, then that transfer is “supplemental” in
accordance to the definition provided under § 42-1101(15),7
triggering the exemption provided
under § 47-902(8).
Conclusion
Common law establishes that an exchange of legal title, pursuant to one trust instrument,
between a predecessor trustee and a successor trustee, can be a "transfer" of legal title. Common
law, however, allows for the avoidance of such a label, provided that either the terms of the trust
or an applicable statute circumvent the label. Additionally, common law allows for a successor
trustee to sufficiently state a claim for injuries that occurred before the successor trustee acquired
legal title to the estate. Regarding the transfer of title from predecessor trustee to a successor
trustee, the D.C. Code, with regard to the taxation of real property, supersedes common law and
necessarily renders such an exchange of title as a transfer. Still, however, pursuant to the same
D.C. Code, the transfer of legal title between a trustee and a successor trustee is exempt from
taxation because, pursuant to a single trust instrument recorded prior to the exchange between
trustees, such a transfer is supplemental.
7
“The phrase “supplemental deed” means a deed that confirms, corrects, modifies, or supplements a prior recorded
deed without additional consideration.” D.C. Code § 42-1101(15).